The Auto Market is Increasingly Dynamic

By Tom Gibbs - August 29, 2012 | Tickers: F, GM, HMC, TM, VLKAY | 0 Comments

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The worldwide auto industry is increasingly becoming one of the most dynamic markets in the discretionary consumer goods sector. Detroit’s Big Three automakers, including General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler have made huge strides from their 2009 restructurings, and have been praised for their ability to adapt to the smaller and more fuel efficient compact vehicle market. 

Foreign automakers, including Germany-based BMW, Mercedes and Volkswagen, have all become successful plays on the dramatic rise in discretionary income spending in the luxury market.  Lastly, Japanese automakers including Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan, after experiencing the trifold effect of their native region’s 2011 earthquake, tsunami, and flooding, have finally boosted production to more or less pre-disaster levels. 

Despite the improvement in vehicle demand in most of the world’s markets, there is still quite a bit of operation rightsizing to be done within all of these automakers.  The well-documented over-capacity issues GM faces in the Eurozone with its Opel brand have yet to be resolved, Chrysler’s impressive comeback in the U.S. market has yet to be fully tested on a worldwide basis, and luxury automakers like BMW and Mercedes are still attempting to grow their relatively small target markets by expanding into smaller vehicle segments. It will be the Japanese automakers’ experience, however, that will continue to face the most pressures out of any other player in the field. 

Multiple Dynamic Shifts

Several key shifts in the Japanese auto market are increasingly making it a difficult place for an automaker to house their operating headquarters. First, there has been a dramatic drop in the number of young citizens that have the desire to own a vehicle. 

A recent study conducted by Nihon Keizai Shimbun, Japan’s largest business newspaper, shows that only about one-quarter of men in their 20s had any desire to own an automobile, which is down from nearly 50% in 2000.  Likewise, men 29 years old and younger comprise around 11% of the nation’s driving population, a penetration rate that has been cut in half since the early 1990s.

A similar long-term trend in the Japanese auto market is the dramatic aging and shrinking of the local population.  Not only will the Japanese population be cut by a third over the next several decades, but the current relatively old population will continue to age. Whereas around 13% of the U.S. population is comprised of citizens 65 years and older (2010 Census), more than 20% of Japan’s population is comprised of the same age group. In more remote areas this group accounts for nearly one-third of the local population.  As the nation’s total population gravitates towards fewer than 90 million people (from around 130 million today) over the coming decades, the 65 years and older demographic is expected to represent upwards of around 40% of population. 

Of course these are all long-term trends, yet the unfavorable impact on the nation’s auto industry is already taking its toll on native manufacturers. Recent production levels have been more robust than the recent past due to a relatively attractive $3.6 billion government subsidy program, which can give eligible new vehicle purchasers discounts up to 100,000 yen (~$1200). The overall, non-incentivized market, however, is at near 35-year volume lows. 

Likewise, although the yen has weakened somewhat over the past month, recently reaching around 83 per $1 from 76 per $1 in late January, the long-term strengthening of the currency has made the Japanese export market increasingly less attractive for native automakers like Toyota, Nissan, and Honda. 

A Mitigating Effort

Fueled in part by the recently desperate U.S. employment market – which reached a 2009 peak of nearly two times the past sixty year historical average of 5.8% -- as well as the pent up demand in the country for new automobiles – the average age of cars on U.S. roads have been rising consistently since 1995 – nearly all automakers are shifting production capacity to the U.S. and the neighboring Mexico and Canada markets.  

As General Motors plans to cut capacity in its ailing European market, it will shift a large portion of that freed up production (nearly 300,000 vehicles) to Mexico by 2016.  Volkswagen (NASDAQOTH: VLKAY) has recently announced the addition of 800 jobs (nearly 33% growth) at its new Chattanooga, Tennessee plant, which has recently produced its 50,000^th vehicle after one year of operations.  Finally, Toyota, as the largest of the Japanese automakers, has the most robust plans for U.S. expansion. What is most interesting with the automaker’s shift is that it not only plans to become more active in the American manufacturing market, but it is increasingly taking a long-term approach to Americanizing its worldwide footprint.

• Increased Production: Toyota has invested $80 million to increase the capacity of its Woodstock, Ontario plant to handle the production of 200,000 RAV4 SUVs (33% more than historic level).  The automaker’s Canada division will increase employment by more than 6% over the coming year.  Toyota has also recently announced the increased capacity for six-speed automatic transmissions by 30% to 520,000 units in its Buffalo, West Virginia plant.  An additional $45 million will be infused into the project, local workforce will expand by 7%, and the project has an expected completion date in mid-2013.  Lastly, the corporation will expand its Princeton, Indiana plant in a $400 million project that will increase employment by 10% and boost Toyota Highlander production by more than 50%.
• Expanded Responsibilities: Toyota has expanded the roles of four top executives in the North American market, including three non-Japanese managers.  The decision, which will give North American leaders a tighter coordination effort in the automaker’s largest market, is as much of an ideological shift as it is an efficiency enhancer.  More decision-making power has been granted to lever-pulling individuals in the United States and Canada, and the parent corporation plans for more vehicle design and marketing decisions to be made in the nation in an effort to get one step closer to local consumers.
• Net Export Base: Toyota not only intends to further penetrate North America to take advantage of the market’s favorable growth dynamics, but it also has plans of using the region to shift away from the aforementioned headwinds it is facing in its native Japan.  The automaker is increasingly using North America to become its global export base, and already shipped more than 100,000 vehicles from the United States to 19 outsider nations (including those in the NAFTA zone) in 2010.  To further escape currency loss, Toyota plans to increase U.S.-manufactured vehicle exports by an additional 200,000 units over the next several years. 

The automaker’s (not only Toyota, but Honda and Nissan as well) move deeper into the North American market should present a meaningful long-term threat to all of the native competition, despite their great improvements from 2009 lows. General Motors, Ford, and Chrysler all received much-needed competition reprieves (relatively) during the several month period following the Japanese natural disasters, when the U.S. share of Japanese automakers fell from 38.5% to 30.1%.  Although Japanese share is still below the pre-recessionary high of around 40%, Toyota, Nissan, and Honda have collectively regained 38% in the past several months. 

The competitive landscape in the U.S. market will become increasingly intense as all automakers boost local production levels, and the upcoming release of key models – newly redesigned mid-sized offerings like the Chevy Malibu, Ford Fusion, and Nissan Altima, upcoming compacts like the Dodge Dart and Chevy Spark, and the announcement of 19 new Toyota models – will keep the U.S. market share race an inestimable mystery until the close of the 2012 fiscal year.

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