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CIMITServicesMarketOutlook GlobalAutomotiveIndustry BusinessIntelligenceGroupAugust2003 Contents ExecutiveSummaryAutomotiveIndustryBusinessChallengesGlobalRegional US Europe Asia Pacific RestofWorldAutomotiveITSpendingTrendsGlobal RegionalITSpendForecastsAutomotiveIndustryITTrendsAutomotiveITServicesIndustry CompetitiveProfilesAutomotiveITServicesMarket BearingPointAlliancesSourcesandContact ExecutiveSummary Automakersarecurrentlyfacedwithslowersales overcapacityanddeclinesinprofitability Big3arelosingmarketsharetoJapaneseautomakers Toyota HondaandNissanincreasedtheirU S salesandmarketshareinthefirsthalfof2003 whiletheBigThreemanufacturers GM Ford DaimlerChrysler sawtheirsalesdeclinedespitespendingheavilyonincentives Currentlytheglobalautomotiveindustryhastoomuchcapacity roughly30 andassalesfall theproblemcontinues Carpriceshavebeenfallingmakingalreadythinmarginsevenmorepressured Theglobalautomotiveindustryisfacedwithmorecompetition greaterpricetransparency risingcustomerexpectationsandqualityimprovements makingthepressureevengreateronpriceandprofitability Chinapresentsthebestopportunityforautomakersduetoincreasedgovernmentincentivesandcooperation cheaperlabor andproximitytoalargepopulationofpotentialconsumers Chinacontinuestomakeprogresstowardsamarketeconomywhichhasledtoglobalbusinesses likeautomotivecompanies tryingtorampupinordertotapintothecountry slargemarketplaceof1 3Bconsumers AyearafterentryintotheWTO in2003 China sautomotiveindustryproduced3 25Mmotorvehicleunits 38 growthcomparedtotheyearbefore ITIssues Industryinsurvivalmode pressuringspending OpportunitiesforCRMMostmanufacturingverticals includingAutomotive havebeenoperatingin survivalmode spendingverylittleoncapitalandoperationalexpenses ITspendinghassufferedasaresult TheNorthAmericanmanufacturingmarketconstitutesapproximately45 ofthetotalworldmanufacturingITspend ExecutiveSummary CurrentlyintheautomotiveindustrythereislesssignificanceplacedontheroleofITinsupportingbusinessstrategies especiallyincomparisontoindustrieslikeFinancialServicesorHealthcarepayerindustries ThisisalargedeterminantofITbudget Inordertounderstandtheirnear termsalesvolume optionmixandpricesensitivity automakershavetostartunderstandingtheircustomersbetterthroughthemanysignalstheyseefromtheirconsumers interactions MuchofthiscanbeaccomplishedthroughCRMinitiatives Whiledealerincentiveshavebeenusedbymostofthemajorautomakers especiallyintheUS companiesleveragingtheirexistingCRMmightbeabletogetmoreforless Thedatagatheredfromincentiveprogramsflowingbacktomanufacturersanddealerscanallowfollow upcampaignsthatbridgethegapbetweensalesandmarketing ERPvendorsareturningtheirfocustodeliveringextendedapplicationsinareasofSCM CRMandPLMtocompensateforthelossofrevenuefromlarge scaleprojects CompetitorsandAlliancesDeloitteConsultinghasajointinitiativewithSAPtosupporttheautomotiveindustryinthedeploymentofthemySAPAutomotivesolutiononaworldwidebasis Aspartofthisinitiative DCandSAParedevelopingmethodsforcustomer specificanalysisonfeasibility cost benefit andROI IBMencouragestheirengineerstorotateinandoutofthefield spendingtimesolvingreal lifeproblemswhilenotabandoningtheirinsideresearch IBMhascreatedan innovationservices groupwithinitsresearchunitdedicatedtoworkingonautomotivecustomerproblems makingthemcapableoftakingtheirresearchandapplyittobusinessissues IntheEuropeanautomotiveindustry SAPiscurrentlyfocusingoncrossfunctionalprocesses packagingtheirSCM PLMandCRMallinone usingdifferentmodules approachingitfromtheperspectiveofthebusinessprocessesthatcrosstheseareas GlobalAutomotiveIndustry BusinessChallenges GlobalAutomotiveIndustryisonaGradualSlide Theworld sautomotiveindustryhasbeenonagradualdownwardslideoverthepastyear acceleratedtosomedegreebythelikelihoodofamajorbankruptcyandfurtherrestructuringoftheindustry Inhibitorsincludeweak regional consumerconfidence highunemploymentanduncertainglobalequitymarkets allofwhichhaveledtolowersales InEurope thefirstfivemonthsof2003sawsalesdropby4 whilenewregistrationsforMayfellthelowestinfiveyears TheUSmarketisforecasttoshrink4 thisyear Currentlytheglobalautomotiveindustryhastoomuchcapacity roughly30 andassalesfall theproblemcontinues Muchoftheover capacityisduetoeachindividualcompanyexpectingtogrowfasterthanitsrivals Andwhilethe90sshowedstrongreturns manyautomakersinvestedinadditionalcapacity createdriskymodels builtmorefactoriesandenteredintoemergingmarketsthathadmorelongtermpromisethanshortterm Formanyyearsthelargesttruckandcarmakershavecontinuallysustainedlossesoutoftheirprimarybusinessesofcarsales oftenmakingprofitsthroughmoneymadefromsellingsparepartsatinflatedprices throughfinancingbusinessesorthroughexchangerates Thisstructureisincreasinglyexposedinadownturn especiallywhenincentiveslike0 financinghavehamperedthefinancingbusiness Carpriceshavebeenfallingmakingalreadythinmarginsevenmorepressured Theglobalautomotiveindustryisfacedwithmorecompetition greaterpricetransparency risingcustomerexpectationsandqualityimprovements makingthepressureevengreateronprice IntheUS incentiveslike0 financingormoneybackhavekeptvolumeupbuthavealsopressuredprices Whileincentivesareexpensive wheneverautomakerspushpricesbackuptheirvolumescollapse GlobalAutomotiveIndustryisonaGradualSlide Asidefromproductissues TheBig3haveunder fundedpensionliabilitiesandhealth carebenefitsforretirees Fordislosingcashandtheirbondshavebeendowngradedtojunkstatus IftheUSmarketcontinuestoslidealarge scalecompetitiverestructuringcouldoccur Europeancarmakers likeFiat whichisladenwithdebtandproductionissues couldbepurchasedbyothercompanieslikeGM thatowns20 oreventuallybeboughtoutbythestate TheindustryupsidesfortheBig3 GeneralMotorswillcontinuetopursueitsgrowthstrategiesinordertoremaincompetitive DaimlerChryslersisinthemidstofitsimprovedcoststructure allowingittobettercompetewithGM Fordisspendingalotofmoneyoncapitalexpenditures Ifthecompanydoesnotexecute itmaybeincrisis TheBig3productshavehigherqualitythanever althoughtheperceptionofqualityisnotashighasitshouldbe Pensionandhealthcaresource MSDW BasedonMmgt Discussions TotalUSPensionFundandHealthcareLiability inMM USAutomotiveMarket Slowing butStilltheLargest TheUSautoindustryisthemostimportantonetotheglobalindustrysincetherewere16 7MregistrationsintheUnitedStatesin2002 downbymorethan3 fromthealltimehighin2000 TheUSmarketforlighttrucksandSUVs 8 6Mregistrationsin2002 surpassedthecarmarketin2002 8 1Mregistrations ThelowlevelofUSfueltaxesboostedSUVsalesfarmorethaninanyothercountry althoughrisingoilpricesandenvironmentallegislationcouldreducesales In2002 roughlyone fifthofthecars lighttrucksandSUVsregisteredintheUnitedStateswereforeign Californiahasthehighestrateofpassengercarpurchases accountingforroughly13 ofthetotal TheUSindustry regardlessofitshighnumbers iscurrentlysaturated Thestockofpassengercarsperheadwastheninthlargestintheworldin2002 Withnearly500carsper1000ofthepopulation theUShasmorecarsperheadthantheUnitedKingdom butslightlyfewerthanItalyandGermany CarusageisextremelyhighintheUnitedStatesoverothercountriesintheworld TheaveragepersonintheUnitedStatestravelsabout9 000kmperyear comparedto6 000kminWesternEuropeand4 000kminJapan Big3ContinuetoLoseMarketSharetoJapan Astheautomotiveindustrygetsmorecompetitive AmericanconsumersarebuyingmoreJapaneseautomobilesduetotheirreputationforqualityandvalue Toyota HondaandNissanincreasedtheirU S salesandmarketshareinthefirsthalfof2003 whiletheBigThreemanufacturers GM Ford DaimlerChrysler sawtheirsalesdeclinedespitespendingheavilyonincentives Thistrendstartedin1998 whendomesticmanufacturersstartedtolosenearly10pointsofshare andtheJapanesegainednearly5 Industry wide carandlight trucksalesweredown2 5 throughJune to8 2M However thethreebiggestJapanesemanufacturerssold100 000morevehicles andthedomesticBigThreesold200 000fewer MarketshareforallJapanesebrandsisatanall timehighof28 5 anddomesticbrandshaveshrunktoahistoriclowof60 5 TheeconomicdownturnhasfavoredautomakerslikeToyotasinceconsumershavebecomemorestingyanddiscriminatingwiththeirpurchases thusfavoringqualityandvalue whicharethemajorsellingpointsformostJapaneseautomakers versus forexample luxuryautos TheJapanesecontinuetograbbiggerchunksofthemarketdespiterecordspendingonincentivesbytheirdomesticrivals AtthebeginningofJune incentivesforChrysler FordandGMaveraged 3 389pervehicle versus 1 062forJapanesebrands Koreanmakesaveraged 1 371andEuropeanbrandsaveraged 1 945 USCar TruckShare1996vs 2003 Source TheEconomist June2003 Big3ContinuetoLoseMarketSharetoJapan TheBig3 sincentives 14 ofsaleprices arelikelyunsustainable TheirdependenceonincreasinglylargeincentivestooffsetthelowerresalevalueofUScarsreflectsperceivedproblemswiththeirlong termqualityanddurability Forexample ToyotaandGMcarscanbevirtuallyidentical sometimesmadeonthesameassemblylineaspartofaGM Toyotajointventure butbecauseGMsellsintheused carmarketfor15 20 lessthanToyota 2GMroutinelyofferspurchaseincentivesof 1 000acar fourtimesmorethanToyota sgivebacks 3TheBig3continuetoconcentratetheirtestingeffortsonthedefectratesofproductcomponents However thisfocusdoesn tincreasethelikelihoodofproducingamoreappealingcar FortheBig3 testsratethecar scomponentsbutwithlessemphasisontheperformanceoftheentirecarasmeasuredbythedesiredattributes suchasquietness Conversely Japaneseautomakersareparticularlyeffectiveattestingfortheattributesthatexcitetheirtargetcustomers TheHondaCivic forexample istestedextensivelyforthreekeyattributes fuelefficiency initialproductquality anddurability Theresultingvehicleismorethanacollectionofdefect freesubsystems itisacarthatperformswellintheareasthatcustomershavecometoexpectfromHonda TheupsidefordomesticautomakersisthatitisdoubtfultheJapanesecancontinueincreasingtheirshareatthesamepace FewersegmentsareleftfortheJapanesetoinvade TheToyotadivision forexample offersafulllineofvehiclescomparabletoFordorChevrolet andithasarangeofmodelsintheLexusluxurydivisionthatincludessedans SUVs andsportscars ProfitabilityisalsopressuredattheBig3comparedtoAsianmanufacturers Forexample Hondaaverages 1 581inprofitpervehicle soldintheUS andToyotagets 1 214 GeneralMotors however earnsonly 701whileChryslerGroupmakesonly 226 Fordlosesanaverageof 114oneachvehiclesoldlastyear GlobalAutomotiveIndustry MarketSharebyRevenue Theglobalautomotiveindustryishighlyconcentratedwhilemarketshareisshifting DaimlerChrysler FordMotor andGeneralMotorsmakeup44 oftotalglobalsales However thisisonepercentlessthanlastyear indicatingtheBig3 slossofmarketsharetosmallercompetitors WhileToyotahasgreatlyincreaseditsmarketshareintheUS thecompanyhasalsolostapercentageofmarketsharesincelastyear ImportstoNorthAmericaarethehighestthey vebeensincethelate80 s OfparticularconcerntoAmericanmanufacturers lighttrucksales oncethemajorprofitgenerator arelosingsharetoforeigncompetitorslikeToyotaandNissan Source StandardAndPoors 2003 IndustryProfitabilitySeverelyPressured ThelargeautomakershavebeenfightingthedownturnandtryingtosustainsaleswithlargerebatesandeasycreditintheUSandincreasinglyinEurope However thesestrategieshaveseriouslypressuredprofits DaimlerChryslerreportedinJuly2003thatnetincomefellworsethanithassincetheindustry slastpoorearningsperiodinlate2001 Mitsubishipromotedeasycredit includingloansthatdeferredpaymentsforayeartoconsumerswithweakcreditbuthaverecentlyrescindedthispromotionduetoprofiterosion PSA sprofitwashitmostlyduetotheriseoftheEuro especiallyagainsttheBritishPoundandBrazilianReal Brazilbeingwhereithasoneplant Someautomakersareattributingthisspanofpoorearningstothebottomofthecurrentcycleofslowdown howevermanyarestillseekingstructuralimprovementsandbetterpricingpowertobufferthiscycle Source WallStreetJournal EarningsReports AutomakersStillPooratAligningSupplyandDemand ProfitsintheglobalautoindustryaresufferingsinceOEMscannotaligntheirsupplywithconsumerdemand Whileconsumerdemanddataisreadilyavailable carmakersfollowlaggingindicatorsandtheresultisineffectiveadvertisingandrebatesandinventoryoverstocks Thecurrentmethodsthatautomakersusetosatisfydemandareoutofalignment Inrecordsalesyears suchas2001 profitsintheautomobileindustryaveragedamere1 2 andonlythreecompanies BMW HondaandMagnaInternational had5 profit Forecastsoftenmissactualdemand Forexample demandforDaimler sPTCruiserfarexceededsupplywhenitcameonthemarket ThenDCXrampedupcapacityto230Kunits makingitordinaryandbuyersmovedon Rightnowthefactoryisdiscountingthemodel furthererodingthemodel simage Suppliersarehurtbyvariation WhenanOEMplansincorrectlyonaparticularplatformvolume ofabout10 15 thefactoryhastoraiseorlowervolumesuddenly In2002saleswerethelowestinfouryears leavingvehicleinventoryat70days Seventydaysofinventorycanmean 40Bincapitalsittingonlots MeanwhiledealersandOEMsspend 3Band 11B respectively everyyearonadvertisements Theloopfromproductionplanningtomanufacturetosaleandbacktakesupto6months whichistoolongtofixoverproductionofanunpopularconfigurationortoinformsuppliersofsurgesindemand Withalaggingmarket intensecompetitionandmorerapidlyshiftingconsumertastes thispooralignmenthasbeenmoreobviousintheindustrythanever Automakersarestillapplyinglastyear ssalesresultstothecurrentyear spre plannedvolumewithoutconsiderationofhowmanydaysittooktosellspecificvehicles USAutomotiveDistribution InefficientNetwork DealersaccountfornearlyallUScarandcommercial vehiclesales butthesenetworksareincreasinglyinefficient Automotivecompanieshavenotbeenabletorelocateorshutdownpoorperformersduetostatelaws However itispossibletoreshapedealernetworksbyorchestratingaseriesofownershipchanges encouragingweakperformerstoexitthemarket helpingtopperformerstoexpand andencouragingdealerstoimprovesalesskills Giventightprofitmargins manufacturerscandefinitelyusetheextraprofitthatamoreefficientdistributionsystemcoulddeliver U Sdealernetworkswerebuiltinanincrementalanduncoordinatedwayoverseveraldecadescreatingroomforconsolidationaswellasotherefficiency enhancingimprovements Manufacturershaveawardedfranchisestothousandsofindependentowner operatorsrangingfromsmallfamilybusinessestolargescalenationalchains Onceadealershipopensforbusiness themanufacturercan texertmuchdirectcontroloveritandmustbecontent essentially withtheroleofproductandfinancingsupplier Multi brandmanufacturersfacetheadditionalcomplicationofdealingwithseveraloverlappingnetworksthatworkagainstoneanother Adealerhassubstantialpowertoputamanufacturer stopandbottomlinesatrisk forexample bycuttingbackitsinvestmentinfacilities pushingthebrandsofcompetitors orpursuingfewerbuthigher marginsalesattheexpenseofthemanufacturer svolumegoals therebyoptimizingitsprofitsandunderminingthoseoftheOEM USautomotivemanufacturersrelyalmostentirelyondealerstodistributetheirproducts In2001 dealershipshadsalesofmorethan 800billion closeto100 ofthemanufacturers totalvehiclesales Themanufacturersalsodependontheirdealernetworkstoprovidetheafter salespartsandservicesthatarefundamentaltotheirsuccess Source McKinseyQuarterly Strategy Business WallStreetJournal EIU USAutomotiveDistribution InefficientNetwork Source McKinseyQuarterly Strategy Business WallStreetJournal EIU USAutomotiveDistribution InefficientNetwork Statefranchiselawsandotherregulationsprotectdealersfrom intrusive movesofOEMs Insomestates directownershipofdealersbymanufacturersisprohibitedoutright inothers manufacturerscan tcloseorrelocatepoorlyperformingdealershipsandmustsettleforisolatedandrelativelysuperficialstore levelimprovements remodelingshowroomsorprovidingadditionalsalesandservicetraining Ifthemanufacturerswereallowed manywouldhavealreadyrestructuredtheirdealernetworks consolidatingtheirpresenceinsomemarketsandexpandinginothers Amoreintegratedapproachwheredealersandmanufactuersworktogether sharingsalesdata trendsandinformationislikelythebestsolutionfordealersandautomotivemanufacturers AmongtheBigThree FordandDaimlerChryslereachhasmorethan4 000dealerlocationsintheUnitedStates GMhasmorethan7 500 Assessingtheperformanceofeachdealership settingitsgoalsforthefuture andoverseeingthenecessarychangesisathree tofive yearprocess Manufacturerscanstartbymappingthebestlocationsfortheirshowroomsandservicecentersineverylocalmarketbyanalyzinghistoricandprojectedsalesdata demographics andmarkettrends Mostmanufacturershavenotundertakenthesesteps andthuscan tidentifydealersthathaveboththeskillsandtheresourcestoaddbrandstotheirfranchisesortosucceedinnewlocations Tohaveanoptimallyconfigurednetwork themanufacturermustputthebestdealersincontrolofit Thismaybeaccomplishedbyusingnegotiatorstofacilitatethetransferofownershipamongdealersineachmarket Manufacturerswillneedtoworkthroughdealerstoforgeaconsensusthatbenefitsboththemandthedealerstoovercomeregulatoryimpediments Source McKinseyQuarterly Strategy Business WallStreetJournal EIU EuropeanAutomotiveDistribution IncreasedCompetitionfromEULegislation AdoptedinJuly2002 andeventuallyfullyimplementedinOctober2003 EUlegislationforblockexemptionswillforcetheautomotivedistributionsystemstobecomemorecompetitive likelycreatingmorepricepressureforcars parts andservices Underthenewrules manufacturerscan Optforexclusivity grantingexclusivesalesterritoriesfortheirdistributors thuslimitingcompetitionamongdealerssellingthesamebrand Optforselectivity givingthedealertherighttosellcarstonon authorizedresellers whichcan inturn sellthemanywhereintheEU Thisalsoallowsmanufacturerstobannon authorizedresellersbutpermitsdealerstosellandmarketcarsdirectlytoconsumersanywhereintheEU Muchofthisnewlegislationwillleadtoincreasedcompetition Restrictionsonmulti branddealershipsarebeingeased sobrandswillgetevenmorecompetitive Cross bordertradewillalsoincrease whichcouldleadtogreaterInternetsales anaccelerationoftheconsistencyofcarprices whichvarywidelyacrosstheEU Newrulesalsothreatencarmanufacturersshareandmarginsintheafter salesmarket wheretheyactuallymakemostoftheirprofit bybreakingdownthecarbusinessvaluechain Carmakerswillalsobeforcedtogiveindependentserviceproviderscompletetechnicalinformation aswellasauthorizationofserviceproviders Source McKinseyQuarterly Strategy Business WallStreetJournal EIU USAutomotiveOutlook PoorinShortTerm FairLongTerm TheoutlookforUnitedStates