Over the next five years, automotive executives around the world anticipate increased restructuring in the industry, from bankruptcies to mergers and alliances, according to a study by audit, tax and advisory firm KPMG LLP.
The study, based on interviews with 150 senior executives at vehicle manufacturers and suppliers globally, found that 81 percent of Asian executives see worldwide consolidation and alliances increasing. Fifty-eight percent of North American executives, 56 percent of Eastern European executives and 32 percent of Western European executives share the same view.
“The majority of the auto industry views this as a time of consolidation, not expansion, as many expect global overcapacity to exceed 10 percent,” said Daron Gifford, National Automotive Industry leader, KPMG LLP. “The reasons for this consolidation are clearly structural and material-cost reduction, as well as revenue growth through new business opportunities.”
The study also found that 57 percent of executives feel that alliances will be more important than mergers and acquisitions. Additionally, 59 percent believe that there will be more consolidations among vehicle manufacturers and Tier 1 suppliers, 61 percent see an increase for Tier 2-3 suppliers and 41 percent see an increase for dealers.
When it comes to bankruptcy, the study found that 87 percent expect bankruptcy rates to either increase or remain the same. Fifty-six percent see an increase, while only 10 percent expect a decrease.
“With shrinking market share, ongoing cost cutting and other pressures, beleaguered companies are tempted to reorganize by way of bankruptcy, which provides them protection from creditors while they sort out their affairs as they seek to strategically restructure and gain breathing room to meet their obligations,” said Gary Silberg, lead automotive partner in KMPG LLP’s Transaction Services practice.
When the driving factors for bankruptcy are broken down by region, the research showed that 70 percent of European executives see non-competitive cost structure as the main factor, 28 percent of North American executives feel it is health care and benefits costs, and 17 percent of Asian executives blame excess debt.
“Our thinking is that this regional difference partly reflects the management reaction of auto companies based in the U.S., to upstream visible cost pressures created from the health care and pension obligations of their OEM customers, but this remains to be seen,” said Gifford.
For profitability, the study found that 42 percent of executives see industry profits being flat or rising slightly over the next five years. Forty-three percent of Asian executives and 45 percent of European executives see some increase, while 38 percent of North American executives see more volatility and unpredictability for the industry.
The study also notes that 54 percent of vehicle manufacturers and 41 percent of Tier 2-3 suppliers see profitability staying flat or rising slightly, versus 37 percent of Tier 1 suppliers.
“Last year, expectations for profitability were low and industry-wide due to wide uncertainties resulting from natural disasters and increased energy costs,” said Gifford. “Now that the business environment has settled down, vehicle manufacturers are adjusting their strategies to meet the changing needs of consumers.”
Asia will see an increase in manufacturing, as the study found that 96 percent of executives predict an increase in the region and 75 percent of automakers and suppliers plan to continue significant investments in China over the five year period. Seventy-five percent of executives rank India after China as a region with high growth potential for the near future. South America and Europe will also see more activity, as 60 percent see manufacturing increases in those regions.
To view the report, click here.
