Momentum auto exec-2009

Automotive

Momentum: KPMG’s Global
Auto Executive Survey 2009
Industry concerns and expectations 2009-2013

kpmg internAtionAl

KPMG Global Auto Executive Survey 2009

Contents –
Foreword 01
Survey methodology 02
Executive summary 04
Introduction 06
Oil prices and the KPMG Global Auto Executive Survey 07
1/ Auto-making in crisis 08
2/ New markets 22
3/ Technology and innovation 26
4/ Beyond crisis: challenges and opportunities 34
Conclusion 40

Foreword 1

Foreword –

KPMG’s Global Auto Executive Survey
2009 coincided with the unfolding of an
unprecedented global economic crisis with
profound implications for the automotive
industry. The expectations recorded in
this survey reflect the depth of the crisis.

The cautious optimism evident among It is clear that the near future is going to be These are difficult times. Yet the KPMG
automotive decision-makers in 2007 is very tough for the automotive industry. Yet Global Auto Executive Survey shows that
gone. In the last quarter of 2008, companies the KPMG Survey also shows that long-term many companies are well aware of the
expect lower revenues, lower profits, concerns have not greatly changed. When challenges they face – and that many are
more bankruptcies, and a long cycle of asked about long-term trends, opportunities ready to build on their strengths as they
restructuring to come. They see more and challenges, companies continue to say face those challenges.
overcapacity emerging, and they believe they retain a long-term focus on innovation
investment will slow. and technology – particularly fuel technologies.

These lowered expectations are not confined The 2009 Survey suggests that innovation
to the mature automotive economies. In China and technology are likely to be at the heart
and India too – economies where growth is of industry efforts to recapture profitability in
still high – companies believe that production the coming months and years. For example,
and sales in the coming five years will be innovation – especially process innovation –
considerably lower than previously anticipated. is still seen by companies as the best way
to cut costs, rather than attacking direct
A sharp lowering of expectations is hardly overheads. Companies also believe that
surprising, given the extent of the current product innovation will be key to rebuilding
Uwe Achterholt
downturn and its impact on auto sales. What sales: it is notable that despite the fall in
Global Chair, Automotive
is surprising can be found in the detail. For energy costs during the last few months,
KPMG in Germany
example, the KPMG Survey shows that many expectations of sales of hybrid and other
automotive companies saw today’s crisis fuel-efficient vehicles continue to rise
coming: our historical comparisons show sharply compared with previous years.
that concerns over the global economy have
actually been rising for the last three years. And in the midst of pessimism, companies
also tell us about success. They say that
effective management will be the key to
success. They do not believe that it is
marketing or brand power that will pull them
out of recession, but the leveraging of
technology and meeting customer needs.

2 KPMG Global Auto Executive Survey 2009

Survey methodology –

The KPMG Global Auto Executive Survey
2009 is the tenth consecutive annual survey
of senior global auto executives carried out
by KPMG firms. This year the survey is more
extensive than in previous years: 200
respondents took part in the survey between
September 22 and October 31 2008, including
companies in the Americas, Asia Pacific,
Europe, Africa and the Middle East.

Survey methodology 3

Survey participants Source:

by job title Key
managers and senior managers
Directors
Head of department
2% ‘C’ level executives
7%
others
5% vice president
president
6%
39%

17%

26%

Survey participants Source:

by company type Key
vehicle manufacturers
tier 1 supplier
14% tier 2 supplier

41%

46%

Each year we ask executives to describe A small number of questions in the survey
themselves and their companies. Although were asked of companies in the U.S. but not
we look for a balanced mix of auto-makers of companies in other countries (these were
and suppliers, this year* no respondents questions relating to U.S. restructuring plans
chose to describe themselves as Tier 3 and progress). Where these results are cited
suppliers, although in previous years the in the survey, they are also flagged as ‘U.S.
survey did include responses from Tier 3 only’ results.
suppliers. In order to present results that are
comparable with previous years, we have
therefore grouped Tier 2 and Tier 3 suppliers
together. This year’s results from Tier 2
suppliers are therefore compared with the
previous two-year results from a
combination of Tier 2 and Tier 3 suppliers.

* Research took place in the last quarter of 2008.
Report published in early 2009.


Executive summary –

The mood has changed, and the
change has been very rapid

Market share expectations continue
Only 12 months ago, companies were
beginning to express a cautious optimism
1/Auto-making in crisis to shift in favor of emerging Asian and
after several years of challenge. Companies mature Japanese and Korean brands
The 2009 KPMG Auto Executive Survey
saw a world where growth was strong, • Chinese brands have moved from
makes it clear that the fundamental issues
and emerging market growth was second to first place in market share
concerning auto-makers have been
unprecedented. They saw margins and expectations, and Indian brands from
rebalanced, but the pattern of concern
profits beginning to be rebuilt, as a result fourth to second place.
remains unchanged.
of long-term restructuring and globalization
• Expectations for U.S. auto-makers have
of manufacturing.
Key issues declined further from a low level.
• Product quality remains the most cited issue.
Today, much of that optimism has been • Europe, Middle East and Africa (EMA)
deferred, if not abandoned. In established • The deterioration of the global economy companies are markedly more optimistic
markets, sales are falling, investments are has continued to rise as a concern. on market share expectation than
being reviewed, and some very large auto companies in the Americas or Asia
• Labor relations continue to fall in importance.
companies are close to insolvency. Pacific (ASPAC).

Margins and profitability are expected
In emerging markets, prospects are being Auto industry assessments of levels of
to fall
scaled back far and fast, as consumer overcapacity have shifted for the worse
• The great majority of companies surveyed
markets are hit by rapid credit contraction and • ASPAC companies are most likely to consider
think there will either be no growth in
a sudden slowdown in overall growth rates. that the industry has overcapacity, while
profits or that profits cannot be predicted
companies in the Americas are least likely.
over the coming five years – and almost a
But auto-making is a long-term business with
quarter think profits will actually decline.
a long-term horizon, and long-term concerns Cost saving is a rising concern
have not changed. Automotive companies • Captive finance company profits are • Innovation (in manufacturing processes and
remain concerned with innovation and the expected to decline sharply. materials technology) is more important
leveraging of technology into products that than direct overhead cost reductions.
• The rate of bankruptcies is expected
will enter the market long after the current
to increase (in 2007 the rate was • The importance of low-cost country
downturn has worked through.
expected to decline). sourcing is falling.

• Tier 1 suppliers are by far the most likely
More M&A and alliances are expected
to consider that bankruptcies will increase.
• High costs and declining economies
will drive restructuring.

• Vehicle makers and dealers expected
to restructure most.

• Investment will grow more slowly – but
innovation investment will be resilient.

Executive summary 5

2/ New markets 3/ Technology and 4/ Beyond crisis:
New-market growth expectations
innovation challenges and
outside China have been rebalanced
Technology and innovation remain
opportunities
• Central and South America
key industry trends
expectations are resilient. Opportunities to find growth remain
• Fuel efficiency improvements,
• Potential for growth seen in alternative
• Africa and the Middle East will alternative fuel technologies and
fuels, fuel efficiency and emerging
also grow. environmental pressures are considered
markets.
the three most influential trends.
Chinese growth seen as significantly • ASPAC companies are more focused on
• Cost concerns are greatest among suppliers.
lower environment-related opportunities.
• Vehicle sales to grow more slowly
Fuel efficiency and alternative propulsion • Only limited opportunities seen in relation
over five years.
will drive product innovation to cost-cutting strategies.
• More than half of companies see • Hybrid systems continue to be the most
overcapacity emerging in the near term. important product innovations. External challenges dominate
• Global economy and financing costs are
• Export expectations are sharply reduced. • Electric and battery technologies are
seen as the key challenges.
growing in importance.
• Vehicle manufacturers most likely
• Overall, there is increasing strategic
to see environmental pressure
focus on technology.
as a challenge.
• ASPAC companies are most
innovation-focused.

Consumer purchases to become
more cost-driven
• For the consumer fuel efficiency now
more important than product quality.

• Affordability is increasing in importance.

• Consumers to become more discriminating.


Introduction –

Seldom has a year made
such difference

Last year’s KPMG Global Auto Executive Meanwhile, the market share winners of
Survey reported on an industry that saw previous years are expected to continue to
itself emerging from a long round of cost advance while the losers will do even worse,
cutting and restructuring. It saw itself say companies. The strong will get stronger,
emerging into a world where overall growth and the weak weaker.
seemed assured, and where both sales and
profits would be higher for companies that Yet what is also striking is that amid
were, in most cases, leaner and fitter. immediate concerns over downturn and
volatility, the auto industry maintains a
In 2008, all that has changed. long-term focus on basic issues, and
The momentum of optimism has been especially on technology, fuel efficiency and
checked: companies are now confronted the environment. On a five-year horizon, say
with a world gone into reverse, where companies, these issues continue to
growth is highly uncertain and where prices dominate their thinking.
and financial conditions are highly volatile.
This change is visible in many areas. It is Times have grown much harder – but the
visible in lower expectations for revenues fundamental drivers of automotive success
and profitability, higher expectations of have not greatly changed.
bankruptcy, and more pessimism on the
speed at which the industry can adapt to
challenging conditions. More companies
expect overcapacity to emerge in key
regions, and that sales and production
growth will fall in emerging markets in
particular. Investment is expected
to grow at a slower pace.

Oil prices and the KPMG Global Auto Executive Survey 7

Oil prices and the KPMG Global Auto
Executive Survey –
This year’s Global Auto Executive
Survey took place against a background
of financial instability and great volatility
in oil prices.

The survey was conducted from the end of This was in stark contrast to the background they report revenues and profitability falling,
September 2008, and through the following of the previous four years of the survey, overcapacity rising, and bankruptcy more likely.
month. During that period, the spot price of when prices rose consistently – the spot Perhaps more surprisingly, they also say that
West Texas Intermediate (WTI) crude oil fell price of WTI rose from US$33.01 a barrel on they expect the importance of hybrid and
from US$96.29 a barrel (on September 29) January 1, 2004, to US$99.64 on January 1, fuel-efficient vehicles to grow very strongly.
to US$61.92 a barrel (on October 27). At the 2008, spiking at US$141.06 a barrel on We believe this reflects the fact that oil
same time an unprecedented global financial July 1, 2008. Growth was high in the prices remain historically high. At the time of
crisis unfolded, and governments around the Organisation for Economic Co-operation publication, the oil price was around US$50
world committed large sums to bailing out and Development (OECD) countries and a barrel – lower in inflation-adjusted terms
banks and stimulating their faltering economies. at unprecedented levels in the four BRIC* than any of the previous three years.
emerging economies. But this is markedly higher than the
inflation-adjusted average over the past
What does this background of instability and two decades, when from 1988 to 2007 oil
price fall mean for this year’s survey results – averaged US$33.36 a barrel in inflation-
given that expectations built up over the adjusted terms (2007 dollars).
previous four years were being challenged
(Price sources: U.S. Energy Information Administration;
by very rapid changes in external conditions? inflationdata.com)
It is clear from the results that most, if not all,
*Brazil, Russia, India and China
companies answered the survey questions
fully aware of the extent of the downturn:


1/ Auto-making in crisis

Global economy
How important is each of the following
issues to the current state

concerns rising
of the auto industry?

Source:

Key
2006
2007
2008

90%
Product quality 96%
94%
87%
The global economy 81%
76%
85%
Reducing costs 86%
89%
82%
New technologies 83%
81%
81%
New products 79%
73%
72%
Affordability No data for 2006 and 2007

69%
Environmental issues 52% 63%
52%

72%
Product/pricing incentives 65%
70%
49%
Labor relations 59%
52%

40 50 60 70 80 90 100

% rating important 4-5 on a scale of 1-5, where 1 means “Not at all important” and 5 means “Extremely important”

The mood of the world’s auto industry has Yet in retrospect, it is clear that some of the However, the number of companies citing
reversed: after the relative optimism of 2007 industry’s most fundamental concerns have labor relations as important has fallen in
with its expectations of a gradual return to been on a rising track for some time. When 2008: just under half of companies rate labor
stability and prosperity, expectations in 2008 companies were asked what were the most relations as important in 2008, compared
have changed for the worse. important issues for the industry overall – with 59 percent in 2007. The number of
the question that reveals the relative weight companies rating labor relations as
of long-term concerns – in 2008, the unimportant has also risen sharply from
deterioration of the global economy rose to 9 percent in 2007 to 16 percent in 2008.
second place (from fourth place in 2007). This is consistent with the deterioration of
While traditional long-term concerns hold confidence in other areas in 2008: while last
their place in the rankings of overall issues year companies remained concerned about
(product quality remains the most cited labor shortages – especially in the fastest
issue, for example) companies have been expanding markets – in 2008, they appear to
consistently forecasting a deterioration of expect their key labor markets to loosen.
overall global growth for the last four years,
with concerns about the global economy
rising year on year from 2005.


Profi
forecast to be
ts Do you think the number of
bankruptcies will increase, remain

lower and more volatile the same, or decrease in the next
few years?

Source:

Key
As financial costs rise and raw material 50

costs remain volatile, expectations that 46% 2006
profitability over the next five years will 2007
also remain volatile have risen very sharply. 2008
An increase of expectations of ‘volatile 40 38%
37%
or unpredictable’ profits from 37 percent
of respondents in 2007 to 46 percent of
respondents in 2008 represents a sharp
30
rise in uncertainty and one that is all the
more striking in that the automotive industry 26% 26%
24%
relies to an unusual degree on long-range 23%
forecasting. The minority of companies
20 19%
predicting rising profits in 2007 (26 percent)
16%
has also fallen sharply in 2008, to only 15% 15%
14%
15 percent. The great majority of companies
(85 percent) think there will be either no 10
growth in profits, or that profits cannot
be predicted over the coming five years.
And almost a quarter (24 percent) think
profits will actually decline. 0
The profitability of the The profitability of The profitability of The profitability
industry will be volatile the industry will the industry will of the industry will
and unpredictable generally rise basically be flat generally decline

Suppliers seen as Of the following types of automotive
companies, which do you expect to be

least profitable among the most profitable over the
next five years?
(Multiple responses allowed)

Source:
80
76%
Who will suffer most from the expected Key
decline in profitability? Companies believe 2007
that the pain will be distributed 2008
approximately according to a respective 60
54% 56%
position in the automotive value chain: Tier 3 50% 50% 49%
suppliers, where profitability is in any case 45%
lowest, will suffer most (only 36 percent of 40% 40%
respondents see Tier 3 companies as 40
36%
profitability leaders). This pattern is the same
27%
as 2007, with one very significant exception:
the sharp decline in expectations for captive
20
finance companies. Expectations of their
profitability have collapsed from 76 percent
of respondents to only 54 percent,
reflecting the liquidity squeeze and the
0
recent unprecedented rise in the cost of
Captive Vehicle Dealers Tier 1 suppliers Tier 2 suppliers Tier 3 suppliers*
wholesale funding. finance manufacturer
companies

*In previous years Tier 2 and 3 suppliers were combined in the questionnaire


Asian finance companies
may suffer

On a regional basis, companies are in broad
agreement about the impact of what is
expected to be a very difficult period for
profitability – with one exception. Asia is
significantly more pessimistic about the
profit prospects for finance companies.
As both consumers and financial institutions
in Asia tend to have less debt – and thus,
in principle, more borrowing capacity
than their counterparts in Europe and
the Americas – this pessimism is all the
more striking, reflecting both the global
nature of the contraction in demand and
the narrowing of financing options.

Of the following types of automotive
companies, which do you expect to be
among the most profitable over the
next five years?

Source:

Key
Americas
80 emA
ASpAC
64% 100

60 90%
55% 56% 55% 56%
52% 87% 87%
49% 48%
47%
44% 45%
80
40% 41%
73%40% 37% 45%
40 70% 36%
68% 68% 33%
65%
62%
59%
60

20

40

0
Vehicle Financial Tier 1 suppliers Tier 2 suppliers Dealers Tier 3 suppliers
manufacturer services companies

20

0
Declining Non-competitive Excess debt Pension liability Healthcare
revenue base cost structure benefit cost


Bankruptcies to rise Do you think the number of
bankruptcies will increase, remain
the same, or decrease in the next
few years?

Source:

Key
Companies say they expect that the rate of
bankruptcies will increase. The deterioration 2006
80 77% 2007
in expectations is both very steep and
represents a reversal of trend. Only 12 2008
months ago, companies reported increasing
optimism with expectations of increased
60 56%
bankruptcies falling year on year from 56
percent to 36 percent. In 2008, 77 percent 48%
of companies expected the rate to increase
– one of the largest one-year deteriorations 40 36%
in expectation in the survey. The number
31%
of companies expecting no change has
fallen sharply, while the number expecting
20%
bankruptcies to fall has declined to a barely 20
significant 3 percent. 13%
10%

3%

0
Increase Remain the same Decrease

Revenue loss a Which of the following do you think
are among the most important drivers

key concern of bankruptcy?
(Multiple responses allowed)

Source:

Key
Loss of revenues as demand growth slows 100
2007
or goes into reverse has taken over as the 90%
2008
most important driver of bankruptcy – cited 87% 87%

by 90 percent of respondents, compared
to 70 percent the previous year. However, 80
73%
it is striking that all the potential drivers of 70%
68% 68%
bankruptcy are cited more often in 2008 than 65%
in 2007 (multiple answers could be given), 62%
59%
60
suggesting that companies believe that
legacy cost structures, indebtedness
and social costs, including pensions
and healthcare, are all exerting greater
40
negative pressure in the deteriorating
business environment.

20

0
Declining Non-competitive Excess debt Pension liability Healthcare
revenue base cost structure benefit cost


Tier 1 suppliers see

most bankruptcies

Tier 1 suppliers are markedly the most likely
to consider that bankruptcies will increase, Do you think the number of
with 87 percent forecasting an increase, bankruptcies will increase,
against 75 percent of vehicle manufacturers remain the same, or decrease
(vehicle manufacturers are the only class of in the next few years?
company where any respondents believe that
bankruptcies may decrease. This may reflect Source:
their expectation of direct government KPMG Global Auto Executive Survey 2009
support packages during 2009). No Tier 2 Key
suppliers forecast a decrease in bankruptcies,
increase
but they are also most likely to see the
remain the same
bankruptcy rate as flat. There were no Tier 3
Decrease
suppliers in the 2009 survey – see
methodology note on page 3.

8%
13%

17% 33%

67%

75%

87%

OEMs Tier 1 supplier Tier 2 supplier


Chinese and Indian brands
to gain market share

Market share expectations continue to shift On a regional basis, EMA companies are
in favor of emerging Asian and mature markedly more optimistic on market share
Japanese and Korean brands; U.S. brands expectation than companies in the Americas
are expected to perform worst. Year on year or ASPAC – and in particular, they are more
Chinese brands have moved from second to optimistic on the prospects for European
first place in market share expectations, and brands (more than half of EMA companies
Indian brands from fourth to second place, see market share increases for VW
relegating Toyota from top position to third. and BMW).
Expectations of Honda’s market share have
grown, as have expectations for many
European brands. Meanwhile, expectations
for General Motors, Ford and Chrysler have
declined further from an already low level,
with 63 percent of respondents expecting
Ford to lose market share, 66 percent for
General Motors and 69 percent for Chrysler.

For each of the following companies,
over the next five years, will their
market share increase, remain the
same, or decrease?

Source:

Key
increase
remain the same
Decrease

100
7% 6% 11% 12% 9% 13% 14% 16% 28% 30% 17% 35% 32% 30% 66% 63% 69%

12% 16%
22% 28%
22%
26% 43% 45%
80
51%
81%
78%

39%
37% 53%
68% 67% 48%
60 44%
62%
60%

40
43%
40%
24%
12%
33% 33% 32% 21%

20
20% 20%
17%
15%
13%
10%
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Overcapacity Is there global overcapacity in
the automotive industry today?

to increase If yes, how much?

Source:

Key

Auto industry assessments of levels of 59%
2006
60
overcapacity have also shifted, for the 2007
worse, reflecting the declining demand 2008
expectations. Overall, more companies 48
44%
believe that overcapacity is now an issue,
and the proportion of respondents believing
it to be in the range of 11-20 percent has 36
32%
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to 59 percent. This assessment is confirmed 24%
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15% 15%
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0% 0% 0%
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None 1-10% 11-20% 21-30% 31-40% More than 40%

Asian companies see Is there global overcapacity in the
automotive industry today?

most overcapacity (Multiple responses allowed)

Source:
100

Regional assessments of the level of 85% 86%
overcapacity do not differ markedly,
80
although ASPAC companies are most 77%

likely to consider that the industry has
overcapacity, while companies in the
Americas are least likely. Yet in all cases, 60
the proportion of companies seeing
overcapacity is high – even in the
Americas more than three quarters
of companies see overcapacity. 40

20

0
Americas EMEA ASPAC

Note: ‘Yes’ percentages represented


Cost saving is
innovation-focused

Amid declining revenues and falling
profitability, companies will need to cut
costs further. In 2008, companies were
generally more likely to rate cost savings
opportunities as important, compared
to 2007. Respondents continue to see
innovation (in manufacturing process and
materials technology) as a more important
cost-saving opportunity than direct overhead
cost reductions. The one area of potential
cost saving that has fallen –both in relative
and absolute importance in respondents’
ratings – is low-cost country sourcing,
reflecting the widespread belief that the
direct cost advantage of low-cost country
sourcing has largely been captured, and that
future savings will be found in process and
productivity improvements.

For auto manufacturers and suppliers,
rate their opportunity for future cost
savings in the following areas

Source:

Key
2006
2007
2008

Manufacturing process and 70%
technology innovations 67%
(including plant flexibility) 66%
59%
Low-cost country sourcing 65%
61%
67%
Product materials innovation 57%
61%

Overhead cost reduction 50%
including shared services 46%
36%

Healthcare, benefits 28%
46%
and pension costs 34%
29%
Direct labor 46%
32%

Computer modeling and 43%
43%
simulation in design 38%
31%
Local regional tax incentives 16% 26%
16%
48%
Restructuring No data for 2006 and 2007

58%
Supply chain management No data for 2006 and 2007

10 20 30 40 50 60 70


Suppliers see most cost-
saving opportunities

For auto manufacturers and suppliers,
Tier 2 suppliers have higher expectations
rate their opportunity for future
of finding cost savings in almost all areas
cost-savings in the following areas
except social costs and supply chain
management. In particular, they see more
Source:
savings potential in restructuring – reflecting
the likely productivity and profitability gains
in what is the most fragmented segment Key
of the automotive supply chain.
oems
tier 1 supplier
tier 2 supplier
100

90

80
77%

70%
70 68%69% 67%
65%66%
62% 63%
60 59%
57% 56%
55%
52%
50 49%49% 49%

43% 43%44%44%
41%
40

32%
29%30% 30%
30 28%
27% 27%
25%

20

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Momentum auto exec-2009

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