Interesting Perspective on the State of the US Auto Industry

State of the US Automotive Industry
YPO Global Conference Call – 10/12/08

Dennis Desrosiers, Desrosiers Automotive Consultants, http://www.desrosiers.ca/

· Dennis Desrosiers is a long time auto industry analyst and consultant – based in Canada and specializes in the Canadian sector but tracks and comments on North America and the Global trends and issues. He is one of the special advisors to the Canadian Government on this industry issue.

Conclusion
· This issue is here to stay for a while. There is a global market issue but the industry crisis is really centered in the US.

· The market must return first – and that could take until 2013 or beyond to get back to current new car demand levels

· The “structural” issues with the Big 3 will take even longer – realistically it’s a 2015 “fix”.

· The Big 3 need to become the Big 2 or potentially the Big 1 – Chrysler will be the first to go and has several quality assets that will be split up and acquired/assumed by others.

· The current financial assistance plans are not the solution, not even a good band aid – realistically the $15B assistance will provide 90 days of life support and the same issues will exist at the end of that window.

Comments
· The market issue is driven by 10 years of overbuying and there is no short term solution out of this ….just a fundamental correction. Consumers, especially in the US have been incented into maintaining new car purchase levels at above sustainable levels.

· Interesting fact. Canada and the Global (ex US) data point is 0.7 cars per adult driver. The US ratio is 1.3. This overconsumption of cars in the US isn’t sustainable and will correct – this will and is causing a significant adjustment in US new car sales for the next 5 years.

· US Market – if you remove fleet and government sales from the mix 60% of the US market is now imports and the Domestic Big 3 are 40% share and declining.

Projections:
Canada – annual new car volume has been approx 1.6M units & is projected to drop to 1.5M
Mexico – projected 8% decline.
US. – much more complicated.

The US has been running at around 17.5M new car units per year. The normalized run rate should have been approx 15M units. So the market has been over consuming by 2.5M per year driven through purchase incentives.

Conservative estimates suggest that the market will correct to 12M in 09 and ’10 and then grow to 14M (’11), 15M (’12) and 16 (’13) – still below today’s new car levels by 2013. There are some scarier scenarios that suggest that should US consumers begin to adjust their 1.03 cars per adult ratio and with the glut of used cars in the field that the normalized demand could be as low as 9M – 10M new units for the 2009 and 2010. That significant drop would cause a massive adjustment in the Big 3 – Big 2 – Big 1 scenario.

· Chrysler – no likely purchaser for the full package (GM and Renault/Nissan would be the front runners but clearly GM is out of the race and the European market conditions would make a full deal impossible for Renault). Viewed that the Chinese are no longer probable candidates – their product range is just too far away 5+ years. The more likely scenario is a break up – GM takes the minivan range, Renault takes the truck business, Jeep will have multiple party interest, the Chrysler car range will have no interest and get buried.

· Legacy costs are insurmountable. Not discussed in the media but on current mfr costs – the legacy costs for health care and pensions are approximately $2,000 per new vehicle – the same input cost as steel. No matter what the industry does to reposition it can’t get out from underneath the legacy burdens – it really progresses the Chapter 11 scenario.

· Future state of the dealerships. Projected significant shakeout – up to 50% of the dealership count. Highly unlikely the industry can restructure to a pull through model so the dealers will still be counted on for carrying the inventory burden but projected that in the future model/colour variety options will be reduced as will the high touch state of the dealership structure today. Desrosiers is a big fan of how the Japanese and Koreans are managing their dealer network and believes that they value dealer profitability and are structuring their networks to create profitable (powerful) dealers. On the other hand he states that a fundamental competitive disadvantage for the Big 3 is they built their structure on wanting a weak dealer base (to protect factory power) and this is really hurting them in a time of need. Desrosiers believes in dealership consolidation and dealer groups and believes that it’s serving to better equalize the power base between the factory and the dealerships. He believes that the future of the dealership network will be a web of dealer groups – smaller dealer count, consolidated ownership, better structure, more powerful voice.

· Future state of product mix. Green/fuel efficient technologies/car downsizing is a here to stay trend globally. BUT Desrosiers suggests that there is nothing to suggest that (despite all of the press) that the US consumer is really ready for this trend and is prepared to make the personal switch. He therefore sees political requirements for green technology as part of the Big 3 support plan a huge red flag – political pressure and hooks may require the Big 3 to change faster than their customer base is prepared to change – thus more market and market share issues in the future. He also believes that green technology is too diverse right now – too many technologies to choose from, too many people working on different solutions. In order to make a real impact there needs to be quick convergence – pick the leading technology and divert the massive research $’s into commercialization. Get focused.

· Future state of parts and accessories. OE suppliers are in massive trouble and there will be tremendous Chapter 11 occurrences with the significant reduction in 5 year new car demand. On the other hand, aftermarket parts suppliers and retailers will do okay. The prediction is the used car over supply will get sucked up in the next 3-5 years which will mean more repair and investment in an ageing road fleet.