Two-thirds of automotive executives believe the recent industry restructuring did not go far enough in addressing fundamental structural weaknesses, according to a new Booz & Co. report, which identifies lessons to help OEMs and suppliers improve their chances of future success.

Despite positive forecasts for the United States automotive industry, a new Booz & Company report says that auto executives remain pessimistic about the industry’s outlook. The global consulting firm found widespread skepticism about the auto industry overall.

Whereas leading industry forecasters expect sales to exceed 16 million vehicles by 2015, auto manufacturers and suppliers surveyed by Booz & Co. expect vehicle sales to reach 14.5 million units during the same period. While respondents report some improvement since the recent industry restructuring, nearly two-thirds believe the industry shake-up did not go far enough in addressing fundamental structural weaknesses and that the industry is not on a path to achieving full return on invested capital. In fact, 30 percent of auto executives expect a major automotive manufacturer to fail in the next two years.

Based on a survey of more than 200 executives from more than 40 companies, including major original equipment manufacturers (OEMs) and auto-component suppliers, the report identifies what auto executives consider critical near-term challenges: rising competitive pressure (76 percent); pricing (53 percent); the macroeconomic situation (45 percent); and labor relations and legacy costs (34 percent).

Auto executives are much more optimistic about their own businesses than the overall industry. More than 80 percent of respondents expect to gain market share in the next three years, an optimism likely driven by strong results so far this year. Thirty percent of suppliers and 25 percent of OEMs anticipate their companies’ revenue growth to exceed 15 percent in 2011.

Meanwhile, suppliers, many of whom have been successful at cutting costs since the industry restructuring, are largely optimistic about their pace of growth over the next year relative to the past two years. In fact, sales are expanding so quickly that 42 percent of supplier executives surveyed said that the availability of engineering and R&D capabilities was far and away the main obstacle to future growth.

OEMs and suppliers both cite China as the biggest looming challenge. Fully 90 percent of executives believe that Chinese automakers will make cars equal in quality to American-made vehicles in the next decade; approximately half of all survey respondents said this could occur in five years.

“Although there has been significant improvement in both product strategy and operations as a result of the restructuring, there is still a lot of work to do,” Scott Corwin, a Booz & Company partner, said in an announcement of the findings. “Many of the practices that got the industry into trouble could re-emerge, particularly if vehicle production exceeds real market demand.”

Lessons for the U.S. Auto Industry
Based on the survey feedback, Booz & Company identified lessons to help the U.S. automotive industry improve its chances of success in a highly competitive, increasingly global market.

For OEMs:

• Focus more intently on building attractive vehicles and rebuilding brands that give American car buyers reasons to “fall in love” again;
• Create vehicles with exciting designs and styling, superior quality, reliability and durability, and technological innovation;
• Rather than rely on a few blockbuster products, instead create portfolios and development systems that produce a positive ROI for all vehicles;
• Continue lowering material and structural costs, while bringing new technology to market cost effectively; and
• Prepare for global competitors that are early adopters of advanced technologies and have better cost structures and greater experience in emerging market segments.

For suppliers:

• Manage portfolios better, focusing on markets where they have the greatest capabilities and opportunity to create a sustained competitive advantage;
• Whenever possible, promote collaborative cost-based agreements with OEMs that give automakers transparency into relevant operations and allow suppliers to earn a fair ROI;
• As industry consolidation intensifies, actively assess the industry structure for each core business and reconsider their future role (e.g., Are they a buyer or a seller?); and
• Accelerate efforts to find greater leverage with high-quality product lines by innovating wisely and focusing on areas that create consumer demand.

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Resources

2011 U.S. Automotive Survey: It the U.S. Auto Industry Ready for Economic Recovery?
Booz & Company, April 2011

…U.S. Automotive Executives Skeptical About the Industry’s Economic Recovery
Booz & Company, April 20, 2011

Global Auto Execs Anticipate Market Share Gains by U.S. Manufacturers Over Next Five Years…
KPMG LLP, Jan. 6, 2011

Auto Industry Outlook and Review – March 2011
Zacks Equity Research, March 10, 2011

April 2011 U.S. New-Vehicle Retail Sales Update
J.D. Power and Associates, April 19, 2011