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(originally published by Booz & Company)


Optimism Returns to the American Automotive Industry

Automobiles are selling again, and executives are confident. The U.S. auto industry is positioned for a global economic recovery — if car manufacturers can avoid repeating the mistakes of the past.

The U.S. auto industry is emerging from one of the darkest periods in its history. Car sales are climbing, and most estimates predict total sales of more than 14 million vehicles in 2012, an increase of nearly 9 percent over 2011. Car manufacturers and suppliers are increasingly profitable, and many automotive industry executives are more bullish about their own prospects, and those of the industry at large, than they have been for years.

More than 200 executives from 75 automakers, suppliers, and dealer groups responded to Booz & Company’s annual U.S. Automotive Industry Survey and Confidence Index, conducted in February and March. Ninety-three percent of the survey respondents view the industry as stronger than a year ago. This is in stark contrast to the results from the 2011 survey, when more than half of all respondents said the industry was about the same as or worse than in 2009. (See Exhibit 1.) Unlike housing, which is still searching for a bottom, the automotive industry has emerged from the lows of the 2008–09 recession with a much stronger and more stable foundation for profitable growth.

It’s a success story that would have seemed implausible in 2009. The industry’s current strength stems from a combination of external forces and the industry’s own improvement, resulting in a far better alignment between supply and demand. (See Exhibit 2.) On the supply side, 65 percent of respondents cited the auto industry’s restructuring as one of the top three drivers of strong performance. Automotive companies have gone to great lengths to improve balance sheets, remove excess capacity, and reduce costs. These efforts have allowed both suppliers and manufacturers to lower their break-even point, enabling them to turn a profit on a much smaller total industry volume.

Better product offerings are a significant factor as well, and new vehicle launches are offering a level of performance, technology, safety features, and fuel efficiency never before seen — giving customers far better value than in the past. Quality ratings for the industry as a whole are continuing to improve, and the gap between domestics and imports has narrowed considerably.

Externally, several factors are turning in the industry’s favor. Consumer confidence is increasing and credit is more widely available. Rising fuel prices are prompting some buyers to upgrade to more fuel-efficient models. Pent-up demand is also spurring sales. The average U.S. car today is more than 10 years old and has logged more than 100,000 miles; both numbers are far above historical averages. Many consumers who put off purchasing a new car during the recession have less reason to do so now.

The new U.S. auto industry has some major differences from the old one, however. For one thing, the current optimism among executives is noticeably tempered. The industry has expressed a sober consensus that it needs to grow intelligently, preventing capacity from growing faster than natural market demand. Projected industry volume of roughly 14 million cars and light trucks in 2012 still represents a drop of nearly 20 percent from the levels sustained through much of the 2000s, which hovered at 16 million to 17 million. Yet this lower baseline represents a much better equilibrium between supply and demand. Instead of focusing on volume and share, automakers are working to build brand equity with consumers, improve the customer experience, strengthen their cost position, and compete globally. Similarly, suppliers have managed to regain some leverage in their relationships with manufacturers, and they’re working to stretch existing production capacity, rather than invest in new fixed assets. “The industry is the most rational it’s been in my 30 years of experience,” says Dave Cosper, vice chairman and CFO at Sonic Automotive, which has more than 100 dealerships in 15 states and sells 30 makes.

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  1. Ben Klayman, “GM Focusing on Profits, Not Market Share: CEO,” Reuters, January 9, 2012: Describes CEO Dan Akerson’s comments at the Detroit auto show regarding GM’s renewed push on fundamentals rather than sales volume.
  2. Alan Ohnsman, “Hyundai Puts Quality Advances Ahead of 2012 U.S. Sales Goals,” Bloomberg Business Week, January 9, 2012: Describes the automaker’s willingness to sacrifice incremental sales growth and focus instead on improving its quality scores.
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