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(originally published by Booz & Company)


Optimism Returns to the American Automotive Industry

Among vehicle manufacturers, this entails a new approach: fewer, more profitable car sales each year. One clear sign of this shift in orientation is production capacity. Instead of ramping up to match the highest rate of recovery — the equivalent of recalibrating to the high-water mark — vehicle manufacturers are maintaining a highly disciplined stance. Certain manufacturers are operating with very low inventories; for example, some report as few as 15 to 20 DSO (days sales outstanding), which is far lower than the peak levels of 100 DSO experienced a few years ago.

Hyundai is a good example. Among respondents to our survey, 88 percent expect Hyundai and its affiliate brand, Kia, to grow share over the next five years, more than any other manufacturer. Yet Hyundai has publicly stated that it does not have a goal of aggressively increasing U.S. sales. Instead, it is focusing on improving its quality rankings and brand perception.

Survey respondents also said that Ford, Volkswagen/Audi, and, to a lesser degree, BMW would gain market share over the next five years. Yet relative market share is no longer as significant as it was five years ago — another way in which the industry has changed recently. In a rising market, now that manufacturers have effectively lowered their cost base to become profitable at lower volumes, they can enjoy the benefit of annual increases in market volumes, selling more vehicles profitably and not obsessing over slivers of share to the degree that they did in the past. This will also enable them to maintain a better balance between supply and demand, and focus on medium- and long-term profitability. As Daniel Akerson, the CEO of General Motors, told reporters at the North American International Auto Show in Detroit in January, “I like profitability more than I do market share.”

These industry dynamics have also helped manufacturers remain disciplined about pricing. (See Exhibit 3.) Many auto manufacturers have reduced their need to rely on sales incentives, which were useful when supply greatly exceeded demand. According to, sales incentives for March were down more than 3 percent from the prior month, and nearly 10 percent from March 2011, putting them at their lowest level for any March since 2002.

It is worth noting that these gains come during a period when sales are rising rapidly and price discipline is easier to maintain. Some in the industry question whether this discipline can last. “I’m not sure we’ve really slain the dragon yet,” says Scot Eisenfelder, vice president of strategy at AutoNation. “I still see evidence of push-based distribution, whether it’s in pockets of particular vehicles or whole model lineups. We don’t have a system that reflects true demand.” The real test will come when the market experiences a month — or several — of slow sales and inventories build up. When that happens, will automakers stay disciplined and work to “sell the car”? Or will they try to “sell the deal”?

Suppliers have also become much more disciplined about pricing and production. This is a significant change from recent years, when many auto suppliers struggled to earn a return on their invested capital. For far too long, many suppliers had been burdened with a huge asset base — after investing heavily to meet the often over-optimistic sales estimates of carmakers — and were caught in a downward spiral of bidding down their prices in a quest to win business at all costs and fill the factory. When sales declined in 2009 and 2010, the situation became untenable; more than 60 suppliers filed for bankruptcy and hundreds of smaller companies simply folded.

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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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