To many people, the U.S. auto industry appears to be on the mend. After an epic sales collapse in the wake of the 2008–09 recession, General Motors, Ford, and Chrysler were all profitable again in early 2011, and European and Korean manufacturers in the U.S. were also enjoying strong results. Only the Japanese transplants are facing earnings pressure, as they wrestle with massive disruptions to their global supply chains and production facilities, due to the earthquake and tsunami at home. Although the U.S. has slipped to number two behind China in auto sales, the U.S. market is still among the world’s most profitable, thanks to consumers’ enthusiasm for high-margin luxury cars, SUVs, and light trucks. Leading forecasters predict that light-vehicle sales in the U.S. will rise to more than 16 million in 2015, up from 11.6 million in 2010.
Yet auto industry insiders themselves are anything but sanguine. A Booz & Company survey of more than 200 executives from 40-plus automakers and suppliers revealed more modest expectations — only 13.5 million in vehicle sales in 2013 and 14.5 million in 2015. The reason: By the executives’ own reckoning, most automobile companies have not fully gotten their managerial houses in order. Almost half of the survey respondents said that the auto industry restructuring of 2009–10 did not go far enough. Two-thirds said that automakers and auto suppliers in general were not yet on a path to achieving sustained, full returns on invested capital. In fact, the auto executives viewed the overall tenuousness of their industry as so potentially serious that almost 30 percent said they expect a major automobile company to fail in the next two years.
For U.S. auto companies, the bankruptcies and restructurings — as well as the stronger focus on lean factories and new union agreements that grew out of the recession — have significantly reduced operational costs, sanitized balance sheets, and eliminated health and pension legacy expenses, or at least helped to make them more manageable. In many ways, however, those steps were the bare minimum necessary for the industry to survive the downturn. As Edward Tse, Bill Russo, and Ronald Haddock suggest in “Competing for the Global Middle Class” (s+b, Autumn 2011), car sales are increasing rapidly in the dynamic new global middle class of emerging markets — but new competitors are also proliferating to serve this market. Can today’s automakers continue to thrive in an industry that will be more in flux and more competitive than ever before? According to the survey, auto executives themselves are not sure.
“If you look at the industry before the sales downturn, it was hyperinflated,” says Ernest Bastien, vice president of retail market development at Toyota USA. “People were using their home equity and easy-to-get loans to take advantage of extraordinary incentives that were being offered. In fact, the industry was not as robust as it looked. Going forward, automakers are going to have to rely on a more fundamental but complex equation for growth: making the right amount of great, high-quality cars and proving to consumers that their brand is the best in terms of total cost of ownership, drivability, and reliability.”
When asked to rank their companies’ most critical challenges, more than 50 percent of the manufacturing executives surveyed chose increasing competitive pressure. (See Exhibit 1.) And although Japanese, Korean, and European rivals are certainly formidable competitors, the looming presence of Chinese companies casts the largest shadow. Fully 90 percent of these executives said that Chinese automakers would be making cars equal in quality to American-made vehicles by 2021. About half of all survey respondents, from manufacturers and suppliers, said this could occur by 2016. In other words, the executives said they believe that companies like Geely Automobile Holdings, which acquired the Volvo brand from Ford, and BYD Company, partially owned by Warren Buffett, will achieve in 10 years what Toyota and other Japanese companies took 30 years, and Korean automakers took 20 years, to do.