U.S. Auto Outlook 2008 Michelle Collins, Deloitte & Touche USA 2008 should be a challenging, yet exciting, year for the U.S. automotive industry. Fresh from finalizing new contracts with the UAW and with restructuring plans well under way, the U.S. "Big 3" automakers are poised to become more competitive. However, the U.S. market remains very competitive for all automakers. Given that this highly contested arena is also forecasting slow growth for the next several years, it becomes imperative that automakers look to emerging markets for new revenue opportunities. The industry has already seen tremendous growth in the emerging markets of Brazil, Russia, India and China. Their seemingly unlimited potential could offset the anticipated flat-to-slow growth in the U.S. and European markets. In the coming year, the industry will likely see continued restructuring as both OEM and suppliers re-evaluate their market position and look to shed noncore products and assets. In a similar vein, industry players will look for potential strategic acquisitions to strengthen their competitive positions and product portfolios. Also, private equity (PE) ownership will continue to play an important role in the industry's transformation. For example, New York-based Cerberus Capital Management, which assumed Chrysler majority ownership in August 2007, moved quickly to bring in experienced executives from both outside and inside the industry, signaling to the market its serious commitment to succeed. Finally, watch for the forces of globalization to fuel the sector's transformation. An emerging trend, and one that is gaining momentum, is increasing inbound U.S. investments by Chinese, Indian, and Russian entities looking to expand their enterprises globally. Several other trends and issues will shape the automotive industry in 2008: New Alliances and Partnerships - As global OEMs and suppliers look for opportunities around innovation and technology, new and different kinds of alliances, partnerships, and equity investments will continue to become increasingly common. For example, GM, Daimler, and BMW formed an alliance called the "Global Hybrid Cooperation" to develop a next-generation hybrid powertrain system. GM and Ford jointly developed a six-speed automatic transmission that is on the road today. Cooperation between OEMs, as well as between OEMs and suppliers, will become an increasingly common and necessary industry dynamic. Consumer Loyalty - Closely linked to the issue of competition is the challenge of maintaining customer loyalty. Consumers today have more choices for automotive vehicles than ever before. When the potential for customer dissatisfaction with product quality, price or performance is added to the mix, loyalty can become severely eroded. As OEMs compete for market share in the coming year, they will need to examine their sales and marketing approaches and product offerings (Generations X and Y have different purchase triggers than Baby Boomers) and identify ways to improve and maintain customer loyalty to bring people back into their showrooms. Tightening Credit Market and Higher Commodity Prices - A tightening credit market due to the subprime mortgage crisis and a spike in oil and gas prices has had - and will continue to have - an adverse impact on consumer confidence and spending. The anticipated impacts to the automotive industryin 2008 will be lower consumer demand for new vehicles and higher materials costs for OEMs and suppliers. Environmental Sustainability - The U.S. automotive industry is routinely criticized for being slow to address environmental issues in the face of increasing fuel costs and consumer environmental concerns. While European and Japanese OEMs have led in the development of fuel-efficient vehicles, traditional U.S. OEMs are now beginning to adapt their product offerings to address consumer demands for improved fuel efficiency and potential legislation on fuel economy standards (Corporate Average Fuel Economy). As they examine options to make their products more fuel-efficient and environmentally compatible, U.S. manufacturers are faced with myriad questions: Are hybrids or all-electrics the best path to sustainability? Is there demand for diesel powertrains? Is ethanol the fuel of the future? Is hydrogen the long-term fuel solution? U.S. OEMs will have to investigate many potential paths to determine which strategy will be best for the consumer, their company and the environment "Going green" and environmental sustainability are issues that are here to stay and the specter of new legislative mandates resulting from the 2008 elections should provide impetus for the industry to start developing common solutions to fuel economy and other environmental issues. Talent Management - The automotive industry is anticipating a dearth of talent in the coming years. Not only is it facing the retirement of significant numbers of workers, the industry is at an extreme disadvantage when it comes to attracting new talent because it is not perceived as being exciting or glamorous. Adding to the challenge is the rapidly advancing complexity of automotive technologies that often require specialized college degrees and skill sets. Auto companies first need to address the fact that they are not just competing among themselves for talent but with flashy, high-tech Silicon Valley companies (among others). Also, the auto industry must consider that salaries are not necessarily a top priority for Gen Y and Gen X employees but attaining work/life balance can be. Finally, the traditionally male-dominated auto industry will need to identify more effective ways to attract female candidates. It will be an uphill climb to change the industry's image, but one thing in its favour is that automobiles are still the most exciting and personal consumer products in the world. The automotive industry has always been dynamic. While the coming year promises to be challenging, it is also ripe with opportunities for companies to break from the pack. Innovation and the creative application of new technologies will be the hallmarks of those auto companies and suppliers that prosper. Ultimately, though, the secret to success has not changed since the industry's inception: Offer the right car that meets the right needs at the right price. Tracking Canadian Auto Sector The auto sector has traditionally been front and centre when it comes to understanding Canadian export performance. But recent trends have taken the sector down a notch in relative importance, and the outlook for 2008 is for more of the same. Autos and parts remain the second-largest export sector for Canada, at just over $70 billion in 2007. Energy exports have leapt into first place, generating revenues of nearly $92 billion in 2007. Close behind autos is exports of services - tourism, financial services, engineering and professional services, and so on - at nearly $68 billion. This is more than a case of energy exports outpacing the rest of the field, however, as Canada's exports of autos and parts have been falling in absolute terms. Back in 2002, for example, Canadian auto exports were about $85 billion, and they were as high as $87 billion in 1999-2000. That makes for a drop of nearly 20% from 1999-2000 to 2007. The fact is that Canada is now producing fewer vehicles. Production of light vehicles was over 2.9 million units annually back in 1999-2000, but that was down to 2.5 million in 2007, a drop of about 14%. There was an even larger drop in the U.S. over the same period, from 12.5 million units to 10.5 million, or a 16% drop. Contrast that with developments in Mexico, where production averaged 1.7 million units back in 1999-2000, but edged over 2 million units in 2007, an 18% increase. The parts sector has been faring better than the assembly sector. Canadian exports of auto parts have fallen by about 9% since the 1999-2000 boom versus a drop of over 20% for vehicles. Moreover, Canadian parts suppliers have managed to connect themselves to the Mexican auto growth story - Canadian parts exports to Mexico have grown by over 40% since 1999-2000. So, what's the story? There are undoubtedly a lot of factors at play - consolidation in the industry, increased competition from imported vehicles, declining retail prices for autos and the passing-down of these pressures into the parts supply chain, to cite a few. The rise in the Canadian dollar also would have played a contributing role. Indeed, while the Canadian dollar appreciated from around 0.67 against the U.S. dollar back in 1999-2000 to average 0.94 in 2007, the Mexican peso remained relatively stable at around 10 pesos per dollar. What is evident from the figures is that the parts sector has played better defence in these conditions than the assembly sector. This is important, for there are considerably more Canadian workers in the parts sector than in the vehicle assembly sector. Back in 1999-2000 there were nearly 57,000 workers in assembly, but an average of 95,000 workers in the parts sector. By 2007, assembly workers had fallen to around 50,000, but there were still 97,000 workers employed in auto parts. All signs suggest that Canada's parts producers are increasingly tapping into the global auto market, which is performing well, not just the North American one, which is likely to struggle for the next while. The bottom line? There can be little doubt that Canada's auto sector will look different five years from now than it does today. But experience over the past 7-8 years suggests that the sector is populated with innovative survivors.