Study predicts continued struggle of American automotive industry

June 12, 2007

Although the sale of Chrysler Group has provided a new direction for Detroit's Big Three, a study of the U.S. automotive landscape shows a continued negative outlook for the industry.

In the study titled "The Challenges of the Global Restructuring of the Automotive Industry," economic and business experts of global trade credit insurer and accounts receivable management partner Euler Hermes ACI review the industry's status and outlook.

According to the study, the decline in U.S. volume demands that domestic automakers adapt and restructure. The move toward new consumption regions is in progress globally, intensified by wage differentials that explain the major reshuffling occurring among production regions.

The study reports that the American product line is out of line with local demand, causing a loss of market share to Japanese automakers. This year the market share of American automakers could drop to 50 percent, down from 59 percent in 2004. The decline comes not from a decrease in new car registrations, but from an ill-adapted product range. Before offering models that meet local demand, American automakers have to restructure their oversized production tool, according to the Euler Hermes research department.

Since 2003 the loss of market share has caused a crisis for American equipment manufacturers. A net margin between 0 percent and 0.7 percent has caused an inability to capitalize on opportunities in new growth regions, such as China and India, causing a loss of market share to competitors.

The EH research department reports a loss of 300,000 jobs in the U.S. automotive industry between 2000 and 2006. After a relative return to stability in labor force numbers from 2002 to 2004, a new U.S. restructuring plan (2006 to 2009) could affect 285,000 jobs.

Additionally, the rise in gasoline prices presents another challenge for the U.S. automotive industry, according to Tony Clary, EH ACI Risk VP-industry manager.

"As we have seen in the past," Clary said, "an increase in gas prices can have a rapid effect on buying habits, so the long period of stability the OEMs were hoping for to help generate interest in the profitable SUV and truck segments once again is obviously not coming to fruition."

The weakening national economy hurts automakers in two ways—increased business costs and reduced consumer spending.

"A key issue with the automotive industry is that unit labor costs are continuing to rise, but automakers cannot raise prices because of increased competition," said Daniel C. North, EH ACI chief economist. "That means profit margins are being squeezed even tighter than in the past, which is hurting everyone down the supply chain."

In addition, the U.S. automakers' reliance on consumer spending could cause continued tough times as the nation's housing market equity—a major source of fuel for consumer spending in the past—continues to decline.

"A faltering consumer will surely lead to a faltering economy, causing business defaults to rise and credit conditions to deteriorate," North said.

Source: Euler Hermes ACI