Auto Market

7/28/2019 Auto Market

1/41

June 29, 2006

Industry SurveysAutos & Auto Parts

THIS ISSUE REPLACES THE ONE DATED DECEMBER 22, 2005.

THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR DECEMBER 2006.

Contacts:

nquiries &

Client Support

800.523.4534

clientsupport@

standardandpoors.com

Sales800.221.5277

roger_walsh@


Media

Michael Privitera

212.438.6679

michael_privitera@


Replacement copies

800.852.1641

Efraim Levy, CFAAutos Analyst

Steve FerazaniFinancial Writer

CURRENT ENVIRONMENT..................................................................1

GM and Ford restructureFords Way ForwardGM to cut jobs, close plantsGasoline rises againFull-size SUVs and pricingSuppliers pressuredUS sales may fall in 2006Improvement in used vehicle and parts markets

INDUSTRY PROFILE...............................................................................9Competition goes into overdrive

INDUSTRY TRENDS ...............................................................................10Cars stay on the road longer

Growth in electronicsRising fuel economy standardsGrowth of safety featuresAffordability improvesLuxury segment expandsBig Three losing market shareOn the global front

HOW THE INDUSTRY OPERATES .............................................................15Made in Detroit and elsewhereFrom drawing board to dealershipRegulatory crosscurrentsHeavy capital commitmentsCompetition redesigns the market

The world of auto partsThe tire marketKEY INDUSTRY RATIOS AND STATISTICS ..................................................23HOW TO ANALYZE AN AUTOMOBILE MANUFACTURER .............................24

Seasons and cyclesModel changeoversThe income statementThe balance sheets

GLOSSARY .............................................................................................28

INDUSTRY REFERENCES.....................................................................30

COMPARATIVE COMPANY ANALYSIS ..............................................33


2/41

Editor: Eileen M. Bossong-Martines

Associate Editor: Joseph M. Coda

Copy Editor: Kimberly A. Castro

Production: GraphMedia

Statistician: Sally Kathryn Nuttall

Junior Designer: Paulette Dixon

Client Support: 1-800-523-4534

Copyright 2006 by Standard & Poors

All rights reserved.

ISSN 0196-4666

USPS No. 517-780

Visit the Standard & Poors Web site:

http://www.standardandpoors.com

STANDARD & POORS INDUSTRY SURVEYS is published weekly. Annual

subscription: $10,500. Please call for special pricing: 1-800-523-4534,

option 2. Reproduction in whole or in part (including inputting into a

computer) prohibited except by permission of Standard & Poors.

Executive and Editorial Office: Standard & Poors, 55 Water Street, New

York, NY 10041. Standard & Poors is a division of The McGraw-Hill

Companies. Officers of The McGraw-Hill Companies, Inc.: Harold McGrawIII, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor,

Executive Vice President and General Counsel; Robert J. Bahash,

Executive Vice President and Chief Financial Officer; John Weisenseel,

Senior Vice President, Treasury Operations. Periodicals postage paid at

New York, NY 10004 and additional mailing offices. POSTMASTER: Send

address changes to Standard & Poors, INDUSTRY SURVEYS, Attn: Mail

Prep, 55 Water Street, New York, NY 10041. Information has been

obtained by Standard & Poors INDUSTRY SURVEYS from sources

believed to be reliable. However, because of the possibility of human or

mechanical error by our sources, INDUSTRY SURVEYS, or others,

INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or

completeness of any information and is not responsible for any errors or

omissions or for the results obtained from the use of such information.

VOLUME 174, NO. 26, SECTION 1

THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 2 SECTIONS.

Standard & Poors Industry Surveys


3/41

General Motors Corp. (GM) and Ford Mo-tor Co. have been losing market share andfacing deteriorating profitability. To restoreprofitability, the two automobile giants haveannounced their latest restructuring plans.Each company has announced independentplans to lay off approximately 30,000 em-ployees and to close plants.

Fords Way Forward

In January 2006, Ford announced a majorbusiness improvement plan for its North Amer-ican automotive operations, which its calls theWay Forward plan. As part of this plan,Ford intends to idle and cease operations at 14manufacturing facilities in North America by2012, including seven vehicle assembly plants.The company also intends to reduce its manu-facturing employment by 25,000 to 30,000people during the same period.

These planned personnel reductions are inaddition to the previously announced reductionof 5,000 hourly employees at AutomotiveComponents Holdings LLC, the reduction ofthe equivalent of 4,000 salaried positions by

the end of the first quarter of 2006, and the re-duction of Fords officer ranks by 12% by theend of the first quarter of 2006. (AutomotiveComponents Holdings employs Ford hourlyemployees who had worked for, or had beenassigned to, Visteon Corp.)

Ford also announced which seven facili-ties would be idled through 2008. The com-pany expects these actions to reduce its

North American assembly capacity by ap-proximately 1.2 million units, or 26%. Withrespect to the remaining seven manufacturingfacilities included in the plan, Ford expectsthem to be idled between 2010 and 2012.

GM to cut jobs, close plants

GMs restructuring-related announce-ments preceded Fords. In November 2005,GM provided additional details for restruc-turing its struggling manufacturing opera-

tions in North America. Under its mostrecent plan, nine assembly, stamping, andpowertrain facilities, and three service andparts operations facilities will cease opera-tions. The goal is to reduce GM North

CURRENT ENVIRONMENT

GM and Ford restructure

LEADING COMPANIES IN GLOBAL LIGHT VEHICLE SALES(Ranked by 2005 total light vehicle sales)

CARS LIGHT TRUCKS TOTAL LIGHT VEHICLE SALESTHOUSANDS OF UNITS THOUSANDS OF UNITS THOUSANDS OF UNITS

2004 2005 E2006 2004 2005 E2006 2004 2005 E2006

General Motors 5,184 5,049 5,255 3,449 3,360 3,265 8,633 8,409 8,520

Toyota 5,335 5,379 5,843 2,135 2,267 2,389 7,470 7,646 8,232Ford Motor 3,452 3,472 3,388 3,118 3,075 2,842 6,570 6,547 6,230

VW Group 4,722 4,696 4,908 284 331 355 5,007 5,026 5,263

Daimler/Chrysler 1,915 1,975 1,949 2,244 2,269 2,468 4,159 4,244 4,417

Hyundai 2,526 2,799 3,280 622 730 725 3 ,148 3,528 4,004

Nissan 2,160 2,219 2,359 1,042 1,160 1,105 3,202 3,379 3,464

PSA Peugeot Citroen 2,673 2,821 2,819 446 449 435 3,118 3,270 3,253

Honda Motor 2,470 2,475 2,632 719 777 805 3,189 3,253 3,437

Renault 2,024 2,078 2,108 373 382 390 2,397 2,460 2,499

Fiat Group 1,602 1,633 1,627 391 370 410 1,992 2,003 2,037

Suzuki 1,468 1,539 1,682 318 334 340 1,785 1,873 2,023

E-Estimated.

Source: Global Insight.


4/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

2

Americas assembly capacity by about onemillion units by the end of 2008, in additionto the previously implemented reduction of

one million units between 2002 and 2005.Factoring in the additional capacity fromGMs new Delta Township facility in Lans-ing, Michigan, which is slated to begin pro-duction next year, the overall net result willbe a GM North American assembly capacityof 4.2 million units. A total of 30,000 manu-facturing positions will be eliminated from2005 through 2008. While we believe theseefforts are steps in the right direction, addi-tional cuts may be needed if sales volumeand market share do not rise as well.

In addition to layoffs and plant closings, toraise cash and increase its focus, GM has di-vested or announced plans to divest holdings incertain foreign car companies. These actions in-clude the sale of its 20.1% interest in FujiHeavy Industries Ltd., a reduction in its stakein Suzuki Motor Corp. to 2.7% from 20.4%,and the dissolution of its 50% ownership in aGM-Fiat Powertrain joint venture.

GM has also reached an agreement withthe United Auto Workers (UAW) to reduceits healthcare costs and offer buyouts to em-

ployees. Delphi Corp. and the UAW agreed

upon an attrition program to cut the numberof US hourly employees at GM and Delphithrough an accelerated attrition program

that combines early retirement programs andother incentives. Through this arrangement,GM should be able to reduce the number ofemployees in the JOBS bank more cost effec-tively. The JOBS bank is a temporary loca-tion where idled employees who meet certainconditions must report while they are unas-signed. Idled employees continue to collectmost of their regular salaries and benefits.

To share the pain of cost cutting, GM an-nounced that, effective February 2006, itwould increase the US salaried workforces

participation in the cost of healthcare, cap-ping GMs contributions to salaried retireehealthcare at the level of 2006 expenditures.

GM to sell GMACIn March 2006, GM reached an agree-

ment to sell a 51% interest in its GeneralMotors Acceptance Corp. (GMAC) sub-sidiary. The planned $7.4 billion sale is toFIM Holdings LLC, a consortium of in-vestors led by Cerberus Capital ManagementL.P., a private investment firm, which also

includes Citigroup Inc. and Tokyo-based

NORTH AMERICAN MOTOR VEHICLE PRODUCTION(Calendar year)

CARS LIGHT TRUCKS

THOUSANDS OF UNITS % OF TOTAL THOUSANDS OF UNITS % OF TOTAL

2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005

General Motors 2,110.1 1,927.3 1,770.9 31.9 30.0 26.8 3,191.8 3,064.7 2,801.0 33.3 31.3 28.9

Ford Motor 1,081.8 936.1 816.9 16.3 14.6 12.3 2 ,634 .3 2 ,544 .2 2,299.7 27 .5 25.9 23 .7

Daimler/Chrysler 503.4 532.2 608.6 7.6 8.3 9.2 1,978.6 2,055.7 2,074.7 20.6 21.0 21.4

Total, Big Three 3,695.3 3,395.5 3,196.3 55.8 52.9 48.3 7,804.6 7,664.6 7,175.5 81.4 78.2 74.0

AM General ... ... ... ... ... ... 38.3 32.8 28.3 0.4 0.3 0.3

Auto Alliance 83.4 133.3 272.6 1.3 2 .1 4.1 ... ... ... ... ... ...

BMW 56.9 35.1 19.8 0.9 0.5 0.3 109.5 108.8 105.0 1.1 1.1 1.1

CAMI ... ... ... ... ... ... 51.0 131.2 190.0 0.5 1.3 2.0

Honda Motor 807.5 783.3 796.2 12.2 12.2 12.0 451.6 434.5 552.7 4.7 4.4 5.7

Hyndai ... ... 91.2 ... ... 1.4 ... ... ... ... ... ...

Mercedes ... 73.5 95.6 ... 1 .1 1.4 190.8 142.0 171.0 2.0 1 .4 1.8

Mitsubishi 126.2 91.5 65.0 1.9 1.4 1.0 47.5 21.7 22.6 ... ... ...

Nissan 595.2 654.2 703.5 9.0 10.2 10.6 234.4 425.1 495.2 2.4 4.3 5.1

NUMMI 233.5 237.4 248.4 3.5 3.7 3.8 161.6 143.3 168.9 1.7 1.5 1.7

Subaru/Isuzu 89.2 98.3 87.2 1 .3 1 .5 1 .3 33.0 20.4 31.8 0.3 0.2 0.3

Toyota 650.1 692.9 742.0 9.8 10.8 11.2 304.9 440.3 466.6 3.2 4.5 4.8

Volkswagen 287.3 225.3 300.4 4.3 3.5 4.5 ... 0.1 1.0 ... 0.0 0.0

Others 163.7 239.7 290.3 1.7 2.4 3.0

Total transplants 2,929.4 3,024.9 3,422.0 44.2 47.1 51.7 1,786.0 2,139.8 2,523.3 18.6 21.8 26.0

Grand Total 6,624.7 6,420.5 6,618.4 100.0 100.0 100.0 9,590.6 9,804.4 9,698.8 100.0 100.0 100.0

Note: Totals may not add due to rounding.

Source: Ward's Automotive Reports.


5/41

Aozora Bank Ltd. GM will retain a 49% eq-uity investment interest in GMAC. In addi-tion, GM and the consortium will invest$1.9 billion of cash in new GMAC preferredequity, with $1.4 billion to be invested byGM and $500 million to be invested by FIM

Holdings. The transaction is subject to anumber of US and international regulatoryand other approvals and conditions. GM ex-pects to close the transaction in the fourthquarter of 2006.

As part of the agreement, GM will retainan option, for 10 years after the closing of thetransaction, to repurchase from GMAC cer-tain assets related to the automotive financebusiness of the North American operationsand international operations of GMAC. Thisis subject to certain conditions, including that

GMs credit ratings are investment grade orare higher than GMACs credit ratings.

Gasoline rises again

As this Survey was going to press in mid-June 2006, oil prices were near $70 per bar-rel below the record high of about morethan $74 reached on May 2006, but up fromless than $66 at year-end 2005, and $43 atyear-end 2004. In addition, there were signsthat the prospect of sustained higher gasoline

prices was having an impact on the purchasedecisions that customers make.Since 2004, US gasoline prices have been

high, compared with prior years, and generallyrising even exceeding $3 per gallon at their

peak. The average price had eased slightlyfrom a record $3.08 per gallon on September5, 2005. On June 6, 2006, gasoline was $2.89per gallon, up $0.77 (about 37%) from a yearearlier, according to the US Energy Informa-tion Administration, a statistical agency of the

US Department of Energy.

Full-size SUVs and pricing

As the industry has been reporting, thefull-size or large sports utility vehicle (SUV)segment has been under a tremendousamount of pressure in light of rising gasprices, aging models, and a general shift inconsumer vehicle preferences. As a result,one would expect to see downward pres-sure on segment market share and pricing.

There has been a continued slide in the seg-ments market share, with year-to-datethrough April 2006 off 11%, comparedwith the same period in 2005. However,GMs new products have made a significantamount of headway in gaining back lostterritory. Volume for the Tahoe is up morethan 35% and once the full GM lineup ison the streets, it should carry the segmentinto positive territory.

On the pricing front, there has been ageneral decrease overall in the price of full-

size SUVs over the last year or so. Accordingto the Power Information Network, a divi-sion of J.D. Power and Associates, the aver-age transaction price less incentive for thefull-size segment was $37,393 in December

US MOTOR VEHICLE SALES & PRODUCTION(In thousands)

SALES* PRODUCTION

MED. & TOTAL MED. & TOTALPASSENGER LIGHT HEAVY MOTOR PASSENGER LIGHT HEAVY MOTOR

YEAR CARS TRUCKS TRUCKS VEHICLES CARS TRUCKS TRUCKS VEHICLES

2005 7,667 9,281 497 17,444 4,320 7,203 297 11,821

2004 7,506 9,361 432 17,299 4,230 7,373 253 11,856

2003 7,610 9,029 328 16,967 4,510 7,319 175 12,0042002 8,103 8,713 322 17,139 5,019 7,001 250 12,269

2001 8,423 8,700 350 17,472 4,879 6,293 255 11,427

2000 8,847 8,503 462 17,812 5,542 6,840 393 12,775

1999 8,698 8,195 521 17,415 5,638 6,955 401 12,994

1998 8,142 7,401 424 15,967 5,554 6,074 338 11,967

1997 8,272 6,850 376 15,498 5,934 5,858 338 12,130

1996 8,526 6,570 359 15,455 6,082 5,463 302 11,847

1995 8,635 6,093 388 15,116 6,340 5,306 329 11,975

1994 8,991 6,068 353 15,411 6,601 5,322 327 12,250

Note: Totals may not add due to rounding. *Total US sales, including foreign models produced both inside and outside the United States, as wellas domestic models produced in Canada and Mexico. Foreign and domestic models produced inside the United States.Source: Ward's Automotive Reports.


6/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

4

2004 and fell to a low point of $36,400 inOctober 2005. (J.D. Power is an entity inde-pendent of Standard & Poors, but is alsoowned by The McGraw-Hill Cos. Inc.)

From November 2005 forward, we haveseen stability in pricing followed by an in-

crease. For example, in April 2006, the av-erage price less incentive was up to$38,962 or an increase of 7% from Octo-ber 2005. This increase is due to the re-designed GM SUVs, which are carrying thesegment. GMs full-size SUVs were averag-ing $36,189 in October 2005 and haverisen to $40,250 in April 2006, or an in-crease of 11%. If we compare the full-sizesegment to the total industry, we find thatthe industry is actually down 2% from$26,850 to $26,399 for the same period of

October 2005 to April 2006. [For addi-tional information on this topic, contactJ.D. Power and Associates at (248) 267-6800 or http://www.jdpowerlmc.com.]

New model activity in 2006New model activity has been very strong

in 2006, with 45 new or redesigned vehiclesintroduced in the United States during theyear. The model introduction is evenly dis-tributed throughout the year, with 24 mod-els in the first half of the year and 21 in the

second half.When looking at the type of vehicles andsegment, there is some concentration. Smallcars and SUV/CUVs (crossover utility vehi-cles) make up two-thirds of all the new activ-ity in 2006, with 19 new SUVs/CUVs and 11new compact or small cars. Several of thesemodels are already on the road and are hav-ing success. Specifically in the compact cararena, the Toyota Yaris, Hondas Civic andFit, and the Dodge Caliber are off to strongstarts and should meet internal targets.

In looking at SUVs, the Chevrolet Tahoeand GMC Yukon are putting up strong num-bers, despite the rise in gas prices. Most ofthe SUVs/CUVs do not launch until later thisyear, but the Toyota FJ Cruiser is doing wellin its second month and is on pace for an an-nualized volume of 55,00065,000. The testwill come later in 2006, when SUVs andCUVs spanning the price and size realm en-ter the market and will do battle with thenew entries on the car side of the industry.(For additional information on this topic,

contact J.D. Power and Associates.)

Suppliers pressured

Because carmakers have had limited pricingpower with consumers, they look for priceconcessions from their suppliers; these compa-nies in turn make demands on their own sup-

pliers and so on down the production chain.Smaller suppliers typically have less financialstrength, liquidity, and ability to resist theircustomers demands, and therefore face someof the greatest challenges.

With production sharply lower and morevolatile at such major customers as GM andFord, some suppliers are in severe financial dis-tress. Those that produce critical parts may geta lifeline from their customers in order to pre-vent more costly production disruptions due toa lack of parts. Others may sell their business,

if they can find a buyer; if they cannot, theymay file for bankruptcy protection or go out ofbusiness altogether.

The size of companies filing for bankruptcyprotection has peaked. In October 2005, Del-phi, with $28.6 billion in 2004 revenues (latestavailable), became the largest auto parts suppli-er in recent months to file for bankruptcy pro-tection. Delphi was struggling with high laborand healthcare costs, rising prices for raw ma-terials and transportation, lower production atGM, and pricing pressure.

The Delphi bankruptcy should have impli-cations, in our view, for the auto and autoparts industry. The bankruptcy filing and relat-ed demands for employee wage concessionscould result in a strike by employees againstDelphi. We believe such a strike is unlikely,however, because if it occurred and persisted, itwould be counterproductive. It would hurtDelphi further and result in lower productionat beleaguered GM, leaving both companies ineven weaker financial and competitive posi-tions and less able to support existing employ-

ment levels and contracts.We believe that lower wages for hourly Del-phi employees are inevitable and that a strikewould be imprudent. Still, the threat of a strikefollowing recent strike authorization could helpthe unions in their negotiations with Delphi.Whatever settlement of wages and benefits Del-phi achieves will likely set a benchmark for fu-ture negotiations between automakers andother auto parts suppliers and the unions.

A strike by Delphi workers could serious-ly disrupt GMs North American operations

and prevent the automaker from executing


7/41

MARKET SHARES OF US DEALER NEW LIGHT VEHICLE SALES(Calendar year)

THOUSANDS OF UNITS % OF TOTAL2002 2003 2004 2005 2002 2003 2004 2005

PASSENGER CARSUS MANUFACTURERS

General Motors 2,069.2 1,959.0 1,875.6 1,743.8 25.5 25.7 25.0 22.7

Chevrolet 746.6 799.5 908.2 858.1 9.2 10.5 12.1 11.2

Pontiac 441.2 408.7 420.0 395.3 5.4 5.4 5.6 5.2

Oldsmobile 118.2 103.1 20.4 1.4 1.5 1.4 0.3 0.0

Buick 370.5 259.3 223.3 186.1 4.6 3.4 3.0 2.4Cadillac 150.1 151.3 141.9 160.9 1.9 2.0 1.9 2.1

Saturn 204.8 189.2 123.5 105.9 2.5 2.5 1.6 1.4

Saab 37.8 47.9 38.2 36.1 0.5 0.6 0.5 0.5

Ford Motor Co. 1,325.7 1,169.4 1,018.3 1,038.9 16.4 15.4 13.6 13.5

Ford Division 864.9 792.3 684.6 742.4 10.7 10.4 9.1 9.7

Lincoln-Mercury 313.1 240.8 204.0 192.4 3.9 3.2 2.7 2.5

Jaguar 61.2 54.7 45.9 30.4 0.8 0.7 0.6 0.4

Volvo 86.5 81.7 83.8 73.6 1.1 1.1 1.1 1.0

DaimlerChrysler Corp.* 527.1 456.7 474.1 526.8 6.5 6.0 6.3 6.9

Chrysler/Plymouth/Jeep/Eagle 178.8 158.1 252.2 267.1 2.2 2.1 3.4 3.5

Dodge 348.2 298.6 221.9 259.7 4.3 3.9 3.0 3.4

Total, Big Three 3,922.0 3,585.1 3,368.0 3,309.5 48.4 47.1 44.9 43.2

JAPANESE MANUFACTURERS 2,879.4 2,785.6 2,946.7 3,158.6 35.5 36.6 39.3 41.2

Honda Motor 838.6 820.1 843.3 837.8 10.3 10.8 11.2 10.9

Mazda 158.6 163.7 187.7 193.3 2.0 2.2 2.5 2.5

Mitsubishi 259.7 161.5 108.9 86.5 3.2 2.1 1.5 1.1Nissan 490.7 505.4 536.8 572.5 6.1 6.6 7.2 7.5

Subaru 123.6 116.4 121.7 121.4 1.5 1.5 1.6 1.6

Suzuki 22.5 22.5 47.1 57.8 0.3 0.3 0.6 0.8

Toyota 985.8 996.0 1,101.2 1,289.4 12.2 13.1 14.7 16.8

OTHER FOREIGN MANUFACTURERS 1,301.9 1,239.7 1,191.3 1,198.9 16.1 16.3 15.9 15.6

BMW 213.9 236.2 226.3 238.7 2.6 3.1 3.0 3.1

Hyundai 296.8 298.9 300.1 326.0 3.7 3.9 4.0 4.3

Kia 150.4 140.4 155.9 146.4 1.9 1.8 2.1 1.9

Mercedes 170.4 186.6 194.1 182.8 2.1 2.5 2.6 2.4

Volkswagen 411.2 362.1 301.5 286.8 5.1 4.8 4.0 3.7

Others 59.2 15.5 13.4 18.3 0.7 0.2 0.2 0.2

Total domestic-built 5,877.6 5,527.4 5,356.9 5,480.1 72.5 72.6 71.4 71.5

Total imported 2,225.6 2,083.1 2,149.1 2,187.0 27.5 27.4 28.6 28.5

Total car sales 8,103.2 7,610.5 7,505.9 7,667.1 100.0 100.0 100.0 100.0

LIGHT TRUCKS

US MANUFACTURERS

General Motors 2,746.0 2,757.0 2,781.8 2,713.0 31.5 30.5 29.7 29.2

Chevrolet 1,883.1 1,843.4 1,839.8 1,794.0 21.6 20.4 19.7 19.3

GMC/Pontiac 619.7 631.3 637.1 581.5 7.1 7.0 6.8 6.3

Saturn 75.5 81.9 88.5 107.7 0.9 0.9 0.9 1.2

Other divisions 167.6 200.3 216.4 229.8 1.9 2.2 2.3 2.5

Ford Motor Co. 2,251.2 2,267.8 2,252.8 2,068.0 25.8 25.1 24.1 22.3

DaimlerChrysler Corp.* 1,678.4 1,670.8 1,731.9 1 ,778 .0 19.3 18.5 18.5 19 .2

Chrysler/Plymouth/Jeep 761 .8 746.1 763.9 858.7 8 .7 8.3 8 .2 9.3

Dodge 916.6 924.7 968.0 919.3 10.5 10.2 10.3 9.9

Total Big Three 6,675.6 6,695.6 6,766.5 6,559.0 76.6 74.2 72.3 70.7

FOREIGN MANUFACTURERS 2,037.5 2,333.0 2,594.5 2,721.4 23.4 25.8 27.7 29.3

Honda 409.2 529.7 551.1 624.7 4.7 5.9 5.9 6.7

Hyundai 78.3 101.3 118.5 129.1 0.9 1.1 1.3 1.4

Isuzu 57.5 34.8 32.2 17.0 0.7 0.4 0.3 0.2

Kia 87.0 97.0 114.1 129.5 1.0 1.1 1.2 1.4

Mazda 99.7 95.2 76.2 65.0 1.1 1.1 0.8 0.7Mitsubishi 86.3 96.0 53.4 38.2 1.0 1.1 0.6 0.4

Nissan 249.2 289.4 449.6 504.5 2.9 3.2 4.8 5.4

Subaru 56.4 70.5 65.7 74.6 0.6 0.8 0.7 0.8

Suzuki 45.4 35.9 26.8 24.3 0.5 0.4 0.3 0.3

Toyota 770.3 870.3 958.8 970.9 8.8 9.6 10.2 10.5

Others 98.4 113.0 147.9 143.7 1.1 1.3 1.6 1.5

Total domestic-built 7,646.8 7,801.4 8,114.7 8,059.1 87.8 86.4 86.7 86.8

Total imported 1,066.4 1,227.2 1,227.1 1,221.3 12.2 13.6 13.1 13.2

Tota l light truck sales 8,713.0 9,028.6 9,361.0 9 ,280 .4 100.0 100.0 100.0 100 .0

Total domestic-built cars & trucks 13,524.4 13,328.8 13,471.6 13,539.2 80.4 80.1 80.0 79.9

Total imported cars & trucks 3,292.0 3,310.2 3,376.2 3,408.3 19.6 19.9 20.0 20.1

TOTAL MOTOR VEHICLE SALES 16,816.4 16,639.1 16,847.8 16,947.5 100.0 100.0 100.0 100.0

Note: Totals may not add due to rounding. *Chrysler division only of DaimlerChrysler.



8/41

its turnaround initiatives. As an alternative,GM could fund a compromise between theparties and has already allocated some re-serves for this potential eventuality.

We believe either scenario will hurt GM.The question is how much will it cost the au-

tomaker to bring a compromise from eachparty. We think it will be cheaper in both theshort and long run for GM to spend the bil-lions of dollars it will likely take to subsidizeboth Delphi and the union workers than tosuffer an extended strike.

In March 2006, Dana Corp. of Toledo,Ohio, with $8.8 billion in sales in 2005, be-came the latest large US parts maker to filefor voluntary petitions for reorganization un-der Chapter 11 of the US Bankruptcy Code.If the pressure does not let up, other smaller

parts makers could file for bankruptcy pro-tection or go out of business.

Parts suppliers seek new customersAs GM and Ford reduce North American

vehicle production, parts suppliers are at-tempting to offset declining sales to those au-tomakers by winning new business fromforeign automakers. In particular, they have

targeted Japanese automakers, which havedramatically increased their US presence inrecent years. Japanese automakers operated20 production facilities in the United Statesin 2005, up from only 11 in 1993. In 2005,

Japanese production in the United States in-creased 7.6% from the year-earlier period tonearly 3.4 million light vehicles.

As a result, US parts suppliers have in-creased sales to Japanese automakers. The

Japan Automobile Manufacturers Associa-tion (JAMA), a trade group, reported that

US companies sold $45.2 billion in parts andmaterials to Japanese automakers in the year

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

6

This section was written by Standard & Poors

Credit Market Services (CMS). S&P CMS is indepen-

dent of S&P Equity Research Services. Views do not

necesssarily reflect those of Standard & Poors Equity

Research Services.

Passenger vehicles North AmericaAccording to Standard & Poors Credit Market

Services, General Motors Corp. (B/Watch Neg/B-3)

and Ford Motor Co. (BB-/Negative/B-2) need to

make progress in turning around their North Ameri-

can operations in 2006, and time is short. GMs US

market share through the first three months of 2006

was 24.2%, down from 26.3% in 2005. Fords share

over the same period was 18.5%, up from 18.3% in

2005. In ongoing contrast, the Chrysler unit of Daim-

lerChrysler AG (BBB/Stable/A-2) is faring better inNorth America for now, with slight market-share

gains from the success of its new products. Japan-

ese and Korean automakers continue to steadily

gain market share in the US, Kia Motors Corp. (BBB-

/Stable/) is planning to build its first plant in the

US, while Toyota Motor Corp (AAA/Stable/A-1+) is

increasing its US production capacity.

We expect 2006 US light-vehicle sales to be

slightly below 2005, although still at historically

robust levels. Competition will remain fierce, and

we remain cautious about how successfully Ford

and GM will be able to move from the popular

employee pricing plans to a value-pricing or

clear-pricing approach. The risk exists that

these companies will return to the heavy incen-

tives of the past few years. Many factors do notbode well for demand this year, among them high-

er gasoline prices, rising interest rates, uncertain

consumer confidence, and lengthening auto-loan

terms.

Auto suppliersAfter facing challenging business conditions for

the past two years, the US auto supplier sector is

now dominated by low-rated, distressed companies.

A combination of vehicle production cuts, high raw-

material costs, unfavorable product mix shifts, and

ongoing pricing pressure from a weakened customerbase has caused most auto suppliers earnings and

cash flow to decline dramatically. A string of com-

panies have been forced to file for Chapter 11

bankruptcy protection, including several large ones

with leading market shares.

The operating environment appears remains very

challenging, and there appears to be little reason to

expect conditions to improve in the near term. On the

contrary, several issues threaten to intensify the chal-

lenges facing auto suppliers in 2006. Standard & Poors

Credit Market Services has several key concerns:

S&P Credit Market Service View:


9/41

ended March 31, 2005, 9% more than in theprevious year, and 127.8% more than in theyear ended March 1995.

Nevertheless, US parts suppliers still facenumerous challenges in gaining a large pieceof the Japanese automaker business. As

Japanese automakers opened plants in theUnited States, they brought many key suppli-ers with them. Similarly, South Korean andEuropean parts suppliers have opened facto-ries in the United States to sell parts to SouthKorean and European automakers with USplants.

Asian and European automakers are con-sidered to have a more congenial collabora-tive process with suppliers, while automakersfrom the United States are much more fo-cused on the bottom line. In recent years, US

automakers have forced suppliers to lowerprices or risk losing contracts. As a result, USsuppliers who do the bulk of their business

with the Big Three have seen their profitmargins squeezed, forcing them to spendfewer dollars on research and development.

US sales may fall in 2006

Customers continued to visit dealershipsthus far in 2006, where automakers offered awide array of brand new models, updatedolder models, and innovative features, to-gether with incentives such as rebates andlower prices. Heavy price competition en-hanced vehicle affordability, but pressuredindustry profitability.

Standard & Poors currently projects thatUS light vehicle sales volume will fall 0.9%to 16.8 million units in 2006, from 16.95million in 2005. Our outlook reflects Stan-

dard & Poors forecast for growth in the USeconomy, along with an improved stock mar-ket, a lower unemployment rate, and rising

The success of new vehicle launches.Of particular concern is whether the launches of

several new vehicles specifically, high-volume

SUVs and pickups from General Motors Corp.

will be successful.

High gasoline prices. The result has been de-pressed demand for large, high-profit-margin vehicles,

from which many auto suppliers generate a dispropor-

tionate share of their earnings.

High raw material prices. Most auto sup-

pliers are not able to fully offset the increased costs

of steel, plastic resin, rubber, and lead with higher

prices.

Declining market shares of Ford and GM.Because most North American auto suppliers re-

main overly dependent on these two automakers,this will hurt suppliers for at least the next several

years.

Labor disruptions. This risk increases as

auto suppliers and vehicle manufacturers attempt to

reduce the burden of their high labor costs. We may

still see a strike at bankrupt Delphi Corp. A strike at

Delphi or any other sizable auto supplier could shut

down vehicle production at some North American

auto plants, and the already fragile supplier base

could face severe financial hardship.

Liquidity pressures. High debt levels have

limited auto suppliers access to bank lines, negative

investor sentiment has hindered the suppliers ability

to raise new capital, and lower credit ratings have re-

duced access to accounts-receivable loan facilities.

Several high-profile bankruptcies have led vendors to

tighten trade credit terms. Some suppliers have alsofound it difficult to raise funds by selling assets be-

cause there is excess production capacity and asset

returns are weak.

In previous years, liquidity pressures or operat-

ing problems specific to each company prompted

bankruptcy. Now, however, several other factors

are likely to come into play. One is the attraction

of lower labor costs if a company files. Companies

could also use a bankruptcy opportunity to more

aggressively restructure operations or address un-

profitable business contracts, or file simply be-

cause their competitors have gained advantage bydoing so.

Moreover, there has been an increased risk of

default by Ford and GM in recent years. A bankrupt-

cy filing by either of these companies would almost

certainly prompt additional filings by some of their

suppliers, who would suffer immediate liquidity

crises if invoices went unpaid. In the longer term,

the suppliers of a bankrupt auto manufacturer would

be vulnerable to potential cutbacks in vehicle pro-

duction while the manufacturer restructured its la-

bor agreements and manufacturing footprint.


10/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

8

consumer confidence in 2006 combined withsome purchase fatigue in 2006, following in-centive driven sales in 2005.

Our near-term outlook for the relativeperformance of the Big Three automakers isnegative. Despite the Chrysler Groups ex-

pected gains, we expect that the Big Threeoverall will lose share to foreign carmakers,principally the Asian brands.

The highly profitable light truck, mini-van, and SUV segment is of special con-cern. Once dominated by the Big Three,this segment faces increasing pricing pres-sure from successful foreign makers as wellas a shift to smaller, newer, more fuel-effi-cient vehicles. Standard & Poors expectsthe Big Threes market share and profitmargins in this sector to decline in coming

periods. We anticipate that the categorywill continue to see the effects of height-ened competition, with increased pricingpressure and discounting. We expect thedomestic brands in aggregate to continueto lose market share.

Improvement in used vehicle andparts markets

Growth in the US replacement parts marketmay be limited in 2006. This largely reflectsthe improved quality of original equipment,

which has reduced the need for aftermarketparts. According to estimates from the Auto-motive Aftermarket Industry Association, atrade group, the automotive aftermarket in-dustrys revenues rose 5% to $270 billion in2005, up from $257 billion in 2004.

Automakers aggressive incentives onnew vehicles have pressured used vehicleprices in recent years by making new vehi-cle prices relatively more attractive. Despitethese pressures, according to ManheimAuctions of Atlanta, Georgia, which pro-

duces a used vehicle value index, the indexhas recovered recently, reaching 116.3 (Jan-uary 1995=100) in January 2006. This levelexceeded the prior multiyear peak of 115.0reached in April 2002, before settling backto 114.2 in April 2006.

US FULL-SIZE SUV SALES(In thousands of units)

E-Estimated. F-Forecast.Source: J.D. Power & Associates.

2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 E 20 05 F 20 06 F 20 07 F 20 08 F 20 09 F 20 10

800

750

700

650

600

550

CAR & TRUCK SALES AND TREND DEMAND

(In millions of units)

Source: Wards Automotive Reports.

1981 83 85 87 89 91 93 95 97 99 01 03 2005

Total car sales Car trend demand

Total truck sales

Truck trend demand

12

10

8

6

4

2

0


11/41


12/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

0

Original equipment manufacturers

(OEMs). These companies manufacture partsand components that automakers use in theassembly of new vehicles. Thousands ofOEMs are small independent firms; amongthe largest independents are Dana Corp.,

Delphi Corp., Goodyear Tire & Rubber Co.,Johnson Controls Inc., Magna InternationalInc., Superior Industries Inc., Tenneco Auto-motive Inc., TRW Inc., and Visteon Corp.Some OEMs are subsidiaries of large diversi-fied companies, such as Allied Signal Inc.,Eaton Corp., General Electric Co., 3M Co.,PPG Industries Inc., Textron Inc., and UnitedTechnologies Corp.

Replacement parts manufacturing. Par-ticipants in the replacement market, also

known as the aftermarket, produce parts andcomponents to replace or supplement partsthat were included in a vehicles original as-sembly. Among the fields important playersare ArvinMeritor Inc., Cooper Tire & Rub-ber Co., Dana Corp. (through its acquisitionof Echlin Inc.), and Federal-Mogul Corp. Asin the original equipment segment, aftermar-ket parts suppliers and distributors may beindependent companies or subsidiaries oflarger companies. Some firms, like Dana,participate in both the original equipment

and replacement sectors.

Replacement parts distribution. Compa-nies in this category distribute automotive ac-cessories and parts, such as air filters, lightbulbs, and fuses, which replace or supplementoriginal vehicle parts. Sales are primarily toautomotive parts retail stores and fleet owners.

Genuine Parts Co. is easily the largest in-dependent distributor of automotive parts.As of year-end 2005, it operated 58 US ware-house/distribution centers associated with the

National Automotive Parts Association(NAPA; a leading American franchiser ofauto parts/accessories stores and distributioncenters), owned about 1,000 jobbing stores,and served more than 5,000 independent au-tomotive parts jobbers. Its size and leadingposition in the industry notwithstanding,Genuine Parts represents only an estimated5% to 6% of the highly fragmented automo-tive aftermarket.

Rubber fabricating. Rubber fabricators

manufacture tires, belts, hoses, and other

rubber products for the automotive industry.Approximately 60% of rubber productionfor the auto industry is tire-related. Abouthalf of worldwide tire production is estimat-ed to come from three companies: Compag-nie Gnrale des tablissements Michelin

(France), Goodyear Tire & Rubber (UnitedStates), and Bridgestone/Firestone Inc.(Japan). Foreign-based tire manufacturersnow own a substantial portion of US domes-tic capacity. Only two US tire companies arenow publicly traded: Cooper Tire & RubberCo. and Goodyear Tire & Rubber Co.

According to estimates by the RubberManufacturers Association, a trade organiza-tion, US light vehicles (both new and used)accounted for shipments of about 303 mil-lion tires in 2005. The 2.0% increase from

297 million units in 2004 primarily reflectshigher demand for replacement tires. Stan-dard & Poors estimates that light vehiclevolume will rise 1% to 2% in 2006, drivenby increased replacement tire demand.

INDUSTRY TRENDS

The most important trends in the automo-tive industry generally involve two relateddevelopments: competition and globalization.

Increased domestic competition pressuresmanufacturers and their parts suppliers toleverage their brands and engineering, devel-opment, and production costs by enteringand competing in foreign markets to developand market niche vehicles that will sell in rel-atively small quantities. As more producersenter new markets around the globe, compe-tition escalates worldwide. One consequenceis that quality, efficiency, and vehicle longevi-ty have been rising.

Also, car makers have used lighter materi-

als to reduce vehicle weight and enhance fuelefficiency to meet consumer and legislativedemands.

In recent years, demand has grown forsafety features in vehicles and for luxury ve-hicles. Luxury vehicles often have the mostadvanced technology and features, includingthe latest safety and electronics features.

Cars stay on the road longer

As automakers improve the durability and

quality of passenger cars, consumers are


13/41

keeping them on the roads longer. The median

age of US passenger cars increased to nineyears in 2005, up from 8.9 years in 2004, andonly 8.3 years in 2000, according to industryresearch group R.L. Polk & Co. Only 4.5% ofpassenger cars were scrapped in 2005 arecord low compared with a scrappage rateof 4.8% in 2004, and 6.4% in 2000. R.L.Polk expects the US passenger car fleet to agefurther in the next decade, as new technologyincreases vehicle durability and longevity.

As vehicles become more durable and lastlonger, the replacement cycle will lengthen,

potentially creating a decline in annual lightvehicle sales.The obvious beneficiaries of the trend are

aftermarket parts suppliers and auto repairshops. Annual automotive aftermarket sales(including aftermarket parts and services) hasincreased at a compound annual growth rateof 4% since 2000 to more than $250 billion,according to tax and accounting consultingfirm Grant Thornton LLC. Large auto partssupply chains are particularly reaping thebenefits from the aging vehicle fleet.

For instance, annual sales for AdvanceAuto Parts Inc. rose 13.1% to $4.3 billion in2005, due to growth in the number of storesand sales per store. Leading auto parts retail-er AutoZone Inc. reported that sales for thesix months through February 11, 2006, roseabout 4.1% to $2.6 billion, as the chainopened 202 additional stores since February2005 to 3,743 stores chain wide.

Use of aluminum and plastic growsAutomakers are increasing their usage of

a variety of materials, including aluminum

and plastic, lowering the weight of vehiclesand improving fuel efficiency. According totrade publication American Metal Market,aluminum accounted for 8.5% of materialsused in an average passenger car in 2004, upfrom only 2.6% in 1977, while plastic simi-

larly increased to 7.6% of total materialsused in 2004, from 4.6% in 1977.Meanwhile steel (a much heavier material)

fell from 60% of total materials used in anaverage passenger car in 1977 to 54.5% in2004. A March 2006 study by the AluminumAssociation, a trade group, found that alu-minum surpassed iron to become the secondmost used material in passenger cars in 2005.

Aluminum is used in engines, bumpers,and hoods amongst others, while plastic isused in interiors, engine components, and

fuel systems.In automotive applications, about onekilogram (2.2 pounds) of aluminum can beused to replace two kilograms of steel oriron, allowing automakers to significantly re-duce the weight of the vehicle. Lightweightvehicles create greater fuel efficiency, whichis particularly important following the surgein gas prices. Nevertheless, heavier vehiclesare believed to provide greater protection incrashes. In addition, aluminum is substantial-ly more expensive than steel.

For instance, Volkswagen AGs Audibrand developed the first high-volume pas-senger car with an all-aluminum body, theAudi A2, which launched in 2000. It endedproduction of the A2 in mid 2005 and plansto replace it with a new steel body A2 in2008. The company said that the aluminumbody increased manufacturing costs 1,000($1,206 based on the June 30, 2005 conver-sion rate) per vehicle. The higher-priced alu-minum cars sold poorly.

Growth in electronics

Consumer demand for improved safety fea-tures, entertainment systems, and communica-tions devices in vehicles is driving growth inautomotive electronics. The global automotiveelectronics market is projected to grow at anannual pace of 7.5% from $86.5 billion in2004 to $124 billion in 2009, according to in-dustry research firm Freedonia Group. By2010, electronics are expected to account fornearly 40% of an average vehicles value. Elec-

tronics are used in a wide variety of safety fea-

MEDIAN AGE OF US CARS AND LIGHT TRUCKS(In years)

*All trucks prior to 1993.Source: Polk Automotive Intelligence.

10.0

9.0

8.0

7.0

6.0

5.0

4.0

1970 74 78 82 86 90 94 95 96 97 98 99 00 01 02 03 04 2005

Light trucks*Cars


14/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

2

tures, including tire pressure monitoring de-vices; electronic damping controls, which ad-just shocks to road conditions to increasestability and comfort; and electronic stabilityprograms (ESPs), which apply distinct pressureon each wheel to prevent the loss of control

that leads to rollovers.Entertainment and information systems,such as GPS navigation systems and satelliteradios, are also becoming increasingly popu-lar with consumers. These value-added prod-ucts are particularly proliferating in premiumvehicles. Automakers can typically chargehigher prices for vehicles that include moreof these features. In addition, premium carbuyers are willing to pay more for increasedsafety.

The leading parts suppliers in the develop-

ment of automotive electronics are DelphiCorp., Visteon Corp., Germanys RobertBosch GmbH, and Siemens AG, as well as

Japans Denso Corp. Notably, Delphi is fo-cusing on growth in its electronics, safety,and entertainment product lines as it plans tosell off noncore operations. Just as automak-ers can generally charge higher prices for ve-hicles that include value-added parts, theyare typically willing to pay higher prices tosuppliers for these parts.

While US automakers have squeezed parts

supplier profit margins in recent years, forcinglongtime suppliers to lower prices or risk los-ing critical contracts, they have continued topay higher prices for automotive electronics.

Rising fuel economy standards

Since the inception of US vehicle fleet fuelefficiency regulations in the 1970s, the fueleconomy of US vehicles has improved mod-estly. In 1975, Congress enacted CorporateAverage Fuel Economy (CAFE) standards to

lower energy consumption in the wake of the1973 oil crisis. These standards require au-tomakers to meet an average fuel economyfor cars and trucks sold in the United States.In March 2006, the Bush administration lift-ed light truck standards from 21.6 miles pergallon in 2006 to 24 miles per gallon by2011. Fuel efficiency standards for passengercars have been unchanged at 27.5 miles pergallon since 1985.

Weighing against efforts to improve theUS vehicle fleet fuel efficiency has been ex-

panded consumer demand for bigger, heavier

sport utility vehicles (SUVs), and automakerefforts to increase performance and horse-power. Heavier, more powerful vehicles aretypically less fuel-efficient. Passenger carsales accounted for only about 45.1% of thelight vehicle market in 2005, compared with

about 50% as recently as 1999. The growingnumber of large SUVs and pickups on theroads is lowering the average fuel economyof the US vehicle fleet. According to the En-vironmental Protection Agency, the averagefuel economy of 2005 model year cars andtrucks sold in the United States was 24.6miles per gallon, compared with 25.1 milesper gallon in 1993. (By comparison, the av-erage fuel economy of 1975 model year carsand trucks was only 15.3 miler per gallon.)

Passenger car sales did make a modest

comeback in 2005, with market share rising1%, due in part to rising fuel prices. Hybridcar sales, while still accounting for less than2% of the market in 2005, also could increaseaverage fuel economy. For instance, the hybridToyota Prius is listed to have an average fueleconomy of about 55 miles per gallon.

Growth of safety features

Evolving government regulations and ashift in consumer sentiment toward im-

proved safety are boosting sales of automo-tive safety features. In particular, the numberof airbags in new vehicles is escalating.While front driver and front passengerairbags have become standard features in al-most all cars, automakers are adding sideairbags and inflatable curtains, as a result ofstrong consumer demand. The percentage ofnew North American light vehicles with side-impact airbags is projected to increase from36% in 2005 to 57% in 2010, while vehicleswith inflatable curtains will grow from 25%

in 2005 to 58% in 2010, according to Glob-al Insight.Inflatable curtains, which deploy from the

ceiling, protect an occupants head in a side-impact crash. Side airbags, which protect thechest during side-impact crashes, are general-ly situated in the door or seat. Although notyet government-mandated, consumers are in-creasingly requesting these features. Head-protecting side airbags reduce the risk of afatality during a side impact collision by53%, according to research conducted by the

Insurance Institute for Highway Safety, an


15/41

independent research organization funded bythe automotive insurance industry. Kneeairbags are also beginning to appear in luxu-ry vehicles although they are not generallyincluded as a standard feature.

Other safety features rapidly growing in

popularity include antilock braking systems(ABSs) and electronic stability programs(ESPs). ABSs automatically pump the brakesand apply pressure selectively to preventbrake lockup. ESPs, which utilize antilockbraking systems, straighten the trajectory ofa vehicle by applying brake pressure when acomputer senses it moving off-course. Fol-lowing a study by the US National HighwayTraffic Safety Administration (NHTSA) thatfound electronic stability programs limitedroad accidents (particularly for SUVs), GM,

Ford, and Chrysler announced in late 2004that they planned to equip most of their SUVswith stability controls as a standard feature by2006. The decision is expected to increase ESPusage in new US passenger cars to 23% by theend of 2006, from 10.1% in 2004.

New government regulations are alsoforcing automakers to install additional safe-ty features. In the spring of 2005, after threeyears of wrangling, the NHTSA passed a rulerequiring that new vehicles be equipped withtire pressure monitors. (The rule is a re-

sponse to the 2000 recall of Firestone tireslinked to more than 270 fatal highway acci-dents.) In December 2004, the NHTSA also

announced a new regulation requiring lapand shoulder belts in all rear seats. (Manyvehicles come equipped with only a lap beltfor the middle rear seat.) The rule was estab-lished to protect young children seated inthat position. The new rules will be phased

in during the 2006 through 2008 modelyears.In the United States, new safety features are

usually forced on automakers by regulation; inEurope, in contrast, such changes are most of-ten generated by customer demand. In fact,many safety devices were first offered in Euro-pean vehicles before migrating to the UnitedStates. As a result, European parts suppliers areleaders in this segment. European producerswere the first to make airbags standard in mostmodels. European manufacturers have also

added side airbags at a more rapid pace. Mer-cedes-Benz and Volvo began installing sideairbags (or chest bags) in 1994 and 1995 (Fordacquired Volvo in 1999). In 2006, 83% of newlight vehicles sold in Western Europe will haveside airbags, compared with only 44% inNorth America, according to Global Insight.

Swedish firm Autoliv Inc. has emerged asthe biggest player in the automotive safetyindustry, with more than one-third of themarket, according to the companys own es-timates. The company estimates that the

worldwide market for automotive safety fea-tures increased 4% in 2005 to $17 billion,led by strong growth in Asia.

US RETAIL SALES OF MOTOR VEHICLES, BY WEIGHT CLASS

2001 2002 2003 2004 2005

% OF % OF % OF % OF % OFCATEGORY UNITS TOTAL UNITS TOTAL UNITS TOTAL UNITS TOTAL UNITS TOTAL

PASSENGER CARS 8,422,625 48.2 8,103,223 47.3 7,610,481 44.9 7,505,932 43.4 7,667,066 44.0

Domestic 6,324,996 36.2 5,877,647 34.3 5,527,430 32.6 5,356,873 31.0 5,480,095 31.4

Import 2,097,629 12.0 2,225,576 13.0 2,083,051 12.3 2 ,149,059 12.4 2 ,186,971 12.5

TRUCKS 9,049,751 51.8 9,035,423 52.7 9,356,961 55.1 9 ,792,641 56.6 9 ,777,263 56.0

Light trucks, total 8,699,744 49.8 8,713,139 50.8 9,028,572 53.2 9,360,988 54.1 9,280,688 53.2

0-6,000 lbs. 6,090,543 34.9 6,068,352 35.4 6,266,475 36.9 6,457,738 37.3 6,585,786 37.8

6,001-10,000 lbs. 2,516,423 14.4 2,564,745 15.0 2,671,249 15.7 2,795,971 16.2 2,528,046 14.5

10,001-14,000 lbs. 92,778 0.5 80,042 0.5 90,848 0.5 107,279 0.6 166,856 1.0

Medium-duty trucks, total 210,393 1.2 176,253 1.0 186,425 1.1 228,456 1.3 243,783 1.4

14,001-26,000 lbs. 118,829 0.7 106,925 0.6 119,636 0.7 153,366 0.9 154,925 0.9

26,001-33,000 lbs. 91,564 0.5 69,328 0.4 66,789 0.4 75,090 0.4 88,858 0.5

Heavy-duty trucks 139,614 0.8 146,031 0.9 141,964 0.8 203,197 1.2 252,792 1.4

(over 33,000 lbs.)

Total US sales 17,472,376 100.0 17,138,646 100.0 16,967,442 100.0 17,298,573 100.0 17,444,329 100.0



16/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

4

Affordability improves

After years in which price increases out-stripped income growth, several develop-ments including heightened competition,consumer demand for affordability, currency

fluctuations, and cost cutting by manufactur-ers have kept a lid on automotive pricesin recent years. In 1973, the average US citi-zen needed 17.5 weeks of annual familyearnings to buy an average-priced car, a fig-ure that rose to 22.6 weeks by 1995. By2005, the figure had declined to 20.0 weeks.Standard & Poors believes the downtrendmay continue in 2006.

Heated competition has contributed to theweak automotive pricing environment. Withoverall improved quality among most manu-

facturers, buyers are more inclined to useprice to differentiate similar offerings. Whenone manufacturer offers incentives (such as re-bates or discounted financing), the others gen-erally follow suit or risk losing market share.Customers, armed with dealer cost informa-tion from consumer publications and the In-ternet, have learned to drive a hard bargainwhen negotiating the purchase of a vehicle.

Luxury segment expands

With vehicle affordability rising, consumersare not pocketing the savings. Increasingly, theyare taking the money and buying vehicles thatare more expensive either upscale brands orvehicles with more options. In addition, de-mand for the safety features generally associat-ed with luxury brands has risen in recent years,enabling this segment to consistently growfaster than the overall vehicle market. Safetyenhancements, such as electronic stability pro-

grams, are generally introduced to the luxurysegment first. (The term luxury segment isloosely defined, but tends to include passengercars and light trucks with a sticker price in ex-cess of $40,000.)

Market share for luxury vehicles in the

United States expanded from about 8.4% in2000 to 10.3% in 2005, according to GlobalInsight. In 2005, leading luxury vehicle man-ufacturers posted solid growth even as theindustry as a whole struggled. Sales of Lexus,Toyotas luxury car brand, increased 5.2% in2005 to 303,000 units, compared with a0.5% gain for the industry.

For the first four months of 2006, lightvehicle sales for BMW increased 10.8% to72,600 units. Meanwhile, total US light vehi-cle sales were up only 1.0% over that same

period.

Big Three losing market share

GM has led the US automobile industry insales since 1930, when it first overtook Ford.In 1978, GMs market share rose as high as47.7%. Afterward, it declined steadily, hit-ting 26.3% in 2005 (for cars and light truckscombined), down from 27.6% in 2004. Inthe first five months of 2006, GMs sharewas 23.8%, down from 25.7% in the corre-

sponding period of 2005.Ford and DaimlerChrysler also have lostground in recent years but are currentlyheading in different directions. Fords sharedeclined to 18.3% in 2005, from a recentpeak of 26.2% in 1995 and 20.7% in2003; DaimlerChryslers share rose to13.6% in 2005 from 13.1% in 2004, butremains down from its 1998 peak of16.8%. In the first five months of 2006,Fords share dipped to 18.3%, from 18.9%in the comparable 2005 period. The

Chrysler Groups share fell to 13.8% from14.1% during the same period.Overall, the Big Three brands commanded

58.2% of the US market in 2005, accordingto weekly trade publication Wards Automo-tive Reports down from 60.1% in 2004,61.8% in 2003, 63.0% in 2002, and 64.5%in 2001. For the first five months of 2006,the Big Three together claimed 55.9% of themarket, versus 58.7% in the comparableyear-earlier period. The decline reflects rivalswell-received new products, including light

trucks, SUVs, and crossover utility vehicles

NEW CAR AFFORDABILITY TRENDS

Sources: Wards Automotive Reports; US Census Bureau.

27

25

23

21

19

17

12

11

10

9

8

7

1973 77 81 85 89 93 97 2001 2005

Average weeks of incomerequired to buy a new car ( left scale)

Passenger car sales (in millions, right scale)


17/41

(CUVs), consumers growing attraction toAsian and European nameplates, and relativeweakness at Ford and GM.

On the global front

The Internet, faster communication, lowertrade barriers, and rising incomes in manyparts of the world are transforming the inter-national automotive market. Competitiononce came primarily from local sources; itcan now come from virtually anywhere onthe planet. The resulting globalization oftheir industry has led automakers to improveproduct quality, lower costs, and repositionthemselves through mergers.

As foreign firms have opened transplantfactories in the United States, they have

chipped away at domestic market share heldby US producers. They are now aiming at theUS light truck segment.

Transplants expand North American productionForeign automakers continue to increase

production capacity at plants in NorthAmerica. In May 2005, Hyundai Corp.s au-tomotive subsidiary opened up its first USfactory in Montgomery, Alabama, making itthe first Korean auto manufacturer with USproduction facilities. Meanwhile, Toyota will

begin production at its sixth North Americanplant, based in San Antonio, Texas, in late2006. Transplants accounted for 31% oflight vehicle production in North America in2005, according to Wards Automotive Re-

ports. That percentage is likely to risethrough this decade; Standard & Poors ex-pects Asian brands to increase productionand the Big Three automakers (GM, Ford,and DaimlerChryslers Chrysler division) toreduce capacity or close facilities to cut costs.

This shift in control of production in theUnited States may create opportunities andrisks for US parts suppliers. We believe mostlarge suppliers will attempt to diversify awayfrom their dependence on the shrinking mar-ket share of the Big Three and increase their

US business with growing Asian producers.Not only would such a shift increase suppli-ers sales, but it also could potentially im-prove margins as research and developmentand other overhead costs would be spreadover a wider production volume. Magna In-ternational Inc., a global supplier of automo-tive systems, said it is following this strategyand trying to win more business with Japan-ese carmakers.

Production capacity concerns

North American overcapacity remains amajor concern for automakers even as theBig Three reduce their capacity levels, ac-cording to a 2005 study by industry researchfirm CSM Worldwide Inc.

Production capacity at North Americanfactories is projected to rise 2.4% from2004 to 2009 as annual capacity reachesabout 19.5 million units. Overproduction isa major factor in creating high incentivelevels in the US market. Automakers areforced to offer appealing financing options

and rebates in order to sell off extra vehi-cles. However, even as US automakers at-tempt to shutter factories to cope with theproblem, Asian automakers are openingnew production facilities and expanding ca-pacity. The CSM Worldwide report foundthat non-Big Three production capacity inNorth America increased from 4.4 millionunits in 2002 to about 5.5 million in 2005;Standard & Poors expects the number tocontinue rising.

Overcapacity at North American plants is

generally estimated at about three millionunits annually. If sales remain relatively flat,the growth of Asian production levels couldbe extremely detrimental to the industry andcreate increased pricing pressure.

HOW THE INDUSTRY OPERATES

The automobile industry is engaged in thedesign, production, marketing, sale, and ser-vicing of motor vehicles. Many different

companies and participants are involved in

LIGHT VEHICLE PRODUCTION BY REGION(In thousands of vehicles)

2000 2001 2002 2003 2004

North America 17,150 17,473 16,369 15,874 15,766

South America 1,978 2,006 1,901 1,922 2,410

European Union 16,648 16,705 16,444 17,472 17,763

Other Europe 2,567 2,465 2,512 1,909 2,354

Asia & Oceania 17,550 17,082 18,110 20,363 22,333

Africa 316 380 364 379 401

Total 56,209 56,112 55,700 57,918 61,028

Source: International Organization of Motor Vehicle Manufacturers.


18/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

6

production and sales, and these processes re-quire collaborative efforts.

Made in Detroit and elsewhere

Automobiles are built in factories around

the world: in North and South America, inEastern and Western Europe, and in Asia.Despite the industrys globalization, however,the plants of the Big Three US automobilemanufacturers General Motors Corp.(GM), Ford Motor Co., and DaimlerChryslerAGs Chrysler division are still concentrat-ed in the area of Detroit, Michigan. (Beforethe 1998 merger of Chrysler Corp. andDaimler-Benz AG, the Big Three referred toGM, Ford, and Chrysler. Today that term isused to indicate GM, Ford, and either

Chrysler or DaimlerChrysler, depending onthe context.)Foreign companies have significant pro-

duction capacity in the United States, mostlyin the Midwest. By increasing in-region de-velopment and procurement, these compa-nies can better adapt to US tastes andpreferences while insulating themselves fromcurrency fluctuations. Although their shareof US production had not changed muchover the decade beginning in 1992 it was25% in 2002, up slightly from 23.5% in

1992 it is up dramatically from zero be-fore 1982, the year that Honda Motor Co.Ltd. opened the first transplant factory inOhio. Nissan Motor Co. Ltd. followed in

June 1983, while Toyota Motor Corp. start-ed its US manufacturing operations in De-cember 1984 through a joint venturecompany. In addition, because of lower pro-duction at each of the Big Three and higheroverall foreign brand production, foreignbrand share of US production climbed to31% in 2005.

We expect further increases in foreign-owned capacity as Japanese and Europeanautomakers transfer production of luxuryvehicles to North America. In addition,more capacity is being added as Japaneseautomakers address their lack of penetrationin the light truck market by introducing newproducts. Daimler-Benzs acquisition ofChrysler reflects, in part, the importance ofhaving US production facilities and distribu-tion channels. Given the increasing presenceof non-US automakers, intense competition

will likely continue in the US automotive

market for the foreseeable future, regardlessof economic conditions.

From drawing board to dealership

In the manufacturing process, raw materi-

als such as steel, glass, plastic, and rubberare first procured from numerous suppliers.They are made into parts at component facil-ities and shipped to assembly plants, wherethousands of workers put the vehicles togeth-er on assembly lines. When going full throt-tle, plants operate two or three eight-hourshifts per 24 hours. In North America andEurope, automakers work forces are oftenorganized by labor unions.

Automakers operations are integratedto varying degrees. However, all work with

independent parts producers is frequentlylocated near the assembly plants. Recently,they have come to depend on suppliers toassume greater design and engineering re-sponsibilities in creating new parts and sys-tems.

Computers revolutionize designBefore production begins, automakers un-

dertake extensive efforts to ensure that newdesigns will appeal to consumers. In the past,the time between a new models first sketch

and its production was as long as five years.Today most automakers have reduced thattime to around three years, and they aim toreduce it to less than two years. In fact, it isnow possible to move from a sketch or aconcept to an actual prototype in less than ayear. A concept car or prototype may notbe brought to production, however, if it isnot well received in market testing or is notcost-effective to produce.

The design process, in particular, hasbeen greatly expedited with the help of com-

puters. For example, it once took 12 Fordworkers 12 weeks to produce a clay model,an essential step in the design process. Now,a single designer can take an idea on a com-puter screen to an animated video of a vehi-cle in three weeks. In addition, the Big ThreeUS automakers are implementing a laborpractice called simultaneous engineering. Itcalls for designers and engineers from vari-ous specialties to collaborate during a vehi-cles design phase in order to reduce oreliminate redesign work during the later

development stages.


19/41

Simplifying parts and processesIn automobile manufacturing, fewer parts

mean lower production costs and a reducedlikelihood of assembly errors. Thus, the BigThree are trying to cut the number of partsused in each component and vehicle by re-

designing existing models as well as by creat-ing altogether new vehicles. Typically, witheach product overhaul or redesign, partcounts have dropped by 20% to 30% for in-dividual car models, and by as much as 50%for certain subsystems like bumpers andairbags.

When redesigning vehicles, automakersalso try to save production costs and im-prove quality by reducing the number ofstampings on sheet-metal parts, such ashoods, trunks, fenders, and doors. In the

past, these parts usually required betweenfive and seven stampings; today, three stamp-ings are common.

Manufacturers also are lowering costs byminimizing industrial waste and pollution.Nearly all component manufacturers nowdeliver their goods in reusable shipping con-tainers. This saves money for the automakersand their suppliers by eliminating excesspackaging and disposal costs.

Reducing the number of labor hours re-quired for the final assembly stage also has

been a high priority for automakers. Greaterproportions of components are being madeat parts facilities and delivered to the assem-bly plants on a just-in-time basis. For exam-ple, virtually all seating today is producedoff-site. Automakers send daily or evenhourly orders for specific seats, which arethen produced and delivered. Years ago,seats were produced at the assembly plant asneeded from an inventory of seating parts,components, and other materials.

Close ties with dealersFinished vehicles are sold to franchised

dealerships, which are independent business-es. Automakers record these sales (net ofmarketing costs) when the vehicles areshipped to the dealers. They work closelywith and share many costs with dealers indeveloping national, regional, and local mar-keting plans, and they offer discounts todealers as well as directly to retail customers.In addition, automakers financing divisionssometimes offer deals to consumers that may

be better than those available from other fi-

nancing sources, such as banks and creditunions. For example, a manufacturers in-house finance unit might offer consumers0% financing on auto purchases in order tostimulate sales of that automakers vehicles.

As independent businesses, dealers assume

the risk of reselling the vehicles they buy. To-day, dealers are normally well-capitalizedfirms that operate multiple franchises in or-der to protect themselves from sales swingsin individual brands and models. While au-tomakers offer guidance in making market-ing and pricing decisions, dealers are free toset vehicle prices, and they may or may notoffer customers the discounts that automak-ers provide.

Matching production to inventories

Car dealers usually aim to stock a 60-daysupply of vehicles in inventory. When thedaily sales rate is rising, however, dealers in-crease their inventories so that they will notlose sales due to a lack of supply.

Changes in dealer inventory levels have aripple effect on auto production. For exam-ple, the total US domestic inventory of lightvehicles stood at 83 days of supply (based onthe prior months selling rate) at the end ofOctober 2004, a number considered aboveoptimum by Standard & Poors. Of greater

concern was the 91 days of supply of lighttrucks, although cars had a worrisome 70days inventory. As a result, GM, whosebrands we believe had inventory levels abovethe industry average, announced fourth-quarter US production cuts of 7.6% (versus2003 levels) to bring inventories more in linewith demand. GM also cut production in thefirst nine months of 2005 (year to year) by9.4% to better match sales and production.These cuts and production reductions at oth-er automakers helped industry inventory of

light vehicles drop to a below normal 50days at August 31. While truck inventorydropped to the traditional 60-day target,sedans fell to a lean 39 days, suggesting theneed to replenish inventory levels. Duringthe fourth quarter of 2005, GM productionvolume was up overall, on increased sedanvolume as truck unit manufacturing declined.

Regulatory crosscurrents

Automakers are often caught between

conflicting regulatory requirements and


20/41


21/41

The TREAD Act requires automotive vehi-cle manufacturers to quickly inform the Na-tional Highway Traffic Safety Administration(NHTSA) about problems with their productsin the United States or abroad. The law alsorequires NHTSA to develop a new dynamic

test on auto rollovers in order to inform con-sumers; that test is in development. The legis-lations goal is to enhance information flow indetecting and speeding the correction of safety-related defects in automobiles, equipment, andparts.

Heavy capital commitments

Large capital commitments are requiredto keep pace with product development andmodel changeovers. Capital budgets vary

among the Big Three, with Ford and GMgenerally spending the most and Chrysler,which is less vertically integrated, spendingthe least. With outsourcing on the rise,some automakers are requiring that theirsuppliers pick up an increasingly largeshare of capital spending.

General Motors. GMs capital invest-ments peaked in 1985 and 1986, whenspending on product redesign and plantconstruction and modernization for the

two years totaled $22.8 billion. For 1991through 1994, the average annual globalexpenditure dipped to about $5.4 billion.

By 2001, as the company invested innew plants and machinery upgrades in theUnited States and Europe, it increased itscapital expenditures to $8.1 billion (ex-cluding $472 million of capital expendi-tures for Hughes Electronics). This increaseis even more astounding because it ex-cludes outlays from GMs Hughes DefenseOperations and the Delphi Automotive

parts business, which were divested andspun off, respectively.GMs worldwide capital expenditures to-

taled $7.9 billion in 2005. This level of com-mitment reflects the companys efforts toimprove plant efficiency and product quality,introduce new and updated products morefrequently, and expand its global presence.While substantial, this total is still lowerthan the mid-1980s peak, both in absolutedollars and as a percentage of sales. For2006, we expect capital outlays to rise to

$8.7 billion.

Ford. Up from an average of $3.5 bil-lion in the early to mid-1980s, Fords annualcapital expenditures have generally exceeded$8.0 billion worldwide in recent years, as thefirm spent heavily to update its vehicles andpower trains (engines and transmissions).

Outlays, however, were just $7.1 billion in2005; they could fall slightly to about $7.0billion in 2006.

Chrysler. For Chrysler (part of Daim-ler Chrysler), capital investments in theUnited States totaled 3.1 billion ($3.8 bil-lion) in 2005. Outlays included costs forcompleting the launches of new vehicles. In2006, we expect the Chrysler division tospend slightly more as it plans to introduce10 new products.

Toyota. Although not a US Big Threemember, Toyota is the second largest vehiclemanufacturer in the world based on salesvolume and has a growing sales and produc-tion presence in the United States. The com-pany planned capital outlays of 1.55 trillion(about $14.0 billion at recent exchange rates)worldwide in the fiscal year ending March2007, up from 1.53 billion spent in the fis-cal year ending March 2006.

Competition redesigns the market

The US motor vehicle market, which do-mestic automakers divided among themselvesas an oligopoly from the 1950s through theearly 1970s, has since become the worlds mostvigorously competitive auto market. Many for-eign automakers entered the open US marketin the early 1980s. Once established, theyseized significant market share by addressingshifting consumer tastes and the quality short-falls of domestic products. Japanese vehicle

manufacturers were particularly successful inthese regards, steadily expanding their marketshare at the expense of the Big Three.

Foreign competition forced domestic au-tomakers to solve underlying organizationalproblems and address poor product quality.After a two-decade slide in market share,which culminated in disastrous financialperformances in the early 1990s, the BigThree took extensive actions to improvetheir designs and streamline their manufac-turing processes. As a result, product quali-

ty and design are becoming less of an issue in


22/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

0

differentiating foreign and domestic manu-facturers.

Rising competition in North America andEurope has also restricted manufacturers pric-ing power. Vehicle price increases have beenlimited in these markets; in some cases, vehi-

cles are priced the same or lower than previ-ous models, despite containing more features.

The selling processThe battle for sales takes place mainly on

the dealership floor, where price and serviceare the primary weapons. Although pricecompetition is generally intense, dealers havesome flexibility to raise or lower prices in re-sponse to consumer interest in a given vehi-cle model. Today, many products sell withina tight price range.

In such a market, dealers are differentiat-ed by their customer service. Service qualitymust be honed day in and day out; any gainsin this area can be achieved only over a longperiod. Any advantage can quickly be lost ifpoor service generates unfavorable publicity.

Pricing factorsSeveral factors can force retail auto prices

to rise. Over time, consumers come to expectas standard equipment features once offeredas optional. New safety or emissions-control

items may be required to comply with gov-ernment regulations. Prices may also rise asconsumer demand for a model increases.

Competition pressures manufacturers anddealers to lower prices. Lower automobileprices can be achieved through higher unit pro-duction volume, cost savings on parts and la-bor, and improved manufacturing efficiencies.When costs are reduced through innovation,savings can be shared between manufacturerand consumer, so profits can still rise. Howev-er, when prices are reduced solely to stimulate

demand and there are no offsetting cost sav-ings, profitability declines.When sales lag, automakers use numerous

tactics to stimulate demand, including dis-counts and cash rebates. Dealers can andoften do give their own discounts in addi-tion to those offered by manufacturers. Anauto companys captive finance subsidiarycan spur sales by offering car buyers financ-ing at lower interest rates than those avail-able elsewhere. Alternatively, manufacturersmay eliminate options on a particular model

to offer buyers a low-priced alternative.

Costs for rebates and other marketing tac-tics, such as the recent employee-discount-for-all buyers, have been rising since the endof 1996. This trend likely will continue, re-flecting greater competition.

Leasing plays a roleIn the distant past, the practice of leasing

cars was largely limited to businesses thatmaintained fleets of vehicles and to individ-ual drivers, generally professionals, whotraded in their cars frequently. During the1990s, however, the practice became wide-spread among ordinary consumers as well.Automakers and dealers regard leasing as away to overcome buyer resistance to highprices and fears that vehicle resale values willnot hold up.

Leasing protects consumers from the un-certainties of resale values when the time ar-rives to trade in their cars or trucks. Afterthe two- or three-year leases expire, con-sumers return the vehicles to the dealer. Theautomakers finance subsidiary then assumesthe risk of reselling the car. Thus, the au-tomakers themselves take the gain (or loss)on the used vehicle. This strategy has con-cerned the investment community. If au-tomakers misjudge their vehicles resalevalues and do not charge sufficiently high

monthly lease prices, they could suffer losseswhen reselling the vehicles, hurting profitsand possibly stock values. In fact, decliningvehicle residual values have caused some carcompanies, such as GM, to reduce their com-mitment to leasing.

In 2005, an estimated 20% to 25% of allvehicle sales were accomplished via leasing.After peaking at about 30% (according tosome sources), this number had been trend-ing downward. However, Standard & Poorsbelieves that with interest rates rising, some

automakers may look to use attractive leaserates (instead of cut-rate financing) to lurecustomers into dealerships.

Demand factorsThe economic environment naturally af-

fects demand for automobiles. Cars are amajor purchase for most families, and con-sumers need to feel comfortable before theyspend so much of their hard-earned money.During periods of sustained economicgrowth and plentiful employment, sales typi-

cally rise as customers feel flush and confi-


23/41

2

dent enough to buy new vehicles. Conversely,when the economy weakens and jobs arehard to come by, consumers are more likelyto delay the purchase of new vehicles.

Other factors affecting new car sales in-clude changes in style, engineering, safety,

and quality (which hasten the obsolescenceof existing models), and the cost and avail-ability of gasoline and insurance.

Safety has captured vehicle buyers atten-tion in recent years and has become a perva-sive theme in automakers ad campaigns. Inresponse to consumer demand for safer vehi-cles, automakers have made wide use ofcomponents such as airbags and antilockbrake systems.

The world of auto parts

Auto parts manufacturers produce originalparts and accessories for new vehicles, replace-ment parts and accessories for older vehicles,or both. The automotive business provides themajority of revenues and profits at most ofthese companies. At some diversified firms,however, nonautomotive operations (usuallysome sort of manufacturing business) accountfor more than half of total sales and earnings.

Online procurement has changed the auto-motive parts business. Because of the increased

price transparency created by online competi-tive bidding, selling prices for commodity itemsare often pressured. However, value-addedproducts are generally less affected.

A dependent relationshipParts suppliers are an important part of the

vehicle manufacturing process. Automakerssuch as GM and Ford design and marketvehicles, but they outsource production ofthe vehicles parts to relatively large partsmanufacturers called Tier 1 (T1) suppliers.

T1 suppliers, in turn, subcontract produc-tion of some parts among thousands ofsmaller manufacturers called Tier 2 (T2)and Tier 3 (T3) suppliers.

T1 suppliers typically have multiplesources for parts. Nonetheless, they oftenstrive to maintain a diversified T2/T3 partssupplier base in order to guarantee a steadyflow of parts.

If T2 and T3 suppliers run into financialdifficulties, they also can create costly prob-lems for the automobile and T1 parts makers

by interrupting the production of vehicles.

Therefore, when suppliers farther down thesupply chain have financial or manufacturingdifficulties, carmakers and Tier 1 suppliersare likely to help in order to maintain timelyparts production.

The cost of supplier distress can absorb

more than just cash; it also can demand man-agement time and attention. In addition toproviding loans and making higher than con-tractually required payments for parts, someT1 companies, such as Delphi Corp., havecommitted staff to help the smaller companieswith purchasing and manufacturing.

Original and replacement partsOriginal equipment manufacturers

(OEMs) and replacement parts makersalike tend to specialize in a few items that

require a high degree of skill and efficiencyto manufacture. Their ability to spreadoutlays for research, product development,and tools and dies over several contractsgives them an important cost advantageover automakers parts divisions. In addi-tion, OEMs and aftermarket parts suppli-ers are less likely to be unionized and thusmore likely to have lower labor costs thanauto manufacturers that run unionizedplants.

While they are similar in some respects,

OEMs and replacement parts makers divergein others, as outlined following.

Original equipment sales. For OEMs,equipment sales depend on the number, size,and complexity of cars and trucks producedin a given year. Another variable is the per-centage of any given part that automakersproduce captively.

The equipment made by OEMs usually issold directly to auto manufacturers. Howev-er, some of it is distributed as replacement

parts to the aftermarket, which comprisesnew car dealers, a few major parts distribu-tors, thousands of smaller jobbers, and otherlocal firms.

For many large manufacturers of autoparts, the backbone of the business is origi-nal equipment sales. With the US marketsannual sales of more than 16 million lightvehicles, OEMs benefit from the ability toleverage their expertise across models andcustomers and into the aftermarket. Originalequipment is a cyclical business, however,

and changes in the economic environment


24/41

J

UN

E29,2006

/AUTOS

&AUTOPARTS

IN

DUS

TRYSURVEY

2

can cause sales to fluctuate considerablyfrom year to year.

Replacement parts sales. Sales of re-placement parts have traditionally been morestable than original equipment sales, because

the number of cars on the road, especiallyolder models, is in a long-term uptrend. Vari-ables affecting replacement part demand in-clude the quality of original equipment(longer-lasting, higher-quality equipment re-duces demand for replacement parts) and thenumber and age of cars on the road. Re-placement parts are distributed to the after-market via car dealers, gas stations, partsdistributors, small jobbers, and other localfirms.

Automakers are less likely to produce re-

placement parts captively, as demand is un-known. This increases opportunities foraftermarket vendors. In recent years, howev-er, replacement parts have experienced de-clines in unit sales, largely because of theimproved quality of the original equipment.

OEMs integral role in auto productionIn the past, original equipment manufac-

turers sold their products to manufacturerslargely by signing annual contracts that cov-ered one model year. The contracts were gen-

erally elastic with respect to price andvolume deliveries.Today, however, manufacturers normally

award contracts for the life of a vehicle mod-el, provided the supplier agrees to specifictargets for productivity increases that offsetinflation for the manufacturer and also canlower per-unit prices. Automakers share withsuppliers part of the savings that they help toachieve, in order to encourage and rewardtheir loyalty to corporate goals.

Original equipment parts suppliers thus

play a large role in production programsand bear greater responsibility for the pro-grams outcomes. While automakers giveparts makers specific goals for cost, quality,performance, timing, and product features,they leave them to their own devices to findthe appropriate solutions. Given just-in-time inventory pressures, suppliers must lo-cate their facilities near the automakersproduction sites or risk losing business.Those that meet the automakers needs canexpect to receive long-term contracts and

expand their businesses.

Parts makers help automakers by en-abling them to accelerate the introductionof new car lines, by sharing the high cost ofdeveloping new models, and by minimizingautomakers exposure to damaging strikes(supplier strikes tend to be smaller and less

frequent than those of carmakers). Key sup-pliers are now involved in the earlier designphases of new products or processes, help-ing to reduce component costs.

The tire market

According to estimates by Modern TireDealer, a monthly trade publication, morethan 60 million tires were shipped to au-tomakers in 2005 for new cars and lighttrucks, and 242 million replacement tires

were delivered for sale. We expect total in-dustry (original and replacement) sales vol-ume for light vehicles to increase 1% to 2%in 2006 led by higher replacement demand.

Auto Market

Documents

Transcript of Auto Market