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Automotive Outlook:When Do Better Times Return

Federal Reserve Bank of Chicago 2010 Economic Outlook Conference

December 4, 2009

Charles ChesbroughSenior Economist

[email protected]@yahoo.com

Automotive Outlook:

What The @#$%&! Happened?

Who’s To Blame For This @#$%&! Collapse?

Will Better Times Ever Return?

2009 © CSM Worldwidewww.csmauto.com

Presentation Outline

Review of Current Economic Indicators

Automotive Economics

The Next Big Issue

Summary


Life As An Automotive Economist In 2009


World: Gross Domestic Product In Decline

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Wor

ld

Uni

ted

Sta

tes

Japa

n

EM

U

Bra

zil

Rus

sia

Indi

a

Chi

na

200720082009 forecast

GD

P G

row

th(Y

ear-

Ove

r-Ye

ar %

Cha

nge)

Source: CSM Worldwide/FERI Financial Services AG

Economic decline is truly global – all major automotive economies falling

Modest rebound expected in 2010


World: Light Vehicle Sales Falling, and Rising

0

2

4

6

8

10

12

14

16

18U

nite

dS

tate

s

Japa

n

EM

U

Bra

zil

Rus

sia

Indi

a

Chi

na

2007

2008

2009 forecast

Car

/Lig

ht T

ruck

Sal

es(in

mill

ions

)

Source: CSM Worldwide

Global sales down 8% from last year and down 13% from their 2007 peak

Developing world still increasing: Brazil up 26% since 2007, India up 16%, China up 45%

2007 2008 200965.0 61.4 56.3

Global Light Vehicle Sales(in millions)


World: Consumers’ Confidence Rebounding

86

90

94

98

102

106

Bra

zil

Chi

na

EM

U

Ger

man

y

Japa

n

Spa

in UK

Uni

ted

Sta

tes

Sur

vey

of C

onsu

mer

Con

fiden

ce(1

00=l

ong

term

ave

rage

)

Mon

thly

Dat

aJa

n 20

08 –

Oct

200

9

Consumers’ outlook improving; optimism will lead to auto salesSource: OECD - Organization for Economic Cooperation and Development

Oct 2009


US: Manufacturers’ Confidence Rising

Source: Institute of Supply Management - Manufacturing Purchasing Managers’ Index

Outlook significantly more optimisticSince Dec ’08 Index has risen 69% - current level highest since April ‘06

25

30

35

40

45

50

55

60

65

70

75O

ct'7

0

Jan'

74

Apr

'77

Jul'8

0

Oct

'83

Jan'

87

Apr

'90

Jul'9

3

Oct

'96

Jan'

00

Apr

'03

Jul'0

6

Oct

'09

Sur

vey

of P

urch

asin

g M

anag

ers

(50=

neut

ral)

Recession


US: New Durable Goods Orders Collapse Over

Orders improving since March lowsOctober’s number still down 11% from last year – recovery has a long way to go

-30%

-20%

-10%

0%

10%

20%

30%A

pr'7

1

Jan'

74

Oct

'76

Jul'7

9

Apr

'82

Jan'

85

Oct

'87

Jul'9

0

Apr

'93

Jan'

96

Oct

'98

Jul'0

1

Apr

'04

Jan'

07

Oct

'09

YO

Y C

hang

e(3

m m

ovin

g av

g)

Recession

Source: US Dept of Commerce


-10%

-5%

0%

5%

10%

15%A

pr'7

1

Jan'

74

Oct

'76

Jul'7

9

Apr

'82

Jan'

85

Oct

'87

Jul'9

0

Apr

'93

Jan'

96

Oct

'98

Jul'0

1

Apr

'04

Jan'

07

Oct

'09

US: Retail Sales Turning

Source: US Dept of Commerce

Retail sales fall significantly during recessionsRecent numbers suggest collapse is over, bottom likely reached

Ret

ail S

ales

(exc

l aut

o/fo

od)

Ann

ual C

hang

e(3

m m

ovin

g av

g)

Recession


-800

-600

-400

-200

0

200

400

600Ja

n'71

Aug

'73

Mar

'76

Oct

'78

May

'81

Dec

'83

Jul'8

6

Feb'

89

Sep

'91

Apr

'94

Nov

'96

Jun'

99

Jan'

02

Aug

'04

Mar

'07

Oct

'09

US: No Jobs - Monthly Non-Farm Payroll Changes

Source: Bureau of Labor Statistics

Recession

Since Dec ‘07 economy has lost jobs every monthWithout job creation soon, confidence and vehicle sales recovery will be impacted

Cha

nge

in E

mpl

oym

ent

(3m

avg

, in

‘000

s)


3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0O

ct'7

0

Jan'

74

Apr

'77

Jul'8

0

Oct

'83

Jan'

87

Apr

'90

Jul'9

3

Oct

'96

Jan'

00

Apr

'03

Jul'0

6

Oct

'09

US: Unemployment Rate Still Climbing

October’s unemployment rate 10.2% - highest in 26 yearsUnemployment expected to remain high for years

Une

mpl

oym

ent R

ate

(in p

erce

nt)

Source: Bureau of Labor Statistics

Recession

8.5 yrs4 yrs


US: Housing Market Collapse Ending?

-20%

-15%

-10%

-5%

0%

5%

10%

15%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280A

pr'9

0

May

'91

Jun'

92

Jul'9

3

Aug

'94

Sep

'95

Oct

'96

Nov

'97

Dec

'98

Jan'

00

Feb'

01

Mar

'02

Apr

'03

May

'04

Jun'

05

Jul'0

6

Aug

'07

Sep

'08

Oct

'09

Aver

age

Sal

e P

rice

(in 0

00’s

) Y

OY C

hange in Price

Source: US Census Housing Statistics

1990’s price trend

Average Sale PriceY-O-Y Change in Price

1990-99 Avg Monthly Appreciation=$456 2000-06 Avg Monthly Appreciation=$1,410

Existing Single Family Home Price

Oct’05

Aug’06X

X

Price collapse appears to be improvingHigh unemployment and more foreclosures will dampen sector’s recovery


-80

-60

-40

-20

0

20

40

60

802Q

'96

1Q '

97

4Q '

97

3Q '

98

2Q '

99

1Q '

00

4Q '

00

3Q '

01

2Q '

02

1Q '

03

4Q '

03

3Q '

04

2Q '

05

1Q '

06

4Q '

06

3Q '

07

2Q '

08

1Q '

09

4Q '

09

Tighter Standards on Consumer Loans

Increased Willingness to Make Consumer Loans

Increased Demand for Consumer Loans

US: Status of Consumer Credit

A “perfect storm” in Q4 2008Situation now improving

Source: Federal Reserve Bank Loan Officer Survey - Consumer

Net

Per

cent

age

of R

espo

nden

ts





The Next Big Issue

Summary


US Autos: Government Motors - 2009 BailoutClose to $120 Billion Provided to American Auto Industry – so far:

GM - $50 billion from US, Canada, wants $5 billion more from EU

Chrysler - $13 billion from US, Canada

GMAC - $18 billion, includes $6 billion in November

Advanced Technology Vehicle Manufacturing Program - $25 billion, possibly $25 billion more in coming years

Auto Suppliers - $5 billion

Warranty Guarantee - $1 billion

Cash For Clunkers - $3 billion

Big success - 700k vehicles sold, 84% of clunkers were trucks, dealer inventories cleared out, August SAAR highest in 15 months, 3,000 workers called back

Issues - 60% of purchases were Asian OEM products, Toyota/Honda have 80% loyalty so former US customers now gone, only pulled ahead sales – September SAAR down 35% from August

Ownership: US government owns 20% of Chrysler, 61% of GM; Canadian government owns 5% of Chrysler, 12% of GM



US Autos: Market Share Changing Quickly


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

General Motors

Ford Chrysler/Fiat Toyota Honda Others

1985200020082015

Sha

re o

f Tot

al C

ar/L

ight

Tru

ck S

ales

Rise of Asian OEM quality and design, coupled with poor American OEM product planning, created huge shifts in consumer preferences

Market Share for Detroit 3: 86% in 1985, 64% in ‘00, 50% in ‘08, 40% by ‘15


US Autos: Retailing Differences Prior Bailout

Source: NADA

Number of Dealers

Detroit 3 distribution network too large – not sized correctly for market share realitiesSmaller network for Honda/Toyota means stronger margins, better looking stores and lower marketing costs

0200400600800

1,0001,2001,4001,600

Gen

eral

Mot

ors

Ford

Chr

ysle

r

Hon

da

Toyo

ta

Sales Per Dealership

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000G

ener

alM

otor

s

Ford

Chr

ysle

r

Hon

da

Toyo

ta


1.3

1.5

1.7

1.9

2.1

2.3

2.5R

enau

lt/N

issa

n

Hon

da

BM

W

Toyo

ta

Volk

swag

en

Ford

Hyu

ndai

Chr

ysle

r

Gen

eral

Mot

ors

Dai

mle

r

US Autos: Economies of Scale Differences


Pro

duct

Seg

men

ts C

over

edP

er P

latfo

rm

Provides huge cost savings for supplied components, design engineers, plant flexibilityGlobally, scale even more important – Chrysler North America only


US Autos: Industry Consolidation Was NeededToo many brands/products

326 nameplates for sale in 2008 from 36 different brandsGM alone had 8 different brands, many selling the same vehicle with only slight variations

Too many suppliersDetroit 3 squeezed supplier margins for years – no cushion remains

Too many dealers Consumers price shopping among brand dealers - forcing dealers to compete with each other, not competitors

Too much capacity and outputIn early 2000s, high fixed labor costs forced over production – incentives used to move metalNew labor contracts allow Detroit 3 to focus on profits, not market share



-50%

-40%

-30%

-20%

-10%

0%

10%

Feb

07

Jun

07

Oct

07

Feb

08

Jun

08

Oct

08

Feb

09

Jun

09

Oct

09

SmallMid-SizeFull-SizeTotal

US Autos: Sales During Recession

YO

Y C

hang

e in

Mon

thly

Sal

es(3

m m

ovin

g av

g)

Detroit 3 hit harder in recession – sales bottomed in the midst of bankruptcy/bailout talksSmall car sales remained strong until Crude Oil bubble burst

-50%

-40%

-30%

-20%

-10%

0%

10%Fe

b 07

Jun

07

Oct

07

Feb

08

Jun

08

Oct

08

Feb

09

Jun

09

Oct

09

Detroit 3AsianEuropeanTotal

OEM Sales Segment Sales



8

10

12

14

16

18

20

22Fe

b'98

Jan'

99

Dec

'99

Nov

'00

Oct

'01

Sep

'02

Aug

'03

Jul'0

4

Jun'

05

May

'06

Apr

'07

Mar

'08

Feb'

09

Jan'

10

Dec

'10

US Autos: Car/Light Truck Monthly SAAR


Sea

sona

lly A

djus

ted

Ann

ualiz

ed S

ellin

g R

ate

(in m

illio

ns)

Cash for Clunkers caused large spike, but only temporaryForecast sees improvement: 13.2 million in 2008, 10.1 in 2009, 11.8 in 2010

Keep America RollingEmployee Pricing For All

Cash For Clunkers


US Autos: Consumer Confidence and Sales

8

9

10

11

12

13

14

15

16

17

18

50

60

70

80

90

100

110S

ep'7

8

Jul'8

0

May

'82

Mar

'84

Jan'

86

Nov

'87

Sep

'89

Jul'9

1

May

'93

Mar

'95

Jan'

97

Nov

'98

Sep

'00

Jul'0

2

May

'04

Mar

'06

Jan'

08

Nov

'09

U M

ich

Con

sum

er C

onfid

ence

Inde

x(6

m m

ovin

g av

g)M

onthly Light Vehicle SA

AR

(6 m m

oving avg in millions)

Sources: University of Michigan Consumer Confidence Index/CSM Worldwide

Monthly Consumer Confidence

Monthly Light Vehicle Sales

Turnaround in vehicle sales not likely until consumers regain optimismRecent trend in confidence an indicator auto sales have bottomed


US Autos: Housing Starts and Sales

Ann

ual H

ousi

ng S

tarts

(in m

illio

ns)

Annual Light Vehicle S

ales(in m

illions)

8

9

10

11

12

13

14

15

16

17

18

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.619

6519

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

09

Strong relationship between housing starts and auto salesVehicle sales will closely follow housing sector out of recession

Sources: US Census Housing Statistics, CSM Worldwide

Annual Housing StartsAnnual Vehicle Sales


Source: Bureau of Economic Analysis, CSM Worldwide

US: Personal Savings Rate and Sales

Annual Light Vehicle S

ales(in m

illions)A

nnua

l Sav

ings

Rat

e

8

9

10

11

12

13

14

15

16

17

18

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%19

71

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Strong relationship between consumer savings rates and vehicle salesAfter collapse, consumers saving more – is this temporary or permanent?

Personal Savings RateAnnual Vehicle Sales


US Autos: Vehicle Assembly Changing

64%

66%

68%

70%

72%

74%

76%

5

6

7

8

9

10

11

1220

02

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

US

Car

/Lig

ht T

ruck

Pro

duct

ion

(in m

illio

ns)

US

Share of N

orth Am

erican Production

US production falls below 6 million units in 2009, but rebounds in coming yearsUS share of North American production doesn’t rebound to previous levels



10.1

11.8

9

10

11

12

13

14

15

16

17

1819

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

1320

15

US: Today’s Recession, Tomorrow’s Opportunities

Ann

ual S

ales

(in

milli

ons)


Recession

Recession Rebounds

We are here

Sales cycle: recessions create pent-up demand, leads to large reboundsPost recession, profitability returns: leaner industry will mean stronger margins

Trend





The Next Big Issue

Summary


World: Developing Countries’ Vehicle DemandChina – Per Capita GDP up over 400% by 2030 to $10,000

• Similar wealth countries’ vehicles in use: 250 per 1,000 people• Potential forecast: 300-350 million additional vehicles needed in next 20 years• Annual auto sales may continuously exceed US sales within next few years

India – Per Capita GDP up over 205% by 2030 to $2,500

• Similar wealth countries VIU: 150 per 1,000 people

• Potential forecast: 100-150 million vehicles needed over next twenty years

Source: Assumes recent GDP growth rates and UN VIU statistics

Possibly 400 – 500 million new vehicles needed in next 20 years in just these two counties

US will need at least 60 millionmore vehicles by 2030


-40%

-30%

-20%

-10%

0%

10%

20%

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50O

ct'9

0

May

'92

Dec

'93

Jul'9

5

Feb'

97

Sep

'98

Apr

'00

Nov

'01

Jun'

03

Jan'

05

Aug

'06

Mar

'08

Oct

'09

US: Gas Prices and Volatility for Consumers

Source: EIA Monthly US Retail Gasoline Price

Gas prices and volatility both increasing dramaticallyIn 1990s, monthly change in prices averaged 2.3%; in 2000s - 5.7%, up 150%

Ret

ail R

egul

ar G

asol

ine

Monthly C

hange in Price

Regular Gas PriceMonthly Change in Price


US: Shift to Smaller Sized Vehicles Continues

Demand - increases in gasoline prices and volatility accelerating consumer trends

Supply - new EPA regulations will force manufactures to sell more small cars

15%

20%

25%

30%

35%

40%

45%

Small Medium Large

2009

Sha

re o

f Tot

al U

SC

ar/L

ight

Tru

ck S

ales

2002

2015



US: Green Technology - All The Rage

•Vehicle •

•

•Cost •Payback years at Fuel Price of:

•$2 •$3 •$4

•$2.80 •$3.80 •$4.80•(Diesel)

Technology CostPayback Years @ Fuel

Price of:$2 $3 $4

Downsizing via DI Gas & Turbo with Stop/Start Micro Hybrid MPG up 11% $1,000 8.1 5.4 4.0

Parallel Hybrid MPG up 25% $3,000 12.3 8.2 6.1

EV With Range Extender Hybrid 40mi + 50 MPG $10,000 10.6 6.4 4.6

Pure Electric Vehicle $0.34/mile $20,000 27.0 14.7 10.1

With current gasoline prices, length of payback period for a significant consumer’s technology investment is too long

Auto manufacturers planning for fuel efficient vehicles, but ROI doesn’t make sense

Assumptions: 15k miles/year, 24 mpg vehicleSources: CSM Worldwide, CALCARS.com


0

5

10

15

20

25

30

35

40

$2.00 $2.50 $3.00 $3.50 $4.00

20,000 miles/yr15,000 miles/yr12,000 miles/yr

$0$100$200$300$400$500$600$700$800$900

$1,000

$2.00 $2.50 $3.00 $3.50 $4.00


US: Electric Cars: Future Or Fiction?

Bre

akev

en P

oint

(in

year

s)Retail Gasoline Price/Gallon Retail Gasoline Price/Gallon

Ann

ual E

lect

ricity

Cos

t($

0.03

4 pe

r mile

)

Sources: CSM Worldwide, CALCARS.com

Consumer/Manufacturers have a huge technology investment = $20,000Operating costs low, but still not a rational choice for consumers to purchase electric

Low Operating Costs BUT… Poor Consumer ROI


Bre

akev

en P

oint

(in

year

s)Retail Gasoline Price/Gallon

0

5

10

15

20

25

$2.00 $2.50 $3.00 $3.50 $4.00


Retail Gasoline Price/Gallon

Bre

akev

en P

oint

(in

year

s)

$7,000 Gov’t Subsidy European/Japanese Gas Prices

0123456789

$6.00 $6.50 $7.00 $7.50 $8.00


US: Impacting Rational Consumers’ Choice

Subsidy: With $7,000 and $3 gas, breakeven point for typical driver is 9 years

Gas Tax: Higher taxes (Europe/Japan levels) significantly impact the consumers’ ROI, but payback still takes too long, and is it politically viable?



02468

101214161820

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020


US: Viability - Innovation & Fuel Policy Needed

Bre

akev

en P

oint

(in

year

s)

Tech

nolo

gy C

ost P

er V

ehic

le

$0 $2,000 $4,000 $6,000 $8,000

$10,000 $12,000 $14,000 $16,000 $18,000 $20,000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Assumes costs15% per year

Sources: CSM Worldwide, Dept of Transportation NHTSA Study

By 2020, high mileage users breakeven in 18 months low mileage users in 30 months

Technology cost must fall, and gas prices rise, for mass production/sales of electric cars to succeed – but neither is known today and OEMs must invest now

Manufacturer Investment Consumer ROI


SummaryEconomic recovery has begun, but strong auto sales not expected until late 2010

Auto production will rebound, but US manufacturing will not return to previous levels

Strong sales and profitability will return to the US auto industry by 2011 – the key question is who survives to enjoy it

Electric cars make sense for many reasons, but consumer economics is not one of them – significant energy policy coordination is needed, and soon

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