Major Overhaul of Auto Industry Business Model Needed
The challenges facing the automotive industry will require a major change in the business model, which is unlikely to arise without government intervention, according to Oxford Analytica.
General Motors’ (NYSE: GM) announcement that it is collaborating with more than 30 electric utilities in the United States and Canada, as part of its plan to accelerate the introduction of plug-in electric vehicles, exemplifies the automobile giant’s effort to remain competitive in a changing global environment. Nevertheless, there are still major challenges facing the industry, OxAn says in Changes demand automotive rethink.
In the first century of its existence the automotive industry delivered major economic, social and industrial gains. However, the 21st century has brought a series of new challenges to the industry. Strong growth in emerging economies — particularly China and India — has placed upward pressure on global oil prices. This is also increasing demand for major commodities. The average cost of raw materials going into a car (including steel, aluminium, iron, plastic resins, rubber and glass) has risen almost 80% since 2003. The nature of competition in the automotive industry makes it difficult to pass on these cost increases to the end consumer.
There are growing signs of disruption and dysfunction in the automotive industry, which reflect its difficulty adapting to major external change. A major change in its business model is required.
Finding a new model is likely to entail abandoning various practices, including:
- trying to make consumer durables into cult objects that confuse the need for personal transportation with self-image and motorsport;
- retailing new vehicles exclusively through proprietary networks;
- selling new cars below full cost;
- changing the mindset of the industry that more products will solve problems;
- financially undermining systems, components and materials suppliers; and
- lobbying forcefully against any new legislation or regulations.
OxAn says major change is unlikely to arise from within the industry. Much of the impulse for change will probably need to come from regulation, legislation, standards-setting and fiscal measures. “This presents a huge challenge for the formulation of public policy.”
CreditSights, meanwhile, takes a look at the increasingly parlous state of the debt the “big three” US automakers in a new report Autos: Summer of Our Discontent Part 1.
The challenges to the macroeconomic story and the narrower “macro industry variables” are as complex as any we have seen in three decades of auto cycles.
“The industry just took a deep breath and decided no one can take the risk that oil prices will revert to anything close to the norm, ” CreditSights says. “Mean reversion for oil would be downright kind reversion, but the stakes are too high for forward mix and capacity planning for the legacy Big 3. Planning must now embrace the potential for a world of triple-digit oil, and that takes a multi-year planning response with even more restructuring outflows.”
For GM and Ford (NYSE: F), the cash bleed keeps going higher on the follow-on restructuring execution (sends cash out) and a sharp North America sales volume slide (brings less cash in) so the painfully simple math ends up as “even more cash goes out.” Plugging that hole is at root of the panic.
In the end, we do not see GM or Ford facing bankruptcy by any stretch though US-centric Chrysler will remain vulnerable near term to the rumor mill on lack of transparency and rising default risk intermediate term.
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August 1st, 2008 at 1:28 pm
[...] the big three US automakers should order a few copies of Oxford Analytica’s report arguing that the automotive business model needs a radical rethink. OxAn’s thesis, which was bolstered by another dismal quarter at General Motors (NYSE: GM), [...]