Microeconomic Analysis: Automotive Industry

Yaw OfosuAyesha TanveerGeneva Todd

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

2

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

3

History of the Automotive Industry

The automobile as we know it was not invented in a single day by a single inventor.

The history of the automobile reflects an evolution that took place worldwide.

It is estimated that over 100,000 patents created the modern automobile.

Here are some of the firsts….

4

Beginnings of an Industry

5

Rapid Progression of New Technology

6

• 1863: Horseless Carriage

• 1867: Improved internal combustion engine

• 1870: 1st

gasoline internal combustion engine

• 1877: 4-cycle internal combustion engine

• 1879: 1st

U.S. patent for an automobile

• 1885: 1st

gasoline pump

• 1885: 3-wheel automobile…a motorbike.

• 1886: 1st

Ford automobile

• 1887: 4-wheel vehicle, 1st

modern automobile

Significant Contributions

First Auto in the World –

Credited to France

Panhard

& Levassor

in 1889, followed by

Peugeot in 1891

First Auto Made to Specification –

Credited to

Benz

Benz built 134 Cars to Specification in 1895

First Automobile in America –

a horse buggy with a 4-hp, single-cylinder engine, assembled by Charles and Frank Duryea in 1892-93.

First Assembly Line Vehicle -

Credited to GM

7

Putting America on Wheels –

Henry  Ford

•

During the 1920’s, Henry Ford accomplished three things 

that revolutionized the automobile industry in the 20th

century. 

Perfected use of the assembly line which became the 

basis for most of the 20th century's mass manufacturing. 

Placed value on his workers by paying them $1 a day 

(which believe it or not, was far above the average wage 

in the early part of the century). 

The Model T, introduced in 1908, was the first car for 

the middle class.

8

Putting America on Wheels –

Henry Ford

•

During the 1920’s, Henry Ford accomplished three things 

that revolutionized the automobile industry in the 20th

century. 

Perfected use of the assembly line which became the 

basis for most of the 20th century's mass 

manufacturing. 

Placed value on his workers by paying them $1 a day 

(which believe it or not, was far above the average 

wage in the early part of the century). 

The Model T, introduced in 1908, was the first car for 

the middle class.

Mergers & Acquisitions

9

10

Major Mergers & Acquisitions

Studebaker & Packard (1954)

Daimler-Chrysler (1998)

GM & Chrysler –

The Merger That Never

Was (2008)

Tata Motors takes control of Jaguar and Land Rover (2006-2008)

Porsche & VW –

Two German Makers

Become One (2004-2008)

Chrysler and Fiat (2009)

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

11

U.S. Market Definition

Oligopolistic Market

Largest passenger vehicle market

Large proportion of revenue from selling automobiles

Approx. 310 million people with Approx. 250 million registered passenger vehicles

GDP Per capita -

$46,000

12

Segmentation

13

% Chg fromOct'09

Cars 448,127 3.9 4,840,525 5.3

Midsize 220,998 -0.2 2,407,457 9.9

Small 142,983 9.7 1,616,840 -1.5 Luxury 78,487 9.7 742,278 7.2 Large 5,659 -31.9 73,950 -0.8Light-duty trucks 502,038 23.5 4,730,196 16.7 Pickup 147,207 16.9 1,334,133 13.9

Cross-over 195,274 20 1,928,191 16.8 Minivan 55,596 21 561,736 15.1

Midsize SUV 51,494 86.6 443,922 37.9 Large SUV 23,946 1.5 202,806 12.1

Small SUV 14,861 53.6 146,000 -3.8 Luxury SUV 13,660 22.1 113,408 26.2

Total SUV/Cross-over 299,235 27.4 2,834,327 18.3Total SUV 103,961 44.3 906,136 21.7

Total Cross-over 195,274 20 1,928,191 16.8

Source: www.motorintelligence.com

Segment totals, ranked by Oct 2010 unit salesOct-10 YTD 2010

% Chg fromYTD 2009

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Key Players –

The Big Three

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Toyota Motors, 14.20%

General Motors, 21.00%

Ford Motor Co., 16.40%Honda 

Motors, 13.00%

Others, 35.40%

15

Market Share by Company

Top Car Manufacturers Worldwide (2009)

GM, 13%

Toyota, 11.8%

Volkswagon, 8.6%

Ford, 8.6%

Honda, 5.4%Peugeot, 4.8%Nissan, 4.8%Fiat, 3.7%

Renault, 3.6%Hyundai, 3.6%

Suzuki, 3.6%

Chrysler, 3.5%

Daimler, 2.9%

BMW, 2.1%

Mitsubishi, 1.9%Other, 18%

16

Porter’s Five Forces of Competition

17

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

18

Regulatory and Legal Framework

Key Regulatory Enactments

Tactics and Collusion

Government Bailout/Intervention

19

Regulatory Enactments

•

Corporate Average Fuel Economy Regulations (CAFÉ)

•

National Highway Traffic Safety Administration (NHTSA)

•

Environmental Protection Agency (EPA)

20

Tactics and Collusion

Crackdown on price-fixing and other collusion

February, 2010: U.S. Justice Dept. Investigation of Automotive Electronic Components Business

Aggressively pursuit and prosecution of international cartels by Antitrust Division

Significant fines and penalties levied

Hybrid tax credit

21

GM “Government Bailout”

The Past ….

$74.4 billion in total debt

$88 billion in losses (2004-2009)

Bankruptcy June 1, 2009

Today……

$15.6 billion in debt and preferred stock

$9.4 billion in underfunded retiree obligations

$4.77 billion in profit (Q1-Q3, 2010)

GM Largest IPO in history (Nov. 17, 2010)

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Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

23

Financial Profile

Cost Structure

2009 Industry Statistics

Factors affecting profitability

Sales volume

Production volume

24

Elements contributing to Cost Structure

25

Industry Statistics -

2009

26

Market Capitalization: 5,116BPrice / Earnings: 8.7Price / Book: 1.4Net Profit Margin (mrq): 4.80%Price To Free Cash Flow (mrq): -42.4Return on Equity: 15.40%Total Debt / Equity: 118.4Dividend Yield: 0.10%

(in $ million) Turnover Investments Public Revenue

USA 561,140 40,149 84,861Japan 575,005 8,514 87,706Germany 300,519 15,708 58,494France 147,709 5,539 44,880

Key Factors Affecting Profitability

Sharp rises in crude oil prices

Reduced consumer buying power and demand

Elevated price of raw materials such as steel and other metals

Intense competition from Asian competitors

Fluctuating currency exchange rate

Large capital expenditure costs

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Sales –

Top 20 Vehicles

28

% Chg fromOct '09

Ford F - Series PU 49,041 24.2 434,920 29.9Chevrolet Silverado PU 34,283 8 301,998 15.6Toyota Camry / Solara 25,014 -17 275,844 -6.3Honda Accord 21,451 -7.6 236,278 -3.4Nissan Altima 18,978 28.5 187,875 10.9Toyota Corolla / Matrix 18,636 -27.5 227,822 -5.4Honda CR-V 18,040 15.1 162,326 2.4Hyundai Sonata 17,505 124.7 166,628 64.4Ford Fusion 17,362 29.1 178,943 20.9Dodge Ram PU 17,316 41.2 158,205 1.8Honda Civic 17,121 7.9 215,393 -3.7Toyota RAV4 14,694 5.2 141,085 16.8Ford Escape 14,578 16.9 157,398 13.4GMC Sierra PU 12,983 9.2 103,218 13Chevrolet Equinox 12,773 62.3 111,828 75.1Jeep Grand Cherokee 12,721 290.7 60,898 41.1Ford Focus 12,396 22.5 146,649 7.8Chevrolet Impala 12,389 -2.6 145,974 4.6Chevrolet Malibu 12,353 2.2 175,599 34Volkswagen Jetta 11,958 31.8 99,065 9.8

Source: www.motorintelligence.com

Oct-10 YTD 2010% Chg fromYTD 2009

Car Production -

2009

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Country CarsChina 10,383,831Japan 6,862,161Germany 4,964,523South Korea 3,158,417Brazil 2,576,628

USA 2,246,470India 2,166,238Others 15,942,866

China 1,605,000

USA 954,210Germany 773,217Russia 755,000Japan 725,000

Employment (Auto Jobs)

Stock Comparison (Most recent annual)

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Company name Price Change Chg % Mkt CapGeneral Motors Company 33.61 -0.28 -0.83% 50.46BFord Motor Company 16.56 0.14 0.85% 57.51BDaimler AG (USA) 71.09 -1.35 -1.86% 72.80BToyota Motor Corp. (ADR) 78.12 0.08 0.10% 122.49BHONDA MOTOR CO., LTD. ... 37.78 -0.17 -0.45% 68.09BNissan Motor Co., Ltd.... 19.34 0.02 0.10% 40.46BVolkswagen AG (ADR) 30.29 -0.71 -2.29% 70.45B

Valuation

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

31

Microeconomic Characteristics

Elasticity of Demand

Keys to industry growth Supply and Demand

32

Elasticity of Demand

Long-term: Demand is inelastic

Cars are somewhat necessary

Long-term: Demand in suburban/rural areas is (generally) inelastic

Fewer alternative modes of transportation

Short-term: Demand is elastic

Purchases can generally be deferred

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Ed = ΔQd/ΣQdΔ

Price/

ΣPrice

Key Factors affecting Supply and Demand

SUPPLY

Labor

Material

Production Methodology

Technology

Competition

Globalization

34

DEMAND

Price

Car Financing/Leasing

Growing demand for fuel-efficient vehicles

Government regulations

Globalization

Environmental issues

Increasing population

GDP growth in BRIC

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

35

Outlook

• Big 3 Decline/Recovery

• Growth of market

• Limits to growth

• Sensitivity to changes in governmental programs/regulations

• Demographics: Global Expansion

• Demand Curve: Relationship to overall economy

36

37

38

Signs of Recovery

39

4040

Changes in Gas Price vs. SUV & Hybrid Auto Sales

The Future

41

Market Disconnect

•

NHTSA and EPA: Improved performance standards by 2016

• Smaller vehicles with high fuel economy

•

Will American consumers demand and pay for the smaller fuel efficient vehicles?

1.

American consumers will buy smaller, fuel-efficient vehicles if gas prices are high;

2.

Given a choice, Americans prefer larger, less fuel-efficient vehicles.

41

42

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Raising the Bar

• Smaller vehicles

• New power sources

•

Electric/hybrid-centric collection of new vehicles

• Higher-quality materials

• Integration of improved connectivity

•

“Infotainment”

and safety capabilities no longer reserved for larger, luxury vehicles

•

Over 35% of U.S. vehicle sales compact or smaller

The Future Is Now!•

Chevy Volt:

2011 Car of the Year

Motor Trend Magazine

Automobile Magazine

Green Car Journal

44

Global Expansion

45

• Rapid expansion into newer markets

• 27% surge in global manufacturing by 2012

Forecasts

• Annual Sales Could Reach 16 Million Units by 2011 on Pent-Up Demand

• Suppliers Could Need Up To $33.5 Billion Through 2012

46

Demand Curve Changes

Demand Curve Changes Based on Positive Forecasts*

Initial Launch: Prices Increase Over Time: Prices Decrease

48 *Assuming demand increases

Agenda

History

Key factors

Market

Regulatory / Legal framework

Financial profile

Microeconomic characteristics

Outlook

Recommendation

49

Present Position

Controlled by a few domestic and foreign companies.

Ford, Chrysler, GM, Toyota and Honda

Electric powered vehicle returns in Hybrid Cars to gain fuel efficiency

With Government’s intervention, the U.S. industry has seemingly regained its momentum from a major slow down and record losses in 2009

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Overall Analysis of Industry1.

Financial Skill-

Great financial performance with increasing profits

-

Industry product leadership

2.

People Factor-

Great management team; relatively good employee relationship

3.

Investment Characteristics-

Limited growth space due to intense competition

-

Low industry profit margin

4.

Investment Price-

P/E Ration is relatively low51

Strengths• Brand recognition

• Return to profitability

• Experience, knowledge of industry

• Closing pay gap with foreign competition

• Technological advancements

• Improving quality, reputation

• “Too Big to Fail”

Opportunities

• Alternative fuel sources

• Promote development of electric vehicle manufacturing plants in BRIC countries

• Strategic alliances, partnerships

• Product development

• Innovation and technology development

Threats• Global Recession

• Loss of alliances and partners

• Price inflation/deflation

•

Strong competition: New products, innovation

• Political climate

•

Relationship with suppliers of raw materials

• Legal and Regulatory risks

• Patents and trademarks

Weaknesses• 5 years to break-even on fuel-

efficient vehicle investment

• Low consumer confidence on fear of rising unemployment

• Credit crunch

• Surplus inventory

• Majority of manufacturing outside U.S.

Primary FactorsSWOT ANALYSIS

52

Recommendations Invest: Yes or No?

• Bright investment perspective GM and Chrysler beat expectations Ford weathered economic downturn Toyota maintains strong market share

• Invest in the Automotive Industry!

SWOT ANALYSIS

53

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ReferencesBromley, R. (2006-7). Class notes. Retrieved December 13, 2010 from

http://www.PCEcon.com_Economics_Notes_and_Study_Aids_to_RayBromley.com

Economics and Business Group Center for Automotive Research. (2003). Economic contribution of the automotive industry to the U. S. economy—an update. Retrieved December 2, 2010 from http://www.cargroup.org/pdfs/Alliance-Final.pdf

Environmed

Research Inc. (1995). Cars, air pollution and health. Retrieved

December 8, 2010 from http://www.nutramed.com/environment/cars.htm

Environmental Defense. (2003). Automobile industry largest source of lead pollution today. Retrieved December 2, 2010 from http://www.environmentaldefense.org/pressrelease.cfm?ContentID=2889

Jones, R. (2006). American auto industry seen at a crossroads. Retrieved December 8, 2010 from http://www.msnbc.msn.com/id/10642724/

Leary, T. B. (2010). Allies in a common cause. Retrieved December 6, 2010 from http://www.ftc.gov/speeches/leary/fdli.pdf

Mankiw, N. G. (2009). Principles of economics (4th

Ed.). Chicago, IL: Thomson West Publishing

U. S. Department of Commerce. (2010). U.S. Automotive industry employment trends. Retrieved December 6, 2010 from http://www.ita.doc.gov/td/auto/domestic/staffreports/Jobloss.pdf

U. S. Department of Transportation. (2002). Fuel consumption in the United States: 1992 and 2000. Retrieved December 10, 2010 from http://www.bts.gov/publications/transportation_statistics_annual_report/2001/html/cha

pter_08_table_01_230.html

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