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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
14
Key Players –
The Big Three
14
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)
22
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
27
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
29
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)
30
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
33
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
43
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
50
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
54
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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