Merrill Lynch peers into its crystal ball and offers its prognosis for the future of the big automakers.
Alex Taylor - Fortune - July 14, 2006
Domestic manufacturers are in real trouble.
New York - Want to take a peek at what the rest of the decade has in store for the world's automakers?
Here's what it looks like: The winners, maintaining their momentum, are Toyota and Nissan. The Koreans have a hit a dry patch and Honda is unexpectedly barren.
But the big losers - no surprises here - are General Motors and, bringing up the rear, Ford. By the end of the decade, the market share of Ford, currently number two in the U.S., could fall below both Chrysler and Toyota.
This automotive crystal ball is contained in an analysis of future product plans compiled by Merrill Lynch analyst John Murphy.
Murphy counts up the production volume of the new models that each company plans to introduce and compares that to their annual production. The number he comes up with - average volume replacement rate - is a near-flawless indicator of future automaker performance.
The rate of new model replacement, according to Murphy, "drives showroom age, which drives market share, which in turn drives capacity utilization, profitability and stock price." The proof can be seen in the results of the past decade.
The Koreans and the Japanese, who generally replace their cars every five years, have achieved big market share gains, while GM, Ford, and Chrysler which tend to wait eight years before making major changes, have lost share.
The race is getting closer now because competitive pressures are forcing every manufacturer to keep its product lines fresher. Between 1992 and 2006, the industry replaced about 13 percent of its volume each year with new models. But between 2007 and 2009, Murphy expects the annual replacement rate to jump to 18 percent.
"Auto companies can compete through cost leadership, superior product or product differentiation," he writes. "For most OEMs, the first two strategies are unachievable, so many try to compete by differentiating their product. This has resulted in an explosion of new models."
The 2007 model year, which officially kicks off on October 1 but actually has been underway for several months, will be the biggest year for changes in history. Some 61 new cars and trucks are due to be introduced vs. 44 in 2006.
Manufacturers are rushing to enter new segments with SUV/passenger car crossovers, hybrid-electric cars, and well-equipped inexpensive models for younger drivers. They are encouraged by the strength of the U.S. market, where auto sales have remained relatively high, despite rising interest rates and gasoline prices.
The heightened new model activity will continue until the end of the decade, with imports staying in the lead. Coming from Japan in 2008, for instance are small crossovers from Toyota and Nissan, and a youthful hatchback from Mazda.
Thanks to heavy spending on new models, the Japanese are expect to gain share over the next four years, although perhaps at a slower rate than in the past. Korea's Hyundai and Kia, meanwhile, are launching three new crossovers between them in 2008 but have little new coming in 2009 and 2010.
Among the Detroit stalwarts, DaimlerChrysler gets the highest marks from Murphy. In the next four years, it is introducing redesigns of two high-volume vehicles - the Ram pickup and the minivan - as well as a slew of new crossovers: the Jeep Compass and Patriot, and Dodge Nitro. As a result, it is expected to maintain its competitive standing and keep its market share relatively flat.
Despite plans to replace three-quarters of its models by 2010, more than the industry average, GM is forecast to continue to lose share, though at a slower rate than in the past. Part of the reason is that it is still skewed towards traditional pickups and SUVs.
Murphy expects GM's share of the U.S. market to decline from 26.3% last year to 21% by 2010. Still, as GM closes plants and lays off workers, the decline should be slow enough to allow it to boost factory utilization rates and thus profits.
Murphy is not so optimistic about Ford, which he says is underspending on product. He calls that "an ominous sign for Ford's market share and leaves its current restructuring efforts short of rightsizing the company."
Murphy expects Ford's U.S. market share to fall by more than a quarter, from 18.3% in 2005 to 13.5% in 2010, plunging it into fourth place among automakers selling in the U.S.
That is anticipated to put pressure on factory utilization until the new F-series pickup is introduced in the 2009 model year. Overall, the message couldn't be clearer: Until GM and Ford can increase their investment in new product; they will continue to fall behind the rest of the industry.