AUTOMOTIVE INDUSTRY PROFILE

Labor and trade unions are common in developed markets. In virtually all automobile assembly plants in the US owned by US automakers, production employees are represented by labor unions. Some US plants owned by foreign companies are nonunion. The European Commission sets basic standards for worker rights and working conditions, including general health and safety regulations, for EU member states. Chinese law prohibits independent trade unions, but the government has allowed some plant-level worker organization in some industries. Gradual reforms in China have led to higher manufacturing wages and better working conditions.

The average hourly wage for US motor vehicle production workers is slightly higher than the national average. Worker safety is a significant issue in auto manufacturing plants. The industry’s injury rate in the US is significantly higher than the national average.

North America

• The US is the world’s second-largest national car market, but it is mature and slow-growing

• Carmakers are under increasing political pressure to keep plants and jobs in the US

• Recent global carmaker investments have favored Mexico over the US and Canada

Major companies in North America include Ford Motor, General Motors, Tesla, and the Chrysler operations of UK-based Fiat Chrysler Automobiles (FCA). The US industry is highly concentrated: the 50 largest companies account for almost the entire industry in sales. Besides the largest automakers, the North American industry includes extremely small, boutique manufacturers and companies that only manufacture automotive chassis.

US automotive manufacturing has traditionally been concentrated in the Midwest. The states with the most automobile manufacturing establishments are California, Michigan, Indiana, Illinois, Ohio, Georgia, Kentucky, Missouri, and Texas.

US-based automakers compete with numerous foreign rivals, including companies such as Toyota, Honda, and Nissan that have extensive auto assembly operations in the US. Together, Ford and GM – the two major US-based light vehicle manufacturers – have a US market share of about 30%. While the US is the world’s second-largest national car market after China, it is mature and slow-growing.

Major sources of imports of cars and trucks to the US are Mexico, Japan, Canada, and Germany. Canada is the largest consumer of US exports. Operating under NAFTA, many US companies assemble autos in Mexico and Canada for sale in the US to take advantage of lower labor costs. Most of the autos imported into the US from Canada and Mexico come from manufacturing facilities owned by US companies.

In Mexico, the industry includes about 20 assembly plants that annually produce nearly 4 million cars and light trucks, according to the Mexican Automotive Industry Association. Major carmakers with plants in Mexico include Nissan, Ford, Volkswagen, Mazda, Honda, GM, Toyota, and FCA. Due to lower labor costs, Mexico has rapidly emerged as an attractive assembly location for global carmakers selling into the North and South American markets, and has captured a greater share of global carmaker investment than the US and Canada. However, carmakers that build vehicles in Mexico that are bound for the US market are under increasing political pressure to keep plants and jobs in the US.

Asia/Pacific

• Regulatory issues and a lack of dealer networks hinders Chinese automakers from entering the US market

• Japanese manufacturers build twice as many cars overseas as they do domestically

• Low market penetration, urbanization, and rising incomes are likely to drive future auto sales in India

The automobile manufacturing industry in Asia/Pacific is primarily concentrated in China, India, Japan, and South Korea. Major companies in China include SAIC Motor, Dongfeng Motor, Chongqing Changan Automobile, and FAW Group. India’s leading domestic companies are Tata Motors and Mahindra & Mahindra. Major companies in Japan include Toyota Motor, Honda Motor, Nissan Motor, Mazda Motor, Fuji Heavy Industries, and Suzuki Motor. South Korea’s auto industry primarily consists of Hyundai Motor and its affiliate Kia Motors.

China is the world’s largest national automotive market in terms of both production and vehicle sales. Its annual sales forecast for 2022 is at 80 million units, down from earlier forecasts of about 82 million units, according to data from JD Power and LMC Automotive. Most foreign investment in China’s auto industry is limited to joint ventures with domestic partners, but that policy is changing.

Most global automakers, including Ford, GM, Daimler, Volkswagen, and Toyota have extensive JV operations in China. However, untangling JV ties – even with the looser regulations – would be complicated and costly. Renegotiating terms of JV in China is complicated as it is uncommon and needs strict compliance with China’s Foreign Investment Law.

China is emerging as a leader in electric vehicle production and technology. To help cement its position in the global battery electric vehicle market, China has made major investments in securing the raw materials to make batteries. China has purchased cobalt mines in Congo to reduce its dependence on other countries for access to the mineral. The move may also make competing countries’ auto industries more dependent on China.

While China’s auto manufacturing industry is fragmented relative to national markets in the US, Western Europe, and Japan, it is fairly concentrated; one company, Shanghai Automotive Industry Corporation has annual revenues of about 750 billion yuan in 2020, according to Statista.

China is a net importer of light vehicles; it is the world’s third-largest importer of motor cars and other passenger vehicles behind the US and Germany, according to the International Trade Centre (ITC). Exports are relatively small. China’s domestic carmakers have ambitious global expansion plans, but currently its exports are mostly to other emerging markets. However, in 2016 the US became China’s top export market amid rising US imports of western-branded vehicles made in Chinese plants. Other top export markets include Iran, Mexico, Chile, Egypt, and Brazil. Difficulties with meeting US regulatory standards, consumer expectations, and in establishing dealer networks have so far hindered China’s domestic auto industry from entering the US market, which many Chinese companies see as a gateway to other developed markets.

Japan is the second-largest producer of light vehicles in the Asia/Pacific region. In 2020, about 7 million passenger cars were produced in Japan, with the total domestic production volume reached more than 8 million units, according to Statista.

However, as a whole, Japanese light vehicle manufacturers build most of their cars in or near overseas markets where they will be sold. In addition to the nearly 10 million vehicles it builds at home, it manufacturers another 18 million in overseas markets, according to JAMA. Major markets for foreign production include Asia (51% of overseas production volume), North America (27%), Latin America (10%), and Europe (9%). About 80% of Japanese companies’ North American production is situated in the US.

As the third-largest national automobile manufacturer in the Asia/Pacific region, India produces more than 4 million light vehicles per year, according to Statista. India’s auto industry consists of about 20 companies, which includes domestic players as well as the subsidiaries and joint ventures of foreign manufacturers, according to D&B India. Passenger car sales are expected to rise more than 10% per year between 2017 and 2020, according to D&B India. India exports passenger vehicles to more than 150 countries. Major export markets include Mexico, the US, South Africa, and Saudi Arabia. Exports to the US began in 2018 with Ford Motors’ EcoSport compact SUV build at Ford’s plant in Chennai, India.

The auto market in India holds long-term growth potential due to low overall market penetration, urbanization, favorable demographics, rising incomes and discretionary spending, more affordable vehicle prices, and an increasing rate of household formations, according to D&B India. India has an “open door” policy toward foreign direct investment in its domestic auto industry, which allows foreign manufacturers to set up wholly owned subsidiaries, as well as joint ventures with local partners. Major companies with assembly operations in India include BMW, Ford, GM, Honda, Hyundai, Nissan, and Volkswagen.

South Korea is the fourth-largest national market for automobile manufacture in Asia/Pacific. Factories in the country built about 1.3 million passenger cars in the past year, according to Statista. Top export markets include the US, Australia, Canada, Saudi Arabia, Germany, and the UK. Rising demand in emerging markets, as well as flagging growth and high labor costs at home have caused South Korea automakers to focus investments on increasing production capacity overseas. This trend is expected to continue as Hyundai and Kia shift more production to lower-cost operations in Brazil, India, and Mexico.

Europe

• The EU’s eastward expansion gives automakers access to growth markets and inexpensive labor

• Free movement of goods and people within the EU benefits Europe’s automotive supply chains

• Brexit is creating market uncertainty in the UK

Europe’s automobile manufacturing industry includes over 300 assembly plants in its 27 EU member states, according to the European Automobile Manufacturers Association (ACEA). The industry is concentrated in Germany, Spain, France, the UK, and the Czech Republic. Major companies headquartered in Europe include Volkswagen, Daimler, BMW, PSA Groupe, Renault, and Fiat Chrysler.

Germany is Europe’s largest maker of light vehicles and is the largest EU car market. The country has faced declining car registrations in recent years, due to the ongoing semiconductor shortage. China is the largest foreign production market; other major markets include the Czech Republic, Spain, the US, Mexico, and Brazil. Most exports go to other countries in Europe. The UK is Germany’s largest national export market. Other key markets include the US, China, South Korea, Japan, and Australia.

Germany, France, and Italy are home to major domestic brands, but automotive assembly plants are scattered throughout Western and Eastern Europe. The free movement of goods and people in the EU has benefited Europe’s auto industry and its supply chains. As the EU has gradually expanded eastward, the auto industry has followed in pursuit of growth markets and less expensive labor. However, the Brexit vote has created market uncertainty in Europe amid the possibility of new tariffs on vehicles and parts entering the UK once it leaves the EU. Automobile manufacturers in the UK worry what Brexit means for the industry’s competition.

South America

• Brazil accounts for a wide majority of South America’s light vehicle production and sales

• Rising incomes and low rates of car ownership signal growth opportunities

• Economic conditions are improving, but political uncertainties persist

Light vehicle production and sales in South America are dominated by Brazil. A small number of vehicles are assembled in Argentina. Most of the vehicles made in Brazil are sold there, but exports to other South American countries, primarily Argentina and Colombia, are growing amid better vehicle quality and an improving regional economy. Global carmakers with operations in Brazil include BMW, Ford, GM, Toyota, and Volkswagen.

South America’s automobile market has about 65 million vehicles in 2020, according to Statista. The region has substantial potential for growth the low degree of overall car ownership and higher levels of disposable income relative to some other emerging markets. Mexico and Brazil produce over 3 million and 2 million units in 2020, respectively. However, political uncertainties in the region have the potential to disrupt recent economic gainss.

Middle East & Africa

• Urbanization and infrastructure development are driving demand for cars

• Iran leads the region in vehicle production and sales

• Violent conflict and oil price volatility are holding back industry growth

Light vehicle sales in the Middle East reached just about 2 million units, dropping by more than 30%, according to Statista. Rising urbanization, improving infrastructure, and industrial development are all helping to drive demand. Iran is the region’s top market for vehicle sales, and it manufacturers its own domestic brands. Conflicts in Syria, Yemen, and Iraq, and the resulting refugee crisis, have disrupted trade and tourism in the region and contributed to rising costs for security and services to displaced populations. Oil price volatility, ongoing conflicts, terrorism, and the threat of civil unrest pose significant risks for economic growth and foreign investment.

As a whole, the market for automobiles in Sub-Saharan Africa is relatively small but has potential for significant growth. The region is rich in natural resources, but is vulnerable to swings in commodities prices. China’s slowing economy poses ongoing risks for Africa if commodity exports to China decline.

Major products are passenger vehicles (about 30% of revenue) and light trucks (over 5%). The light truck segment, which includes SUBs, has a higher average price. Cars and trucks are produced on assembly lines, an invention of the auto manufacturing industry of the early 1900s. Many refinements have made the assembly line more efficient. Robotics and other advances in automation have reduced the number of workers on a line.

A typical automobile plant has capacity to produce about 300,000 vehicles annually. Flexible manufacturing has enabled different car models to be manufactured on the same assembly line, saving hundreds of millions in setup and tooling costs. Tighter tolerance of parts enables greater consistency of product quality and reduces line stoppages. Most parts used to assemble passenger cars are bought from OEM parts manufacturers, but car companies often operate plants that manufacture key components such as engines and transmissions.

Raw materials include steel, aluminum, glass, plastic, rubber, and coatings. As many as 15,000 parts are required on some vehicle assemblies. In the US, material costs represent a significant part of total shipment value. Assembly plants require a high degree of supply chain management and coordination, as many parts and sub-assemblies are delivered to assembly plants for same day usage to minimize inventory storage and carrying costs. Many suppliers have established manufacturing or warehouse locations near assembly plants.

Technology

In addition to automated assembly processes and supply chain management, computer technology is used extensively for product design. Sophisticated computer modeling programs help with material, fuel efficiency, emissions, safety, and product quality design choices.

Cars with electric rather than internal combustion powertrains are a key area of industry research and investment. However, consumer acceptance of plug-in electric vehicles (EVs) has been lukewarm amid concerns about vehicle range, limited charging station infrastructure, and high sticker prices. To counter these perceptions carmakers have worked to expand?vehicle range, pooled resources to invest in charging infrastructure, and introduced more entry-level models. Fuel cell EVs, which use hydrogen to create electricity through an electrochemical reaction, are also an area of industry focus but model availability is lower than for plug-in EVs. A fuel cell EV’s range is similar to that of an internal combustion engine vehicle, and they can be fueled quickly at a conventional gas station. However, they do face safety challenges for?in-vehicle hydrogen storage.

On-board computers are ubiquitous in today’s cars and trucks. Even modestly equipped economy cars have at least one computer that interprets signals from various sensors in the vehicle’s engine. Computers may also control automatic transmissions, anti-lock brakes, air bags, cruise control, infotainment systems, and other automotive functions. As computing costs have gone down, the technology content in cars and trucks has risen, especially in relation to safety. Recent technologically enabled safety enhancements include tire-pressure monitoring, adaptive cruise control and collision mitigation, blind-spot detection, lane-departure warnings, rollover prevention, and rearview cameras.

In recent years, carmakers have worked to seamlessly integrate consumers’ mobile devices with vehicle infotainment systems. To that end, car companies are increasingly working with technology companies to ensure automotive features are compatible with the most popular computing operating systems. However, as cars have become more connected, keeping them secure from cyberattacks has become a critical issuer.

Advanced sensor-enabled safety features combined with internet connectivity are the bridge technologies that will eventually lead to the commercialization of fully autonomous cars and trucks. While the technology is likely years away from widespread adoption, driverless systems are being developed and tested by most major automakers as well as companies such as Alphabet, Apple, and Uber. Carmakers are also making investments in ride-hailing, trip planning, car-sharing, and other tech-enabled mobility services as a hedge against a future with less car ownership and more shared ridership.

As most automobile manufacturing companies are experiencing supply chain disruptions, the use of 3D manufacturing is used as a solution. The use of 3D printing enables supply chains to recover during demand surges as well as shortages. Developers are incorporating the use of 3D printing with traditional processes to create uniquely combined parts which could perform better and have a lower cost.

The global auto industry is dominated by a small number of US, Western European, and Japanese companies. In the pursuit of sales and market share growth, the major companies have expanded aggressively into emerging markets by setting up local subsidiaries or joint ventures. Domestic manufacturers in emerging markets often enjoy tax benefits or other policies that give them an advantage over foreign competitors. Manufacturers in emerging markets also have global expansion ambitions and are increasingly exporting their products to both established and other developing markets.

Demand is driven by employment, wage growth, and interest rates. The profitability of individual companies depends on manufacturing efficiency, product quality, and effective marketing. Large companies have economies of scale in purchasing and marketing; smaller companies can compete by focusing on specialized markets.

Competitive Advantages:

Developing a Focused Strategy – Amid transformative trends including electric drivetrains, autonomous technologies, vehicle connectivity, mobility services, and emerging global markets, having a cohesive strategy is essential. Trying to do too much to address these trends could be as risky as doing nothing. Industry watchers suggest automakers need to develop and execute strategies that play to core brand strengths while investing in technologies that reinforce and complement those strengths.

Global Flexibility – Shifts in demand, product preference, and regulations can occur suddenly, and in different geographic locations. As carmakers are increasingly global in scale, product development, production, marketing, and supply chain operations need to be agile enough to respond quickly to changes in individual markets.

Optimized Product Mix – Industry insiders suggest the concept of being all things to all buyers is a dated automotive product strategy. Some companies focus more on luxury brands and SUVs, while others may emphasize fuel-efficient, middle-market offerings. Key to success is finding the right blend of products and brands across the various regions in which the company operates.

Companies to Watch:

Ford Motor builds cars and trucks under the Ford and Lincoln brands. The company’s Ford Motor Credit division is one of the US’s leading auto finance companies. The company plans to pare its car offerings down to the Mustang to focus on trucks, SUVs, and crossovers.

General Motors (GM) makes cars and trucks, with well-known brands such as Buick, Cadillac, Chevrolet, and GMC. In 2017, GM sold its European operations to focus on North America, China, and autonomous technologies.

Honda Motor is Japan’s #2 automaker (after Toyota) and the world’s largest motorcycle producer. The company also makes a line of ATVs and personal watercraft. Honda’s power products division makes commercial and residential machinery, portable generators; and outboard motors.

Hyundai Motors is South Korea’s leading carmaker and produces compact and luxury cars, SUVs, minivans, trucks, buses, and other commercial vehicles. The company operates manufacturing plants in China, the Czech Republic, India, Russia, South Korea, Turkey and the US. Hyundai also owns a 34% stake in Kia Motors.

Toyota Motor is among the world’s largest automotive manufacturers by revenue and designs and manufactures a diverse product line-up that ranges from subcompacts to luxury and sports vehicles to SUVs, trucks, minivans, and buses. The company is a pioneer in the gasoline-electric hybrid vehicle market.

Volkswagen (VW) is Europe’s leading carmaker and second in the world by vehicle sales, after Toyota. VW owns several luxury brands including Audi, Lamborghini, Porsche, Bentley, and Bugatti, as well as Spanish automaker SEAT, Czech automaker Škoda, and commercial vehicle makers Scania and Man.

Independent dealers in local markets are the primary sales and distribution channel. Most car buyers use the internet as a shopping venue, but the dealership is still the primary sales outlet, even if the buyer shops online.

Dealers often enter into multi-year sales agreements with manufacturers. Some dealers have exclusive agreements with a single manufacturer; other dealers represent multiple manufacturers. Manufacturers may impose various operating requirements on the dealer for inventory, working capital, sales practices, showrooms, service facilities, and monthly reporting. Dealers also agree to offer warranty service, parts, general maintenance, and repair of the manufacturer’s products. Most manufacturers require that certified technicians perform this work.

Manufacturers typically own multiple product lines, often marketed under different brands. Brands are targeted to consumers by income, age, and sex by highlighting model characteristics, such as performance, economy, quality, and safety. Ads are delivered primarily by TV, radio, newspaper, and the internet. Manufacturers advertise directly and also support cooperative dealer advertising programs.

Cash flow is somewhat seasonal, as sales are strongest in warm-weather months. Field inventories are carefully tracked at dealer locations to ensure supply and demand remains in balance. Curtailing manufacturing operations quickly as a result of inventory build-up is difficult and expensive for auto manufacturers. Due to intense competition, per-vehicle profits tend to be fairly low. Companies must therefore scale their operations to reduce costs. Building products locally and sourcing from local component suppliers also helps protect companies from currency exchange fluctuations. The industry is capital-intensive: average annual revenue per employee in the US is about $1.5 million.

Trade tariffs can also place manufacturers at a significant advantage or disadvantage over a competitor from a different country when trying to sell into a given foreign market. Major global manufacturers have sought to build factories in foreign markets where vehicles will be sold in order to avoid tariffs.

Manufacturers offer inventory financing to dealers, either through captive lenders such as Ford Motor Credit or Toyota Financial Services, or third-party lenders. These lenders also provide loan services to consumers through manufacturer/dealer arrangements. Most cars are sold on credit.

The global regulatory environment for automakers is extremely complex and varies from country to country, as well as on a local basis within individual markets. Government regulation of the auto industry focuses primarily on five key areas: emissions control, fuel economy, industrial environmental controls, use of chemicals, and vehicle safety.

Amid the auto industry’s rapid growth in emerging markets, the worldwide patchwork of regulations has generally evolved from those established in mature markets, chiefly the US, Western Europe, and Japan.

In the US, the Environmental Protection Agency (EPA) issues emissions standards; Occupational Safety and Health Administration (OSHA) enforces worker safety standards; the National Highway Transportation Safety Board (NHTSB) administers fuel efficiency regulations, determines passenger safety standards, and issues safety ratings. In the European Union, emissions standards are regulated by the European Commission (EC), as well as by agencies within each EU member state. The EC also regulates fuel economy.

China’s emissions regulations combine elements of those in the EU and the US. The more stringent China 5 emissions standards went into nationwide effect in 2017. China’s regulations are slated to get progressively tighter through 2023.

Air pollution in India has also resulted in tougher Bharat Stage (BS) VI emissions standards which take effect in 2020. The new standards are based on the Euro 6 vehicle emission standards.