|Frost & Sullivan Market Insight||Published: 25 Sep 2008|
By Aswin Kumar, Research Analyst, Automotive & Transportation
In the beginning of 2007, when the hydra of the ongoing sub-prime mortgage crisis started to show up, many economists predicted that it was just a small blip on the radar that will soon disappear. Fast forward to 2008, things are worse from bad. Failure of major financial institutions including Merrill Lynch and Lehman Brothers has made the economy unstable.
There remains a challenge for the auto industry to emerge successfully from the looming credit crunch. 2008 has been a mixed bag for the automotive industry as a whole. There was a rise in the sale of fuel efficient vehicles such as hybrids, thanks to the oil prices that went to record levels. But the oil prices also pushed consumer decisions to buy other traditional vehicles, to a record low. With the credit crunch looming large over the auto industry now, it is yet to be seen whether this will be the final nail in the coffin for some of the automakers.
Consumer Trends and Credit Options
Frost & Sullivan conducted a consumer research survey to determine consumers' perceptions and attitudes towards cost of ownership and to evaluate its impact on the purchasing decisions. The research had a sample size of 1,840 respondents spread across European countries such as France, United Kingdom, Germany, Italy and Spain.
A majority of the consumers rely on a variety of financing options to buy their vehicle. More than two thirds of EU (European Union) consumers had paid for their current car by credit card or loan. Although this trend is likely to remain consistent for the next vehicle purchase, the ongoing credit squeeze will reduce the overall new vehicles sales by 4 to 7 percent.
Chart 1.1 Consumer Attitudes on Vehicle Financing Options (Europe)
More than half (54 percent) of consumers consider interest rates as the most important factor when deciding what financing they will choose for their next vehicle. The major financial arms of the automakers will also be in a tight spot to give easy credit for its consumers. Currently, consumers do not feel attracted to the financing options of any of the major automakers owing to the unattractive financial options from the respective financial arms.
The majority of the consumers rated the financing options of Vehicle Manufacturers as average satisfaction in terms of interest rates offered. GMAC and Ford Credit rating, the financial arms of GM and Ford respectively, are already pressurized from the parent companies' current losses, will be the worst affected because of this consumer perceptions and attitudes toward the vehicle's cost of ownership.
Chart 1.2 Consumer Satisfactions on Financing and Cost of Ownership, (Europe)
Financial Crisis Weigh on Auto Sales
With a struggling financial economy in North America, it will be harder for dealers and the suppliers to have good profit margins. The worst affected would be the marginal suppliers and the dealers in the ecosystem. Dealers will find it hard to come up with attractive financing options to lure prospective buyers.
A majority of the automakers have slashed down their production forecasts this year and each day they are having a difficult-sell. The giants from the other side of the globe such as Toyota, Honda and BMW are in much better shape because of a better funded lending divisions and a better credit rating than the financial arms of the Detroit big three. Their Indian and Chinese counterparts are also in a much better position because of Government backing (as witnessed for SAIC and Maruti) and better cash inflows (as witnessed for Tata Motors, a subsidiary of the huge Tata Conglomerate). The banking institutions are tightening the credit for the consumers by being very selective to avoid defaults and leasing business is slowly disappearing from the dealerships.
The whole automotive ecosystem is in desperate need for money and change. With sufficient backing from the Government, the U.S auto market will make a turn around, albeit taking longer time than desired. Although the anticipated loan of $25 billion would be much needed for the automakers to come up with greater fuel efficient vehicles, the real trick and the need of the hour would be to tackle the already declining consumer spending and confidence.
The recent bailout of AIG by the Federal Reserve for $80 billion and the anticipated loan for the automakers pegged at another $25 billion alone accumulates to a whopping $110 billion which is roughly one-fifth of the African Union's GDP. It remains to be seen how the Federal regulator is going to fill up the fast emptying coffers. If the burden is passed on to the tax payers, then this will amount to further deflation and reduced purchasing decisions. If the burden is not passed then this will add to the further restrain the Government's deficit and be a stumbling block on its other political agendas. There is no single magic wand for the crisis and this financial crisis will be etched in everyone's memory for a long time to come.
The automakers will do whatever it takes to shrug this massive crisis off their shoulders. This transformation will eventually lead to more fuel-efficient vehicles and both automakers and suppliers will start looking at more 'green' technologies to limit dependency on traditional fuels. This metamorphosis is inevitable but the question still remains as to how soon this may happen.