Auto Executives Don't See Big Profit Rise Until 2006, KPMG Study Reveals

Worst Year for Profits Behind Industry

North American brands face further market share erosion

NEW YORK, Jan. 2 -- The global automotive industry is not expected to return to peak profitability levels until at least 2006, according to the results of an annual global survey by KPMG LLP, the audit, tax and advisory firm. However, automotive executives indicate the worst is behind them, citing 2003 as the worst year for profits in the half-decade.

KPMG's fifth annual survey, conducted in October and November 2003, polled 100 American, Asian and European automotive executives from 19 automakers and from 49 Tier 1 and 32 Tier 2 suppliers.

In the study, 29 percent of the 100 executives surveyed said they expect overall auto-industry profitability to be at its greatest level in 2006, followed by 2008 (16 percent), 2005 (15 percent), 2007 (12 percent), 2004 (9 percent). In KPMG's survey last year, 18 percent anticipated greater levels of profits in 2004, with 30 percent forecasting better profits in 2005. Auto execs in prior year's studies have alluded to the year 2000 as the year of highest profitability.

"In a down economy, our survey has found executives always pushing profitability a few years out, and this year is no different," said Brian Ambrose, national industry director of KPMG's automotive practice. "But what the executives are telling us this year is that they have seen the worst and that the industry is poised for a rebound."

Unlike past KPMG surveys, automotive executives are not expecting dismal profits in the immediate year ahead, indicating they believe the industry has turned the corner. In fact, this year when asked to cite the worst year of profitability, 36 percent identified 2003, with 13 percent expecting it to be 2004. In contrast with KPMG's 2002 study, 27 percent cited 2002 as the worst year of profitability with another 30 percent expecting it to be in 2003.

"We are seeing the convergence of improved economic conditions, the leveling off of sales incentives and the huge amount of new vehicle launches scheduled over the next few years all playing a factor," said Ambrose. "During the past few years we saw the executives pointing off into the future in the hopes that profits lay there. Today, the profitability picture is much more clearly coming into focus."

The KPMG global survey also found a continued decline in global market share for U.S. brands. Most executives -- 53 percent -- said they expect market share to fall over the next five years, the same proportion as has been predicted for the last three years. Only half of the respondents agreed that "U.S. automakers will become more efficient and more competitive" over the next five years, down from 56 percent in KPMG's survey of a year ago.

Executives are more confident this year that North American brands have the best chance to grow in Asia, especially in China, with 90 percent agreeing that consumers in Asia will become "a major source of growth" for global automobile demand over the next five years, up from 66 percent last year.

Additionally, 85 percent of the executives surveyed said that Asia will continue to add or expand manufacturing facilities over the next five years, while only 29 percent predicted such expansion in Europe and just 23 percent in North America. Overall, 40 percent of executives said there will be a decrease in the building of new manufacturing facilities in North America.

Expectations for ongoing Asian market share growth continues a three-year trend. Eighty percent of executives expect Asian carmakers to gain market share, up from 74 percent last year. Executives said greater efficiencies by Japanese automakers would help them gain market share, with 67 percent of respondents strongly agreeing that over the next five years "restructured Japanese automakers will continue to leverage greater efficiency into greater market share." Last year, 70 percent agreed.

European brands are expected to grow at a slower rate or remain flat. Over three years, executives who feel European brands will gain global market share has fallen from 51 percent in 2001 to 38 percent in 2003, while those who think the European share will hold steady rose from 36 percent to 49 percent.

"With regard to market erosion, Asian brands are definitely going to continue to gain market share in the North America," said Ambrose. "However, North American automakers are launching many new and diverse model offerings and we may see less of a need for sales incentives."

In the KPMG survey, only 38 percent of respondents expect an increase in the use of sales incentives in the near future, down significantly from 63 percent in 2001, and from 48 percent in 2002.

KPMG LLP is the audit and tax firm that has maintained a continuous commitment throughout its history to providing leadership, integrity and quality to the capital markets. The Big Four firm with the strongest growth record over the past decade, KPMG offers clients scale, global reach, industry insights, and a multidisciplinary range of services. KPMG LLP (www.us.kpmg.com) is the U.S. member firm of KPMG International. KPMG International's member firms have nearly 100,000 professionals, including 6,600 partners, in 150 countries.