Global Auto Execs See Profitability Sooner, KPMG Study Reveals

North American market share losses expected to slow Hybrids and Cars on the rise

NEW YORK, Jan. 7 -- Global automotive executives have accelerated their forecast for a financial turnaround, saying they expect the industry to return to higher profit levels as early as next year, according to the results of an annual global survey of automotive leaders by KPMG LLP, the U.S. audit, tax and advisory services firm.

KPMG's sixth annual survey, conducted in October and November 2004, polled 110 American, European and Asian automotive executives from 23 automakers, and from 58 Tier 1 and 29 Tier 2 and 3 suppliers.

In the three previous years, the KPMG global survey found global executives eyeing profitability two-to-three years away. For example, in 2002, they said it would be 2005 and, in 2003, they projected that peak levels of profitability would return in 2006.

This year KPMG found global executives eyeing profitability much more in the near term, but they had difficulty determining just when it would be. Twenty-three percent expect overall auto-industry profitability to be greatest in 2006, followed by 22 percent who said 2007, and 16 percent who said that 2005 would be the most profitable year. Only 4 percent of executives said 2004 would be the industry's year of greatest profitability.

This compares with the results from KPMG's 2003 survey, where 29 percent of executives had predicted higher levels of profit in 2006, followed by 12 percent who had predicted greater profits in 2007.

"In prior years, saddled with heavy incentives and a sagging economy, industry executives pushed profitability out as far as they could," said Brian Ambrose, national industry leader for KPMG's automotive practice. "Our survey this year has definitely found improved profit levels emerging sooner rather than later, and this is very encouraging."

North American Market Share Losses Slowing

The KPMG study also found that North American market share losses are slowing. Fifty-five percent of executives said they expect to see North American brands remain the same or increase over the next five years, up from 42 percent in 2003. Additionally, the number of executives who expect North American brands to lose market share shrank to 45 percent from 53 percent in 2003.

"North American manufacturers have really focused on product, launching a wide variety of new and exciting model offerings," said KPMG's Ambrose. "This has led to more intense competition and greater offerings for consumers. In the end the consumer wins, in terms of choice, product quality and affordability."

Meantime, European brands are declining. Twenty-five percent of executives expect European market share to decrease, up from 12 percent in 2003 and 9 percent in 2002. Only 30 percent of respondents said they expected European brand market share to increase over the next five years, down from 38 percent in 2003 and 47 percent in 2002.

Overall, only Asian brands are expected to grow, continuing a four-year trend. Eighty-seven percent of respondents said Asian brands would increase over the next five years, up from 80 percent in 2003. Similarly, 83 percent of those surveyed said they expect increases in manufacturing facilities in Asia in the next five years, slightly down from 85 percent in 2003. Only 20 percent of the executives surveyed said they expect an increase of manufacturing facilities in North America and 16 percent expect an increase in Europe.

"The investment in Asia is largely seen as the potential to sell to Chinese consumers, followed somewhat closely by the opportunity to export products from China," said KPMG's Ambrose. "Having a presence in China has become a necessary strategy for manufacturers competing globally, but we can expect a shakeout in future years."

In fact, the KPMG study found that most execs, 46 percent, believe that four to six competitors will exist five years from now.

Cars Making a Comeback

Executives also expect growth in cars but a decline in luxury models. Fifty-six percent of executives expect an increase in cars over the next five years, up from 48 percent in 2003 and 36 percent in 2002, while only 40 percent of executives expect increases in luxury models, down from 48 percent in 2003. Market share expectations for crossovers (48 percent), SUVs (42 percent), minivans (40 percent) and pickup trucks (25 percent) all remained relatively flat in year-to-year comparisons.

"Several successful cars have been launched recently to meet rising global demand for practical, economical yet exciting transportation, and we can expect this trend to continue," said KPMG's Ambrose.

Most executives surveyed - 74 percent - said hybrids would capture the biggest market share, up slightly from 73 percent in 2003. Also, the percent of executives who agreed with the statement "there will be major increase in U.S. sales of alternative-fuel or hybrid fuel cars," rose to 58 percent from 43 percent in 2003.

  Other KPMG Survey findings
  * In terms of the major issues facing the automotive industry, the
    executives interviewed see product quality (91 percent), new products
    (84 percent), the economy (77 percent), and new technologies
    (72 percent) as the most important - all of which ranked high in the
    2003 study.  Consumer tastes decreased significantly year to year.  Last
    year 71 percent of the respondents felt consumer tastes was important,
    but only 47 percent felt so this year.

  * When asked what would influence a consumer's purchase decision over the
    next five years, the automotive executives, in order of importance,
    stated quality (82 percent), fuel efficiency (77 percent), safety
    (75 percent), affordability (67 percent), new technologies (64 percent)
    and sales incentives (46 percent).

  * The use of sales incentives is expected to slow. Only 35 percent of
    executives said they expected increases, down slightly from 38 percent
    in 2003 and 48 percent in 2002.

KPMG LLP is the audit, tax and advisory firm that has maintained a continuous commitment throughout its history to providing leadership, integrity and quality. The Big Four firm with the strongest growth record over the past decade, KPMG turns knowledge into value for the benefit of its clients, people, communities and the capital markets. Its professionals work together to offer clients scale, global reach, industry insights, and a multidisciplinary range of services. KPMG LLP (http://www.us.kpmg.com/ ) is the U.S. member firm of KPMG International. KPMG International's member firms have nearly 100,000 professionals, including 6,800 partners, in 148 countries.