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|States also have the right to regulate carbon dioxide emissions. California has historically imposed harsher emissions standards than the Federal Government. As a result, other states are given the option between enforcing the federal standards or the California standards in order to avoid forcing automakers to comply with 50 potentially different sets of environmental regulations.<ref>USA Today: Auto emissions rules face Vt. court test|http://www.usatoday.com/news/nation/2007-04-08-emissions_N.htm</ref> Currently, California legislators are considering a law enforcing an overall fleet efficiency of 40 mpg by 2020.<ref>autobloggreen: CAFE what?|http://www.autobloggreen.com/2008/02/27/cafe-what-california-law-could-require-40-plus-miles-per-gallon/</ref> This could be a major challenge for automakers as around 15 other states enforce California emissions standards.||States also have the right to regulate carbon dioxide emissions. California has historically imposed harsher emissions standards than the Federal Government. As a result, other states are given the option between enforcing the federal standards or the California standards in order to avoid forcing automakers to comply with 50 potentially different sets of environmental regulations.<ref>USA Today: Auto emissions rules face Vt. court test|http://www.usatoday.com/news/nation/2007-04-08-emissions_N.htm</ref> Currently, California legislators are considering a law enforcing an overall fleet efficiency of 40 mpg by 2020.<ref>autobloggreen: CAFE what?|http://www.autobloggreen.com/2008/02/27/cafe-what-california-law-could-require-40-plus-miles-per-gallon/</ref> This could be a major challenge for automakers as around 15 other states enforce California emissions standards.|
|-||It should be noted that although luxury marques such as BMW have not met CAFE standards for many years and consequently pay millions of dollars in fines annually, they have still remained profitable in the US.<ref>Pittsburgh Post Gazette: Fuel standards leave some automakers feeling burned|http://www.post-gazette.com/pg/08211/900147-185.stm</ref> Fines are assessed on the basis of how much the actual fleet average fuel economy misses the legislated level.||+||It should be noted that although luxury brands such as BMW have not met CAFE standards for many years and consequently pay millions of dollars in fines annually, they have still remained profitable in the US.<ref>Pittsburgh Post Gazette: Fuel standards leave some automakers feeling burned|http://www.post-gazette.com/pg/08211/900147-185.stm</ref> Fines are assessed on the basis of how much the actual fleet average fuel economy misses the legislated level.|
|'''DEVELOPING WORLD'''||'''DEVELOPING WORLD'''|
During 2007, the worldwide automotive industry produced 73.1 million vehicles. The auto industry as a whole grew more than thirty percent between 1995 and 2005, providing around 60 million jobs worldwide while at the same time supporting a host of ancillary industries such as steel, rubber, glass, and plastics. Over the past thirty years differences in government regulation and economic opportunities have created three major clusters of producers- in Western Europe, the U.S., and Japan/South Korea- that developed different characteristics regarding the size, power-train and fuel efficiency of their vehicles.
In the European market, where taxes have made gas expensive, car makers have become expert producers of small displacement gasoline engines and diesel engines(which can generally achieve 35% better fuel economy than a petrol engine of equivalent power). Low gas prices in America have encouraged an ongoing increase in vehicle size and engine displacement. As engine technology has improved and now allows more power from a smaller engine, instead of substituting smaller engines with equivalent power, cars produced for the American market have utilized new technologies to increase horsepower and torque. These design characteristics also hold true for foreign companies such as DAIMLER AG (DAI), Toyota Motor (TM), Nissan Motor (NSANY) and Bayerische Motoren Werke AG (BMW) that derive a large portion of their revenue from U.S. sales. Conversely, Japanese companies such as Subaru (owned by Fuji Heavy Industries) and Honda Motor Company (HMC) have continued to exclusively build more fuel efficient automobiles.
The major car producing regions discussed above have recently been joined by a mushrooming of auto-producers in the great emerging economies of India, Russia, China, and Brazil. These four markets, collectively known as the BRIC countries, represent the future for automotive sales growth- with 2007 car sales increasing in China 22%  Brazil 26%, Russia 36% , and India 12%. The automobiles produced for mass consumption in these developing markets sell for a fraction of the price of cars in Western Europe or the U.S.(the new Tata Nano sells for a mere $2500) , but consequently are lacking in safety devices, comfort equipment such as air-conditioning or stereo equipment, and reliability.
The Major car producing nations in the world and their outputs in 2007 are Japan: 11 million, U.S.: 10.5 million, China: 8.1 million, Germany: 6 million, South Korea: 4 million, alongside smaller producers such as France, Spain, Brazil, Canada, Mexico, and India - where between 2 and 3 million automobiles were assembled.
The following table illustrates the 15 largest carmaking companies by volume for 2007.
|Ranking||Name of Company||Total Vehicle Output|
|1||General Motors (GM)||9,349,818|
|2||Toyota Motor (TM)||8,534,690|
|4||Ford Motor Company (F)||6,247,506|
|5||Honda Motor Company (HMC)||3,911,814|
|6||PSA (Peugeot Citroen)||3,457,385|
|7||Nissan Motor (NSANY)||3,431,398|
|8||FIAT S.p.A. (FIA)||2,679,451|
|10||Hyundai Motor Company||2,617,725|
|11||Suzuki Motor (SZKMF)||2,569,316|
|13||Daimler AG (DAI)||2,069,977|
|14||Bayerische Motoren Werke AG (BMW)||1,541,503|
This section will discuss the major costs faced by automakers and the factors that will aggravate or mitigate these costs over the coming years. The diagram at right provides a useful manner to conceptualize the challenges of the automotive industry and some of the variables they try to adjust to improve their competitiveness.
The following chart illustrates the relative cost of labor in a number of major auto-producing nations compared to the United States. A major factor effecting The Big Three are high union enforced wages and costly pension and healthcare liabilities. However, through ongoing negotiations with unions to reduce wages and the adoption of more efficient manufacturing methods such as greater automation, America's big three automakers have brought their production costs in line with their Asian competitors. This is a significant change from fifteen years ago when Japanese car producers required on average half the labor hours to build a car than their American competition. Nevertheless, as shown in the table below, there are tremendous cost savings to be realized by moving production away from Japan, Western Europe, and the U.S., to less developed economies. As an anecdote, Volkswagen pays its workers in Germany $50/hour to work a 28 hour week, whereas its factory in Slovakia pays workers $6/hour for a 40 hour week. Those companies best able to move production will realize an enormous advantage.
Indexes of hourly compensation costs in manufacturing.
|Country or Area||2000||2006|
|Republic of Korea||38||57|
Due in large part to massive demand from emerging economies, the prices of all major raw materials used in the manufacture of automobiles has increased considerably over the past several years. These materials include rubber, plastic, copper, steel, and aluminum. As of mid-2008 the prices of these commodities have increased 45%, 20%, 23%, 66%, and 40%, respectively, since the beginning of the year. Higher raw material costs squeeze the profit margins of automakers and as most have increased simultaneously, it has become useless for automakers to substitute one material for another - for example use more aluminum instead of steel. The future pricing trends for these materials will be definitive in determining automaker profitability into the future. However, for perspective it should be noted that steel -the most used material in new automobiles- represents only about 3% of the cost of building a new car. Similarly, many car companies and especially the Big Three use independent suppliers to provide components for their vehicles, thereby helping to shield them from commodity price increases.
The third factor affecting the cost and the quality of automobile production are the manufacturing techniques employed by auto company. While Japanese producers were once universally the most efficient because of new factories that embraced the most current labor saving automated assembly lines (as well as not having to deal with the UAW), that gap has largely closed and today production methods are basically the same at all major automakers around the world. By the summer of 2008, Chrysler and Toyota both required an average of 30.37 hours to make a vehicle, GM 32.29 hours, and Ford 33.88 hours. This evidence reflects the fact that the difference in labor usage between the most and least efficient major car producers shrank to 3.5 hours in the first half of 2008. When Japanese producers entered the US market in the 1970s and 1980s their cars often required half the labor hours than the domestic competition. In today's globalized and increasingly competitive auto market differences and inefficiencies in production methods are increasingly stamped out as all automakers are forced to adopt the most efficient production methods in order to be competitive with industry leaders.
Another important factor in production is the quality of the product produced. While traditionally Japanese producers topped the list for reliability, this is no longer the case and reliability cannot be generalized geographically. The 2008 JD Power Initial Quality Rankings indicate build quality and reliability for all major producers. Larger firms such as Toyota or GM that produce a wide range of models often have difficulty in making all of their vehicles reliable.
The growth of auto consumers and producers in the world's emerging economies present an interesting twist on the issues of quality, productivity, and labor costs discussed above. All major car companies, excepting perhaps Daimler and BMW, are struggling to straddle the gap between the quality and features demanded by the developed world and the low prices necessary to access the rapidly expanding third world auto market. Automakers have taken the step of directly marketing vehicles under the brand of the mother company and/or through the purchase of a local producer or distribution agreement/product licensing with a local car maker. For example, Ford markets the Volvo and Ford brands in China, but some Ford cars are produced by a local company called Changan motors, who also use technologies licensed or purchased directly from Ford in their own designs. Similarly, both GM and Volkswagen operate joint ventures with Shanghai Auto; these joint ventures are respectively the number one and three chinese car manufacturers by volume for 2007. VW has another joint venture called FAW VW, which is the number two chinese car manufacturer. Other western automakers have similar agreements, such as Chrysler and Chery Auto or Fiat and Nanjing Automobile. Not surprisingly the result of such extensive use of joint ventures is that chinese automakers have quickly and cheaply acquired a great deal of technology and operational knowledge, which have not always been used legally. There have been numerous lawsuits where foreign motor firms accuse chinese companies of taking their technology and illegally incorporating it into their own vehicles. Two high profile cases currently taking place include a lawsuit between Fiat and Great Wall Motors and another between GM and Chery Motors. Technology sharing disputes and legal tensions also continue in India, Brazil, and Russia.
Despite the rapid acquisition of technological know-how by new automakers in the developing world, these companies have been largely unable to capture the growing demand in emerging markets in the same way as more established automakers. For example, sales of domestic producers in China such as Geely or Chery have stagnated as the sales of Volkswagen, GM, Ford, and other foreign companies have grown prodigiously. This is because even though the foreign vehicles are more expensive, overall they are considered a much better value when performance, reliability, and extra features are considered. So while young automakers from the developing world will certainly continue to gain both technological and market experience, established international car companies still have considerable advantages in technological, management, and marketing that should give them a solid advantage in the BRIC countries for some time to come.
For the United States in 2007, 88.3% of new car purchases were financed either through an auto loan or lease. The source for this financing is either from a financing company owned by an automotive firm (e.g. Toyota Financial Services, GMAC, or Ford Motors Credit) or banks and credit unions (including online lenders). Additionally, many car buyers in the US have extracted cash from their homes through home equity loans to purchase automobiles. Conversely, the use of car financing in emerging economies is extremely limited and is expected to grow dramatically over the next decade.
Car Financing is important to the automotive industry for two reasons. First, as very few consumers have enough cash to purchase a new vehicle outright, the automakers rely on financing to allow potential consumers to purchase a car. Second, before the economic downturn beginning in 2007 which has saddled many auto-lenders with large write-downs, major automakers earned huge returns from their financial arms even during previous downturns.
Before 2008, leases accounted for about 20% of demand for new cars in the United States. However, the profit realized on a lease depends on whether the creditor offering the lease is able to accurately calculate the value of the car when the lease terminates. If the lease issuer overestimates this value, they will charge too little for the lease, and end up losing money on the car when they sell it afterwards. As higher gas prices and sluggish economic growth have reduced the demand for used cars in the US, many lease lenders have found themselves unable to recoup the expected value from vehicles coming off lease. As a result, Chrysler Financial decided to stop offering leases in the summer of 2008, while GM has tightened leasing standards in the US and stopped leasing altogether in Canada. Most other major automakers lost money on their US leases because of deteriorating car demand through 2007 and 2008. Leasing remains relatively unpopular in Europe, allowing auto-lenders to escape serious loses in these markets.
Luxury brands such as Cadillac, BMW, or Mercedes lease a greater percentage of their new vehicles than mainstream brands.
The development of a new car costs billions of dollars and often takes over five years. The process usually begins with an attempt to ascertain consumers desires through public surveying before design and engineering actually begins. Recently most major automakers have incorporated engineers and marketing experts into teams which are together responsible for the development of new product, helping to cut development time and costs. Nevertheless, although designing the car itself is no easy task, the design and construction of the manufacturing facility is the real financial and temporal expense. (It should be noted that this reality may be changing as the latest generation of car factories are designed to be able to produce a variety of engines and vehicles) What this means is that when automakers come out with new products they are making a bet on consumer desires, which cannot be cheaply or quickly revised. Recently this reality has been especially evident with the Big Three, but also Toyota, all of which had invested heavily in developing new generations of their large pickup trucks just as Oil Prices went well over $100 per barrel. The following sections will discuss some new technologies that will compete as part of the macro-economic adjustment for higher energy costs.
It should be understood that there are many low-tech options for increasing fuel efficiency. These include the use of turbochargers, transmissions with more gears (that allow the engine to rev in its most efficient rpm range), improved aerodynamics, idle engine shut-off, low rolling resistance tires, and weight-reducing engineering, to name a few.
Diesel engines are able to achieve 35% better fuel efficiency than gasoline engines. During the 2000's half of all new car sales in Europe had diesel engines, but they have not caught on in the United States for two reasons. First, many consumers associate diesel engines with the sooty emissions of older generation designs, which are significantly mitigated with the newest engines. Second, and perhaps more importantly, as of the summer of 2008 diesel fuel costs about 20% more than gasoline. Due to this price differential, the cost advantages of diesel's greater efficiency are largely erased. Nevertheless, several major automakers including Ford and Daimler are planning to introduce several european diesel models to the US. All major automakers have diesel technology from their European divisions which could be quickly exported to the US or any other market.
Biodiesel fuels, made from renewable agricultural products, can be used as a 20% additive without modifications in current diesel engines. Continued development of biodiesel production could help improve the cost differential between diesel and gasoline. However, a tank of biofuel has enough energy (calories) to feed an adult male for eleven days, making its widespread use ethically difficult in a world with both record food prices and large scale malnutrition.
Hybrids, using an internal combustion engine and regenerative breaking to create electric power used to drive the car, have become extremely popular both in the US and internationally. Although they only constitute 2.2% of vehicles sold in the US in 2007, that fraction is expected to grow to 7% by 2015. However, current hybrids from Toyota and Honda have failed to produce the miles per gallon advertised to the public, and in reality provide a similar fuel economy to the small displacement automobiles widely used in Europe. Moreover, hybrids tend to cost several thousand dollars more than the same model with an internal combustion engine, offsetting much of the savings a consumer realizes through lower fuel bills.
As of mid-2008 all major automakers offered a hybrid vehicle or had plans to do so in the near future. Furthermore, hybrid technology is largely indistinguishable amongst major automakers, and this will likely remain the case as various groups of the largest automakers have teamed-up in joint ventures for the development of hybrid technology.
Initially introduced by GM in 1996 with the EV1, the market success of plug-in electric cars has been held back by battery technology, which severely limits the range of electric vehicles. If the necessary batteries can be developed, plug-in technology represents a very credible alternative to internal combustion engines in the long-run for two reasons. First, due to economies of scale the cost and pollution from utilizing energy produced at a power plant is less than that produced by millions of individual internal combustion engines - even more so if the energy is developed from Renewable Energy sources. Second, the current electricity grid provides the necessary distribution network, which would have to be developed anew for hydrogen or most other alternative fuels. Widespread adoption of plug-in cars would represent an important business change for Electric Utilities.
Currently GM plans to offer the Chevrolet Volt plug-in by 2010 and Toyota intends to offer a plug-in version of the Prius shortly thereafter. Most major carmakers have tentative plans to launch their own plug-ins after those of Toyota and GM.
Hydrogen fuel cells use the combination of hydrogen and oxygen to produce electricity - with the only emission being water. Despite this appeal, hydrogen fuel cells have several major obstacles. First, the energy used to create the hydrogen needed for propulsion would most likely be taken from the current electricity supply. If this is the case, it appears both easier and cheaper to simply use the existing electricity grid to distribute the energy to plug-in cars. Along similar lines, creating an infrastructure to produce, transport, and store hydrogen - a hydrogen version of the existing network for gasoline- would be very expensive. A study by Royal Dutch Shell (RDS'A) estimated that it would cost upwards of $20 billion to build a hydrogen infrastructure to supply just 2% of America's automobiles.
Despite these hurtles Honda released the FCX Clarity in 2008, leased only to drivers in the L.A. who can fill up at the areas 5 hydrogen equipped gas stations.
EUROPEAN UNION Emissions regulation in the European Union is different from the US in that regulations stipulate the allowable amount of certain pollutants emitted from various types of vehicles. If the prescribed level is not met, that vehicle cannot be sold in the European Union. Additionally, the European Commission is currently considering legislation to regulate overall fleet efficiency. If implemented these rules will be more detrimental to companies such as BMW and Daimler that produce large luxury cars, than other european firms such as FIAT S.p.A. (FIA), Nissan Motor (NSANY) (Renault), or Puegeot/Citroen, which produce smaller more economical vehicles.
In 2007, the European Union passed legislation requiring that automakers take back all of their vehicles at the end of their useful life-cycle.
UNITED STATES In the United States, both the federal and state governments have the ability to regulate auto emissions. In December 2007, Congress passed the new CAFE fuel economy standards, which will require that automakers have a fleet average of 31.6 mpg by 2011, and 35 mpg by 2020. The current average fleet mpg standard is 27.5 mpg. These new standards are based on the footprint (size) of a vehicle, thereby allowing SUV's and pickups more emissions than cars.
States also have the right to regulate carbon dioxide emissions. California has historically imposed harsher emissions standards than the Federal Government. As a result, other states are given the option between enforcing the federal standards or the California standards in order to avoid forcing automakers to comply with 50 potentially different sets of environmental regulations. Currently, California legislators are considering a law enforcing an overall fleet efficiency of 40 mpg by 2020. This could be a major challenge for automakers as around 15 other states enforce California emissions standards.
It should be noted that although luxury brands such as BMW have not met CAFE standards for many years and consequently pay millions of dollars in fines annually, they have still remained profitable in the US. Fines are assessed on the basis of how much the actual fleet average fuel economy misses the legislated level.
DEVELOPING WORLD Although China has banned many cars from Beijing for the Olympics, there is little systematic regulation of car emissions in China, India, or other parts of the developing world.
Some very big guns in the value investment world have been buying stocks in the auto sector. In November 2007, Berkshire Hathaway (BRK) Warren Buffett disclosed a 13.98 million share stake in CARMAX (KMX) valued at $284.3 million (9.6% of total). CarMax has 90 locations, where it sells mostly used autos. It also showed a new, 2.7 million share stake in Wabco Holdings Inc (WBC), a maker of braking and other vehicle control systems. Sears Holdings (SHLD) Chairman Eddie Lampert has been very aggressive in adding to his AutoNation (AN) stake and still holds AutoZone (AZO) shares. AutoNation is the behemoth of the bunch with 245 locations primarily in the Southeast US. Leucadia National (LUK) recently agreed to a standstill after accumulating 30% of the outstanding shares of Amercredit (ACF), an auto loan servicing company. AmeriCredit's focus is primarily in the Southwest US.
Americans have to drive. It is also to say that despite the current housing environment, the auto loan business has, up until this point, held up much better. My thinking is that I can walk away from my home if I am stuck in a resetting mortgage that will break me and still rent an apartment. But, in most cases, I will still need a car to get back and forth to work from wherever I end up living.
As of mid-2008, the worldwide motor industry has considerable excess capacity. According to estimates made by the automotive consulting firm CSM Worldwide, the world light vehicle production capacity is 85.4 million cars per year, which is about 16.8 million more than the number demanded by consumers. This is the fundamental factor that makes today's automotive industry so fiercely competitive, even in the face of prodigious demand growth from the developing world. This means that to gain market share today a car company cannot simply make cars of reasonable quality and styling. Instead, more than ever before, the automobile must be distinguishable either in terms of design, as has been seen with Ford of Europe's enormous success, or of notorious durability, such as with Toyota's vehicles. So in the near future, a successful automaker will need to both effectively manage production and technology concerns while at the same time delivering vehicles that are differentiable from the glut of other cars on the market.