Asian Vehicles Seen Gaining Increased Global Market Share, as North American Models Slide, KPMG Survey Finds

Auto Executives Voice Pessimism Over Outlook for Industry's Profitability

DETROIT, Jan. 4 -- Automotive executives predict that Asian vehicle brands will increase their global market share significantly over the next five years, as consumers shift their preferences away from North American and European manufacturers, according to the results of an annual global survey of automotive leaders by KPMG LLP, the U.S. audit, tax and advisory firm.

The KPMG survey, based on interviews with 140 senior executives at vehicle manufacturers and automotive suppliers from around the globe, found increased competition and rising costs impacting the auto industry's overall profitability, with the majority of executives viewing profitability either declining or remaining flat over the next five years.

"Expectations for the industry's future profitability around the world are low, even in China," said Betsy Meter, partner in KPMG LLP's automotive practice. "Meeting consumer demand in regions around the world with high quality products is the formula for success."

A full 88 percent of respondents expect Asian vehicle brands to increase in global market share over the next five years, at the expense of North American and European models.

Korean and Chinese brands were viewed most favorable by respondents, with 79 percent seeing an increase in Korean brands and 77 percent saying Chinese brands would advance. Respondents also view Japanese brands positively, with 65 percent saying they would increase in global market share over the next five years, while 52 percent say Indian brands would post gains.

"Automotive execs in our survey have been predicting market share advances by Asian brands for years now," said KPMG's Meter. "Asian brands have been successful at bringing the right product to the market quickly while being flexible in their manufacturing processes to respond to changes in demand."

In contrast, respondents are growing increasingly pessimistic about the prospects for North American brands. Fifty-eight percent expect these models to lose global market share over the next five years, compared with 45 percent who held that view in last year's survey. Additionally, only 32 percent agree that U.S. automakers will become more efficient and more competitive over the next five years, compared with 39 percent who held that view last year and 50 percent who agreed with the statement in 2003.

"The high cost of manufacturing is jeopardizing the business of manufacturing in the U.S.," said KPMG's Meter. "Domestic manufacturers need to get cost in line with their foreign counterparts in order to compete around the globe. Recent announcements by the North American OEMs signal a fundamental shift for the industry, including recognizing the need for capacity rationalization and labor cost reductions as critical success factors for competing in the global marketplace."

As for European brands, respondents are divided about their prospects: 34 percent expect their global market share to increase, 28 percent expect it to decrease, while 38 percent believe it will remain the same.

In another major KPMG finding, the global execs surveyed are not optimistic on the profit outlook for the industry over the next five years. In fact, 28 percent expect profitability to decline, 21 percent predict it will be flat, and only 16 percent feel it will increase. Thirty-five percent of the execs couldn't forecast future profitability feeling that profitability is "volatile and unpredictable."

Vehicle manufacturers were expected to be the most profitable sector over the next five years, cited by 41 percent of respondents, up from 28 percent a year ago. Captive finance companies were cited by 38 percent as being the most potentially profitable, sharply lower than last year's 54 percent figure. Suppliers held the middle ground, with Tier 1 capturing 29 percent and Tiers 2-3, garnering 21 percent.

"Auto execs are grappling with the dynamics of increased competition, rising commodity and healthcare costs and the need to invest in new manufacturing facilities," said KPMG's Meter. "All of this is leading to a rather bleak outlook on profitability through the rest of this decade and a trend toward greater consolidation."

Indeed, in comparing the results of prior studies, the majority of executives still target Tier 1 and Tier 2 suppliers for consolidation, but 51 percent anticipate consolidation of vehicle manufacturers, up from 35 percent a year ago. The survey found that the most important drivers of consolidation are cost pressures, cited by 73 percent of the respondents, followed by a lack of profitability, at 59 percent.

The KPMG survey also found that outsourcing to countries such as China and Eastern Europe offer the greatest opportunities for cost savings. This year 59 percent of the execs viewed outsourcing as a means to cost savings, compared to 46 percent who felt so a year ago.

In the KPMG survey, the automotive executives interviewed represented companies in North America, Great Britain, France, Germany, Sweden, India, China, Korea and Japan. KPMG has released an annual survey of automotive executives expressing their views on the state of the industry since 1999.

KPMG LLP, the audit, tax and advisory firm (http://www.us.kpmg.com/), is the U.S. member firm of KPMG International. KPMG International's member firms have nearly 94,000 professionals, including 6,800 partners, in 148 countries.