Study shows U.S. automotive industry woes will continue

While the recent sale of the Chrysler Group has provided a new direction for Detroit's "Big Three” automakers, a study of the U.S. automotive landscape shows a continued negative outlook for the troubled industry.

In a study entitled "The Challenges of the Global Restructuring of the Automotive Industry," released May 15, economic and business experts of global trade credit insurer and accounts receivable management partner Euler Hermes reviewed the industry's current status and outlook. According to the study, the volume declines observed in the United States demand an adaptation that will require restructurings. Globally, the move toward new consumption regions is under way, intensified by wage differentials that explain the radical reshuffling that is taking place among production regions.

The study shows that the American product line is out of sync with local demand, causing a loss of market share to Japanese automakers. In 2007, the market share of the American automakers could drop to 50 percent, down from 59 percent in 2004. The source of their difficulties is not a collapse in new car registrations, but declining market share on their own continent due to an ill-adapted product range. In four years, they will have lost nearly 10 percentage points to the Japanese automakers. According to the Euler Hermes Research Department, "Before they can offer models that align with demand, the American automakers will have no other choice than to restructure their largely oversized production tool. With volumes sold continuing to slide, 2007 will again be a loss-making year in general. On the American continent, GM hopes to be back in the black in 2008 and Ford in 2009."

Meanwhile, due to the loss of market share, American equipment manufacturers are barely staying afloat and have been in crisis since 2003. A net margin of between 0 and 0.7 percent is not enough to capitalize on opportunities in the new growth regions (China and India). As a result, they are losing market share to their competitors. In the American automotive industry (car makers and equipment vendors), the Euler Hermes Research Department is seeing a loss of 300,000 jobs between 2000 and 2006. After a relative return to stability in labor force numbers between 2002 and 2004, the United States is seeing a new restructuring plan (2006 to 2009) that will affect 285,000 jobs.

In addition, the recent rise in gasoline prices marks another challenge for the U.S. automotive industry, said Euler Hermes ACI Risk vice president/industry manager Tony Clary. "As we have seen in the past, an increase in gas prices can have a rapid effect on buying habits, so the long period of stability the OEMs were hoping for to help generate interest in the profitable SUV and truck segments once again is obviously not coming to fruition.”

And finally, the weakening national economy is hurting the automakers two-fold: through increased costs of doing business and faltering consumer spending.

"A key issue with the automotive industry is that unit labor costs are continuing to rise, but auto makers cannot raise prices because of increased competition,” said Euler Hermes ACI chief economist Daniel C. North. "That means profit margins are being squeezed even tighter than in the past, which is hurting everyone down the supply chain.” Also, the U.S. automakers' reliance on consumer spending will cause continued tougher times as the nation's housing market equity – a major source of fuel for consumer spending in the past – continues to fall.

"A faltering consumer will surely lead to a faltering economy, causing business defaults to rise and credit conditions to deteriorate,” North concluded.

As business and economic conditions continue to decline, companies involved in the business-to-business arena need to be increasingly vigilant about their accounts receivable. Euler Hermes ACI offers a complete range of accounts receivable management solutions. For more information, call 877-909-3224 or visit www.eulerhermes.com/usa.