Summary
This article regarding automotive sales is very accurate. Consumer confidence in their income and wealth growth prospects drive automotive sales. But we can predict the OEM's and Tier Suppliers and technologies that will emerge as survivors and as investment potentials. Also, historically similar downturns are followed by a surge in replacement demand for new vehicles.
Analysis
The Bloomberg article is very accurate in describing what drives automotive demand. Across markets and economies, consumer confidence in their ability to secure stable income and growth their net worth are drivers of new vehicle sales. The ability to secure financing, while important in the US and some other markets, is much less important in others. And the price of fuel, which dramatically affected purchasing behavior in the type of vehicles purchased in the US, is less of a factor in other countries.
What we do know is that sales will return to previous levels and will greatly surpass previous levels. It is only a matter of time. Income and wealth confidence will return. Currently owned vehicles will rack up mileage and will wear out. So the important thing to know is the indicators of OEM health and Tier Supplier health, and their ability to withstand the downturn and emerge prepared for the new market opportunities.
One important factor is OEM market presence from a global perspective. Not only does this mean being present in the market, but providing a world product that is dominant or significant in most markets. For example, Chrysler has long relied on a single market for the vast majority of sales volume - the US. While it is the largest automotive market, we have seen how competitive this market has become in the last ten years and how unstable in the last eighteen months. Volkwagen Group, Toyota, Honda, and BMW on the other hand, have world products that are either dominant or significant in more than 140 world markets. So while US sales may be slower, China and Russia may still be growing. And the same platforms are used throughout these markets, with only compliance and feature differentiation for these markets - such things as regulatory compliance features such as safety and emissions content or market specific content such as satellite radio, diesel, or 4 cylinder engines. examples would be the Golf/Rabbit platform or the 3series platform.
In addition, those involved in the premium market, from a global perspective, typically see their downturns occur later, the downturns are less severe, and the recovery is sooner. So Daimler, BMW, Audi, Ferrari, and other premium or luxury marques should experience less of the downturn than the mass market or the luxury marques that are only largely US based such as Lincoln, Lexus, or Cadillac.
In addition, several of the OEM's, both those based in Asia and in Europe, have been working for many years now to improve operating capacity utilization and cost per unit. Operating efficiency and cash reserves have been created and improved. These companies will be at a significant advantage if the downturn lasts well into 2010.
As for the Tier suppliers, similar indicators exist. Those that have a diversified customer base will perform much better than those who have relied extensively on the Big Three or on only one Asian or European OEM. If their customer base is 70% diversified to a mix of several Asian and European OEM's they should be among the survivors. Companies that come to mind are Johnson Controls, Continental, Freescale, Borg Warner, and Harman among others.
Also, the Tier suppliers that are involved in significant technologies will also continue to be in demand during the downturn and after the downturn. Technologies that come to mind are chipsets, senors, electronics, telematics and infotainment, active safety, emissions components, fuel economy improvement technology,and hybird technology. Even with the downturn, most OEM's will continue the investment in and placement of these technologies in their vehicles either because it is required by regulations and government standards, or because it will mean a competitive advantage for the customer demographics that will be present in 2011 to 2015. So Freescale, Atmel, NXP, Autoliv, TRW, Federal Mogul, Harman International, Borg Warner, and Johnson Controls among others will have products that will continue to be demanded by the OEM's and might even enjoy better margins than some other components.
There is no denying that 2009 will most likely be a very difficult year for most OEM's and Tier suppliers. But there are indicators of who will survive and who will emerge in a position to capitalize on the pent up and replacement demand that will certainly drive automotive sales to record levels in the 2011 to 2014 time frame.
