U.S. Light Vehicle Outlook - PDF Free Download

Economy The Slippery Road to the Recession 2004 Oil prices begin to rise early in year, hit $50 per barrel at year-end FED starts raising interest rates at start of 2004 2005 Housing peaks in mid-year 2006 Economy slows in mid-year 2007 2008 Sub-prime credit crisis appears early in 2007 Oil hits $75 per barrel in mid-year and $100 by year-end Interest rates stop rising at the year-end Housing deteriorates year-end Economy declines at the beginning of the year Consumer begins to pull back starting in January FED begins aggressively cutting interest rates in January Tax stimulus package enacted first quarter Economy stabilizes second half 2009 Economy recovers second half Copyright 2008 Global Insight, Inc. 3

The U.S. Economy Is in a Recession The housing crash, credit crunch, and high oil prices have pushed the U.S. economy into a mild recession The downturn is spreading beyond housing, as credit tightens Home sales, prices, and construction will fall further Consumers and businesses will spend cautiously The export outlook still looks positive, and must remain so, if the economy is to avoid a deeper downturn The Fed is likely to cut interest rates at least twice more Fiscal and monetary stimuli will help to revive growth in the second half, not avert the recession Plan for a mild recession lasting through spring 2008 Copyright 2008 Global Insight, Inc. 4

U.S. Economy: In a Mild Recession The Worst is Yet to Come (Percent unless otherwise noted) 2006 2007 2008 2009 Real GDP Growth 2.9 2.2 1.4 2.2 Employment Growth 1.9 1.3 0.3 CPI Inflation 3.2 2.9 2.5 Oil Prices (WTI, US$/bbl) 66.12 72.18 78.53 Housing Starts - mm 1.812 1.344.900 Federal Funds Rate 4.96 5.02 2.35 10-year Government Bond Yield 4.79 4.62 3.26 Dollar (Major Trading 2000=1) 0.812 0.767 0.706 0.7 1.6 74.33 1.180 2.72 3.82 0.715 Copyright 2008 Global Insight, Inc. 5

The Domestic Economy Really Struggles in 2008 Autos Are Part of the Domestic Economy (Annualized rate of growth) 6 The recession will not be mild as far as the auto market is concerned 5 4 3 2 1 0-1 -2 2007 2008 2009 Real GDP Domestic Demand Copyright 2008 Global Insight, Inc. 6

Little Relief From High Crude Oil Prices And Still a Major Risk Factor 100 (West Texas Intermediate price, dollars per barrel) High oil and gasoline prices have negatively impacted auto volume 80 60 40 20 0 1998 2000 2002 2004 2006 2008 2010 2012 Copyright 2008 Global Insight, Inc. 7

What If Oil Is $10 Higher Than Our Baseline? Changes from baseline, 2008 Real GDP -0.2% Real Disposable Income -0.4% Real Consumer Spending -0.3% Gasoline Prices +19 cents/gall CPI +0.5% Employment -100,000 Light Vehicle Sales -190,000 Source: Global Insight U.S. Model Simulation, September 2007 Copyright 2008 Global Insight, Inc. 8

Household Energy Spending Accounts for Less of Family Income 10 (Percent of disposable income) 8 6 4 2 0 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Gasoline Consumption All Energy Consumption Copyright 2008 Global Insight, Inc. 9

A Four-Year Decline in U.S. Home Prices 20 15 10 5 0-5 (Year-over-year percent change) A 10% price decline would reduce housing wealth by $2.1 trillion. With a wealth effect of.06, consumption would be cut by $126 billion, or 1.3%. -10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Average Existing Single-Family Home Price Copyright 2008 Global Insight, Inc. 10

Housing Starts Will Hit Bottom in 2008 2.4 2.0 (Millions of units) The housing boom sales, starts and prices, was a major plus for autos 1.6 1.2 0.8 0.4 0.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Single-Family Multi-Family Copyright 2008 Global Insight, Inc. 11

Payroll Employment Growth Has Stalled 3 2 (Percent change, annual rate) Without jobs, the first time auto buyer is not in the showrooms 1 0-1 -2-3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Copyright 2008 Global Insight, Inc. 12

Consumer Spending Growth Has Slowed Tax Rebates Will Provide a Temporary Boost Autos can not buck a retrenchment in consumer spending & slow income growth 5 (Percent change) 4 Includes tax rebates 3 2 1 0 2000 2002 2004 2006 2008 2010 Real Consumer Spending Real Disposable Income Copyright 2008 Global Insight, Inc. 13

The U.S. Dollar Hits Record Lows A weak dollar pressures import prices & hurts profitability, but is not the end of the world 1.3 (Real Trade-Weighted Dollar Index, 2000=1.0) 1.2 1.1 1.0 0.9 0.8 0.7 0.6 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Industrial Countries Developing Countries Copyright 2008 Global Insight, Inc. 14

Risks to the Forecast Double-Dip Recession (25% probability): Home prices, sales, and construction fall more sharply Higher inflation and a weakening dollar force the Federal Reserve to raise interest rates in late 2008 As the fiscal stimulus wears off, the economy slips back into recession in early 2009 Touch and Go (25% probability): Business investment and exports show more robust growth Housing markets rebound more quickly Lower oil prices and stronger productivity gains lead to milder inflation, keeping long-term interest rates low Copyright 2008 Global Insight, Inc. 15

Real GDP Growth in Alternative Scenarios 8 (Percent change, annual rate) 6 4 2 0-2 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 Baseline (50%) Pessimistic (25%) Optimistic (25%) Copyright 2008 Global Insight, Inc. 16

Economy Bottom Line The U.S. economy is in a mild recession Weakness in consumer spending and investment will be cushioned by strength in exports Tax rebates and further interest rate cuts will boost activity in the second half of 2008 Home sales and construction should hit bottom later this year, but prices will fall into 2009 Inflation will settle near 2% The current recession is a temporary cyclical phenomena not a long term condition (stagflation) Copyright 2008 Global Insight, Inc. 17

U.S. Economy and the Auto Market The Recession s Impact on Auto Sales Sales will dip into the mid-fifteen million unit range and stay there for the first half of 2008 Every manufacturer, except BMW and Mazda, lose volume Detroit Big 3 will lose two points of market share, GM one point on its own Economic factors weighing on Detroit: Housing slump especially for big pickups Subprime credit crisis Decline in employment & high oil prices should impact their buyer more Continued reduction in rental fleet sales Asian Big 3 gain more than a point Copyright 2008 Global Insight, Inc. 19

Credit Crisis Hits the Auto Market Since 2005, OEMs have provided customers with low interest rates, long loan maturity and low down payments to encourage them to buy new cars and trucks Unfortunately this is potentially dangerous because of defaults and it takes a long time for this type of buyer to return to purchase new vehicles Initially the subprime crisis had a minimal impact as marginal and subprime buyers were driven out of the showrooms Subprime issues trigger a credit crisis negatively impacting housing and then economy ultimately hurting the consumer Consumer confidence plunges Credit standards get tougher and loan availability suffers Auto loan delinquencies and defaults begin to rise to recessionary levels Mortgage payments go up driving the value and marginal buyer out of the auto market Copyright 2008 Global Insight, Inc. 20

New Auto Loan Rates Finance Companies 8.0 7.0 (Percent) Long maturity, low down payments & huge amounts financed are dangerous 6.0 5.0 4.0 3.0 2.0 2001 2002 2003 2004 2005 2006 2007 Federal Reserve Board Months Copyright 2008 Global Insight, Inc. 21

New Auto Loan Rates Delinquency Rates 3.0 (% - Accounts past due 30 days or more) 2.5 2.0 1.5 The subprime crisis hits auto dealers 1.0 1975 1980 1985 1990 1995 2000 2005 Federal Reserve Board Direct (Bank) Loans Months Indirect (Dealer) Loans Copyright 2008 Global Insight, Inc. 22

New Vehicle Buyers Average Credit Score Avg. Score Percent The sloppy practices of 2005-06 are over 750 740 730 720 710 700 690 680 670 660 650 16% 11% 1/1/2005 3/1/2005 5/1/2005 7/1/2005 9/1/2005 11/1/2005 1/1/2006 3/1/2006 5/1/2006 7/1/2006 9/1/2006 11/1/2006 1/1/2007 3/1/2007 5/1/2007 7/1/2007 9/1/2007 11/1/2007 1/1/2008 FICO SCORE % UNDER 670 Copyright 2008 Global Insight, Inc. 23

Manufacturer Incentives While Value Pricing is the standard, look for the selective use of incentives in 2008 $6,000 $5,500 $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 GM Ford Chry Toyota Nissan Honda Hyundai Kia Subaru CNW Marketing Months Copyright 2008 Global Insight, Inc. 24

CPI New Cars & Trucks 4% (Percent change, year over year) 3% 2% 1% 0% -1% -2% Actual transactions prices will still have to decline to support sales 1990 1992 1994 1996 1998 2000 2002 2004 2006 Copyright 2008 Global Insight, Inc. 25

Median Age New Vehicle Buyer 49 47 (Years) Because of the economy, the mature buyer dominates the market, again 45 43 41 39 37 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 CNW Marketing Months Copyright 2008 Global Insight, Inc. 28

United States Car & Truck Sales, SAAR 21.0 (Units in millions) 20.0 19.0 Annual trend 18.0 17.0 16.0 15.0 14.0 The economy has caused the auto market to downshift Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Months Copyright 2008 Global Insight, Inc. 29

Gasoline Retail Price All Grades Per Gallon Cents 320 300 280 260 240 220 200 180 High gasoline prices are here to stay and are ingrained in the consumer s mind 160 2004 2005 2006 2007 2008 Source: DOE Weeks Updated 2/18/2008 Copyright 2008 Global Insight, Inc. 30

United States Car & Truck Sales, SAAR 13.0 12.0 (Units in millions) Crossovers keep truck sales on top 11.0 10.0 9.0 8.0 7.0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 CARS LT. TRUCKS Copyright 2008 Global Insight, Inc. 31

U.S. Light Vehicle Sales: Big Six Business / Government / Fleet (Share) 0.40 (Percent) Fleet sales supported activity at the end of last year and in January 0.35 0.30 0.25 0.20 0.15 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Source: CNW Months Copyright 2008 Global Insight, Inc. 32

U.S. Light Vehicle Inventory Days Supply Should stocks get out of hand, production cuts will restrict the 2008 models 80 (Days Supply) 75 70 65 60 55 50 45 40 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Months Seasonally Adjusted Copyright 2008 Global Insight, Inc. 33

U.S. Light Vehicle Sales Units in millions 18.0 Market Share 70% 17.5 17.0 16.5 60% 16.0 15.5 15.0 50% 14.5 14.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 40% VOLUME / UNITS - L DETROIT BIG 3 SHARE - R Copyright 2008 Global Insight, Inc. 34

Foreign Manufacturers Sales Share of U.S. Market Market Share 32% 30% The U.S. imports 3.5 to 4.5mm vehicles a year 28% 26% 24% 22% 20% 18% 16% 14% High imports and transplant sales continue to weigh on Detroit 1999 2001 2003 2005 2007 2009 2011 2013 TRANSPLANT IMPORT Copyright 2008 Global Insight, Inc. 35

Segment Shifts Favor CUVs Subcompact Compact Lower mid-size Upper mid-size CUV SUV Van STW Pickup Growth largely result of new models High gas prices only a minor positive, not Gen Y (they don t like small cars) Get squeezed by subcompacts and lower mid-size cars and CUVs Credit crisis will hurt the compact buyer They became the family car in 2007, generating explosive growth 2008 is merely a reaction to the big volume in 2007 and market downturn Manufacturers are exiting market (the old Taurus is gone) Gas prices hurt this segment CUVs are the family vehicle They ride better and get better mileage than SUVs, have great functionality There is a huge in flux of new products High gasoline prices and CUVs have killed the SUV sector GM and Ford have abandoned the van market for CUVs, leaving it to Chrysler and the Asian OEMs STWs are really station wagons in disguise and lose out in popularity to CUVs Full-size pickups are hurt somewhat by gas prices, but decline in housing and construction kills this sector Smaller pickups lack functionality and are not popular Copyright 2008 Global Insight, Inc. 38

Light Vehicle Sales Depend on the Economy 19 (Millions of units, annual rate) 18 17 16 15 14 13 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Baseline (50%) Pessimistic (25%) Optimistic (25%) Copyright 2008 Global Insight, Inc. 39

2008 Production Outlook Global Insight estimates North American light-vehicle production will decline to 14.106 million units, - 6.1% below the 15.030 million units assembled last year. The Big Three remain more vulnerable to declining assembly volume due to their product mix and dependency upon truck models; particularly full-size pickups for profits. First-quarter production schedules remain vulnerable as OEMs respond to a revised economic outlook. The current forecast reflects down time at assembly plants to address inventory on particular models. Annual light vehicle production has not been this low since 1993 when annual production was 13.867 million units, and U.S. sales were 13.888 million units. Copyright 2008 Global Insight, Inc. 41

North American Quarterly Production Outlook Quarterly Comparison Year-over-Year 1Q08 2Q08 3Q08 4Q08 CAR -5.0% -5.1% -5.2% -0.4% TRUCK -8.0% -12.8% -9.1% -0.4% TOTAL -6.7% -9.6% -7.4% -0.4% The final quarter of 2007 totaled 3.637 million, 0.8% higher than the October-December total in 2006 of 3.608 million. Chrysler made significant cuts to the final quarter of 2007, but General Motors added significantly more volume than scheduled. Copyright 2008 Global Insight, Inc. 42

OEM Annual Assembly Annual Comparison Year-Over-Year 2007 2008 2009 CHRYSLER 0.5% -7.6% 3.8% FORD -6.5% -8.9% 2.1% GM -8.1% -9.7% 1.1% HONDA 3.4% 3.8% 4.2% NISSAN 4.0% -5.5% -3.0% TOYOTA 7.5% 3.3% 10.1% TOTAL -1.5% -6.1% 2.7% Copyright 2008 Global Insight, Inc. 43

North American Light Vehicle Production 11 10 9 8 7 6 (Units in Millions) 2008 Forecast 14.107 18 17 16 15 14 5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Car - L Truck - L Total - R 13 Copyright 2008 Global Insight, Inc. 44

Big Three Assembly vs. North America 12.8 Recovery in 2011 and 2012 reflects strength of GM s new models Units/MM 16.5 12.0 15.9 11.2 15.3 10.4 14.7 9.6 14.1 8.8 13.5 8.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 12.9 Big Three Total Copyright 2008 Global Insight, Inc. 45

General Motors General Motors continues to struggle in 2008 as output slides -9.7% y/y Economic pressures and a low point in the product cycle are key factors in decline New model introductions include: Chevrolet Traverse, Hummer H3T More buyouts still expected in 2008 plant level Annual GMT900 volume hits 1.281 million units, nearly 500,000 fewer units than 2004 More significant losses for GMT360/370 platform Lambda platform is pivotal for GM as market shifts from SUVs to CUVs Zeta platform may eclipse Epsilon output; RWD a formula for success? Key to GM revitalization is global platform strategy, and product design Copyright 2008 Global Insight, Inc. 46

Ford Ford suffers from Big Three dependency on big trucks 2008 volume continues to decline impacting profits D3 platform has not revitalized car side of business Ford remains less competitive in the CUV segment despite the Ford Edge/Lincoln MKX Next-generation Ford Explorer (ORE) A Ridgeline competitor derived from ORE platform? Exiting traditional minivan market; Replaced with Ford Flex and Lincoln MKT B segment vehicles will be derived from Mazda2 platform; Assembly at Cuautitlan Mexico facility Ford is developing a modern RWD platform; investment will be significant Copyright 2008 Global Insight, Inc. 47

Chrysler LLC Under private equity: a smaller, leaner and more selective automaker than the expansion-driven division when it was under the German management of DaimlerChrysler AG Since acquiring Chrysler for $7.4 billion in August, Cerberus has been unwinding the strategy of the automaker's previous management Chrysler trimming model line-up in 2008, as well as assembly shifts Chrysler: Crossfire, PT Cruiser Cabriolet, Pacifica and Dodge Magnum Plans to eliminate an additional 11,000 jobs by end of 2008 Drop shifts at five assembly plants in the U.S. and Canada Cutting costs to improve financial results, but Chrysler still has a long road ahead for retooling its product lineup Copyright 2008 Global Insight, Inc. 48

Chrysler LLC in 2008 Chrysler's revenue will continue to trail costs before the company and plans to become profitable in 2009 Chrysler has announced 25,100 job cuts since February 2007 Minivan segment key to 2008 volume Ram assembly volume falling faster than GM and Ford products All-new Ram perceived as a hit at the NAIAS Chrysler s position in CUV market geared more toward STW styled models Chrysler model derived from Journey has been killed Copyright 2008 Global Insight, Inc. 49

Transplant Assembly vs. North America 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Transplants represent all the growth in North American production Units / MM 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 16.5 16.0 15.5 15.0 14.5 14.0 13.5 13.0 Transplants Total Copyright 2008 Global Insight, Inc. 50

Honda Honda has adopted a more focused approach to the U.S. market by marketing products that are consistent with the Honda philosophy of engineering efficiency Leading Toyota in full autonomous product development independent of Japan All-new MDX platform fully integrates MDX, Ridgeline, and Pilot models allowing for a fourth model in line-up Adding capacity, but remains tied to unibody structures Ridgeline design tied to structural demands Ability to compete in Large CUV segment? Acura still not defined for consumer; Infiniti RWD is not off the table In the past, Honda has not understood the U.S. luxury market Copyright 2008 Global Insight, Inc. 51

Nissan In 2008, Nissan suffers from a slowed product cycle due to investment Nissan weighing the importance of CUV market in U.S.; Pathfinder a candidate to move to unibody structure Nissan has adopted a more Toyota-like, full line approach to the U.S. market Development delays for a full size van, as well as a cancelled heavy-duty pickup Investment in new product at assembly plants in Mexico has vastly improved utilization Cost-cutting culture put Nissan in the black; quality hurt, as well as new model cycle; but strong focus on design Copyright 2008 Global Insight, Inc. 52

Toyota Toyota entering a new phase of leading the pack, as opposed to tackling a challenge; as well as rising costs Global platform strategy and manufacturing practices still key to its success Not immune to quality issues Brand image solely dependent on quality Toyota's design may stifle aspirations for the brand Tundra under pressure to achieve higher volume Segment sales depressed; incentives are part of the process; not an inferior model Additional capacity expansion continues through end of decade; Woodstock, Tupelo, Mexico? The Prius Brand? A competitive advantage? Copyright 2008 Global Insight, Inc. 53

Hyundai/Kia Hyundai is gaining ground in the U.S. market Further growth requires a Toyota approach of increased capacity and the movement of models to the U.S. for assembly Hyundai continues to strive for premium products without a premium brand Improving their image for shoddy quality and using pricing strategy in certain segments to compete with the major players. Kia s U.S. plant delayed to open until 2010 CY Copyright 2008 Global Insight, Inc. 54

Summary Economic & Market Outlook The economy will be particularly brutal for the auto market in 2008 The housing downturn is a major headache Subprime crisis spreading to mainstream consumer and into the auto market The consumer now is starting to react negatively Oil prices remain high throughout the forecast Incentives and fleet sales will bolster volume in the short run, but don t expect huge fire sales New union contract will save Detroit thousands of dollars and significantly close the cost gap FED is moving aggressively, there will be light at the end of the tunnel Long term supports for auto sales - +3% economic growth, return of housing & employment, solid demographics, normal scrappage and vehicle fleet expansion Copyright 2008 Global Insight, Inc. 55