POISED FOR PROGRESS // Automotive demand grows, reflecting global demographics, economic activity
October 2014 - The era of a Detroit-centric sector in North America has mutated, shifting from the heartland of the U.S. outward, with automakers expanding assembly operations in the South and building greenfield sites in Mexico.
Globally, China is at the forefront of consumption and production, employing business models and vehicle platforms forged by the experience of American, Japanese, Korean and German makers.
“That’s a definite change,” says Michael Robinet, managing director, IHS Automotive Advisory, Southfield, Michigan. “The Chinese are using a global structure for future vehicles—why design an engine cradle for one market out of steel and aluminum for another? That’s why China is so very important.”
NAFTA and global trends won’t align perfectly in the next few years, as “North American production will be more focused on slightly heavier vehicles mainly due to the structure of the market and needs of the consumer. But going forward, North America will reflect what’s going on globally,” he predicts. “We have to lightweight—there’s no way around the [fuel economy and emission] regulations. Many of our smaller vehicles are developed in Europe. If we sell those here, their structures are lightweighting, and only getting lighter.”
Likewise, domestic automakers are looking to streamline. “GM and Ford are trying to alter their European footprint so there will be capacity reductions,” Robinet says. Even so, “There’s such a global scale in the industry that it will be more difficult [for one player] to make an impact.”
Among the top 12 automakers selling in the United States, the annual sales rate (not seasonally adjusted) could rise 4.8 percent this year compared to 2013 to just below 16 million units.
Location, location, location
Development of new or redesigned models is timed at every five to six years. As a carmaker, “you can’t renew your vehicle [as infrequently as] every nine to 10 years due to global scale considerations—otherwise, the economics become off-balanced,” Robinet says.
Shifting the manufacturing footprint is also a strategy as moving operations to mid-Mexico allows automakers to lower costs and improve access to regional markets with the greatest growth potential. “The logistics and trade access out of Mexico to ship to Asia and Europe are an advantage,” Robinet says.
Equities analysts at KeyBanc Capital Markets “are encouraged by the strength of the retail consumers, who continue to drive demand despite the estimated $800 year-over-year increase in industry-wide average transaction prices, while industry incentives were up only $200,” they said in an August 2014 report.
KeyBanc stood by its conservative 2014 U.S. light vehicle sales outlook of 16.1 million units “and we continue to anticipate further acceleration in demand in the near term,” its analysts say.
Aluminum smelting and rolling mill operators are intensely focused on the shift to vehicle lightweighting. Steel and iron parts, such as bumpers and other structural components, are being replaced with aluminum. Jack Hockema, president and CEO of Kaiser Aluminum Corp., Foothill Ranch, California, noted the 2015 Ford F-150, using a vastly greater amount of aluminum than earlier model years, making it roughly 700 pounds lighter than the steel-based model, is a big change.
“Everyone else is looking at aluminum trucks and the same thing is happening with cars. Lightweighting throughout the industry [is] creating opportunities for us,” Hockema told investors during the company’s July earnings call.
Alcoa executives echo the trend. “In North America, we are seeing a possible growth of 2 to 5 percent” based on automotive usage, Chairman and CEO Klaus Kleinfeld recently told investors. “There’s still good pent-up demand sitting there.”
As automakers strive to meet corporate average fuel economy of 54 miles per gallon by 2025, aluminum-intensive vehicles allow for better fuel efficiency because they reduce weight. “The midsized sedan can be lightweighted by 28 percent, improving the fuel efficiency by 18 percent—that’s fantastic,” according to Kleinfeld. MM