Q&A with J.D. Power and Associates' Dave Sargent and Jeff Schuster: The Auto Industry Outlook for 2010
For those who thought things in the automotive world couldn't get
any wilder, a look at recent headlines about Toyota and other auto
manufacturers' woes suggests that turmoil and change may be the
industry's only constants, going forward.
Sales
at the beginning of 2010 are sending mixed signals about an impending
recovery. Although sales reached the 10.8 million mark in January, they
hit a speed bump in February. J.D. Power and Associates believes these
numbers would have been even better, likely pushing past a seasonally
adjusted annual sales rate, or SAAR, of 11 million had it not been for
the payback from the strong close of 2009 and the ongoing safety crisis
enveloping the world's largest automaker.
The
situation at Toyota seems unlikely to settle down anytime soon. It's
by no means the first time a major maker has found itself at the center
of a swirling controversy, and, as before, it could prove the critical
test not only of the maker's resources and resourcefulness, but also
the loyalty of its buyers.
If
nothing else, the latest developments underscore that quality,
reliability, dependability, transparency and, of course, safety have
only become more important to consumers—and to the best manufacturers.
As the most trusted arbiters of automotive insight, we asked two of
J.D. Power and Associates' senior automotive executives, Jeff Schuster, executive director of automotive forecasting, and Dave Sargent,
vice president of vehicle research, to lend their thoughts on what the
big stories and underlying currents are in the auto industry as we
reach the mid-winter point.
Q.
Let's start with what is without a doubt the biggest issue of the new
year: the spate of safety-related recalls at Toyota. How will that
impact the automaker's image as the industry's quality leader? How
will it affect sales, and who might stand to benefit most?
Sargent:
Toyota has been a quality leader in the U.S. since J.D. Power started
measuring the entire industry in the mid-1980s. Great quality is the
cornerstone of how it built its reputation, so it must do everything it
can to protect this. Toyota by its own admission was slow in fully
reacting to the situation. However, it is clearly taking
responsibility for the problems and is taking steps to ensure that its
vehicles are safe. This is critical, as regaining its reputation among
consumers is more important than short-term sales and profits.
Schuster:
How much of an impact this has on sales will no doubt depend on how
long the situation continues and how consumers respond to how Toyota is
dealing with the recalls. In February, Toyota's total sales were down
11 percent from one year ago. For comparison, the industry was up 13
percent for the same period. Toyota's share of the industry declined to
10.7 percent in February 2010, compared with 13.5 percent in February 2009.
There is no question we are seeing a negative impact currently. As the
situation drags on, there is an increasing probability that the impact
could shift from affecting sales within 2010 alone to a longer-term
problem.
Q: We're coming off one of the worst years the auto industry has ever experienced. Is the worst over?
Schuster:
No question, 2009 was a difficult year, and we believe the worst is
over. We're currently forecasting total auto sales at 11.7 million
units, or 9.6 million at the retail level, both representing a 13
percent increase from dismal 2009. That doesn't mean 2010 is without
risk. The key variables are the pace of the country's general economic
recovery, with a focus on unemployment; the availability of credit;
what manufacturers do in terms of pricing and incentives, which they
insist they're going to cut; and the general level of consumer
confidence.
Q: What does the industry need to do to regain consumer confidence and rebuild demand?
Sargent:
The recovery of the industry as a whole is dependent on the wider
economic picture, but for individual automakers, the key is to maintain
a portfolio of products that meet consumers' needs for value, quality,
performance, economy and utility, as well as less tangible attributes
such as excellent styling and a strong brand image.
Q:
How does the auto industry look beyond 2010? Will we get back to the
16- to 17-million-unit sales levels we saw in 2000 through 2007? Or is
there a new norm?
Schuster:
We are projecting a slow and steady recovery during the next few years,
but we've gone through some significant structural changes that will
likely lead to a permanent decline in the level of "normal" sales. We
don't expect light-vehicle volumes to cross the 15-million-unit level
until 2012, but they should reach 16 million by 2014. This is more of
a function of stable replacement demand and the addition of new
households, with less focus on fleet sales.
Q: That brings up a letter J.D. Power President Finbarr O'Neill wrote to the Wall Street Journal, in which he states that the industry needs to focus on consumers, rather than daily rental fleets. Is that happening?
Schuster:
A significant amount of "bad" fleet was removed from the system, with
fleets accounting for just 17 percent of sales in 2009, down from 22
percent in 2005. Most of the reduction was with daily rentals, which
is a low-profit business. Cutting excess capacity helps the
industry—and especially domestic brands—shift to a healthier mix. The
question going forward is: Will manufacturers remain disciplined
throughout the recovery and the "new normal?"
Q:
We've seen an unusual level of cooperation between the auto industry
and the government. Was this a rare exception or a permanent shift?
Sargent:
Short of another financial collapse of any of the domestic automakers,
we would expect direct government involvement to wane over time.
However, the government will clearly continue to play a key role in
terms of the legislative and regulatory environment covering issues
like fuel economy, emissions and safety. It is very unlikely that this
will diminish over time. It is more likely to increase.
Q:
Has the industry done enough to bring North American capacity in line
with demand? If not, what else needs be done? And what about the rest
of the world?
Schuster:
The industry has taken out 1.2 million units of capacity since 2006,
most of that by the domestic brands. The foreign-owned makers have
actually added capacity and shifted from importing vehicles to building
them domestically. I think there is a need for a further reduction in
capacity globally, as there has been less cutting in other parts of the
developed world, notably Western Europe, Japan and Korea. Whether we'll need further cuts in North America
will depend on the pace of recovery and the long-term level of demand,
but there is risk that over-capacity will remain an issue.
Q: Speaking of imports, India's
Mahindra is poised to enter the American market with two trucks, while
several Chinese makers want to crack the market. Will that finally
happen this year?
Schuster:
Mahindra is planning to enter the U.S. market this year, but the volume
is expected to be low. Chinese brands are later in the future. There
have been many announcements, but the launch of significant Chinese
vehicles is not expected during the next few years. There's a lot
involved with bringing a new brand to the market. They would not only
have to develop the right products, but also set up a dealer base,
develop their marketing and get all of the infrastructure in place, and
those things take time. While we fully expect both Indian and Chinese
makers to make a push into North America, the reality is that any significant volume is still a few years away.
Q: We've been seeing huge strides in quality at Ford and General Motors. Will that pay off for them?
Sargent:
While we don't predict future quality scores, we would not be surprised
to see both Ford and GM score even more quality gains in the near term.
The key challenges are, as always, the launch of new models and, in
particular, the launch and proliferation of new technologies in these
models. Making high-tech systems as flawless and intuitive as possible
will be a key battleground for all of the automakers in the future.
Q:
What about Chrysler? Even its management has openly admitted it has
some serious quality problems. Can it survive if it doesn't reach
world-class levels?
Sargent:
The simple answer is that no automaker will survive over the long term
without competitive quality levels, and these days that requires
world-class quality. This is the price of entry, and any automaker
that has serious quality deficiencies will see its reputation—and
ultimately its ability to earn viable profits—diminish rapidly. There
is no doubt that Chrysler understands the importance of quality and its
impact on business performance. If Chrysler attacks the quality issue
with the same level of determination and rigor as automakers such as
Ford, GM, Hyundai and Volkswagen, then it should be able to close the
gap over time. We certainly think they have the determination and
ability to do so. The toughest part will be closing the perceived quality gap with consumers. As other automakers have found, this is harder than closing the actual quality gap.
Q: Are small cars really the next growth segment?
Schuster:
Small vehicles have been getting a large amount of attention. There
is no question that consumers respond to increases in gas prices by
shifting their purchase decisions downward. However, the true demand
for small vehicles will be tested over the next three years, as nearly
one-half of new models will be small. While I believe consumers are
becoming more accepting of small vehicles, the industry may be going
too far too soon.