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The Financial State of the Automotive Industry
By all accounts, the U.S. automotive industry is facing unprecedented challenges brought about by a perfect storm of convergent, declining macroeconomic conditions. Restructuring efforts of the Original Equipment Manufacturers (OEMs) and their derivative supply chains and dealer networks are being thwarted by the impact of record high gas prices, deteriorating consumer confidence, a global credit crisis and skyrocketing raw materials costs. Despite all the recent media attention focused on bankruptcy concerns among the domestic three automakers, we do not anticipate any domestic OEM filing for bankruptcy protection. However, we anticipate increased bankruptcy activity within the supplier base in the latter part of 2008 and into 2009.
Background
In response to gasoline prices reaching $4 a gallon, consumers have reacted more rapidly than widely anticipated and are moving away from SUVs and pickup trucks to more fuel-efficient vehicles. As a result of this structural shift, the U.S. automotive industry has scrambled to rationalize capacity and restructure its product offering as fast as it can, a move that severely impacts the entire supply chain. Demand for SUVs and full-size pickup trucks has declined so quickly that OEMs are now sitting on high-inventory levels despite their best efforts to market and move product through rebates and other incentives. Automakers are simultaneously rebalancing car and truck production capacities throughout their supplier networks and, to the extent there are no viable economic alternatives, responding to accommodation requests from financially distressed suppliers in an effort to remain viable and retain market share. For the first time in history, market share of domestic OEMs now accounts for less than 50% of total U.S. vehicle sales, compared with 60% less than five years ago and about 75% as recently as the 1980s.
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