Auto execs: Higher profits still years away

/ Source: The Associated Press

Automotive executives worldwide believe the industry is still a couple of years away from returning to peak profitability, but many are more bullish on the prospects for growth than in previous years, according to a new study.

The same executives also forecast what many other industry observers see happening in the next few years: little or no global market-share gains for North American manufacturers — namely the Big Three — but continued expansion by Asian brands.

Twenty-three percent of the 110 auto executives interviewed by KPMG LLP, the audit, tax and advisory services firm, said they expect industry profits to return to peak levels in 2006, followed by 22 percent who said 2007. Only 16 percent cited 2005 for a return to peak profitability.

In KPMG's survey last year, the highest number of executives also pointed to 2006 as the year big profits would return.

KPMG conducted its sixth annual survey in October and November. The American, Asian and European executives work for 23 automakers and 58 suppliers.

"In prior years, saddled with heavy incentives and a sagging economy, industry executives pushed profitability out as far as they could," said Brian Ambrose, a leader of KPMG's automotive division. "Our survey this year has found improved profit levels emerging sooner rather than later."

But obstacles remain. Many suppliers face high commodity prices and lower vehicle production at General Motors Corp. and Ford Motor Co., the two largest U.S. automakers.

Also, GM and Ford continue to battle rising health care and pension costs — two major drains on their profits.

"I think you'll see certain segments — mainly the Asian manufacturers — continue to have high levels of profitability," Ambrose said.

Those Asian companies also will continue to grab more of the international auto market in the coming years, the executives said. Eighty-seven percent of the respondents said they expected Asian brands to increase their share over the next five years, up from 80 percent in 2003.

Conversely, 55 percent said they expect North American brands to maintain or grow their piece of the global business. A positive note: The number of executives who predict North American brands to lose market share declined to 45 percent in 2004 from 53 percent in 2003.

Twenty-five percent of the executives expect European brands to lose share in the next five years, up from 12 percent in 2003 and 9 percent in 2002.

On the manufacturing side, 83 percent said they expect an increase in Asian production facilities in the next five years. Much of that activity will likely take place in China, the world's fastest-growing automotive market.

Only 20 percent predict similar growth in North America, where GM and Ford are closing plants because of overcapacity.

Consumer incentives, the survey said, will remain a staple of the industry in 2005, but possibly at lower levels than past years, helped in part by a slew of new vehicles on the market.

That said, a new study by Harris Interactive and Kelly Blue Book Marketing Research found that nearly half of U.S. consumers in the market to buy or lease a new car this year say they're not likely to make a purchase without some kind of rebate or financing deal.

"Automakers have been talking about reducing and even eliminating incentives in the new year, but with continued consumer dependency on them, there will have to be a staunch effort among all manufacturers for that to happen," said Kelly Blue Book editor Charlie Vogelheim.