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Monday, January 2, 2012

It's a big, bad world...

...will 2012 ring in the red?...
It's a big world...but everyone is aiming to expand for a bigger world. Toyota of course intends to get back on track. Hyundai/Kia will hit 7 million units (see the Bloomberg story). GM will stay on top, with VW close behind, or maybe a bit ahead. Honda is simply hoping to recover, and awaits the performance of new models. Nissan is doing well, Chrysler is helping Fiat stay afloat. PSA (Peugeot) – well, because they're neither in the US nor in Japan, I tend not to hear much about them. Of course Mazda and Mitsubishi, dependent on exports from Japan, will be lucky to stay afloat in the face of a strong yen. Suzuki looks more and more like an Indian company, not important globally.
Of course the global market will expand in 2012 – we hope. Europe however is likely to see full-fledged recession, and I think it's optimistic that NAFTA won't feel a cold wind. (New England: brace yourselves for a nor'easter of historic proportions.) Japan – well, the economy will be slow and the number of licensed drivers continues to decline. China's growth will surely be slower than in 2011, while India remains small and (unlike India) has done little to improve the infrastructure that helps make car ownership functional. Brazil may do OK. All this means that the major markets will on the whole be stagnant or, in the case of China, slower but with much greater supply and hence softer pricing. (For the major economies in 2012, I find the December 15, 2011 prognosis of Morgan Stanley's Global Economic Forum thoughtful, particularly in its effort to integrate the projections for individual countries to provide a globally consistent story reflecting the integrating effects of trade and capital markets.)
Now we're not looking at a repeat of 2009. Indeed, on a total unit basis there will be growth.
I think the industry may face another shock, lower energy prices. After all, while emerging markets continue to emerge, if more slowly than in 2011, the developed markets will be moribund, depressing demand in what in the aggregate remains the biggest market for energy. Meanwhile, a period of high prices boosts investment in exploration and extraction / recovery. The output of those efforts takes a few years to start showing up in the market. Upon completion financial imperatives mean those projects will be hungry for revenue and will produce even if they face a soft market. Well, it's now been four years. That may be good news to the Detroit Three in the US, but it will mean that overall the market for energy-efficient vehicles will soften. Yet that's where the industry's players have poured their R&D. Sure, R&D is a long-run strategy that isn't expected to generate much of a short-term pay-back. However, it has short-run profit implications when it doesn't generate any up-front return.
It's hard for me to see 2012 bringing in more black; I can't tell a consistent upside story for the industry on a global basis. Single markets are less and less capable of driving results; we have entered an era where firms need more than their home market to generate profits. (A caution: for years the effective home market for Toyota and Honda has been the US, not Japan. That may also be the case for BMW.) However, I'm not (quite) pessimistic enough to say that 2012 will ring in the red.
Mike Smitka