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Market Focus: Automotive

The automotive market is the one most served by injection molders, so the roller coaster of this monstrous industry means ups and downs for molders as well. In September at the SPI Machinery Div. fall conference in Boston, William Wilson, vice president and economist at Comerica Bank in Detroit, addressed the gathering with a review and assessment of the market.

Wilson's data-rich presentation assessed the market in terms of historical trends, current profit drivers, and expectations for the next few years, particularly in light of the uncertain worldwide economy. He says that while growth in the automotive market will continue, other market factors will slow the trend. The most notable factor is the effort among the big three carmakers to cut costs and evolve to more efficient production systems. Despite record profits and stable unit sales, GM, Ford, and DaimlerChrysler are looking to cut $2 billion to $4 billion in costs in the coming year, comprising 1.6 to 2.6 percent of sales.

Cost-cutting may be spurred by historical and economic trends pointing to leaner times ahead. For instance, from 1988 to 1997, households that could afford to buy an average car dropped from 54 percent to 50 percent. For the average truck, that number dropped from a peak of 52 percent in 1989 to 42 percent in 1997. With afford-ability declining, Wilson says to expect an increase in leasing.

Further, the number of used cars on the market is growing. Vehicles coming off-lease in 1995 numbered 2.5 million, rising to an estimated 4.65 million in 1999. Used car prices, as a result, are falling, dropping 6 percent in 1998, Wilson says. Sales of new small cars are suffering as well. On the large-vehicle side, sport utility vehicles (SUVs) have provided healthy profit margins for many years, accounting for 60 percent of profits with only 15 percent of the volume. But Wilson expects to see those numbers erode gradually as SUVs proliferate. In 1989, there were 25 SUV models on the market, but that number is expected to more than double by 2002 to 58 models. Vans, trucks, and SUVs, says Wilson, are here to stay with each contributing more to profit than volume, making them attractive for manufacturers.

For the future, Wilson says the three determinants of the long-term trend are change in the number of households, change in the number of vehicles per household, and replacement of scrapped vehicles. The number of consumer households in the U.S. has trended upward for decades, and Wilson expects it to continue. There were 110 million households in 1997 and will be an anticipated 122 million by 2005. Similarly, the number of vehicles per household continues to rise, going from 1.81 in 1997 to an estimated 1.91 by 2005. Most likely owing to increased vehicle quality, scrappage rates, as a percent of registered vehicles, continue a downward trend. About 7.1 percent of registered vehicles in 1986 were scrapped, but only 5.9 percent in 1996. By 2005, that number is expected to drop to 5.3 percent.

For the next year, Wilson says the worldwide supply of vehicles will hit 70 million, outstripping the demand by about 20 million units (see chart). He also says to look for cost cutting to continue and to be aware of new fuel efficiency regulations pending at the EPA. Wilson notes that federal regulations account for 15 percent of a vehicle's cost and may be compounded by additional federal action. Also, Wilson expects white-collar work force downsizing, GM plant closings, and capital-intensive investment.

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