DETROIT — Though the industry seems to be on the upswing with new-car sales
booming, producing more trade-ins and quality used inventory flowing
through the auction lanes, growth might be hindered by a global issue:
an overall "sluggish" economy.

Granted, the economic recovery from 2008's recession continues on.
However, lingering low employment and the low consumer confidence that
goes along with it might work to stall the automotive industry's return
to pre-recession levels.

That's the word from global business advisory firm AlixPartners, which has put out its annual Automotive Outlook study.

The company also cited fast-rising overhead costs at automakers and
suppliers alike, and a few generational demographic shifts that might
prove detrimental to industry growth.

AlixPartners contends that Millenials and other young people are
"caring" less about cars than past generations. And with aging Baby
Boomers having less and less reason to drive as the years go by,  the
shift in young people's opinions towards vehicles may be something to
watch out for.

With these factors in mind, though new-car sales for the industry are
up, AlixPartners predicts that there are 5 million fewer potential
car-buyers today than five years ago.

Due in part to that fact,  the company expects U.S. auto sales will come
in at 14.3 million units this year and that sales in the U.S. and
Canada are not likely to exceed 16 million through at least 2015.

Commenting on the trends and predications, John Hoffecker, managing
director at AlixPartners and head of the firm's automotive practice,
said, "It's long been a truism that if people don't have jobs, they
don't buy cars. Given lingering low employment in this country, plus the
fact we estimate that in the last decade incentives 'pulled ahead' more
than 18 million units of sales, we see true, underlying demand being a
big issue for the industry going forward.

"Successful companies will be those that stop the old bad habits of
yesteryear from creeping back into their systems while making
aggressive, well-informed investments in product — all the while
recognizing that they're unlikely to get a whole lot of help from the
economy," he continued.

And as the global economy isn't likely to provide any real help in
spurring on growth in the automotive industry, the worsening financial
crisis in Western Europe will add to the "woes of European volume
players, who are losing ground to both value and premium players," as
well as potentially affecting the U.S. automotive industry, officials
noted.

Further explaining this issue, Hoffecker, said, "The last few years of
steadily increasing volumes have benefitted virtually all in North
America, after a difficult period of restructuring. However, with
possible contagion from Europe further weakening the U.S. economy,
fast-changing consumer demographics
further skewing underlying demand and the challenge of efficiently
implementing global mega-platforms facing it, the North American auto
industry, despite its current success, has its work cut out for it in
coming years.

"Perhaps the industry's biggest challenge, though, is an internal one:
whether it will be satisfied with its recent performance, or prepare now
for the big challenges ahead in this still-cyclical industry," he
continued.

The company also went on to highlight a few key findings from the study in greater detail.

Changing Demographics

The study predicts that changing demographics are expected to be
responsible for up to 15 percent of the lower underlying demand in North
America, with about 13 percent of that attributable to less vehicle use
(mostly on the part of Boomers) and about 2 percent attributable to a
lower tendency to drive (mostly on the part of Millenials and other young people).

In fact, the company even referenced a new term to describe young people
who consider vehicle-ownership less of a priority than generations
past.

"The American auto industry is about to see the rise of Generation 'N' —
as in 'neutral about driving,'" said Mark Wakefield, a director in
AlixPartners' Automotive Practice.

"This cohort, which is as big as the Baby Boomer cohort and which grew
up on the Internet and not so much on cars, could well present the
industry with an even greater challenge in the area of reduced
fundamental demand," he continued.

Industry Profitability

Though production has ramped back up again among the big OEM players and
suppliers since the 2008 fall-out, AlixPartners explain that
profitability (as measured by median EBIT percentage vs. production) has
not followed suit, remaining relatively "flat".

Despite automotive raw-materials costs being down 21 percent per vehicle
from their April 2011 peak, automakers are still searching for ways to
make more of a profit, the company continued.

And it seems suppliers are spending more, as well, without the income boost they may need.

"Supplier SG&A levels have risen back up to pre-restructuring
levels, due to about a $1-billion-per-quarter overhead-spending
increases since the third quarter of 2009, representing about a $4.8
billion reduction in supplier net income in that time," officials
explained.

 ‘Mega-platforms'

And though profitability remains flat among more OEMs, the company is
predicting continued growth in production, spurred by the rise of more
big-time vehicle platforms.

"Globally, vehicle platforms able to yield about a million or more units
in production are forecast to double by 2017, and to account for almost
all (96 percent) of industry growth in that time (47million units in
2017, versus 23 million last year), presenting both challenges and
opportunities for OEMs and suppliers," the company shared.

Hoffecker went on to note: "The best of these platforms will enable a
very wide variety of vehicle types and sizes, including different
vehicle widths as well as different lengths, but while still delivering
superb vehicle dynamics.

"Success in these platforms will require companies to act truly global
across all their major customer-facing-processes, including engineering,
quality, manufacturing and launch management. In addition, significant
internal improvements and global consistency will be required for
costing, pricing and capital-allocation processes," he continued, noting
that OEMs might have to change their strategy a bit to keep up with
global developments.

A Take on M&A

The study also cited "bearish valuations in the industry and low
multiples" as reasons behind potential "strategic plays" for both
suppliers in North America and OEMs globally — especially in Europe. 

Further explaining the potential for shifts in the marketplace,
Christian Cook, also a director in AlixPartners' Automotive Practice
said, "With EBITDA multiples off more than a quarter and discounted
transaction values remaining about flat with the depressed levels of the
year before, this may well be a time for companies to be thinking about
strategic acquisitions or, just as important, divestitures, especially
with private equity most likely hesitant to return to the auto industry.

"The key, as always, is exactly what kind of deal you make, the strategy
behind it, the due diligence behind it and, of course, it operational
execution," he concluded.