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.