KPMG Global Study : Alternative fuels, Vehicle specialization and Overcapacity map the road ahead of the auto industry for Romania and rest of World

• Urban planning and vehicle purpose will dictate mobility solutions
• New technologies and enhanced safety seen as key differentiators
• Alliances to be the solution to the changing business model challenge
• Export into other markets considered a solution to overcapacity but emerging markets becoming overbuilt

Growing consumer need for purpose-built vehicles in Europe and North America, and for safe, lower-cost cars in emerging markets like China, have global automotive players evaluating how best to meet a dramatically changing landscape. KPMG International’s 12th Annual Global Auto Survey asked leading Automotive Executives how they plan to meet new challenges and lead in innovation and an evolving value chain over the next 5 years.

“This survey is a predictor of change,” said Dieter Becker, KPMG’s Global Head of Automotive. “In 2004, fuel efficiency was forecast to rise among consumer purchase criteria; today, fuel efficiency is the number one consumer concern.”

Creating a Future Roadmap for the Automotive Industry, the KPMG 2011 Global Automotive Executive Survey, provides insight from over 200 Global Automakers, suppliers and dealers on expected challenges and opportunities in consumer trends, technology innovation; new business models; opportunities for growth and profitability; and emerging markets over the coming 5 to 10 years.

“In many ways, there is a two-tier global market in play,” Becker said. “More mature countries are struggling to cope with the problem of changing mobility behaviour while in up-and-coming regions in Asia, for example, there is a push to deliver a variety of cars to populations eager for greater mobility. Automakers will need to act quickly to meet these expectations.”

As Bill Bowman, KPMG in Romania, Deputy Senior Partner, said: “In a turbulent environment with an uncertain outlook, the Romanian auto market has grasped opportunities to stand out from the 27 countries of the European Union.” At the EU level, Romania’s Dacia became one of the top players for sales growth in January 2011, against the same month of the previous year, with a 19% increase. This achievement confirms the Romanian producer’s positioning as a leading player in the EU market.

“As for the national market, Romania seems to have found an antidote to the recession, as it recorded a growth of 24.8% of new car registrations in the first month of the year, compared with January 2010, according to information provided by the European Automobile Manufacturers’ Association (ACEA),” added Bowman.
At a national level, Dacia continued on its path as main performer, with triple the amount of unit sales compared with its closest competitor, in January 2011, according to the Romanian Association of Carmakers and Importers (APIA).

Consumer Trends Call for Purpose-Built Vehicles, ‘Mobility Solutions’

Population growth and urbanization is driving a significant change across the entire automotive landscape. A rise in low-emission zones and restricted access to inner city centres might be only the beginning, as new car-free cities like Masdar in the United Arab Emirates demonstrate.

These emerging trends are the dominant view among respondents with 73 percent believing vehicles will be designed for specific purposes, and 76 percent saying that vehicle design will be determined by urban planning.

While the world waits for affordable electric vehicles, for which intensive R&D is currently underway, the study showed, ‘mobility service solutions’ are what some respondents believe may be game-changing. While only 9 percent of respondents believe that mobility solutions will represent a significant part of their strategy, some automakers like Daimler, Peugeot, BMW and others are already investing in this area.

Daniela Strusevici, Director in KPMG in Romania’s Audit Department and supervisor of the Timisoara office, said: “In Romania, auto producers and numerous tier 1 automotive suppliers have invested and continue to invest in Research and Development centres. By Order no 20862010 to approve application norms for deductions on R&D expenses from the calculation of taxes on profit, these companies now have the legal framework to benefit from a supplementary deduction of 20% for eligible expenses invested in R&D activities. Automakers and auto parts suppliers should take advantage of these stimulus measures to increase competitivity.

“Such a forward-thinking approach could become the competitive edge that will accelerate these companies into a leadership position in a realigned automotive value chain,” Bowman said. “Those who own the mobility grid could well be the same as those who own the market.”

With the emergence of mobility service solutions - and fuel-efficiency still unequivocally the biggest consideration when purchasing a car - around 80 percent of respondents say that hybrid and electric vehicles will see the lion’s share of growth of any vehicle category over the next 5 years. Nevertheless, many respondents are expecting a continued role for government, since they believe electric cars will not be affordable without subsidies anytime soon
New Technologies and Shifting Responsibilities in the Value Chain

While a majority of respondents said electric cars will not be affordable to the mass market in the next five years, investment in this category is important – of all available alternative fuel technologies, almost 90 percent of respondents are planning to invest in hybrid systems, battery electric power or hydrogen fuel-cell technologies over the next five years.

The drive towards alternative fuel and powertrain technologies will also put a sharper focus on safety.

“As more and more vehicles start to be powered by new technology,” Becker commented, “the potential for combustive batteries and other dangers rises, giving both suppliers and OEMs the chance to take the lead in safety as a means of gaining vital competitive advantage.”

In the race to lead in technology innovation in alternative fuels and powertrain technologies, 68 percent of major players are opting to enter into strategic alliances or joint ventures with suppliers rather than seek capital and go it alone. This view is shared mainly among global players in the EMEA and America’s region; those in Asia Pacific are most likely to secure loans to fund these investments.

These movements could have significant implications for how the automotive value chain will evolve.

“Alliances are a good way to get access to specialized technological know-how in addition to sharing risk and cost,” Bowman said. “This is particularly true with hybrid and electric powertrain technology. What is worth noting is that these joint activities may blur the differences between suppliers and manufacturers.”

Half of those participating in the survey believe that, with strategic partnering so key to rapid technological innovation, the industry will see a value chain evolution with a new dynamic taking shape between OEMs, suppliers, new entrants and niche players.

These shifts, which respondents believe will take some years, will call into question such issues of where along the value chain the brand will have dominance and whether it will be the original equipment manufacturers (OEMs) or their partners who will lead in powertrain technology. Well over two-thirds of respondents believe that OEMs will own powertrain technology up to 2020.

“In this brave new world of changing market conditions, supplier evolution and the drive for rapid innovation, pooling knowledge is a must,” Mr. Becker said. “However, automakers need to begin thinking about new business models to retain their technology, know-how and brand reputation. Our report gives some indication of what those models could be.”

In terms of overall profitability, most respondents believe OEMs will be the most profitable over the next five years. Although respondents do not currently see financial services among the most profitable automotive business segments, it does present tremendous potential, particularly in emerging markets where the sector is relatively underdeveloped, Mr. Becker said.

Overcapacity a concern but exporting to other markets offers a solution

As automakers grapple with the inevitable changes that will shape the future of the sector, overcapacity continues to be a chief concern in both mature and emerging markets. Almost two-thirds of respondents believe the US is the most overbuilt with Japan and Germany following; interestingly enough even China and India are expected to reach noteworthy overcapacity within five years. “Overcapacity in China is a consideration but if we do not invest in our plants then we’ll miss out on sales opportunities. It’s a risk worth taking,” said Bernd Pichler, Managing Director, Volkswagen China.

Most automakers believe that increasing exports to new markets could offer relief; however, with many OEMs building plants in new markets, export opportunities may be limited in the future.

“Romania’s accession in the European Union, a reduced tax burden, competitive wages, highly qualified technical staff and investments announced by Ford and Dacia are turning Romania into an attractive destination for auto components suppliers,” added Daniela Strusevici.

Two hundred automotive executives participated in the survey, of which over half were business unit heads or higher. Respondents represent all parts of the automotive value chain including Original Equipment Manufacturers, Tier 1, 2 and 3 suppliers and dealers.

Fifty-one percent of the executives were based in the Europe, Middle East and Africa region, 27 percent in Asia-Pacific and 22 percent in the Americas. All participants represent companies with annual revenues greater than US$100 million and more than a quarter work for firms with revenues greater than US$10 billion.

(A copy of the survey is available here: www.kpmg.comAutomotive)

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG in Romania operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chişinău. We currently employ more than 600 partners and staff, both Romanian and expatriates.

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