The Global Auto Industry's Recovery Gains Traction
August 25, 2014 - Detroit, MI
Few economic sectors have mounted a more impressive comeback from the ravages of the financial crisis than the automotive industry. Both original-equipment manufacturers (OEMs) and component makers delivered five-year median annual returns that were well in excess of the median annual return for 26 industries, according to a new report by The Boston Consulting Group (BCG). The report, The 2014 Automotive Value Creators Report: A Comeback in the Making, is being released today.
OEMs produced a median annual total shareholder return (TSR) of 29 percent from 2009 through 2013, while component makers posted a median annual TSR of 33 percent. These results surpass the median annual return of 21 percent for the 26 industries tracked by BCG. The automotive industry's recent performance represents an impressive recovery from the depths of the 2008 financial crisis, when the big three U.S. automakers alone posted nearly $75 billion in losses and unit sales plunged worldwide.
"The automotive sector has enjoyed a good run, but sustaining that standout performance will be a challenge," said Xavier Mosquet, a BCG senior partner and a coauthor of the report. "OEMs and component makers will have to prioritize innovation to meet the needs of consumers."
Important Sources of TSR: Focus and Scale
One of the report's most striking findings is that OEMs' country or regional focus influenced how they created value. OEMs that concentrated on emerging markets produced a median annual TSR that ranged from 36 to 49 percent, creating value primarily through a combination of margin improvement and sales growth. Automakers that focused globally on developed markets posted lower median annual returns that ranged from 23 to 35 percent, creating value in large part by expanding their profit margins, rather than increasing sales, and returning cash to shareholders through dividends and share repurchases.
"Our findings also highlighted the importance of global scale," said Justin Rose, a BCG partner and a coauthor of the report. "It's no accident that from 2004 through 2013, the five largest-selling OEMs posted a 47 percent increase in combined unit sales. Global scale not only helps OEMs remain competitive on costs but also positions automakers to capture share in high-growth markets and solidify their competitive advantage."
Creating a Strategy for Sustainable Returns
To prepare a long-term value-creation strategy, OEMs and component makers should take into account all sources of TSR. "Global scale in itself is not sufficient to sustain performance, especially if growth comes at the expense of profitability," said Rakshita Agrawal, a BCG principal and a coauthor of the report. "Both OEMs and component makers must also expand margins."
Devising a long-term strategy will be an important challenge for industry executives. Analyzing a company's performance in terms of its ability to deliver sustainable value creation is what investors do every day. Armed with the right tools, there is no reason why executives can't develop an even better-informed perspective, given their intimate knowledge of their company's plans and industry trends. When executives do, they can stay one step ahead of investor expectations and consistently generate superior shareholder value for many years to come.
A copy of the report can be downloaded at www.bcgperspectives.com.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or firstname.lastname@example.org.
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