GM and the Automobile Market: Context

Clay Carroll Saira Gillani Elysha Shipley Andrea Young

Demographics

Demographics

• US population • • • Racial Percentages Baby Boomers Generation Y • World population • Current Leaders • Future Population Leaders

US Population

1

US Population

1

US Population

1

Racial Population Percentages

3 • As of 2000 Census (major groups): • 69 percent “White” (slowest growing) • • 13 percent “Hispanic” (fastest growing) 12 percent “Black” • 4 percent “Asian or Pacific Islander”

The Biggest Targets: Baby Boomers

4 • • • • • • • • • Own more than 70% of U.S. financial assets Control 70% of U.S. households Purchase 61% of all new cars and 48% of all luxury cars Account for more than $2 trillion in income More than 79% own homes Use more traditional forms of shopping More inclined to purchase American brand names Buying cars they wanted in their youth but could not afford (i.e. Muscle cars) Larger portion of this market will be female as they grow older.

The Biggest Targets: Generation Y

5 • • • • • Technology is a foundation of their education (reading, writing, arithmetic, and point-n-click).

More diverse than any previous US Generation in race and household structure (i.e. single parents, etc.) Now entering high spending years of early adulthood Internet is the main channel of media, information, and communication.

Views direct marketing aimed at them negatively due to growing up with marketing saturation.

World Population

1

World Population

1

• • • • • • • • • •

Current Top Ten Countries by Population

2 China India United States Indonesia Brazil Pakistan Russia Bangladesh Nigeria Japan 1,300,000,000 1,087,000,000 294,000,000 219,000,000 179,000,000 159,000,000 144,000,000 141,000,000 137,000,000 128,000,000

• • • • • • • • • •

Future Top Ten Countries by Population (2050)

2 India China United States Indonesia Nigeria Pakistan Bangladesh Brazil Congo, Dem. Rep. of Ethiopia 1,628,000,000 1,437,000,000 420,000,000 308,000,000 307,000,000 295,000,000 280,000,000 221,000,000 181,000,000 173,000,000

Population Data

• • • • • The World’s Population is Growing at a decreasing rate Third world countries are experiencing the most rapid growth US is more Diverse than ever before with the minority population growing at a rapid rate India will soon pass China as the worlds most populated country The African Continent has many countries with high populations that are growing

Sociocultural Trends

What Americans Want

10 Percentage of Market by Vehicle Minivan Wagons Pickup Car Full-sized van SUV Hybrid Type of Vehicle Minivan Wagons Pickup Car Full-sized van SUV Hybrid Percentage of Market 7 3 19 44 2 25 1

Market Implications

10 • Despite the hype, only 1% of the American market sought a hybrid vehicle in 2005. The hybrids are not expected to have a double digit market share unless fossil fuel runs out.

• SUVs are still a quarter of the U.S. market. The new trend in SUV’s is modest size. SUV’s are being downsized to deliver more fuel efficiency while still offering space and comfort. Examples are the H3 Hummer and the Honda Pilot.

Opinions On Reliability

11 • In general, Americans perceive American-made automobiles as having lower quality and less reliability.

• In 2004, American cars outperformed European cars in a Consumer Reports reliability study-- American brands: 18 problems per 100, European brands: 20 problems per 100.

• BUT Japanese and Korean cars were reported to have only 12 problems per 100.

Most Reliable Automobiles Consumer Reports' Predictions for Most Reliable 2006 Models 12 • • •

Small cars

– – – – – Honda Civic Toyota Prius Honda Civic Hybrid Toyota Corolla Subaru Impreza

Sporty cars

– – – – Honda S2000 Mazda MX-5 Lexus SC 430

Chevrolet Monte Carlo

Sedans

– Lexus GS 300 – – Infiniti M35/M45 Lexus IS 300 – – – – Honda Accord Hybrid Toyota Camry Honda Accord (four-cylinder) Lexus LS 430 *italics denote GM brand • • • • •

Wagons

– Toyota Matrix

Small SUV’s

– Toyota RAV4 – – Honda CR-V Honda Element – – Subaru Forester Mercury Mariner – Mitsubishi Outlander

Midsize SUV’s

– Lexus RX 400h – Toyota Highlander – – Toyota 4Runner Infinity FX35

Large SUV’s

– Toyota Land Cruiser

Pickups

– Honda Ridgeline – Toyota Tundra

Safety

13 • Safety is becoming more important to car-buyers. This trend began to see a large uptick with the Ford Explorer and Firestone tire problems.

• Experts name the following as being associated with a safe brand: Volvo, BMW, Lincoln,

Saab

, Honda, and Subaru.

• But, safety is becoming a top priority for all manufacturers.

*italics denote GM brand

Safety: Examples of 2006 SUV 5-Star Crash Test Ratings As Determined by NHTSA 14 SUV BWM X5 4DR w/ SAB

Buick Rendezvou s 4DR Cadilac Escalade SRX 4DR Chevrolet Equinox 4DR

Ford Escape 4DR Hond a Ele ment 4DR Nissan Pathfinde r 4DR Toyota Highlande r 4DR *italics denotes GM brand Frontal St ar Rating Driver Passenger 5

3

5

4 4 5

4 5 4 5

4 5

4 5 4 5 Side St ar Rating Front 4

SAFETY CONCERN 5 5

5 5 5 5 Rear 5

5 5 5

5 SAFETY CONC ERN 5 5

Safety vs. Design

15 • So, what is more important to consumers: design or safety?

– According to a Consumer Reports survey, the top ten features desired in a new vehicle are generally related to comfort, convenience, and entertainment. This is significant for GM because foreign-made vehicles are typically perceived as more stylish and comfortable than American-made vehicles.

Features: Design vs. Safety

15 1. Air conditioning 2. AM/FM radio 3. CD player 4. Antilock braking system (ABS) 5. Cruise control 6. Power door locks 7. Full-sized spare tire 8. Anti-theft system 9. Power outside mirrors 10. Keyless entry with remote 11. Side air bags 12. Traction control 13. Curtain air bags 14. Tilt or tilt/telescopic steering wheel 15. Power-adjustable seats 16. Brake-assist system 17. Four-wheel drive/all wheel drive 18. Rear-seat side air bags 19. Active head restraints 20. Electronic stability control (ESC) Considered very important 40 37 35 33 31 29 27 87% 74 64 63 59 55 48 48 47 44 27 26 26 Present in most-recently-purchased new car 23 33 10 73 47 23 27 93% 90 61 77 83 80 49 46 68 59 8 23 16 Desired in next new vehicle 57 42 50 60 56 28 38 73% 68 65 65 67 70 60 54 63 64 38 39 35

The Profile of Daily Commuting in America

16 • Personal Vehicle: 91% • Public Transit: 5% • Walking: 3%

A Look at Transit Trends

17,18,19 • About 1 in 5 families have 3 or more cars, despite flat income trends.

• The average driver spends about 62 hours a year stuck in traffic.

• More workers are opting out of carpools and mass transit, but the number of people working from home is increasing.

• Water buses/taxis and ferries are a new trend in public transit in places like Seattle, Boston, and Fort Lauderdale, but more tourists than locals use them.

Implications

• There are very few places in the United States that contain comprehensive, seamless mass transit systems. In most cases, commuters must have access to a vehicle to get to the public transit.

• Most cities in the United States are designed in a sprawling manner. Though exercise trends are up, these areas are impractical to navigate on foot or by bicycle.

• Thus, until these factors change, the need for vehicles will remain.

Economic Environment

The Current State of the Economy

27 • The Federal Open Market Committee decided on November 1st to raise its target for the federal funds rate by 25 basis points to four percent.

• Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. • Monetary policy accommodation (i.e. Federal Reserve actions), coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. • The cumulative rise in energy and other costs have the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

What is the Federal Funds rate now?

27

Federal Funds Rate History

27

Economic Overview of the Auto Industry

28

• Higher interest rates ahead • Flat demand • The Big Three’s (GM, Ford, DaimlerChrysler) shares of the US market fell to record low of 60.1% last year • 2005 US car and light truck sales should total 16.6 million vehicles compared to 16.7 vehicles in 2004

Economic Overview (cont’d)

28

• Profits are down due to incentive wars.

• Higher steel prices have added about $500 to the cost of an automobile.

• Financing divisions are profitable.

Global Economy

29 • Auto sales continue to rise on a global level.

• Auto purchases in China should exceed five million by the end of the decade.

• China will emerge as the world’s second largest auto market.

12 10 2 0 8 6 4 18

Global Light-Vehicle Production Forecast: North America vs. China

29 (millions of units)

16 14 China N America 2002 2003 2004 2005 2006 2007 2008

Interest rates

• • • Interest rates have been rising for the past two years History has shown that when interest rates rise the demand for borrowing will decrease The automobile Industry relies heavily on sales through financing since most people can not afford to pay cash for an automobile

Trends in Inflation

23 Seasonally Adjusted Changes from Preceeding Month

Category

All Items

Mar. Apr. May June July Aug. Sept.

0.6

Transportation 1.9

0.5 -0.1

0.0

1.8 -1.0 -0.1

0.5

1.5

0.5

2.2

1.2

5.1

Transportation costs increased 5.1% from August to September, while the price of all consumer goods only increased 1.2%. Transportation inflation has risen sharply since June. Transportation costs include new and used vehicles, gasoline, parts and equipment, maintenance and repair, and public as well as private transportation.

Inflation

30 • The Federal Reserve Bank is always concerned with inflation of the nation’s currency.

• “Inflation Targeting” is a policy of announcing what you're going to do, and then doing it. • If the incoming Fed chairman, Ben S. Bernanke, has his way, monetary policy will depend much less on the force of will, keen economic insights, and other exceptional qualities of the Fed's chief. • Instead, Bernanke will move the Fed toward clear and coherent rules for hitting publicly announced inflation targets - an operating style that he calls "constrained discretion."

How does “Inflation Targeting” work?

30 • The central bank chooses and publicizes a target goal for the inflation rate -- say, 2% a year. • The bank then publicly estimates how high it expects inflation to be in the coming year. It steers monetary policy to try to hit the target inflation rate. • If inflation is getting above the target, the bank would ordinarily raise interest rates to cool the economy and bring inflation back down. • If inflation gets too low, the bank would lower rates to juice up growth, raising inflation.

The Effect So Far….

30 • For now, the choice of Bernanke to lead the Fed has not altered the outlooks for either the economy or Fed policy. • The financial markets still expect the Fed's target federal funds rate to reach at least 4.25% by spring. • Based on the expectations implied in the market for interest-rate futures, investors continue to believe the funds rate has a high probability of reaching 4.5% by April.

Inflation Targeting and Auto Sales

31 • Inflation fears have eased.

• A slow down in consumer spending and sluggish growth contributed to lower sales in the 2 nd quarter of 2004.

• Consumers spent 5.5 times their normal share of gasoline spending in the 2 nd quarter.

• The scrappage rate of old vehicles has slowed.

High Fuel Prices Contribute to Industry Shifts

32 • High fuel prices cause industry shifts to smaller cars.

• There is a low cost of entry into the compact car segment.

• Small car sales are up 9.5% for the first nine months of 2005 compared to 2004.

Gas Prices

35,40

Gas Prices and Production

• The United States is heavily dependent on oil, and much of the world’s supply of crude oil is located in the Middle East.

• The United States has created a national reserve of gasoline, but in times of natural disaster, such as the gas shortages after Hurricane Katrina, the U.S. becomes heavily dependent on other nations’ ability to produce and refine oil. • As a consequence, prices are often tied to the policies of OPEC nations.

Crude Oil Production

36

GM and Industry Shifts

32 • GM will rely on its subsidiary, Daewood, to design and produce subcompacts.

• Daewood has the advantage of minimal prduct development costs and available plant capacity.

• GM sold 55,225 Chevrolet Aveos through September 2005. Up 44% over last year.

October Sales

33 • New car sales dropped 33% the first nine days of October.

• GM sales were down 57%.

• Automakers such as Ford and GM are reluctant to launch sales incentives.

• Industry officials feel that Hurricane Katrina is to blame for high fuel prices and slow sales.

Technology

Technology: From Real to Surreal

20

Current Technology and Who Has It

21 • • • • • Blind-Spot Detection: an alarm or warning light deploys when a vehicle is in your blind spot (2005 Volvo S60 and V70).

Lane Departure Warning: a camera tracks road markings and sets off an alarm if the car drifts (several 2005 Infinities; 2005 Mercury concept car).

Stability Control: sensors monitor brake pressure, tire and steering-wheel rotation, and other operations to determine if control is being lost. If so, the system automatically applies brake pressure (Toyota 4Runner, Ford Explorer, Jaguars, and all GM models by 2006).

Airbags: a system adjusts the size and pressure of the bag, based on severity of the crash, the seat’s location, and whether the passenger is wearing a seatbelt (2006 Buick Lucerne, Cadillac DTS).

High-Tech Headlights: – Lights swivel around corners at speeds exceeding 10 km/h (2005 Audi A6).

– Lights brighten or dim based on levels of oncoming traffic (2005 Cadillac STS).

– Night View technology illuminates everything up to 150 m ahead of you and projects the image onto the windshield (2005 Lexus LX 470).

Internet vs. Dealerships

9 • • • • The dealerships are having to deal with their customers like the never have before due to the internet giving customers what they never had before--INFORMATION 2/3’s (and growing) of Consumers in the market for an automobile will use the internet for research. Now the dealers can not build value by simply telling customers the features of the car. By the time the customer has arrived at the dealership, they have already compared prices, incentives, features, and options. The customer is more prepared to shop around and it is very easy to do now because of the internet

Wouk and the Hybrid

41 • Victor Wouk developed the first Hybrid car for GM in a 1972 Buick Skylark model.

• The hybrid has since become a sought-after technology among car manufacturers due to rising fuel prices and increased consumer environmental awareness.

• The hybrid technology consists of a gasoline fuel source and an electric fuel source. There are several modifications on the market today.

Fuel Cell Technology

37 • A fuel cell is an electrochemical device that produces electricity by separating fuel (generally hydrogen gas) with a catalyst. • Protons flow through a membrane and combine with oxygen to form water; electrons flow to create electricity. • A fuel cell is composed of a piece of plastic between a few pieces of carbon plates that are sandwiched between two end plates acting as electrodes. These plates have channels that distribute the fuel and oxygen.

• Since it converts the fuel, hydrogen, and oxygen directly to electrical energy, the only by-products are heat and water. Without combustion, fuel cells are virtually pollution free.

Fuel Cell Development

34 • • California, Florida and New York will spend millions in the next five years to test electric automobiles powered by hydrogen fuel cells and to build a network of hydrogen fueling stations.

The goals are to: • • • reduce air pollution.

counter soaring gas prices.

become leaders in the effort to build affordable hydorgen-powered cars.

Hands-Free Technology

6,7,8 • • • 15 States have Bills Pending to Ban the use of Hand Held Devices in automobiles while driving Companies are developing Voice automated systems that use a Voice-Activated Interface to use wireless Multi-Media and Communication Devices These Devices will revolutionize the Car Driving Experience

Hands-Free Technology

7,8 • These devices will allow Drivers to: • Access and Manage personal Information • • • • • Access the Internet Get Traffic and Directional information Use their Cell Phone Access news and Weather information Download Streams of Audio and Video Content

Regulatory Environment

Hands-Free Legislation: Will It Affect What Consumers Want?

6

Federal Regulation: The Clean Air Act

42 • The Clean Air Act regulates air emissions from area, stationary, and mobile sources. This law authorizies the U.S. Environmental Protection Agency to establish National Ambient Air Quality Standards (NAAQS) to protect public health and the environment.

• The goal of the Act was to set and achieve NAAQS in every state by 1975. The Act was amended in 1977 primarily to set new goals (dates) for achieving attainment of NAAQS since many areas of the country had failed to meet the deadlines. • The 1990 amendments to the Clean Air Act in large part were intended to meet unaddressed or insufficiently addressed problems such as acid rain, ground-level ozone, stratospheric ozone depletion, and air toxics.

UAW: A Significant Influence on Regulation

43 • The International Union of the United Auto Workers (UAW) has approximately 620,000 active members and over 500,000 retired members in the United States, Canada and Puerto Rico.

• In Washington and state capitols, the UAW is fighting for better schools for kids, secure health care and pensions for retirees, clean air and water, tougher workplace health and safety standards, stronger worker's compensation and unemployment insurance laws and fairer taxes.

UAW’s Power Over Benefits

44 UAW’s GM Negotions: UAW’s Ford Negotions:

Natural Environment

The Greenhouse Effect and Global Warming

22 The greenhouse effect is responsible for the earth’s current climate and weather. It keeps the planet at a habitable level. However, when concentrations of greenhouse gases increase, problems occur that lead to global warming. The biggest implication is the resultant increasing of overall global temperature. In turn, this leads to the melting of polar ice caps, rising sea levels, increased evaporation, decreased soil viability, increased quantities of rainfall, and increased intensity of storms. Each of these factors can affect all species and their ways of life.

Temperature Over Time

22 If global warming continues at the current rate, the average global surface temperature could rise 1-4.5 degrees F in the next fifty years, and 2.2 10 degrees F in the next century, with significant regional variation.

Use of Fossil Fuel: Exploiting Nature?

22 • The burning of fossil fuels by automobiles and other sources have caused increasing methane and nitrous oxide concentrations. The carbon dioxide level alone has increased about 30% since the industrial revolution.

• If emissions control policies are not tightened, by the year 2100 carbon dioxide concentrations are projected to be 30 150% higher than today’s levels. The impacts of this increase could be disastrous in terms of global warming and its consequences.

Methane

39 • • • Methane losses occur during the production, processing, storage, transmission, and distribution of natural gas. Because gas is often found together with oil, the production, refinement, transportation, and storage of crude oil is also a source of methane emissions.

It is estimated that 60% of global methane emissions are related to human-related activities

Mass Transit and Helping the Environment

38 • A study conducted by the American Public Transit Association found that in 2001 alone, public transportation use in the Atlanta area saved 19.3 million gallons of gasoline and kept more than 300 million pounds of pollutants out of the air.

• The Metropolitan Atlanta Rapid Transit Authority (MARTA) is Atlanta's state-of-the-art public transportation system. • MARTA costs $1.75 for a one-way fare.

GM SWOT Analysis

Strengths

24 • GM has many divisions under its umbrella, most of which are associated with strong brand recognition.

• GM has led global industry sales since 1931.

• Manufacturing operations are carried out in 32 countries, and GM vehicles are sold in 200 countries.

• For four consecutive years, GM has set industry sales records in the U.S.

• GM is the majority shareholder in GM Daewoo of South Korea.

• GM has developed several partnerships around the world: – Technology collaborations with DaimlerChrysler, BMW, and Toyota – Vehicle manufacturing ventures with Toyota, Suzuki, Shanghai Automotive Industry Corp, AVTOVAZ, and Renault

Weaknesses

25 • Accounting practices are proving to be an internal problem for GM. • GM is trailing behind competitors in innovation, especially relating to fuel-efficient vehicles and cosmetic appeal.

• GM has a significant challenge in terms of paying for pensions and employee health care costs.

• In comparison to competitors GM has a weak ROA, ROE, OM, and stock return.

• Union regulations keep GM from making personnel changes that could better the position of the company.

Opportunities

• The rising price of fuel can create an opportunity to produce and sell more fuel-efficient cars.

• New global markets are emerging (i.e. China, India) and will be important to the future of all car manufacturers.

• Safety is becoming increasingly important to the consumer; investing in augmentation of the safety profile of their vehicles can be an opportunity for GM.

• Many consumers are still looking for products that are “Made in the USA.”

Threats

26 • • • • • • Prices of gas may cause some consumers to switch to mass transit and/or buy fewer SUV’s.

The expense of the American work-force (i.e. pensions, healthcare, higher wages) will necessitate higher cost of goods sold.

The Federal Reserve has increased rates twelve consecutive times since June 2004, and economists are predicting at least three more increases. This will negatively impact borrowing and buying trends for vehicles.

Inflation for transportation has risen sharply since June, and will be a threat to car manufacturers, as consumers will bear the brunt of price increases.

Japanese and Korean car-makers are leaders in creating cars with fewer mechanical problems Japanese and European car-makers are leaders in designing upscale luxury cars.

1.

2.

3.

4.

5.

References

US Census and World Population Data., 2000., www.census.gov

Top Ten Countries by Population http://www.prb.org/pdf04/04WorldDataSheet Eng.pdf

Race and Hispanic Data, March 13, 2001, AP release., http://cnnstudentnews.cnn.com/2001/fyi/news/03/13/hispani c.census/ Akers, Karen., More Boom For Your Buck., Winter 2001., http://www.logomall.com/imprintPM/issues/winter 2001/Features4.htm

Generation Y., Nueborne, Ellen., February 1999., http://www.businessweek.com/1999/99_07/b3616001.htm

References

6. Hands-free legislation., Map 2004., http://www.headsetzone.com/nylegislation.html

7. Hands free, Phone-Or Press Release., Feb. 28, 2000., http://www.phone-or.com/nwPrRel2.asp?RelID=5 8. Hands free technology., Newsfactor: Los Angeles Newsroom., October 12, 2000., 5255 http://www.wirelessnewsfactor.com/story.xhtml?story_id= 9. Internet vs. Dealerships., Lohr, Steve., Just Googling It Has Companies A Bit Unsettled ., November 05, 2005., http://articles.news.aol.com/business/article.adp?id=200511051 45309990002&_mpc=business.10.1&cid=403

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Newsweek

. 10 Oct. 2005, Vol. 146, Issue 15. 11. “American Cars—Reli abili ty Versus Desireabili ty.” Edmunds.com. 02 Apr. 2004 http://www.ed munds.com/news/column/carmudge on/101636/article.html

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USA Today

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USA Today

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Architectural Record

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USA Today

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Maclean’s

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References

24. “Company Profile.” GM.com. 14 Nov. 2005 http://www.g m.com/company/corp_info/profil es/ . 25. Friend, C., Harjati, E., Staffey, V. “Automi ble Manufacturing Industry: Competitors Overview.” 26. Crutsinger, M. “Fed Expected to Keep Raising Rates.” Yahoo News. 2 Nov. 2005 http:// news.yahoo.com/s/ap/fed_interest_rates;_ylt=Alx8nQOYM.EG5ViLf0VrQynAlak

A;_ylu=X3 oDMTB iMW04NW9mBHNlYwMlJVRPUCUl .

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31.

32.

Peter, Coy

.

What's the Fuss Over Inflation Targeting

? Business Week.

November

,

7, 2005, Issue 3958 Johnson, Richard. Industry shifts to smaller cars.

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33.

34.

LaReau, Jamie. Ford, GM sales screech to a halt.

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Kenworthy, Tom. States get into the driver’s seat of fuel-cell development.

USA Today

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References

35. American Gas Cost:

http://upload.wikimedia.org/wikipedia/en/thumb/0/0d/ Gas_Prices_Medium_Term.png/300px Gas_Prices_Medium_Term.png

36. Figure 1.1 Energy Overview:

http://www.eia.doe.gov/emeu/aer/pdf/pages/sec1_4.pdf

37. Fuel Cell Technology Showcase:

http://www.sae.org/fuelcells/fuelcells.htm

38. MARTA:

http://www.itsmarta.com

39. Methane:

http://www.epa.gov/methane/sources.html

40. Mobile Gas Price:

http://news.nationalgeographic.com/news/2005/08/imag es/050830_gas_prices.jpg

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.

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.