May 2003 / No. 23

Auto Industry

Iran and World Automotive Manufacturing Outlook

The relationship between the manufacturer and the customer will become more direct as the role of the dealer changes in the future.

The profitability of the major global manufacturers is still relatively marginal, caused by production over-capacity in established markets.

Globalization: Recent years have seen a proliferation of mergers and acquisitions in the global automotive industry and it is anticipated that within a decade there will only be six major manufacturing groups remaining in existence: two based in the U.S., two based in Europe and two based in the Far East (Japan). Over the last few years there has been an increasing trend towards the globalization of the world’s automotive industry. Apart from market share, industry leaders –surveyed earlier this year– felt that cost reduction and synergies were the other main reasons for globalization.

Impact of new technology and e-commerce: The relationship between the manufacturer and the customer will become more direct as the role of the dealer changes in the future. One of the major contact points through which this relationship will be managed is the Internet. This will enable the manufacturer to maintain and develop a customer relationship profile by registration on a webpage. Maintenance of this database will allow manufacturers to establish a similar relationship with the customer like the one currently enjoyed by the dealer. The relationship is already being established via the Internet and through use of other media such as direct mail and call centers.

Changes in production process: The advent of the three-or-five-day car is around the corner. Where it used to take 10 working days to assemble a car, the OEMs want to respond to specific vehicle orders within five or even three days. This requires massive changes in the way that the OEMs and suppliers approach the entire process of ordering supplies, producing and delivering parts. OEMs are working with their supply chain to reduce costs, working with Tier 1 suppliers on an "open book" basis in many cases: That is deciding first, what a reasonable margin is for a certain piece, building the price from the direct and indirect costs. OEMs then expect annual price reductions from 3% to 5% per year, every year for the duration of the contract. These price cuts must come from continuous improvements in operating methods.

Flexibility: A growing trend of team manufacturing has transformed traditional roles in the auto-industry, with employees interacting with counterparts at every level, from engineers to computer technicians to the line workers. Another innovation is just-in-time manufacturing, whereby parts are delivered the day they are needed on the assembly line, saving inventory expenses and letting manufacturers change direction more quickly. Even more flexibility is on the horizon in the form of rapid prototyping, in which computers generate solid, three-dimensional models of products.

Technological Evolution: Technology is rapidly changing the way many companies operate. For example using innovative computer programs, designers can transform their visions into realistic production plans without the need for mechanical or electrical engineers. The result is a blurring of the line between design and manufacturing. At the same time, techniques like just-in-time manufacturing can’t work without reliable data-tracking systems and ironclad communications between manufacturer and supplier, which are increasingly based on the Internet. The Internet is also being used to support on-demand manufacturing. The ultimate manifestation of integrated manufacturing and information could be so-called mass customization. Ford for example, is considering adding bespoke spoilers and other special items to its standard mass-produced range of cars.

Multinational Manufacturing: Auto manufacturing companies are going multinational in a big way. U.S. companies not only operate plants in other countries, but in many cases own foreign corporations or are owned by them. Many forces drive this trend. Companies are seeking joint ventures and acquisitions abroad to shield themselves from the uncertainty of currency fluctuations (such as occurred during the 1998 financial crisis in Asia). They’re joining forces through mergers and acquisitions. For example: Daimler-Benz and Chrysler merged in 1998; GM owns Saab; Ford owns Jaguar and Volvo; Daimler-Chrysler owns a controlling interest in Mitsubishi Motors; Dow Chemical bought Union Carbide; International Paper purchased Champion International; New Holland bought Case Corporation and became CNH Global; and so on. They are expanding international operations to meet a growing demand for infrastructure projects in developing regions, such as Latin America. Finally, to cut costs and avoid over-reliance on the U.S. market, manufacturers have taken to shutting down domestic factories and mills and are shifting their attention to international markets. It’s easier than ever before to do this, as new technologies and regulations aid simplicity of capital transfer across international boundaries, often in the blink of an electronic eye.

Motor Vehicles: The leaders in this segment are the Big Three auto manufacturers. There are also foreign manufacturers producing autos in the U.S., including Nissan, Honda, Toyota, and BMW. Finally, there are makers of utility vehicles such as cargo vehicles, trucks, and buses; for example Freightliners (owned by DaimlerChrysler) and Navistar. For the most part, these companies are located in the Midwest, with the American automakers located primarily near Detroit. This is a big industry segment –GM alone employs more than 350,000 people– and it makes up a big chunk of the auto manufacturing industry on the whole.

North America: With a production level of almost 15 million cars and trucks, North America represents nearly 25% of the world’s total auto production. Traditionally the Big Three (Daimler-Chrysler, Ford, and General Motors) dominated the business, but others, especially the Japanese have penetrated the American business as well.

Western Europe: Western Europe is the strongest automobile manufacturing area beside the U.S. In 1999 more than 16.5m cars and trucks were manufactured, which is about 29% of the world car production. Main producers are France, Spain, UK and Italy, with Germany leading the pack by far.

Eastern Europe: The potentials in Eastern Europe are still good and forecasts vary from a more than 100% market growth to less than 20%. Biggest growth market is Hungary, with 143,000 cars sold in 2002, up from 74,000 in 1996. The highest volume of trade is currently in Russia with over 1 million cars sold in 2002, followed by Poland with 700,000.

Asia Pacific: The Asia Pacific region mainly comprises of Japan, Australia, Korea, Malaysia, the Philippines, India, Indonesia, Burma, New Zealand, China, Taiwan, Singapore, Thailand, Hong Kong and Vietnam. The total car sales amounted to more than 13 million units in 1997. Yearly growth rates are estimated at more than 20%. Since the Asia crisis however, investments in these emerging markets are made with great caution.

Central & South America: Central & South America is divided into two important regions of Brazil and Argentina. There are no essential national manufacturers in these regions, but the development of these markets is extremely important. Of special interest is the development of the South American conglomerate including Brazil, Argentina, Uruguay and Paraguay, the so-called ‘Mercosur’. Three million cars were manufactured in this area in 2000, which places this market in the world’s top five.

Turkey: Iran and Turkey are the biggest auto manufacturers in the Middle East. Iran, unlike Turkey, is able to design parts but remains weak in investments. Turkey’s auto industry is in the hands of giant foreign auto manufacturers such as Renault, which have been making use of Turkey’s assembly capabilities while importing more than 80% of their components.

United Arab Emirates: UAE’s 10 billion dirham ($2.75 billion) automobile industry is expected to achieve unprecedented growth in the coming years taking into consideration the rapid increase in economic activities in the country over the last few years. UAE is a lucrative market for the car industry and the coming international automobile show provides an excellent opportunity for car companies to successfully tap this potential. UAE automobile market has grown by more than 5% and is expected to perform even better in the coming years.

India: There is a major shake up taking place in the ever-changing dynamics of the Indian automobile industry. New leaders are emerging forcing the old stalwarts to don their thinking caps to try to stay ahead in the race once again. For some, the issue is not staying ahead in the race – it is staying in the race. The passenger car market in the country is undergoing transformation and competition is expected to be intense. The most dramatic growth of over 9% has come from B segment cars. Against sales of 166,093 between January and July 2001, the number has climbed to an impressive 181,517 units this year. The C segment has grown by over 4% helped by strong performances of Hyundai Accent, Ford Ikon and Ambassador.

South Africa: 2001 represented a relatively good year for the South African auto industry with new vehicle sales rising for the second year in succession.  Aggregate new vehicle sales rose to 366,907 units, an improvement of 7.6% over the 341,082 sold in 2000. Industry vehicle exports during 2001 performed exceptionally well.  In aggregate terms, exports of South African production vehicles rose by 59.2% in 2001.

Pakistan: Afghanistan’s eastern neighbor, Pakistan, has been hit harder than most countries by the US military presence in the region. However, the strengthening automobile industry has defied the dreary scheme of things. Last year, it emerged from nearly a decade of stagnation posting a growth of over 20% –the highest out of all manufacturing sectors in the country. Domestic demand has skyrocketed by 50% this year, but due to the limited market size, production volumes have been low. Still, there are clear indications that the industry has finally come of age, manufacturing cars of eight international brands in a whole range of models, with quality and endurance all approved by the original manufacturers. This, together with competitive pricing has fostered exports. In 2000-2001, auto parts exports have already more than doubled to $25 million from $12 million in 1999-00. This year, $35 million worth of forex is expected to flow in under this lead.

Malaysia: The auto industry in Malaysia is closely linked to the history of Perusahaan Otomobil Nasional Bhd (PROTON). PROTON was incorporated on 7 May 1983 to manufacture, assemble and sell motor vehicles and related products, including accessories, spare parts and other components.  The development of the local motor vehicle industry has had useful economic functions –such as generation of employment– and has helped the establishment of supportive industries. It has spawned a number of companies solely dedicated to making specialized accessories such as sports rims and tints in scores of workshops.  Presently, Malaysia has become one of the region’s largest auto markets and holds a dominant position in vehicle sales among ASEAN countries.

Iran’s Auto Industry: The Auto industry is a key sector of priority for Iran. It used to receive considerable preferential treatment over capital allocation and foreign exchange, but these have been gradually withdrawn. By 2001 all manufacturing units ought to have become self-sufficient with regard to foreign exchange requirements. Not being immune from general economic woes of the country, the auto industry also has far lower propensity to react to any general downturn in the economy than most other sectors. Between 1994 and 1998 the auto industry grew by about 30%, five times that of other national industries and eight times the rate of growth of the economy while generating close to 235,000 jobs. The domestic demand and export potential are considerable but there are too many local manufacturers. Privatization and rationalization is on the cards but outmoded regulations and bureaucracy slow the process. The authorities are eager to promote local production and variety via joint ventures hence imports remain tightly controlled. Problems persist in local manufacturing output and aspects of the centralized economy can lead to tortuous decision-making process. Notwithstanding this the market can be lucrative for those determined to stay the course.

The automotive sector is viewed as a strategic industry by the authorities, not least because it is a major employer, providing work for 400,000 in 1998. It accounts for 2.5% of GNP and 18% of the total value added goods produced in the country. Some 246,000 vehicles were manufactured in 1999 and total sales approached 10,000 billion rials (over $1 billion), saving the country $4.5 billion in hard currency. It receives high priority in the allocation of domestic capital (for investment) and foreign exchange (purchase of raw material), although preferential rates have been abandoned. The authorities are also keen to promote a greater role for the private sector, both in vehicle and component production. The quality of parts and finished vehicles remains a serious and sensitive issue in Iran. Despite quoting ISO 9000/2 standards regularly, manufacturers consistently fail to meet acceptable quality standards. Those involved are usually very sensitive about such issues and questions when aired, should be broached delicately.