Automotive Industry Review Dennis DesRosiers March 8, 2011

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Automotive Industry ReviewDennis DesRosiers

March 8, 2011

Forecasting the North American Market requires two separate Analysis– First, is to calculate structural demand or as some may call it

“Long Term Trend Line” demand … following are some important considerations:

• Scrappage rates or replacement demand– Age structure of the vehicles on the road– Vehicle Usage– Build quality/technology – ”Expected Useful Life”– The state of repair of the vehicle Parc

• Driving age population– Age structure of the population– Immigration policy and trends

• Vehicle ownership levels or the penetration of vehicles into Society– The cost of ownership– Attitude towards vehicles– Household structure … family formation– The types of vehicles available to consumers– Transportation Infrastructure etc

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5,000

10,000

15,000

20,000

25,000

North American Vehicle Sales(thousands of vehicle)

Source: DesRosiers Automotive Consultants Inc.

Trend DemandLong Term Trend Line Demand is positive but has fallen to below 1 percent per year even with significant overbuying the last decade.

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Vehicle Scrappage as a percent of Units in OperationNorth America 1900 - 2010

Source: DesRosiers Automotive Consultants Inc., Polk

U.S. Data Only

• Better built vehicles (especially materials) has slowed scrappage to about 5 percent per year… fortunately there are a lot of vehicles in operation

• The age structure of vehicles on the road can be positive for scrappage• The amount of driving is a key issue and with high gas prices this is negative for scrappage

UNITS EXPECTEDIN USEFUL

OPERATION LIFEMILLIONS KILOMETRES

1960-69 88,567,147 151,5731970-79 130,748,437 169,580% CHANGE 47.6% 11.9%1980-89 175,516,757 213,081% CHANGE 34.2% 25.7%1990-99 217,940,789 262,370% CHANGE 24.2% 23.1%2000-09 256,317,061 291,573% CHANGE 17.6% 11.1%2010-19 Forecast 286,834,708 338,036% CHANGE 11.9% 15.9%

Expected Useful Life of Vehicles


• Expected useful life of a vehicle is up substantially and this puts downward pressure on new vehicle sales.

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300 Units in Operation, North America (millions of light vehicles)


Trend line growth

• There are currently 280 million Vehicles in Operation so 5 % replacement demand translates into about 14 million units per year of trend line demand.

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Driving Age Population, North America (millions of people, age 16+)


Trend line growth

• Growth in Driving Age Population remains positive and adds another 1.5 to 2.0 million units of demand to long term growth

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Vehicles per Driving Age Population, North America(Percentage of population, age 16+)


• This is the most difficult variable to call since the US is De-fleeting … there is some growth in Canada and significant potential for Mexico but a potential that has never been realized. If long term trends continue it adds up to about 2 million units of long term trend demand but any reversal would reduce demand by millions.

Expect a Long Term “LEAN” New Vehicle Market from a trend line perspective– Most factors affecting long term trend line demand in

North America are negative or only slightly positive … vehicles are better built and lasting longer, driving age population is slowing, Mexican and Canadian vehicle ownership is growing but NOT in the US which is beginning to DE-FLEET.

– Trend line demand has fallen to less than 1 percent per year

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Trend Demand

Forecasting the North American Market requires two separate Analysis– The second step is to estimate what we call

“Cyclical” demand or in other words the economic factors that leads to the market running above or below trend line demand. Key variables include:

• Employment/Unemployment … If you have a job in N.A. you need a vehicle

• Real Income growth … affordability issues• Interest rates since 90 percent of vehicles are financed• The wealth effect … best example is house prices but equity

markets are also an important element• Consumer Confidence• New product Introductions• OEM incentive programs• Ability for any OEM to actually get product allocated for the North

American market

Cyclical Issues devastated the market in 2008/9 and are still prevalent today

– Almost all factors that determine whether the market runs above or below long term trend demand are negative.

• Unemployment is stubbornly high• Real income growth is stagnant• Interest rates can’t go lower and are more likely to go higher• House prices are stable at best but down radically from three years ago• Consumer confidence has not recovered• Some growth in new vehicle introductions but not enough to offset the

negatives from the other variables.

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Unemployment Rate (US and Canada)1990 – 2010

Source: BEA, Statistics Canada

• High Unemployment is costing the market 2 to 3 million units per Year

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Real Disposable Personal Income GrowthUSA

Source: Company Data, Credit Suisse

• Income is closely tied to employment but real income growth is below long term potential and costing the market another 1 to 2 million units per year

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Fed Funds Rate1980 – 2010

Source: BEA

• Low interest rates have been positive for demand but can’t get any lower and are more likely to head higher within a year or two. When they head higher it will cost the market a million or more sales per year.

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U.S. Home Price Index, YOY % Change1980 - 2009

Source: FHFA

• 3 to 4 million Americans per year mortgaged their home to buy a vehicle and there is virtually no ability to do this today and in the foreseeable future

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Canadian Index of Consumer Confidence and Light Vehicle Sales(1977 - 2011 Percentage change – February Tracking)

-50.0%

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-20.0%

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77 79 81 83 85 87 89 91 93 95 97 99 '01 '03 '05 '07 '09 YTD11

Calendar Year

Ligh

t Ve

hicl

e Sa

les

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Vehicle Sales Confidence

Source: DesRosiers Automotive Consultants Inc., The Conference Board of Canada

New Model Launches by Model Year

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42 4244

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Model Year

20102001

• Sales began to fall in 2006 and fell off a cliff in the fall of 2008 with only a modest recovery to date in 2010

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J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N

Uni

tsNorth American Light Vehicle Sales: SAAR Monthly 2000 - 2010

SAAR 6 Mo. Trailing Average

The hope for a steady recovery in NA sales has NOT materialized although they are up from the bottom of the cycle in Feb 2009

20102008

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Uni

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North American Light Vehicle Sales: SAAR Monthly 2008 - 2010

SAAR 6 Mo. Trailing Average

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Cyclical Issues are pushing the market well below trend line demand and it will remain below for quite some time

– The market has recovered slightly from its low in 2009 but remains about 3 to 4 million units below trend line demand in 2010

– They will improve over the next 3-4 years so that is positive but will still remain below trend line demand until 2013 – 2014

– Consumers will buy fewer vehicles this decade than last decade

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Trend Demand

TOTAL VEHICLE TOTAL DRIVING AGE VEHICLES PERVEHICLE USAGE UNITS IN POPULATION DRIVING AGE

SALES BILLIONS OF OPERATION MILLIONS POPULATIONUNITS KILOMETRES

1960-1969 103,500,717 15,556 88,567,147 169.4 52.3%1970-1979 142,695,663 24,080 130,748,437 206.9 63.2%Percent Change 37.9% 54.8% 47.6% 22.2%

1980-1989 152,515,567 32,180 175,516,757 247.1 71.0%Percent Change 6.9% 33.6% 34.2% 19.4%

1990-1999 167,305,208 43,816 217,940,789 285.2 76.4%Percent Change 9.7% 36.2% 24.2% 15.4%

2000-2009 188,318,225 53,763 256,317,061 328.7 78.0%Percent Change 12.6% 22.7% 17.6% 15.3%

2010-2019F 177,334,295 59,204 286,347,708 371.0 77.2%Percent Change -5.8% 10.1% 11.7% 12.9%

North American Light Vehicle Sales(Structural Demand Table)


• This will be a difficult decade for vehicle sales in North America but despite the leanness of the market consumers will still buy a significant volume of vehicles

TOTAL TOTAL PRODUCTIONVEHICLE VEHICLE TO SALES

SALES PRODUCTION RATIOUNITS UNITS

1960-69 103,500,717 101,331,179 97.9%1970-79 142,695,663 128,917,841 90.3%% CHANGE 37.9% 27.2%1980-89 152,515,567 120,272,734 78.9%% CHANGE 6.9% -6.7%1990-99 167,305,208 147,297,933 88.0%% CHANGE 9.7% 22.5%2000-09 188,318,225 151,922,187 80.7%% CHANGE 12.6% 3.1%2010-19 Forecast 177,334,295 138,674,167 78.2%% CHANGE -5.8% -8.7%

North American Light Vehicle Sales vs. Production


• Vehicle production under performs vehicle sales due to increased import penetration led by European and Asian vehicles in the near term …. China and others towards the end of the decade

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Questions?

Dennis DesRosiersDesRosiers Automotive Consultants Inc.

80 Fulton Way, Suite 101Richmond Hill, Ontario

t: 905.881.0400f: 905.881.7456

e: [email protected]

www.desrosiers.ca

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Automotive Industry Review Dennis DesRosiers March 8, 2011