DETROIT – Armed with growing revenues, strong balance sheets, and a desire to keep up with increasing vehicle demand, U.S. auto executives expect to boost domestic headcount and expand facilities in the coming year, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm. The KPMG survey was conducted in late May 2012 and reflects the responses of 100 senior U.S. executives in the auto industry.
In the KPMG Automotive Industry Outlook survey, two-thirds of executives say they have added personnel over the last twelve months, and nearly three-quarters say their companies will continue to hire more domestic employees in the coming year – up significantly from 62 percent in the KPMG 2011 survey. Almost one-quarter of executives predict their companies will increase personnel by over 7 percent.
When asked to predict when their companies’ U.S. headcounts would return to pre-recession levels, nearly a third say they are already at pre-recession levels, or will be by the end of 2012. Despite these positive indicators, executives still cite some significant challenges ahead, including persistent pricing pressures, a growing gap in qualified labor, and the ongoing European sales slowdown.
Strong outlook for revenue and capital spending
“The survey results clearly demonstrate a U.S. automotive industry that is regaining confidence,” said Gary Silberg, national automotive industry leader for KPMG LLP. “Even though the overall economic recovery remains weak, that is not the case in automotive where pent-up demand for vehicles in the U.S. is expected to carry over for years. As a result, auto companies and suppliers are ramping up their hiring and production activities, and investing heavily in new products and facility expansion.”
Silberg further notes that the industry has significant cash on hand “and companies are intent on putting it to use.” In fact, 67 percent of those surveyed indicate that their companies have significant cash on the balance sheet, and 64 percent say they will invest that cash before the end of the year. Additionally, almost three-quarters say their company will increase capital spending over the next year, with the highest investment priority in new products or services, as well as expanding facilities.
“This investment follows market success,” adds Silberg. “Revenues are higher and execs feel confident that revenues will grow stronger still.” 76 percent say company revenues are up from last year, and 83 percent expect revenues to continue rising next year.
Another key area for investment will be M&A. In fact, almost half of the auto executives surveyed by KPMG say it is likely that their companies will be involved in a merger or acquisition as a buyer, while one-tenth say they will be sellers. Executives indicate the key drivers behind M&A activity over the next year will be access to new markets and customers, and access to new technologies and products.
According to Silberg, “The improved cash position allows U.S. auto manufacturers to be more aggressive to drive growth and product innovation, and sets the stage for an active M&A environment. In the survey, company execs also indicated a greater ability to get financing.”
Despite optimism, challenges persist
While auto executives express optimism about company revenue, growth, and hiring plans, they do so “against the backdrop of a tough economy,” said Silberg. “They are not projecting an economic turnaround for years.”
In fact, 82 percent of respondents to the KPMG survey predict the U.S. economy will remain flat or see only moderate improvement next year, with 60 percent saying a full economic recovery won’t happen until 2014 or later.
Beyond the economy, auto manufacturers continue to point to growth barriers such as pricing pressures and energy costs. One of the most noted shifts in the 2012 survey findings was that the number of executives who cited the lack of a qualified workforce as the most significant growth barrier nearly doubled – from 10 percent in 2011 to 19 percent in 2012.
“We are hearing from U.S. automakers that they are poised for growth, but are struggling with their ability to find the right people with the right technical skill sets for jobs they are looking to fill,” added Silberg. “This is becoming an increasing cause for concern, not just for auto companies, but for many companies in the manufacturing sector. It remains to be seen how companies will fill the gap.”
Automakers are also faced with slow European vehicle sales, which nearly three-quarters of surveyed executives predict will continue for at least another 18 months. Almost a third of executives say the European slowdown has had a moderate to significant impact on their companies’ profits. Thus, executives indicate that their companies are taking steps to minimize the impact of the European slowdown through a number of practices, including: restructuring European operations, implementing cost mitigation, rationalizing capacity, changing distribution strategies and channels, and making cutbacks outside Europe to compensate. Surprisingly, 19 percent say sluggish European sales have had no impact at all on their profits.
The survey also cites concerns about potential tax reform. 68 percent of respondents say the introduction of a Value Added Tax (VAT) would negatively impact the auto industry, and 88 percent think the U.S. corporate tax rate should be reduced from its current 35 percent rate.
Additional survey findings:
- The majority of surveyed auto executives indicate that North America (63 percent) is the primary growth market for their companies, followed by China (44 percent) and South America (30 percent).
- When asked what government regulation will have the most impact on the auto industry, executives most frequently cited the corporate average fuel economy (CAFE) standards (47 percent), emissions standards (43 percent), and healthcare reform (35 percent).
- The most significant opportunities cited for improvement in the supply chain were: better communication/supplier relationships, consolidating buys, and accelerated innovation from suppliers.