Auto profits to surge, over half coming from China
Global automakers, in the midst of one of their best years ever, are poised to rake in even greater profits the rest of this decade, according to a new report. The challenge, especially for the Big 3 (GM, Ford, Chrysler), is increasing production in North America, where sales have returned to pre-recession levels.
"North America and China are the greatest profit pools," said Hans-Werner Kaas of McKinsey & Co. "China, in particular the premium market, will see the greatest growth."
McKinsey noted global auto profits will grow by 50 percent by 2020, with more than half of that coming from China. The report projects emerging markets as the area where automakers will be primed to grow revenues.
With U.S. auto sales surging this summer, pressure is mounting on automakers to add capacity to build more cars and trucks. By year-end, half of the models sold in the U.S. by the Big 3 will come from North American plants running three shifts, according to IHS Automotive.
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So when will the Big 3, and other automakers, add more assembly lines and plants?
"I'm sure those conversations are already happening," Kaas said. "But, the domestic automakers will be cautious about adding capacity."
Auto executives in Detroit and elsewhere will shortly have to make a decision, he added. It takes 18 to 24 months to bring an assembly plant online. If sales continue growing at their current rate, North American auto production will be stretched as far as possible within a couple of years.
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"Domestic automakers will hit the limits of capacity in North America by 2015, so there's no doubt executives have to start talking about expansion," Kaas said.
Volkswagen is building a final assembly plant in in Mexico that will supply Audi models for the United States.
China and emerging markets
McKinsey projects that emerging markets will generate a larger proportion of global auto sales over the next seven years. Such markets, including China, Russia and India, are responsible for half of all cars and trucks sold every year. The consulting firm expects that share to rise to 60 percent by 2020.
The growth, especially in China, is why Kaas thinks automakers will need to move even more production to that country and emerging markets.
"Urbanization and industrialization are driving the growth in China, and that will continue for many years," he said
General Motors, Ford and VW are all racing to get new plants up and running in China.
On Friday, Standard and Poor's raised Ford's credit rating to investment grade and lifted General Motors outlook to positive partly because of the success both companies are having in China.
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