Nearly ten years after the automotive industry’s surprisingly strong postcrisis recovery, 2017 was a peak year for its earnings. However, despite this decade-long winning streak, investors are discounting auto stocks, expecting traditional OEMs to fall short in the rapidly shifting world of future mobility.
Global automakers had a tough year in 2018, with several headwinds: higher expenses required to meet stricter emission regulations, global trade tensions, and slowing sales in key end markets. These triggered profit warnings at several large OEMs.
The first half of 2019 has looked challenging for the industry, with some large OEMs announcing declines in profitability and scaling back full-year profit guidance. Given that key risks for the industry remain elevated and that competition from new mobility attackers is intensifying, the road ahead looks bumpy.
Where’s the money? A granular look at the industry profit pool
The auto industry’s strong performance over the past five years results from a fizzy blend of high volume growth, a product mix that favors higher-margin vehicles (like SUVs), and strong growth in China. While the industry achieved peak profits of $130 billion in 2017, attempts to take the pulse of the market must start at a more granular level, digging into what’s happening at the regional and product segment levels, where it is possible to identify true winners and losers.
While estimated aggregate industry operating profit margins are 6 to 7 percent (Exhibit 1), large variations in profitability exists across companies. For instance, some European niche, luxury companies make double-digit margins more akin to those of high-tech players, while mass-market (or value-focused) OEMs make 4 to 5 percent.
Regionally, China and North America continue to chug along as the leading global profit engines, contributing nearly 65 percent of global industry profits. Europe, while home to most of the 15 largest global OEMs, still contributes only about a fifth of the global industry profit pool, despite a strong rebound in profitability seen recently.
Viewed across the three main archetypes, value-focused OEMs contribute roughly 55 percent of the global industry profits, premium automakers provide an estimated 40 percent, and entry-level players contribute only about 5 percent.
Please click here to view the full press release.
SOURCE: McKinsey & Company
