The study cautions, however, that the availability of financing, total cost of ownership and the unfolding events in Japan will impact vehicle sales in both markets.

Behind the forecast, four key macroeconomic factors were measured. Economic recovery scenarios were developed to project the possible outcomes, the variables being:

1. overall economic growth;
2. credit availability;
3. consumer prices; and
4. consumer confidence.

Pent-up demand and whether the recent downturn will resemble prior recessions adds additional factors, as does vehicle age and the need to replace older cars, the current average age being 10.4 years. The forecast’s wild card is Japan, where in the aftermath of the earthquake and tsunami, parts shortages will impact 2011 US. new vehicle sales by 200,000 units.

Given what we know about production downtime, in 2011 we see 328,000 US customers of the affected brands up for grabs, and more if the time to wait for a particular brand begins to extend.

—Dan Cheng, partner and leader of A.T. Kearney’s Automotive Practice

Another variable is the creation of 15 million “new sub-prime consumers” from the recession. From this group, the study estimates that at current loan approval rates, approximately 530,000 customers would be locked out of the new vehicle market. This represents a $3.2-billion contribution opportunity for the auto OEMs.

Auto lenders who understand that lending has more nuance to it than a FICO score and are able to accurately size up credit risk in a lower FICO-score environment, will better avail themselves of the opportunity to help buyers finance new car purchases.

—Dan Cheng

The shift between gasoline prices and demand for smaller cars. The sharp rise in gasoline prices over the past year, along with the weakened US dollar, will continue to have an impact on consumer purchasing decisions. Since 1996, gas-price fluctuations have explained more than 72% of the volatility seen in new small car sales. A.T. Kearney’s Cheng points out that one way for OEMs to navigate this uncertainty is to develop the capability to flex production in terms of vehicle size.

EMs will have to respond rapidly to shifting customer demand. Those that have a flexible manufacturing capability and a responsive supply base will win the day.

—Dan Cheng

Further, the study finds that when fuel prices increase rapidly, consumers seeking to maintain their total fuel expense as a percentage of their disposable income have a variety of choices beyond simply moving to a smaller vehicle with higher fuel economy. Therefore the mix of purchase price, gasoline consumption, finance charges, maintenance and insurance expenses will ultimately factor toward the purchasing decision, with ramifications to the overall demand for new cars.

The study points to the following imperatives for OEMs and Suppliers:

• Proactively manage supply capacity risks. OEMs face multiple risks with their supply base that include financial, operational, social/reputational, natural hazard and economic. A.T. Kearney’s primary research found that OEMs had a good understanding of the risks associated with their first-tier suppliers but focused primarily upon financial and operational risks. However, they had only a limited understanding of the lower tiers. Notes Cheng, “Currently, supply-base monitoring is being delegated at each level of the supply chain, often to smaller suppliers who lack the resources to monitor risk properly.” The research also found that over a third of the study’s supplier participants said their capacity was below the requirements of the OEMs, and that access to capital was a significant issue for suppliers with annual revenues less than $100M.

• Procurement moves into the spotlight. Based on automotive industry trends, including fluctuating consumer demand, capacity constraints with lower tier suppliers and commodity price volatility, purchasing executives must learn to manage an increasing number of requirements and factors. A.T. Kearney has identified at least 64 methods to reduce costs and increase value with suppliers.

• Learn from competitor mistakes and systematically test internal vulnerabilities. While product quality continues to improve, some OEMs are doing better than others at reducing quality issues. OEMs and suppliers must continuously stress test their quality systems and learn from competitor recalls.

• Need for advanced analytics to better anticipate consumer needs in a volatile marketplace. The study highlights the importance of the emerging use of advanced analytics that points to factors such as competitor activity, real-time national demand and inventory levels, in order to better identify products that have the highest propensity to sell.