Using plastics and chemicals in automobiles is hardly a new idea
In 1942, Henry Ford patented a plastic-bodied car. The frame, made of tubular steel, had 14 plastic panels attached to it. The panels were made of plant fibre in a phenolic resin with formaldehyde used in the impregnation. The car weighed 2,000 pounds, 1,000 pounds lighter than the average steel cars at that time.
Ford was a visionary, but he was also a practical, hugely successful business person, and his recognition of the benefits of plastics and chemicals for automobiles continues to be shared by successful automotive manufacturers around the world.
Consider that today, passenger cars contain an average of 300 pounds of polymer compounds included in critical components such as seat belts, airbags, high- performance tires and nylon washers. That is about eight percent of the car by weight, and this percentage is expected to increase in the future.
The automotive industry is one of the largest industries in the world, employing nine million people directly in making the vehicles and the parts that go into them. This represents over 5 percent of the world’s manufacturing employment.
Globally, passenger cars make up approximately 87 percent of the total motor vehicle annual production. The remaining 13 percent is made up by light commercial vehicles and heavy trucks, buses, coaches and minibuses.
Scotiabank estimates that over 53 million new cars and light trucks were sold around the world in 2010, adding to a worldwide total of one billion cars and light trucks. The International Monetary Fund expects the total number of vehicles worldwide to reach three billion by 2050.
Despite the underlying strength of the global automotive industry, many automotive companies are still recovering from the economic downturn. In 2008, global new light vehicle sales volume fell to about 61.5 million units, down 5.6 percent over 2007 sales. This decline continued in 2009 at 6.1 percent, resulting in sharp reductions in production and employment across the industry.
The crisis was felt primarily in the developed countries, particularly in the US. By November 2008, US car sales had dropped to their lowest levels since 1982. In October of 2009, the three leading US automobile manufacturers— Ford, General Motors (GM) and Chrysler— were summoned to appear before Congress to discuss the state of the industry. Subsequently, GM and Chrysler filed for Chapter 11 bankruptcy protection and drew down a total of US$25 billion of government loans as they restructured their organizations under government direction.
In the UK, Honda cut about 1,800 jobs in its UK operations during the crisis and now employs about 3,000 people. The company will produce about 137,000 vehicles in the UK this year, compared with the 220,000 it typically produced in the pre-crisis years.
In 2008, Toyota restructured its North American production capabilities. This included production cutbacks and improvements in its plant utilization ratios.
In May of 2010, Daimler’s Board decided to restructure the business activities of Financial Services AG and Mercedes- Benz Bank AG in Germany by the end of 2012. This restructuring is designed to help streamline the structures and processes at Daimler.
Manufacturers in other developed countries suffered in much the same way. In December of 2008, Toyota, the world’s largest car maker, predicted its first operating loss in 70 years and even reduced its workforce in Japan; Suzuki and Honda also reported production cuts and shrinking revenues. In Europe, September 2008 car sales decreased by 8.2 percent. The next month, sales in Spain fell another 40 percent.14 By March of 2009, light vehicle sales in Europe had fallen by 12 percent year-over-year.
Troubles with automotive manufacturers cascaded down the supply chains. In 2008, KPMG automotive professionals observed that 25 percent of auto suppliers were in some sort of financial trouble; and that figure increased with the severe tightening of credit. Many companies faced bankruptcy, and restructuring led to layoffs for thousands of employees.
For emerging markets, however, the recession was a different story. For example, China was the only profitable automotive market in the world for 2009. After a brief dip in late 2008, total vehicles sales in China rose 18 percent for the first half of 2009, year-over-year. In June, sales increased 48 percent over the same month of the previous year.
In many ways, the recovery of the automotive industry has been just as dramatic as its downturn.
GM’s changing fortunes serve as a case in point. After declaring bankruptcy in 2009, the company liquidated assets, laid-off thousands of employees and underwent a significant reorganization. By August 2010, GM saw revenue soar by 44 percent, and in November 2010, the company conducted the largest IPO in US history.
This turnaround at GM reflects the global industry at large. Major automakers predict that the recovery will continue to gather momentum in 2011. The U.S. market is expected to post its second consecutive double-digit increase in 2011. Worldwide, 2011 is expected to set records in both sales and revenues.
The turnaround was not restricted to OEM’s that received government support as Ford, Jaguar, LandRover, Kia, Hyundai and other global brands operating in the Western world also benefited from the market increases and government scrappage schemes.
However, future growth is expected to be highest in the emerging markets, including China, India and Russia. Sales growth in China is forecasted to remain strong but steady at about 15 percent, even as government stimulus programs expire. Car sales in Russia rose by roughly 30 percent in 2010, and backed by government incentives, the industry is expected to post double-digit gains in 2011. India, the second-best performing major auto market over the past decade, saw car sales climb to a record 1.82 million units in 2010, and local manufacturers will add almost one million units of new vehicle assembly capacity in the country over 2011.
A passenger car today contains an average of US$2,000 worth of chemical processing and products, helping to increase fuel efficiency through lower weight, enhance performance, improve safety and support sustainability.
To give just a few examples, plastic components in a car’s exterior resist dents, dings, stone chips, and corrosion. They allow modular assembly practices, lower production costs, and enable advanced exterior styling. Plastics are also used to support more comfortable, durable, and aesthetically pleasing interiors – all while reducing noise and vibrations that disturb drivers and passengers.
Electrical and computer-aided devices use plastics for lightweight, non- conductive, and flexible housing, mounts, and insulation. In addition, plastic’s ability to withstand high temperatures and exposure to a variety of chemicals make it an appropriate choice for powertrain applications. Engine components made of nylon, polypropylene, polyethylene and thermoset polyesters hold up well in the high-temperature, corrosive environment found in the engine compartment.
Not surprisingly, the automotive market is a significant and growing market for a number of major chemical companies, including BASF (up to 15 percent of revenue), Dow (up to 6 percent) and Solvay (up to 11 percent).
Many economic recoveries are marked by a return to previous buying levels and habits. Not so with today’s global automotive industry.
Despite the recent recovery, analysts suggest that car companies are unlikely to recover their pre-crisis output levels for many years, in what some are calling ‘the new normal’ for the industry. In the US and Europe, car sales may not return to pre-crisis levels for 4 to 5 years.
At the same time, buyers will continue to want smaller, more economical cars, both in developed and emerging markets. George Pipas, a sales analyst at Ford, estimates that small vehicles’ share of worldwide sales will climb to 61 percent in 2013, up from 58 percent in 2008. He expects North American sales for small vehicles to grow from 31 percent to 36 percent. J.D. Power predicts that by 2015 nearly 60 percent of the passenger vehicles sold in China will be lower-margin subcompact and compact cars.”
The trend toward smaller cars has been in place for at least a decade. Partly this is a generational shift in buying habits. Large, luxury cars are often less attractive to younger buyers. In a recent market survey in Germany, young consumers said that a mobile phone was more important to them than owning a car. The growing market for entry-level cars in Asia also contributes to this trend.
Smaller cars also tend to be more fuel efficient and therefore better able to meet tougher environmental regulations. Credit Suisse recently estimated that the industry faced €1,000 in higher costs per vehicle to comply with the European Union’s 2012 carbon dioxide targets.
To remain competitive, many automobile manufacturers in developed countries are moving their manufacturing and assembly to lower- cost locations. In North America, this has meant a move from Detroit to Mexico. In Europe, manufacturers are setting up operations in Central and Eastern Europe.
However, Asia is becoming a far more attractive destination for today’s automotive manufacturers and suppliers. In 2009, China overtook Japan as the world’s biggest carmaker, and in 2010 it overtook the US as the largest automotive market. Not surprisingly, Ford plans to add 66 new dealerships in China, bringing its total to 340. Its joint venture, Changan Ford Mazda Automotive Ltd., is building a new assembly plant and a new engine plant in Chongqing.
Barclays Capital expects the shift of the automotive industry to emerging markets in Asia will accelerate in the next decade, and this development will have significant consequences for chemical companies who supply automotive manufacturers and tier-one suppliers.
Some chemical companies in the West have already established a firm presence in Asia. For example, Germany’s Freudenberg Group and its partners established their first subsidiaries in China over 25 years ago, producing lubricants, release agents and other products for Chinese manufacturers. Automotive sales now account for half of Freudenberg’s total sales in China.
As another sign of growing strength, Chinese automotive companies made their first acquisition of an established brand from a Western country. KPMG firms recently supported Ford Motor Company on the sale of Volvo Car Corporation to Zhejiang Geely Holding Group Company Limited.
Our global team provided sell-side support throughout the transaction cycle on this deal as well as on the disposals of Aston Martin and Jaguar Land Rover. The challenging market conditions required a flexible and innovative approach for each deal. Understanding the impact of separation, both from a financial and operational perspective was integral to the success of these deals.
In preparing each business for sale, KPMG member firms’ professionals assisted in identifying separation issues, developing cost mitigation strategies, providing systems, planning and analysis support, conducted vendor due diligence and supporting the Ford team in the successful delivery of their transformational divestment programme.
By producing lightweight, resilient and recyclable products, chemical companies are well positioned to help the automotive industry meet today’s regulatory requirements, customer demands and business goals.
GM estimates that 5 to 10 percent of the plastics currently used in GM vehicles are made of recycled materials. Ford reported that in 2008 its recycling efforts saved between US$4 to 5 million and that it recycled 25 to 30 million pounds of plastic that otherwise would have ended up in landfills. In addition, nine percent of all of the recycled milk cartons, laundry detergent bottles and other materials made out of high-density polyethylene in the US ended up as auto parts in 2008. That compares to less than one percent 10 years ago.
In the same way, plastics can improve sustainability in vehicles by reducing overall weight, since plastic components often weigh 50 percent less than similar components made from other materials. Analysis has shown that for every 10 percent reduction in weight of the total vehicle, fuel economy improves by 5 to 7 percent. For every kilogram of vehicle weight reduction, there is a potential to reduce carbon dioxide emissions by 20 kilograms over the vehicle’s operating life.
Innovative chemical products are also replacing a growing range of components formerly made from metals. BASF has developed a specialty-grade of nylon-6,6 reinforced nylon for use in engines that combines outstanding resistance to heat aging with the superior processability of nylon-6,6.
Hyundai’s plug-in-hybrid concept car Blue Will employs carbon-fiber reinforced plastics and nano-composites for side sills, moldings and fenders in the body of the car. Additionally, bio-plastics are used in the car for interior panels and parts, including a bike rack that is integrated into the trunk of the car. Recycled plastic bottles are used to make the headlight bezels.
As climate change issues become ever more politicised, the world at large will become increasingly reliant on the chemical industry’s innovative solutions which will provide lightweight materials and alternative fuel sources for the vehicles of tomorrow.
KPMG in the UK
+44 161 2464336
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