Managing the downturn
Market challenges for European carmakers were mounting long before the current economic crisis began. Meeting proposed carbon dioxide emission standards will be expensive, and the deepening global car sales slump has magnified the economic hurdles ahead. Other factors complicate the future for both carmakers and their suppliers.

Peter Fuss, European Automotive Industry Leader and Partner at Ernst & Young's Global Automotive Center, Stuttgart, Germany, comments on challenges and potential solutions.

How were pressures building before the economic downturn?

There was already considerable urgency for European carmakers to develop technologies that would improve fuel economy and lower CO2 emissions. The challenge was biggest for automotive manufacturers (OEMs) in the premium segment, because they faced the need for greater proportional improvement at the same time as higher fuel prices were hurting their sales volume and shifting the sales mix to smaller and less profitable models. Meeting the proposed European Union CO2 standards will be easier for companies that specialize in small cars because they already offer vehicles with lower emissions. But that will be a temporary advantage. By 2015, when full industry compliance of the proposed CO2 standard is required, consumers will be able to buy a premium car that is just as clean as a small car.

Will carmakers and suppliers continue to add capacity in Eastern Europe?

Yes, because there will be growing demand for cars within that market. But a recent Ernst & Young survey shows a significant slowdown in interest among carmakers in using plants in that region to supply Western Europe. This is because transportation, logistics, raw material and labor costs are all going up quickly. Obtaining the proper workforce is becoming more difficult, and shifting production to a “low-cost” country may not necessarily result in lower total cost.

How well are European OEMs expanding into developing markets?

They all recognize that most of their growth will be in emerging markets. They also must recognize that consumers in each of these markets look at cars differently in terms of price, features and performance. You cannot successfully sell a so-called “world car” that suits every customer and fits every market. There will be different cars for different markets. These vehicles may share platforms with vehicles sold elsewhere, but the quality, interior and other features will be different.

This presents a major challenge for suppliers: How do you best support OEMs as they build sales in multiple emerging markets? The Indian €1,600 Nano low-cost car has sent a very important message to the industry. It shows what is possible if you develop a vehicle by moving up from two-wheel transportation instead of trying to downsize a more expensive car. That car is intended for consumers who ride a two- or three-wheeler now. They do not care about top speed and special features. They just want to drive with their family in the rain without getting wet.

What is your advice for suppliers?

Some of the same companies that supply parts for a certain ultra-luxury brand also supply parts for the ultra-low-price Nano. Car manufacturers are looking for suppliers with that kind of flexibility and ability to innovate. Those who can only develop parts at a certain price point or less complex level will have trouble in the future.

The same is true for the type of components a supplier can make. One day, someone will develop a battery for cars that runs for 1,000 km on a single charge and can be recharged in five minutes. When that happens, what will become of suppliers that have focused only on the standard engine?

Today’s suppliers must challenge their product portfolio by asking themselves, “Do I need additional know-how? What do I need to do for long-term sustainability?”

How should companies respond to the current economic downturn?

Although cash generation and cost cutting are the top issues on the agenda of automotive companies these days, they must continue to focus on innovation in order to be competitive going forward. Yes, there is a downturn at the moment, but the global auto industry will remain a growth sector. Companies must continue to look for better ways to respond to customer needs in all automotive markets. The momentary downturn will force more cooperation among suppliers and OEMs in order to save money. But the consumer doesn’t care. Instead he demands efficiency and performance at a reasonable price. For companies in the automobile industry, flexibility is the key to success.

For more insights into automotive trends, please contact Peter Fuss at +49 711 9881 27412 or or Kristen Michalik at +1 313 628 8326 or

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