Presentation to the Automotive News World
Congress
Stephen J. Girsky
January 2004
Disclosures
Analyst Certification
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and
will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Stephen J. Girsky.
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Global Stock Ratings Distribution
(as of December 31, 2003)
(Continued)
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Overview
Auto Outlook: Same problems; Less of them
· Global Dilemma: Most participants spending for growth
yet the industry does not grow.
· Demand growth is likely to be modest despite economic
recovery.
· Competitive pressures are likely to remain difficult.
· Weaker dollar could level provide some offset.
· Higher rates create risk of weaker demand, weaker mix and
lower finance company earnings.
· Big Three opportunity: Actual quality is better than perceived
quality.
Global Light Vehicle Sales: Slow Growth
CAGR %
Source: LMC~. Power & Morgan Stanley Research
Global Sales Forecasts: 2003 - 2004
Source: Global Insight & Morgan Stanley Research
* Note forecasts are derived from Global Insight
. Sales
Units
FY03E
Units
FY04E
Source: Autodata & Morgan Stanley Research
Japanese SAAR
Units
FY03E
Units
FY04E
Source: Morgan Stanley Research
Western European SAAR
FY03E
FY04E
Source: Morgan Stanley Research
Global Excess Capacity at 25%-30%
or 20mm units
Source: Autofacts & Morgan Stanley Research
CapEx / D&A FY2003E:
OEMs Spending for Growth
Source: Company data & Morgan Stanley Research
*Adjusted to fit scale
Zero Sum Game
Global Dilemma: Most participants are spending
for growth, yet the industry does not grow.
· Slow growth & excess capacity suggest deflation /
revenue pressures are likely to continue.
· Not everybody can be a winner.
· Winners will be low cost producers who deliver a good
product that consumers are willing to pay for.
Modest Demand Growth
Demand growth is likely to be modest despite
economic recovery:
· Auto sales did not weaken materially in the most recent
recession and thus, significant pent-up demand was
never created.
· The number of off-lease vehicles is falling sharply –
fewer consumers are being forced back to a dealer to
buy or lease a new vehicle.
· Extended financing terms are likely to prolong vehicle
turnover.
· Economic conditions appear mixed.
Light Vehicle Sales Trend Line Demand
Source: Morgan Stanley Research
Light Vehicle Sales Cycle: Trough to Trough
Source: . Polk, Global Insight & Morgan Stanley Research
Weighted Median Age of a Vehicle vs. Sales
1 Year Lead Correlation %
Source: Polk & Morgan Stanley Research
Off Lease Vehicles Begin to Decline
Source: Manheim & Morgan Stanley Research
Fewer Consumers Being Forced Back to the Dealerships
Average Maturity of Vehicle Loans (months)
Source: Federal Reserve Board & Morgan Stanley Research
Taking Longer to Establish Consumer Equity
Source: FRB & Morgan Stanley Research
Economic Conditions
Better than they were, but still not robust
Source: CPI & Morgan Stanley Research
Peak Trough Now
Jan-02 Oct-02 Nov-03
Interest Rates
Consumer Confidence
Gasoline Prices
Used Car Prices
Employment
Affordability Near 25 Year Best
Number of Weeks of Income to Purchase a Vehicle
Source: FRB & Morgan Stanley Research
Intense Competition
Competitive pressures are likely to remain
difficult:
· Capacity growth to continue in 2004.
· Pricing is likely to remain difficult although a weak
dollar may provide a modest offset.
· Market share pressures to continue as well.
NA Capacity Additions, Despite Flat Sls Outlook
Source: Company data & Morgan Stanley Research
2005
2003
Ford
Nissan
(122)
250
308
2004
Ford
GM
(211)
(98)
80
= 100,000 units
GM
Ford
Honda
Nissan
Toyota
125
(146)
180
200
30
Net Increase Of 853,000 Units or Roughly % of NA sales
2006
Toyota 150
389
180Toyota
DCX
Hyundai 235
6
Excess Capacity & More Is On The Way
Every 1% Pt. of Market Share Translates into $ in Profits
853,000 Units of Added Capacity is % of NA Capacity,
or $5bn in Pretax Profits
NA Pretax Profit
Big Three
FY03E (in MM)
$1,971
Source: Morgan Stanley Research Estimates
Revenue Pressures Worst Since 1970’s
New Car CPI vs. Domestic Light Vehicle Sales
Source: CPI & Morgan Stanley Research
Y/Y Change in Monthly New Car CPI
Source: CPI & Morgan Stanley Research
Price Reductions Pressure Manufacturers
· Every 1% Decline in Prices is Worth
- $ at GM
- $850mm at Ford
- $550mm at DCX
Source: Morgan Stanley Research
Big Three Market Share Continues to Slide
%
%
%
Every 1% Point of Share is Worth Roughly $1bn in Profit
Source: Autodata & Morgan Stanley Research
Market Share Winners / Losers – FY03
Source: Autodata & Morgan Stanley Research
Big Three Share of Sales by Segment:
FY-03 vs. FY-02
Source: Autodata & Morgan Stanley Research
US Dollar per Euro: Jan 03 - Present
Source: FactSet & Morgan Stanley Research
Japanese Yen vs. . Dollar
Source: FactSet & Morgan Stanley Research
Yen to US Dollar Price Sensitivity: YTD 03
Source: Company Data & Morgan Stanley Research
Note: * Includes Acura, Infiniti, Lexus
Weaker Dollar Could Help a Little
Source: Morgan Stanley Research
Global Operating Margins FY02
Source: Company data & Morgan Stanley Research
*Morgan Stanley Estimates
Excluding Pension & OPEB Expense for the Big Three
Porsche
Nissan
BMW
Honda
Toyota
Hyundai
GM
Peugeot
Kia
VW
DCX
Renault
Ford
Fiat
%
%
%
%
%
%
%
%
%
%
%
%
%
%
Higher Rates Could be a Negative
Higher rates create risk of weaker demand,
weaker mix and lower finance company
earnings
· Extended terms suggest longer replacement rates.
· Every 1% increase in financing rates on 5-year loans is
worth $730-750 per vehicle.
Auto Finance Terms: Fall 2001 vs. Now
Source: FRB & Morgan Stanley Research
GMAC / FMCC Borrowing Costs
Source: FRB & Morgan Stanley Research
Big 3 Opportunity:
Actual Quality is Better than Perceived Quality
Source: JD Power, CNW & Morgan Stanley Research
The Big Three: Positives & Negatives
Each Company Faces Unique Challenges:
· GM has operational momentum and has made
significant strides relative to its fixed legacy costs.
· Ford’s share is likely to remain under pressure. While
earnings and cost cutting have been strong, cash flow
needs to catch up.
· DCX continues to struggle with its product line. Quality
issues, both perceived (Chrysler) and actual (Mercedes)
continue to linger.
Big Three Relative Stock Performance: 2003
Source: FactSet & Morgan Stanley Research
General Motors
· GM still appears to have a variable cost advantage vs. F
& DCX and a fixed cost disadvantage.
· GM’s aggressive funding of pension and healthcare
have helped to narrow the fixed cost disadvantage.
· Significant new product launches give GM its best
chance of gaining share/reducing incentives in years.
· GM is going into 2004 with above average inventory.
· Finance company earnings are likely to decline due to
higher interest rates and lower mortgage refinancing
activity.
GM Market Share
%
%
%
Source: Autodata & Morgan Stanley Research
. Healthcare & Pension Cost/Unit FY03
Source: Company data & Morgan Stanley Research
$1,134
$601
$1,159 $814 $889
$740
$1,899
$902 $1074
$185
$88
GM Pension Funded Status: 2003 Update
Source: Company Data & Morgan Stanley Research
GM Has Built Inventory in 2003
Source: Autodata & Morgan Stanley Research
Financial Service Earnings Unlikely to Match 2003
Source: Company data & Morgan Stanley Research
GM New / Replacement / Redesigned Products
Source: Company Data, Ward’s Automotive & Morgan Stanley Research
Ford Motor Company
· Earnings have exceeded expectations. Now cash flow
needs to catch up.
· With the exception of the F-Series, new products are
limited until year-end, suggesting share pressure is
likely to continue.
· International Operations / Premier Auto Group need to
start pulling their weight.
· Stability in management ranks is important.
F Market Share
Source: Autodata & Morgan Stanley Research
% %
%
%
F vs. GM Cash Flow
Source: Company reports & Morgan Stanley Research
F Auto Pre-Tax Profit, 1999-2004E
Source: Company Data & Morgan Stanley Research
F Geographic Pre-tax Profit: 3Q03 vs. 3Q02
Source: Company reports & Morgan Stanley Research
F New / Replacement / Redesigned Products
Source: Company Data, Ward’s Automotive & Morgan Stanley Research
F New Product Monitor
Source: Autodata & Morgan Stanley Research
GM/Ford Outlook; What They Say
· GM expects markets to grow around the world and their
market share to grow in every region.
· Ford expects profits to decline in North America. They
were not specific but suggest cost issues lingering.
· GM expects European profits to grow by $300-
400mm($500-$700mm pretax) in 2004, while Ford
expects profits to grow by $900-1,000mm. It is unclear
how this profit growth can occur given the difficult
market conditions there.
DaimlerChrysler
· Product line has been playing defense for some time.
Offense needs to get on the field.
· Chrysler faces perceived quality problems.
· Mercedes has actual quality problems.
· Affiliate issues may loom large in 2004.
· Commercial truck business at DCX could be a positive
source of earnings for the company in 2004.
DCX Market Share
%
%
%
Source: Autodata & Morgan Stanley Research
DCX Car & Lt. Truck Sales As A % of Parent
Cars
Light Trucks
Source: Autodata & Morgan Stanley Research
Chrysler & DCX Operating Margins
Source: Company reports & Morgan Stanley Research
DCX New / Replacement / Redesigned Products
Source: Company Data, Ward’s Automotive & Morgan Stanley Research
Implications
· GM will continue to pursue its “grow our way out” strategy.
· DCX improved cost structure is keeping it in the game.
New product is critical to alleviating revenue pressure.
· Foreign OEMs are likely to continue to add capacity in NA.
· Ford likely to be playing defense for one more year. The
company needs to hang on and continue to attack their
costs until new product arrives.
· On the bright side, the Big Three product is the best its ever
been.
Source: Morgan Stanley Research
Suppliers’ Relative Stock Performance: 2003
Source: FactSet & Morgan Stanley Research
Dealers’ Relative Stock Performance: 2003
Source: FactSet & Morgan Stanley Research
Expectations: Year Ago vs. Today
Source: Morgan Stanley Research
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