GM and the Automobile Market: Context

1. GM and the Automobile Market: Context Clay Carroll Saira Gillani Elysha Shipley Andrea Young

2. Demographics

3. Demographics • US population • Racial Percentages • Baby Boomers • Generation Y • World population • Current Leaders • Future Population Leaders

4. US Population1

5. US Population1

6. US Population1

7. Racial Population Percentages3 • As of 2000 Census (major groups): • 69 percent “White” (slowest growing) • 13 percent “Hispanic” (fastest growing) • 12 percent “Black” • 4 percent “Asian or Pacific Islander”

8. The Biggest Targets:Baby Boomers4 • Own more than 70% of U.S. financial assets • Control 70% of U.S. households • Purchase 61% of all new cars and 48% of all luxury cars • Account for more than $2 trillion in income • More than 79% own homes • Use more traditional forms of shopping • More inclined to purchase American brand names • Buying cars they wanted in their youth but could not afford (i.e. Muscle cars) • Larger portion of this market will be female as they grow older.

9. The Biggest Targets: Generation Y5 • Technology is a foundation of their education (reading, writing, arithmetic, and point-n-click). • More diverse than any previous US Generation in race and household structure (i.e. single parents, etc.) • Now entering high spending years of early adulthood • Internet is the main channel of media, information, and communication. • Views direct marketing aimed at them negatively due to growing up with marketing saturation.

10. World Population1

11. World Population1

12. China India United States Indonesia Brazil Pakistan Russia Bangladesh Nigeria Japan 1,300,000,000 1,087,000,000 294,000,000 219,000,000 179,000,000 159,000,000 144,000,000 141,000,000 137,000,000 128,000,000 Current Top Ten Countries by Population2

13. India China United States Indonesia Nigeria Pakistan Bangladesh Brazil Congo, Dem. Rep. of Ethiopia 1,628,000,000 1,437,000,000 420,000,000 308,000,000 307,000,000 295,000,000 280,000,000 221,000,000 181,000,000 173,000,000 Future Top Ten Countries by Population (2050)2

14. Population Data • The World’s Population is Growing at a decreasing rate • Third world countries are experiencing the most rapid growth • US is more Diverse than ever before with the minority population growing at a rapid rate • India will soon pass China as the worlds most populated country • The African Continent has many countries with high populations that are growing

15. Sociocultural Trends

16. What Americans Want10

17. Market Implications10 • Despite the hype, only 1% of the American market sought a hybrid vehicle in 2005. The hybrids are not expected to have a double digit market share unless fossil fuel runs out. • SUVs are still a quarter of the U.S. market. The new trend in SUV’s is modest size. SUV’s are being downsized to deliver more fuel efficiency while still offering space and comfort. Examples are the H3 Hummer and the Honda Pilot.

18. Opinions On Reliability11 • In general, Americans perceive American-made automobiles as having lower quality and less reliability. • In 2004, American cars outperformed European cars in a Consumer Reports reliability study-- American brands: 18 problems per 100, European brands: 20 problems per 100. • BUT Japanese and Korean cars were reported to have only 12 problems per 100.

19. Small cars Honda Civic Toyota Prius Honda Civic Hybrid Toyota Corolla Subaru Impreza Sporty cars Honda S2000 Mazda MX-5 Lexus SC 430 Chevrolet Monte Carlo Sedans Lexus GS 300 Infiniti M35/M45 Lexus IS 300 Honda Accord Hybrid Toyota Camry Honda Accord (four-cylinder) Lexus LS 430 Wagons Toyota Matrix Small SUV’s Toyota RAV4 Honda CR-V Honda Element Subaru Forester Mercury Mariner Mitsubishi Outlander Midsize SUV’s Lexus RX 400h Toyota Highlander Toyota 4Runner Infinity FX35 Large SUV’s Toyota Land Cruiser Pickups Honda Ridgeline Toyota Tundra Most Reliable AutomobilesConsumer Reports' Predictions for Most Reliable 2006 Models12 *italics denote GM brand

20. Safety13 • Safety is becoming more important to car-buyers. This trend began to see a large uptick with the Ford Explorer and Firestone tire problems. • Experts name the following as being associated with a safe brand: Volvo, BMW, Lincoln, Saab, Honda, and Subaru. • But, safety is becoming a top priority for all manufacturers. *italics denote GM brand

21. Safety: Examples of 2006 SUV 5-Star Crash Test Ratings As Determined by NHTSA14 *italics denotes GM brand

22. Safety vs. Design15 • So, what is more important to consumers: design or safety? • According to a Consumer Reports survey, the top ten features desired in a new vehicle are generally related to comfort, convenience, and entertainment. This is significant for GM because foreign-made vehicles are typically perceived as more stylish and comfortable than American-made vehicles.

23. Features: Design vs. Safety15

24. The Profile of Daily Commuting in America16 • Personal Vehicle: 91% • Public Transit: 5% • Walking: 3%

25. A Look at Transit Trends 17,18,19 • About 1 in 5 families have 3 or more cars, despite flat income trends. • The average driver spends about 62 hours a year stuck in traffic. • More workers are opting out of carpools and mass transit, but the number of people working from home is increasing. • Water buses/taxis and ferries are a new trend in public transit in places like Seattle, Boston, and Fort Lauderdale, but more tourists than locals use them.

26. Implications • There are very few places in the United States that contain comprehensive, seamless mass transit systems. In most cases, commuters must have access to a vehicle to get to the public transit. • Most cities in the United States are designed in a sprawling manner. Though exercise trends are up, these areas are impractical to navigate on foot or by bicycle. • Thus, until these factors change, the need for vehicles will remain.

27. Economic Environment

28. The Current State of the Economy27 • The Federal Open Market Committee decided on November 1st to raise its target for the federal funds rate by 25 basis points to four percent. • Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. • Monetary policy accommodation (i.e. Federal Reserve actions), coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. • The cumulative rise in energy and other costs have the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

29. What is the Federal Funds rate now?27

30. Federal Funds Rate History27

31. Economic Overview of the Auto Industry28 • Higher interest rates ahead • Flat demand • The Big Three’s (GM, Ford, DaimlerChrysler) shares of the US market fell to record low of 60.1% last year • 2005 US car and light truck sales should total 16.6 million vehicles compared to 16.7 vehicles in 2004

32. Economic Overview (cont’d)28 • Profits are down due to incentive wars. • Higher steel prices have added about $500 to the cost of an automobile. • Financing divisions are profitable.

33. Global Economy29 • Auto sales continue to rise on a global level. • Auto purchases in China should exceed five million by the end of the decade. • China will emerge as the world’s second largest auto market.

34. Global Light-Vehicle Production Forecast:North America vs. China29(millions of units)

35. Interest rates • Interest rates have been rising for the past two years • History has shown that when interest rates rise the demand for borrowing will decrease • The automobile Industry relies heavily on sales through financing since most people can not afford to pay cash for an automobile

36. Trends in Inflation23 Transportation costs increased 5.1% from August to September, while the price of all consumer goods only increased 1.2%. Transportation inflation has risen sharply since June. Transportation costs include new and used vehicles, gasoline, parts and equipment, maintenance and repair, and public as well as private transportation.

37. Inflation30 • The Federal Reserve Bank is always concerned with inflation of the nation’s currency. • “Inflation Targeting” is a policy of announcing what you're going to do, and then doing it. • If the incoming Fed chairman, Ben S. Bernanke, has his way, monetary policy will depend much less on the force of will, keen economic insights, and other exceptional qualities of the Fed's chief. • Instead, Bernanke will move the Fed toward clear and coherent rules for hitting publicly announced inflation targets -- an operating style that he calls "constrained discretion."

38. How does “Inflation Targeting” work?30 • The central bank chooses and publicizes a target goal for the inflation rate -- say, 2% a year. • The bank then publicly estimates how high it expects inflation to be in the coming year. It steers monetary policy to try to hit the target inflation rate. • If inflation is getting above the target, the bank would ordinarily raise interest rates to cool the economy and bring inflation back down. • If inflation gets too low, the bank would lower rates to juice up growth, raising inflation.

39. The Effect So Far….30 • For now, the choice of Bernanke to lead the Fed has not altered the outlooks for either the economy or Fed policy. • The financial markets still expect the Fed's target federal funds rate to reach at least 4.25% by spring. • Based on the expectations implied in the market for interest-rate futures, investors continue to believe the funds rate has a high probability of reaching 4.5% by April.

40. Inflation Targeting and Auto Sales31 • Inflation fears have eased. • A slow down in consumer spending and sluggish growth contributed to lower sales in the 2nd quarter of 2004. • Consumers spent 5.5 times their normal share of gasoline spending in the 2nd quarter. • The scrappage rate of old vehicles has slowed.

41. High Fuel Prices Contribute to Industry Shifts32 • High fuel prices cause industry shifts to smaller cars. • There is a low cost of entry into the compact car segment. • Small car sales are up 9.5% for the first nine months of 2005 compared to 2004.

42. Gas Prices 35,40

43. Gas Prices and Production • The United States is heavily dependent on oil, and much of the world’s supply of crude oil is located in the Middle East. • The United States has created a national reserve of gasoline, but in times of natural disaster, such as the gas shortages after Hurricane Katrina, the U.S. becomes heavily dependent on other nations’ ability to produce and refine oil. • As a consequence, prices are often tied to the policies of OPEC nations.

44. Crude Oil Production36

45. GM and Industry Shifts32 • GM will rely on its subsidiary, Daewood, to design and produce subcompacts. • Daewood has the advantage of minimal prduct development costs and available plant capacity. • GM sold 55,225 Chevrolet Aveos through September 2005. Up 44% over last year.

46. October Sales33 • New car sales dropped 33% the first nine days of October. • GM sales were down 57%. • Automakers such as Ford and GM are reluctant to launch sales incentives. • Industry officials feel that Hurricane Katrina is to blame for high fuel prices and slow sales.

47. Technology

48. Technology: From Real to Surreal20

49. Current Technology and Who Has It21 • Blind-Spot Detection: an alarm or warning light deploys when a vehicle is in your blind-spot (2005 Volvo S60 and V70). • Lane Departure Warning: a camera tracks road markings and sets off an alarm if the car drifts (several 2005 Infinities; 2005 Mercury concept car). • Stability Control: sensors monitor brake pressure, tire and steering-wheel rotation, and other operations to determine if control is being lost. If so, the system automatically applies brake pressure (Toyota 4Runner, Ford Explorer, Jaguars, and all GM models by 2006). • Airbags: a system adjusts the size and pressure of the bag, based on severity of the crash, the seat’s location, and whether the passenger is wearing a seatbelt (2006 Buick Lucerne, Cadillac DTS). • High-Tech Headlights: • Lights swivel around corners at speeds exceeding 10 km/h (2005 Audi A6). • Lights brighten or dim based on levels of oncoming traffic (2005 Cadillac STS). • Night View technology illuminates everything up to 150 m ahead of you and projects the image onto the windshield (2005 Lexus LX 470).

50. Internet vs. Dealerships9 • The dealerships are having to deal with their customers like the never have before due to the internet giving customers what they never had before--INFORMATION • 2/3’s (and growing) of Consumers in the market for an automobile will use the internet for research. • Now the dealers can not build value by simply telling customers the features of the car. By the time the customer has arrived at the dealership, they have already compared prices, incentives, features, and options. • The customer is more prepared to shop around and it is very easy to do now because of the internet