Auto execs see more woes ahead

NEW YORK (CNNMoney.com) -- Top auto industry executives expect to see increased bankruptcies and continued tough picture on profits, according to an annual survey by KPMG.

The annual survey of 150 industry executives around the globe by the U.S. audit, tax and advisory firm found that 87 percent believe the level of bankruptcies in the industry will increase or remain the same over the next few years, while only 10 percent see a decrease.

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The survey, conducted in the fall 2006, did not differentiate between bankruptcies by automakers and auto parts suppliers, though. The last year and a half has seen a number of high-profile bankruptcies in the parts sector of the industry, led by Delphi (Charts), the world's largest parts supplier which filed for protection from creditors in October 2005.

While both General Motors (Charts) and Ford Motor (Charts) have seen their debt downgraded deep into junk bond status due to the risk of default and bankruptcy from ongoing losses, executives at both companies have repeatedly said they have no intention of filing for bankruptcy.

The North American executives surveyed were pretty evenly split as to the reason they expect to see more bankruptcies, with non-competitive cost structure, spending on health care and expected declines in revenue being the three major culprits cited by those surveyed.

The outlook on a return to profitability is relatively rocky. Executives at automakers who believe that profits will generally rise the next five years is only 19 percent, compared to the 20 percent who felt that in the 2005 survey.

And while those who expect a worsening outlook has declined to only 8 percent, down from 34 percent a year earlier, about a third of those surveyed see profits being volatile and unpredictable, and a third expect little change from the current difficult outlook of widespread losses in the industry. Only 20 percent gave each of those two answer a year ago.

"There's clearly a lot of concern about profitability," said Daron Gifford, national automotive industry leader at KPMG. "They don't think it's going to get worse, and perhaps it's bottomed out. But they're not sure when it's going to get a lot better."

GM and Ford have both announced plans to shut dozens of plants and have used buyouts and retirement packages to slash the size of their work forces as they try to adjust production to meet current demand for their products. DaimlerChrysler (Charts) slashed production at North American plants in late 2006 due a glut of vehicles at its Chrysler Group unit.

That has helped the global overcapacity somewhat, according to the executives surveyed, as only a quarter now see overcapacity of 20 percent or greater, down from a third of those surveyed who saw that level of overcapacity in the previous year's survey.

But the cuts have only dented the overcapacity problem, not solved it, in the view of executives. The survey found 44 percent now put overcapacity at 11 to 20 percent, up from 38 percent in the 2005 survey.

Gifford said that part of the problem seen by executives in terms of capacity is belief that there could soon be overcapacity in China, which has been the world's fastest growing market for autos.

"Even if we are solving overcapacity in North America, there's a concern that of the great unknown about overcapacity in China," he said.

The rush of investment in new plants there by global automakers has so far been filling the growing demand by Chinese consumers. But Gifford said that 40 percent of the executives surveyed believe that overcapacity in there will be a serious problem for the global market over the next five years, as the Chinese start to export to more developed markets.

The last year has seen Renault and Nissan (Charts), which have an alliance and share a CEO and significant equity stakes in one another, hold unsuccessful talks about GM joining their combination. The chairman and Toyota Motor (Charts) also met with the CEO of Ford at the end of the year, although a significant combination was not discussed, according to the companies.

Gifford said that despite all the talk of alliances or other combinations between major automakers the last nine months, it's likely that the eight major global automakers will still be around five years from now, unless there's a financial collapse by one of the players.

But Gifford said the survey showed more limited alliances or combinations in the auto parts segment are likely to become increasingly important in the coming years. Much of the activity could be between established automakers and those in developing markets like China and India, and other combinations could take place in the auto parts sector as it goes through a shakeout.

The survey found 81 percent of Asian executives expect global consolidations and alliances to increase over the next five years, followed by 58 percent of North American executives and 56 percent of Eastern European executives. Only in Western Europe were executives less bullish, with 32 percent of respondents looking for combinations.

The group as a whole also expects alliances to be more important than a traditional merger or acquisition.

GM, Ford sales plunge, Chrysler falls to No. 4