What’s Next for the Auto Industry?

By Rajeev Dhawan
NABE Board Member and Member of Financial Roundtable
Director, Economic Forecasting Center
J. Mack Robinson College of Business
Georgia State University

An October 11 session at the annual meeting featured two presentations that focused on the future of the “domestic” auto industry. The word domestic is in quotes as the focus was on production and sales of vehicles in the domestic market where the Big Three in Detroit are playing an increasingly smaller role. The moderator for the session, William Strauss, Federal Reserve Bank of Chicago, warmed up the session by presenting some interesting facts on the fast-changing nature of the auto sales market. That the audience was very interested in this topic was evident in the fact that the question-and-answer session was very lively with questions focusing on levels of auto sales needed for the industry’s profitability, the importance of just-in-time methods, and the role of foreign manufacturers.

The first presenter was Thomas Klier, senior economist in the economic research department of Federal Reserve Bank of Chicago, whose presentation titled “Auto Industry in Turmoil—What Direction After the Perfect Storm?” started with a quick overview of the history of vehicle sales in the domestic market, and where they stand now in the business cycle. Next, he focused on geographic location of production plants and auto part suppliers, illustrating trends with some very interesting density charts about where the production used to be located and where it is now. We saw that auto production is increasingly moving to the Deep South, where the foreign manufacturers have located their plants since the early 1990s. Consequently, we have gone from four carmakers in the United States to the current 14 in the last 34 years.

 After a quick recap of the recent “rinse” cycle bankruptcy of General Motors and Chrysler, three interesting questions were raised. What type of recovery will it be? It could be weaker than expected. If it is only gradual and vehicle sales are much less than the old norm of 16 million unit sales annually, will GM and Chrysler be viable in the new environment? Probably not, but we have government back stopping them on the financial side at least. And what are the wildcards: new “CAFÉ” [corporate average fuel economy] standards and the price of gasoline? In Q&A session it became clear that if there is an oil shock and oil prices go back to where they were in mid-2008, then the entire sector is in serious trouble and not just the Big Three in Detroit!

Strong Market Called Unlikely Until 2012

The second presenter was George Magliano, director of North American automotive research at IHS Global Insight, who is responsible for overseeing Global Insight’s North and South American Automotive Forecasting Services. He is a 20-year veteran of following and analyzing this industry. His talk was titled “U.S. Light Vehicle Outlook” and he started by giving his estimate of about how much of future auto demand was pulled ahead by the latest cash-for-clunkers program (300,000), adding that price incentives are at an all time high on MSRP (25%) and the program benefitted mostly foreign manufacturers. He then showed how auto lending moved solidly into subprime loan territory during 2005-2007, and how deep the correction was in 2008.

Magliano forecast that the market will not be back on track until 2012. He argued, based on demographics, that vehicle sales of 17 to 17.5 million are feasible by 2015. In terms of biggest automaker by sales, Toyota will be the biggest seller by 2012, Ford will be right behind, and Honda will move up a notch from its number five position in the long run. Chrysler is the casualty as it cedes its number three position to have the smallest share by 2015. GM will be at number three with its sales share half of what it was just 10 years ago. His assertion was that the United States imports four million vehicles a year, which was excessive. Detroit has moved into the cross-over-vehicle market and GM and Ford have left the mid-size van market. He had plenty of forecast charts on auto sales by segment. He felt we were close to a bottom on auto sales and that Detroit’s latest restructuring has opened the market to new entrants, and finally auto part suppliers must sell to transplants to survive.
It was a very informative session that answered a lot of burning questions. The audience participated as was evident by their questions and given that the presenters finished within their allotted time there was plenty of time for this exchange. It surely helps to have two good presenters in a session as it gives everybody enough time, including the audience, to make their points!

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