Dean Barber

A Rocky Road Ahead for the Auto Industry

In Corporate Site Selection and Economic Development on May 7, 2017 at 10:12 am

Spring has sprung and ostensibly, things are looking not so bad for the U.S. economy.

The Labor Department on Friday said employers added 211,000 jobs in April, the 79th straight month of job gains, and the unemployment rate is down to 4.4 percent, its lowest since May 2007.

Wages are up (the average hourly earnings rose by 2.5 percent from the previous year to $26.19), and we are enjoying low inflation, low interest rates and low fuel prices at the pump.

With all these things going for it, why would the automotive industry be nervous? After all, U.S. consumers bought a record number of new cars and trucks in 2016. While a repeat performance in 2017 might be a tall order, there’s no reason to be overly concerned, right?

Well, maybe there is. After seven years of steady growth — including three consecutive years of record sales — some industry observers believe auto sales have peaked and are set to trend downward.

Sales Are Off

In April, sales of cars and light trucks were off 4.7 percent from the year before, a decline of 70,000 vehicles. That marks the fourth straight month, every month this calendar year, in which sales have declined on a year-over-year basis.

It is the longest stretch of declines since 2009, when the industry was embroiled in bankruptcies. So far in 2017, sales are off 2.4 percent, or by 133,000 vehicles, with the top six automakers in the U.S. market all reporting declines from their April sales a year ago.

Ford car and light truck deliveries fell 7.1 percent last month, while GM’s dropped 5.8 percent and Toyota’s decreased 4.4 percent. All three companies reported slumping sales for passenger cars including the Ford Fusion, Chevrolet Malibu and Toyota Prius sedans.

Most analysts have predicted that auto sales will suffer a small decline this year — to about 17.2 million vehicles from the record of 17.5 million sold last year.  Mark Wakefield, managing director and head of the automotive practice at AlixPartners, is forecasting auto sales to decline to 16.6 million vehicles in 2018, and 15.2 million in 2019.

“People are starting to see that this is not necessarily a plateau,” Wakefield told Bloomberg. “It’s a meaningful reduction, and they’re starting to make plans around that.”

Layoffs Have Begun

In response to softening sales, Ford Motor Co. announced last week that it would cut production of its medium-duty F-650 and F-750 model trucks, and temporarily lay off 130 workers at the Ohio Assembly Plant in Avon, Ohio.

According to The Wall Street Journal, the layoffs will likely last until Ford launches the latest version of its F-Series in September.

Ford temporarily shut down five plants in late 2016, and Chief Financial Officer Bob Shanks told automotive analysts in March during a conference call “Don’t be surprised” to see further temporary reductions in the months ahead.

Also, last week, General Motors Co. said it would shut down its Lordstown, Ohio, plant in July for two weeks, on top of a two-week shutdown previously announced for June.

GM will lay off as many as 1,100 workers at its Lansing Delta Township Assembly plant in Michigan when it cuts the plant’s third shift this month. About 700 of the workers are expected to be rehired by the end of the year. Three other G.M. plants are eliminating shifts, moves that will idle more than 3,000 other workers.

Said GM Chief Financial Officer Chuck Stevens in a conference call last week: “We are very focused on acting like we are in a downturn.”

Fiat Chrysler is laying off 3,200 employees at its Toledo Assembly Complex in Ohio, as it shifts Jeep Cherokee production to a plant in Illinois and prepares the Toledo plant make an all-new Jeep Wrangler. The laid off workers are expected to return, but the callbacks will not begin until the year’s fourth quarter. Another 550 jobs are being permanently eliminated from suppliers.

Bloating Inventories

When sales don’t materialize as expected, however, inventory can and usually will pile up. At the end of April, GM reported that it had 935,758 vehicles in inventory—which is 100 days’ worth of selling activity at the current rate. A year ago, the company had 618,000 vehicles in inventory, representing only 71 days of selling activity.

Ford had about 72 days’ worth of selling activity in inventory in April (about the same as it did in April 2016). The industry considers 60 days ideal.

When inventory builds up when sales are declining, dealers and automakers will often resort to cutting prices, providing more incentives, pushing credit on easier terms. Such short-term measures to boost sales will dampen profits.

Of course, any cuts in auto production in the U.S. are counter to the wishes of President Trump, who has been pushing carmakers to make more cars here and import fewer from other countries.

The Big Kahuna

U.S. manufacturing and auto manufacturing jobs have yet to reach their pre-recession levels, but the auto industry has seen steady improvement. Since 2009, when it bottomed out at just over 600,000 jobs, the auto sector has been above 900,000 jobs for the past two years and at 946,300 in April, according to Labor Department.

In short, the auto industry is still a very big deal to this country, and particularly to certain communities where it is the source of better paying jobs. When I was an economic developer in Alabama and Indiana, the automotive industry was the Big Kahuna in my book and I studied it relentlessly.

There is an old saying in the industry that when the economy catches a cold, the auto industry gets pneumonia. That is particularly true for communities where the automotive industry is a big employer.

Michigan’s Remarkable Turnaround

You would think, and you would be partly correct, that Michigan would be particularly vulnerable. Back in 2009, the unemployment rate rose to 14 percent. (It was 5.1 percent in March.) But the recovery in manufacturing jobs from 2009 to 2016 has been nothing short of remarkable.

From 2009 to 2016, manufacturing jobs in Michigan rose by nearly 32 percent compared with just over 4 percent nationally. Nearly one of every three new jobs in the state during that eight-year span was in manufacturing.

Now I know what you are thinking. You’re thinking that so goes the auto industry, so goes Michigan. And while there is some truth to that, what I find most compelling is the fact that most of the new manufacturing jobs were NOT in the auto sector.

Remember that I said that manufacturing jobs accounted for about 32 percent of the total jobs growth in Michigan from 2009 to 2016, compared to 4 percent nationally. Incredibly, non-transportation manufacturing jobs added 18.5 percent.

What this suggests is that when there is another downturn in the economy, and there always another downturn on the horizon, Michigan may fare somewhat better than it has in the past. Mind you, automotive remains hugely important, but there are a host of manufacturers there making non-automotive products in medical device, aerospace, and others.

In neighboring Indiana, the automotive manufacturing sector is a $15.8 billion industry that employs more than 100,000 people. Automotive manufacturing is the second-largest manufacturing sector in Indiana, behind only chemical production. Automotive jobs have seen a 40 percent increase since 2009.

Some Parting Thoughts

As a site selection consultant for companies and an economic development consultant for communities, one of the things I like most about the multi-state Great Lakes Region is its deep bench in manufacturing talent, at least in comparison to much of the country.

That does not mean there are not shortages of talent. The tool & die industry, making the molds for which auto components are made, is facing an acute shortage of experienced and qualified workers, according to a recent recent report by the Center of Automotive Research.

That is but one headwind facing the automotive industry. There are others, which I hope to further touch on in next week’s blog.

In the meantime, I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. BBA helps companies and communities. Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com

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