Crystal Ball Manufacturing IHS Automotive’s Gillette: The auto industry: the pulse is strong
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By Jim Gillette
Senior Consultant
IHS Automotive
Those of us working in the auto industry are breathing much easier today having escaped what could have been a worst-case scenario. After emerging from Chapter 11 bankruptcy, the “new” General Motors is doing quite well, Ford’s performance continues to be positive, and Chrysler, under Fiat management, is poised (again?) for a rebirth.
Given constant reminders by the media of high unemployment and slow auto sales at home, it may come as a surprise to many that light vehicle sales and production have recovered globally, now reaching record levels. Yes, European sales are struggling thanks to payback from the massive cash incentives offered to buyers to accelerate purchases last year, but auto industry growth in Asia is more than making up for any sluggishness in the mature, developed markets. Total global light vehicle sales and production are now running over 70 million units annually.
We’ve witnessed the worst decline in vehicle sales since the Great Depression. U.S. light vehicle sales peaked at 17.3 million in 2000 and remained in the 15-16 million range for much of the decade that followed. The industry collapse that began in 2008 eventually took U.S. sales to a low of 10.4 million in 2009, although the late summer “Cash-for-Clunkers” prevented a more disastrous decline. Due to high levels of inventories on dealer lots going into the recession and the closure of several dealers, production declined more sharply to 8.6 million in 2009.
Any expectations of a quick recovery for the industry have been muted by continued high unemployment and the prolonged damage done to household balance sheets by sinking prices for housing. Credit availability for households is less of a problem today than it was two years ago, but families will remain reluctant to take on additional purchases and debt for the near term.
IHS Automotive forecasts North America production (vehicles are sold in the U.S., Canada and Mexico, as well as being exported to other regions) to be 11.9 million in 2010, 12.3 million in 2011 followed by 13.3 million in 2012. The 15 million level is not predicted to be reached until 2014. U.S. light vehicle sales are forecasted to reach 11.4 million units in 2010, 12.8 million in 2011, and 14.8 million in 2012. Our analysts see 2013 as the year sales will once again hit 16.0 million. Given recent strong performance, there is some room for upside.
Employment cuts throughout the North American auto industry over the past two years have been nothing less than draconian. This has no doubt contributed to the sharp rise in accounting profit being reported by publicly held auto suppliers as we move through even a modest recovery. Suppliers who thought they were “lean” in 2007 have been forced to rethink their definition of the term. Every auto analyst I know, including myself, thought many more suppliers would fail in 2008 and 2009. That so few did is testimony to the resilience and managerial skill of the supply base heretofore insufficiently recognized.
Net income reported by auto suppliers with West Michigan operations approached, if not equaled, levels attained prior to the onset of the recession. Companies like Johnson Controls, Magna and Gentex have been boosted by strong sales overseas and, particularly in the case of Gentex, the global boom in luxury and near-luxury vehicle sales. The relatively weak dollar has contributed to some extent in making auto parts made in the U.S. more competitive in global markets.
According to the U.S. Bureau of Labor Statistics, Michigan’s auto parts manufacturing employment peaked in 2000 at 231,000 workers and then fell precipitously to a trough of 72,500 during July 2009, a stunning 69-percent collapse. Since then, Michigan auto parts employers have added a meager 14,400 workers to reach 89,400 as of October.
The automakers’ Michigan ranks have not fared any better. After reaching a high of 101,700 during mid-2000, employment dropped to 30,700 during the bankruptcy crisis of July 2009 and has only inched up some 8,600 workers by October 2010. While we are seeing some new hiring going into 2011, auto industry employment levels equal to those 10 years ago are unlikely to reappear.
During 2000, slightly over 3 million light vehicles were assembled in Michigan, just under 18 percent of the North American total. Currently, about half that number are assembled in the state annually, amounting to only 13.2 percent of North American output. While the industry recovery will see an increase in production this decade, it is doubtful that Michigan’s vehicle manufacture will approach levels achieved during the 1990s. Expansion of the industry in the South plus increased activity in Mexico continues to draw business from Michigan.
Michigan’s problems have not changed much. UAW President Bob King is already talking tough about the 2011 contract talks. Competition from right-to-work states is formidable. The troubled state’s fiscal situation along with a business tax environment, which is less friendly than many Southern states, is keeping Michigan’s relative competitive position weak. The state’s traditional political regime, in the opinion of many, had long exacerbated the problems. The atmosphere may be decidedly more pro-business over the next four years as a staunchly pro-union candidate suffered a resounding defeat in the November gubernatorial election against a pro-business candidate.
In spite of the economic damage suffered since 2007, Michigan remains the home of numerous centers of expertise for the industry. In addition to profitable and innovative suppliers with global reach headquartered here, it has been gratifying to see some new manufacturers enter the market building advanced technologies.
One thing is clear — suppliers who survived the Great Recession, and the Detroit 3 automakers (GM and Ford, for sure) may be more competitive now than at any time in the last four decades.