Auto Industry’s Facing an
‘Uncomfortable Period of Change’

The auto industry is going through a period of extreme transformation, one that will produce winners and losers among automakers and their suppliers in the years to come.

“What we are seeing today is an extraordinarily uncomfortable period of change. Those most comfortable in dealing with change can use this period to gain a competitive advantage,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. Cole spoke at the Global Market Trends Conference Sept. 13 in Chicago-suburban Oak Brook, sponsored by the Washington, D.C.-based Copper Development Association.

CAR’s mission is to focus on the future of the auto industry and help the industry anticipate and react to trends. Such trends include the emergence of competent new competitors in China and India and sharply rising material costs.

World auto production capacity totals 85 million vehicles today, while annual demand is only 65 million vehicles. “The consumers own this market,” Cole noted. With suppliers raising prices for metals, plastics and other automotive materials, the power is no longer in the hands of the large auto companies.

Cole emphasized the importance of the current round of contract negotiations under way between the United Auto Workers and the car companies. The traditional domestic industry is betting its future on this contract, he said. “A poor contract will kill at least one of the Big Three.”

Worker and retiree health care is the big elephant in the room, he added. Even if the auto companies negotiate concessions, packaging them so they are acceptable to the rank and file could be a stumbling block. Less confrontation and more cooperation between labor and management is critical. This contract needs to be transformational, he said. “There has to be something near a $20 per hour cost improvement for this contract to succeed.”

Demographics play a big part in the changes automakers face in both marketing and producing their products. The aging of the population is shifting consumer behaviors and socio-political issues such as health care as baby boomers begin to retire. Mass retirements by boomers in the next decade promise to create a shortage of 10 million skilled workers. “Watch out for the demographics and what the impact will be on your business,” he urged his audience.

The automotive and consumer electronics industries are major engines for the U.S. economy. Automakers produce an economic multiple of 7.5; in other words, for every auto plant job that is cut, another 6.5 are lost in related and supporting industries.

“Competition is relentless and unforgiving today. That’s reality,” said Cole. “Success requires automakers to improve in terms of both cost and revenue. You can’t just cost-cut your way to success in this industry. You must increase revenue,” he added.

GM has successfully cut $9 billion, or $2,000 per vehicle, from its cost structure, a major triumph for the giant car company. But it still has a long way to go, and is particularly burdened by legacy retirement and health care costs.

Since 2000, auto industry production has been at a high volume, while profitability has remained poor, Cole noted. “So increasing the volume is not going to heal this industry. The old business model is broken. The new business model is ‘lean agile.’ It’s change or die, and shrink to grow.”

Collaborations, even between competitors, promise to spread out the cost of innovation and secure more environmental technology for future vehicles. Such joint efforts include Ford and GM’s development of transmission technology; GM, Chrysler and BMW’s collaboration on hybrid fuel technology; and the Auto/Steel Partnership to develop stronger but lighter alloys for safer, more fuel-efficient vehicles.

Cole observed that knowledge is increasing at a greater rate than its application. Those who can innovate and apply that knowledge before others will come out on top. He described the revolution in new automotive fuel technology. Much R&D is focused on improving gasoline, diesel and hybrid power plants; even the experts don’t know which approach will prove most efficient. The future cost of gasoline is a major unknown for automotive developers. Without knowing whether gas will cost $1.50 or $3.50 per gallon in the future, it is impossible to determine which technology will be most cost-effective.

Much is said about the boom in corn-based ethanol as an alternative to petroleum products, but using corn to produce fuel raises prices in other parts of the food chain such as cattle feed, meat, and related goods. There is no net savings to society. Using cellulosic materials such as corn stalks and grasses to ferment alcohol, however, holds great promise. By 2012, CAR estimates, cellulosic biofuel will be available at a cost of around $1.10 per gallon., dropping to 70 cents per gallon by 2020.

New lithium-iron-phosphate batteries with four times the capability of lead-acid batteries, rechargeable 8,000 times, promise to boost development of plug-in hybrid vehicles.

Also on the horizon is “vehicle infrastructure integration,” in which the car has the technology to communicate with the highway, and with other vehicles, to relieve congestion and vastly improve safety. “Auto utility integration” is the collaboration between automotive developers and electric utilities in anticipation of the day when most people will plug their car into a socket in their garage and recharge its batteries each night.

“These innovations are happening,” Cole said. “They require development, not invention.”

Summing up for his audience of copper producers, distributors and users, Cole concluded: “The bottom line is that what is emerging today in the automotive industry will produce a dramatic increase in the use of copper.”

*Editor’s note: Shortly after David Cole’s presentation—in which he asserted that the Big Three automakers needed a “transformational” labor contract in order to ensure their survival—General Motors Corp. announced that it had reached agreement on a new national labor pact with the United Auto Workers. The deal reportedly restructures GM’s obligations to cover retirees’ health care costs, allowing the carmaker to shift $51 billion in health care liabilities to a special trust. It will also allow the automaker to buy out thousands of high-paid workers and replace them with lower-paid employees. The new deal paves the way for GM to significantly improve its manufacturing competitiveness, providing the basis for maintaining and strengthening its core manufacturing base in the United States, the company said. Observers expect the GM contract to serve as a model for similar labor agreements at Ford and Chrysler.