Can Auto Outdo the Economy Again?
With GDP growth well under 3 percent, the U.S. auto industry should be struggling. But it’s not. Can it defy the economic indicators again in 2013?
By Tim Triplett, Editor-in-Chief
“We dodged a bullet last year. Will we dodge it again in 2013?” That’s the central question facing the automotive industry as it embarks on a new year riddled with many of the same old economic potholes, said Bernard Swiecki, an assistant director with the Center for Automotive Research in Ann Arbor, Mich., who addressed FMA’s Toll Processing Conference March 1 in Tampa, Fla.
The U.S. auto industry did better than it should have in 2012, given the anemic GDP, high joblessness and various fiscal crises in Washington. U.S. light vehicle sales increased 13.4 percent to 14.5 million units last year and were on an annualized pace of 15.4 million units early this year.
“We did not see a swoon. We did not see things fall apart toward the end of 2012 [as in 2011],” he said. But the ongoing debate over sequestration and forced government spending cuts, as well as weakness in Europe and other parts of the world, keep the U.S. economy in jeopardy. “Normally we need 3 percent year-over-year GDP growth for a robust auto market, so we are getting better sales than we deserve. With GDP forecast to remain below 3 percent in 2013 and 2014, we wonder how long the market can outdo itself.”
In fact, automotive has actually helped lift the rest of the economy, he said. “Vehicle sales have picked up in spite of the fact the economics say people should not be buying cars now.”
Why is the industry “getting away with one?” he asked. One factor is the effect of Hurricane Sandy. The storm on the East Coast destroyed thousands of cars, making used vehicles relatively scarce and more expensive. With cheap financing readily available, many people are opting for new cars. The average vehicle on America’s roads is now about 11 years old, so there is a big pent-up need for replacement. That’s good news for automakers and their metals suppliers.
Experts’ forecasts for light vehicle sales in 2013 range from 14.8 million to 15.5 million units, with the average around 15.1 million cars and light trucks. That’s a major comeback from the 10.4 million sold in 2009, but is still well shy of the 17 million of the past. “This is a modest recovery, let’s be honest. And it does not come back to peak. But it is one based on more sound fundamentals. Automakers and their suppliers are both making money,” Swiecki said.
As carmakers strive to take weight out of their vehicles to meet future government fuel efficiency standards, they will use more lightweight materials, such as aluminum and plastics. But steel will hold its own, he asserted. Use of conventional steel is rapidly declining, but high- strength steel is picking up the slack. “Even with the CAFÉ standards, going out a decade or two, it will really be more a question of what kind of steel they use, as opposed to whether it will be steel or something else,” he said.
Pointing to leading car companies, he noted that all saw growth last year over 2011. GM grew by 3.7 percent, Ford by 4.7 percent, Nissan by 9.5 percent, Hyundai/Kia by 11.4 percent, Fiat/Chrysler by 20.6 percent, Honda by 24.0 percent and Toyota by 26.6 percent. The performances of GM and Ford were fairly disappointing in a market that grew by 13.4 percent overall. Chrysler beat expectations. Honda and Toyota came storming back from a 2011 in which their supply chains were disrupted by the effects of Asian tsunamis.
The hottest brand in the U.S. right now is Hyundai/Kia, but demand for its models is outstripping its production capability. The company has opted not to invest in new plants, and is operating its existing ones at 120 percent of capacity. “So the hottest car company in America is losing market share right now,” Swiecki noted.
U.S. market shares for the Big Seven car companies, as of December 2012, were: GM, 17.9 percent; Ford, 15.5 percent; Toyota, 14.4 percent; Fiat-Chrysler, 11.4 percent; Honda, 9.8 percent; Hyundai/Kia, 8.7 percent; and Nissan, 7.9 percent. The Detroit Three, which used to command a majority of the market, hold about a 45 percent share today. “GM is still on top, but to be honest that is a disappointing number. This is the worst market share for GM in about 80 years,” he said.
The narrowed spread between their highest and lowest market shares—just 10 percent today versus 28 percent in 1999—point to an industry with much more parity. “We are a much more competitive market right now. It is much harder for companies to differentiate themselves, and for consumers to choose between them. There are many more competitors in this market that actually matter.”
The Big Three in North America have cut their production capacity by 35 percent since 2004 or by 4.8 million units. That translates into an industry that is more stable and more profitable. “Because of all these cuts and costs they have taken out of the system, combined with pricing discipline and lower incentives, you see a dramatic increase in revenue per vehicle among the Detroit Three. This is confirmation that their restructuring worked,” Swiecki said.
In the recessionary year of 2009, industry capacity utilization plummeted by nearly 44 percent and profits by nearly 50 percent. By third-quarter 2012, capacity utilization had recovered to 77.3 percent and profitability to an average of 3.7 percent.
“All the automakers are making money now. Good chunks of the supplier sector are profitable, as well. We are finally getting respect on Wall Street. The restructuring in both the supplier sector and among the automakers has been effective. It was a roaring comeback, but it is not like the industry is wildly profitable.”
In terms of vehicle type, the American market is beginning to look more like Europe and Asia. Eighty percent of vehicles purchased today are car-based, as opposed to the large SUVs built on truck frames that were so popular in the past. Crossovers or CUVs are the most popular, with 24 percent of the market, followed by midsize cars with 21 percent and small cars with 20 percent. “If you look at the percentage growth, it’s the midsize and small car segments that are growing the most rapidly. With the new CAFÉ standard of 54.5 mpg by 2025, that is only going to pick up pace,” Swiecki said.
Surprisingly, alternative power train vehicles such as hybrids and electrics won’t necessarily play a big role in meeting the new fuel-efficiency targets, he adds. With a market share of just over 3 percent, including diesels, “green” vehicles remain niche products. “They will grow slowly for the foreseeable future, partially because of the cost penalty, but also because standard gas-powered vehicles are getting so much better. We have become very good at making conventional vehicles very efficient.”
Investment by North American automakers in 2012 totaled just $7.5 billion, well below prior years. That includes $3.7 billion in both the U.S. and Mexico, and just $200 million in Canada. Mexico is attracting new auto plants not just because of its low labor rate, but also because of its free trade agreements with countries around the world. “When it came to automotive investment last year, Mexico ate our lunch,” Swiecki said. “If you are trying to sell a vehicle globally, you can build it more cheaply in Mexico and you can export it without tariffs.”