Automotive Market’s Driving the Recovery
A healthier, more streamlined domestic auto industry enjoyed a surprisingly strong 2010, and likely will continue to lead the manufacturing sector’s economic recovery.
By Dan Markham, Senior Editor
Two years ago, the North American automotive industry seemed to be at death’s door. Its leaders had resorted to descending on Washington, hat in hand, to beg for government assistance. Today, an amazingly short time later, they are back in the driver’s seat.
In February, those same automobile companies reported some of their biggest monthly sales increases in history. General Motors, one of the two domestic carmakers that received federal bailout money, reported retail sales growth of 70 percent, a company record. Ford Motor Co. saw its retail sales grow 23 percent vs. the year-ago period. Industry-wide, auto sales were up 27 percent compared to February 2009 and 22 percent for the year to date.
“It’s a good healthy sign,” says Ron Krupitzer, vice president of automotive applications for the American Iron and Steel Institute in Washington, D.C. “It’s an indicator that, even though this has been a slow and steady recovery, the automotive side of the recession is ebbing and it’s truly leading the economy.”
Automotive analysts project North American sales of more than 13 million vehicles in 2011—a substantial recovery from the 8.9 million in 2009, but still well short of the 16 million annual rate prior to the recession.
GE Capital forecasts sales of 13.1 million units this year and another 14.7 million in 2012. “There’s a slight likelihood those forecasts will increase a tad as a result of the positive economic news that’s come out regarding industrial production, ISM’s new orders index and consumer confidence,” says Gregory Eck, senior vice president for metals and mining at GE Capital in Chicago.
To Eck and others, several factors are working in the automotive industry’s favor. He points to the age of the fleet on the road, which averaged 10.6 years in 2010. That’s a historically high level, one that suggests widespread replacement will soon be necessary. Additionally, since 2008, the United States has been scrapping more vehicles than it has been purchasing. “That’s a condition that can’t continue in perpetuity,” Eck says.
Tracy Schneiter, a vice president for auto consulting firm IRN Inc. in Grand Rapids, Mich., notes that the gap between the price of new and used cars has been closing for several months. When the price of a used car approaches that of a new vehicle, it drives consumers toward new car purchases, she says.
A stabilizing jobless rate, even if the number of Americans out of work remains high, will provide a boost to auto sales, Eck adds. “There’s a psychological barrier you cross once unemployment is not increasing any longer. People feel less concerned they are going to be laid off.”
That kind of security is crucial to sustained car sales, notes Dennis DesRosiers, who heads up DesRosiers Automotive Consultants Inc., Richmond Hill, Ontario. “The auto industry is very psychologically driven. Consumers need a lot of confidence to sign up for a $30,000 or 40,000 vehicle.”
As a result, automakers tend to inflate the market’s positives and downplay negatives. He points to the average age of the vehicles, which is increasing because cars are being made better. The higher scrappage rate is a result of the population’s defleeting, with ownership declining from more than 100 percent (households with more cars than drivers) to about 96 percent.
“We look at core fundamentals and divide them between structural variables and cyclical variables. And both are still somewhat problematic,” DesRosiers says. The cyclical variables include the basic economic variables—high unemployment, moderate GDP growth and interest rates that will invariably go up. “Although there is no deterioration, we’re still a long way from having a healthy marketplace,” he says.
The recent spike in oil prices, above $105 per barrel in late March, could be another threat to the recovery, or at least shift consumer preferences toward smaller vehicles and away from the larger trucks and crossovers. That in turn is an issue for metal suppliers, as less steel and aluminum is used in the production of smaller vehicles.
Schneiter is skeptical about fuel-efficiency concerns driving many buyers toward smaller cars. Though there was some movement away from larger vehicles during the most recent gasoline price surge in 2008, the truck and crossover segment actually bounced back to take a greater share of the market than before. Carmakers have done a good job of developing new power train technologies that get far better gas mileage, so Americans can continue to drive vehicles with the size and utility they prefer.
While the short-term numbers have been good for automakers, the long-term outlook is also promising. Part of that is due to the healthier, more focused domestic auto industry that emerged from the downturn.
“The recession had the effect of speeding up the evolutions within the automotive and steel industries,” says Tom Marchak, vice president of commercial for Severstal NA, Dearborn, Mich. “It has forced us to break from past practices and embrace change.”
Eck agrees the new domestic industry is much different than the one that required Washington’s assistance. “I think they’ve done a good job, much like the way the steel industry did in 2000 through 2002, in terms of consolidating their supplier base and negotiating more favorable labor agreements. ”
With its structural problems largely in the past, the industry has been allowed to direct its attention to its core products, says Doug Richman, vice president of engineering and technology at Kaiser Aluminum, Foothill Ranch, Calif. “The Detroit car companies are hiring and back on the innovation trail, aggressively driving designs to meet the new energy requirements.”
Still, Schneiter cautions, the ongoing recovery will not resemble the pre-recession era for car companies. The nearly uninterrupted run-up from the early 1990s to the late 2000s was an aberration in the auto industry’s history. “The volatility in the next 10 years or so is probably going to be far greater than it was in the last 10 to 15 years.” n