Special Coverage
State of Industry: North America
This is an auto recovery like no other.
Old cars have not rusted away and created pent-up demand. Auto makers are not piling cash on hoods to jump-start sales. And consumer confidence is as hard to find as a fullsize spare tire on a ’13 model.
The U.S. economy isn’t cooperating, either. It usually bounces back from recessions with surging gross domestic product and employment numbers. Not this time. A15 million-unit sales year, once considered “average” in the U.S., now looks like a snow-covered peak you can drive toward all day without getting any closer.
“It’s just amazing that with the number of adults we have in this country that we’re at this rate of purchase,” says Sean McAlinden, chief economist and vice president-research at the Center for Automotive Research.
Yet despite excruciating, slower-than-expected growth, North America still looks like the land of opportunity when viewed from Asia and Europe. The weak dollar and peso make the U.S. and Mexico attractive to Japanese auto makers looking to escape the profit-sapping effects of the rising yen, and they are expanding production here.
And, in a recovery led by the upper-middle class and the wealthy, European brands such as Audi are selling at a record clip. Europeans now have their highest share ever of the U.S. market, about 10%.
North American light vehicle production will increase 600,000 units, from 12.9 million this year to 13.5 million next year, and 80% of the growth will be from Asian- and European-owned auto makers, says Warren Browne, vice president-business development at Pennsylvania-based forecaster AutomotiveCompass.
“There is going to be an optimization of North American capacity at the expense of overseas capacity, both for export and local consumption by everybody, not just Asians and Europeans,” Browne says.
Earlier this year, Honda announced it will invest $800 million in a new vehicle and engine plant in Mexico that will have capacity to produce 200,000 Fit subcompacts annually beginning in 2014.
“Strategically, Mexico plays very strongly to our plans,” says John Mendel, executive vice president-American Honda. “We’ll now have the capability to do everything on shore in North America.”
What’s more, Honda Manufacturing of Alabama just announced it is investing $84 million and will hire 100 new full-time workers to increase annual Odyssey minivan production capacity 40,000 units to 340,000 vehicles and engines.
Toyota began Corolla production at a new $800-million plant in Blue Springs, MS, Nov. 17.
“Toyota and Honda have to follow Nissan out of (Japan),” McAlinden says. “Honda and Toyota North America production is down 20% due to lack of parts for the first 10 months; Nissan is up 12% because it did not rely on Japan as much for parts.
“They have to build plants here. We could see ¥60:$1 yen and Japan auto workers could cost more than German workers. They already are as expensive as the UAW in Japan, and that’s not good when you add in transportation costs. The Mississippi plant probably is not going to be Toyota’s last.”
Hyundai and Kia also are seeing unprecedented sales and market-share gains in the U.S. and are eying more capacity to keep up with demand from U.S. buyers.
“The luxury-car market is expected to show strong recovery in 2012, and Audi has been experiencing demand ahead of supply for a considerable period, says Johan de Nysschen, president of Audi of America. “We are very optimistic about the near-term future prospects.”
Audi is rumored to be planning a new plant in Mexico, although de Nysschen denies a decision has been made. Parent Volkswagen contemplates more capacity in the U.S. as well, even though its new $1 billion plant in Chattanooga, TN, is just ramping up Passat production.
VW’s Puebla, Mexico, facility is the highest output plant in North America, churning out the new Jetta and Beetle. BMW and Mercedes also are expanding their U.S. assembly operations.
But that does not mean the outlook for Detroit-based auto makers is bleak. They have downsized capacity to the point they can make money even in a dismal 10 million-unit U.S. market, and they have gotten out from under most of their crushing legacy costs.
Because their balance sheets now are healthy, General Motors, Ford and Chrysler should see good profitability next year even with weak overall sales of about 13.2 million, Browne says.
“We’re ready to compete in any foreseeable market environment because we now have a low breakeven point, solid cash flow, strong brands and a wave of new products,” GM North America President Mark Reuss says.
The industry is not interested in selling 16 million and 17 million units any more, even if it could, adds Alan Baum, principal at West Bloomfield, MI-based Baum and Associates. “They figured out the way to make money is to reduce production and increase pricing, and that’s going very well for them.”
The focus on profits rather than sales has been evident much of the year, as Honda and Toyota ran out of inventory due to Japan’s earthquake in March and flooding in Thailand in October and November that mired production in Japan and the U.S.
Rather than host fire sales to grab market share, rivals raised prices and kept inventories low, Baum says.
The newly signed United Auto Workers union contracts also have made Detroit auto makers competitive. The new labor agreements won’t cause a stampede of new work to flow back into the U.S., but they are bringing some new work to the U.S.
GM is building the subcompact Chevrolet Sonic in the U.S. thanks to a new local wage agreement with the UAW at its Orion, MI, plant. GM also is reopening several plants, including the long-shuttered Spring Hill, TN, facility.
Ford is adding Fusion production to Flat Rock, MI, and Fiat may finally bring Alfa Romeo production here.
Chrysler just announced a $1.7 billion investment for development and production of a next-generation Jeep SUV, which includes $500 million earmarked for the auto maker’s Toledo, OH, assembly complex.
Upgrades to the 69-year-old Toledo facility include a 260,000-sq.-ft. (24,154-sq.-m) expansion of its current body shop. The auto maker expects the investment will result in a second production shift, adding about 1,100 workers.
Improvements at Toledo assembly will begin in the fourth quarter and continue through next year, with the new Jeep coming in 2013.
But don’t expect the new labor agreements to spawn new U.S. plants, warns CAR’s McAlinden. Auto makers will squeeze more and more production out of existing factories as they continue to hone excess capacity in some areas.
“There’s not even the remote thought of building a new plant in Detroit,” McAlinden says. “The first impulse is raise price; second impulse is just increase overtime, then 7-day-a-week production.”
Plus, vehicle assembly is expected to rise steadily south of the border. AutoCompass projects Mexico’s production to rise from 2,482,409 units this year to 3,078,226 by 2014. "The vehicle production base in Mexico continues to grow and continues to widen its gap with Canada," Browne says.
Baum says the real impact of the improved UAW labor agreements may be more subtle. Auto makers will start insourcing more major components such as stampings, big plastic parts and engine components formerly made by suppliers.
The Canadian Auto Workers union will negotiate a new contract next summer and that could be problematic for future production north of the border, McAlinden says. Canada’s dollar is at parity with the U.S. dollar, eliminating its currency advantage, and Canadian workers now earn substantially more than their U.S. counterparts. Plus, there is no 2-tier wage agreement for new hires.
Despite some positive fundamentals in the U.S., such as a big new-vehicle market that is moving in a more positive direction than Europe’s and a weak dollar that makes manufacturing for export attractive, most forecasters have a far less optimistic outlook for overall sales than they had a year ago. High unemployment, a miserable housing market and low GDP growth are strangling the recovery.
Last January, analysts predicted 2011 sales of 13.4 million or 13.5 million, not good but far better than the previous year’s 11.6 million deliveries, the second worst since 1982.
Instead, this year will end at 12.5 million or 12.7 million units, short 700,000 to 800,000 deliveries.
AutoCompass predicts next year will be only a little better with U.S. sales of 13.2 million. Baum and McAlinden are a bit more hopeful, predicting 13.6 million and 13.8 million U.S. sales, respectively.
Even normally upbeat industry executives have been chastened by the lack of sales momentum this year. GM’s Reuss sounds especially cautious when he says 2012 sales “will be at least flat with 2011, or perhaps even a bit higher.”
Kia Motors America is cautious, too, even though its sales have climbed 35.4% through October, the largest gain in the U.S. Yet, it forecasts sales of 13 million-13.2 million units in 2012.
“The bad news is that we expect the economy will continue to be a challenge, and the growth we’re forecasting for 2012 will likely come from people who are in need of a new vehicle rather than those who are choosing to purchase,” says Tom Loveless, vice president-sales.
Driving much of the new pessimism about 2012 is the idea that long-awaited pent-up demand is a mirage. “Pent-up demand is going to stay pent-up,” says Browne.
For most of this year, sluggish sales have been blamed on low inventories caused by the natural disasters in Japan and Thailand. But the hope of tens of millions of consumers poised to replace their aging cars and trucks with new ones has been lingering in the background.
The statistics are there. The average age of vehicles on U.S. roads today is about 11 years. Plus, millions of 20-something “Gen Y” buyers now theoretically are at the life stage when they should be buying their first new vehicle. But old theories about recoveries and vehicle-buying habits don’t work anymore.
Part of the problem is auto makers have been building far more durable vehicles. Better powertrains and heavily galvanized steel means cars and trucks do not rust away like they used to, and determined owners can keep them running for decades, if necessary.
Furthermore, high unemployment among people under 30, coupled with student-loan debt and other liabilities, has turned the idea of the big Gen Y generation fueling a new-vehicle-buying binge into a joke.
Instead of imitating their consumption-crazy Baby Boomer parents, analysts estimate 1million to 2 million young adults have moved back in with their parents and are sharing a family vehicle.
“Below age 35, we’re not sure anyone can afford to buy a new car,” McAlinden says.
Consumer confidence is the key metric Mark Fields, Ford president-The Americas, and many other auto executives are watching closely to predict where sales will go in the next 12 to 18 months.
“When people are confident about the state of the economy and the likelihood that they will have – and keep – their jobs, they are far more inclined to buy new products, including vehicles,” Fields says.
Given the scarcity of confidence these days, the road ahead promises to be a slow, painful climb.
