Labor, Fuel Prices Threaten to Derail North American Auto Industry in 2015

The North American automotive industry has been rolling along at a brisk pace, with sales in the U.S. rebounding to pre-recession levels. Many expect 2015 to be more of the same, but there are potential obstacles that could put the brakes on the industry’s momentum.

 Among the unknowns: The future of the 2-tier wage system at UAW-organized plants.

“No more concessions. We are tired of it. Enough is enough,” New UAW President Dennis Williams said during his inauguration speech. “We are all committed to eliminating the 2-tier system.”

Williams claims the lower level of the 2-tier compensation structure, where newly hired employees earn roughly $20 an hour compared with $27 for veteran workers, does not provide a livable wage. He characterizes it as a starting point arrived at by bargainers from the UAW and Chrysler, Ford and General Motors during a time of crisis.

“We did not know if we would be successful,” he recalls of talks meant to rescue the automakers in 2007. “We had no idea. We had to take drastic measures and we had to have a starting point.”

Although Chrysler and GM eventually fell into bankruptcy, the pay scale brought down the labor costs of all three companies and made them more competitive with the non-UAW workforces at U.S. transplants and got their finances humming again.

It also allowed automakers to build less-profitable small cars, such as the Chevrolet Sonic, in Michigan rather than Mexico.

“(The 2-tier scale) is not acceptable now,” Williams says, adding it is time for his membership to have “a reward” in the next 4-year agreement.

2-Tier Wage System at Risk

Gary Chaison, industrial relations professor at Clark University in Worcester, MA, says the Detroit Three automakers likely will submit to the UAW’s demands and rescind the 2-tier wage system.

“The automakers might see it as more aggravating than anything else,” he tells WardsAuto, adding the Detroit Three don’t want to risk the possibility of a strike. “Automakers are right on the edge of recovery, but they still know they’re vulnerable.”

David Cole, chairman-AutoHarvest and chairman emeritus of the Center for Automotive Research in Ann Arbor, MI, disagrees, saying the automakers likely will offer other concessions rather than agree to eliminate the 2-tier system.

“What companies are afraid of is anything that is a cost not tied to profitability,” he tells WardsAuto. “So the companies will say, ‘We may be able to enhance profit sharing, which means in good years you do well, in bad years you won’t, but we don’t want to add a fixed cost.’”

Rather than eliminate the 2-tier system, Cole says automakers may agree to adjustments, such as shortening the time it takes for new hires to achieve the wages paid to senior-level workers.

The UAW this year also is expected to continue its push to organize transplant automakers. Last year, the union announced it managed to organize at least 45% of the workers at Volkswagen’s Chattanooga, TN, plant.

UAW Secretary-Treasurer Gary Casteel says the union now is “ready to move forward with formal conversations” with management, and he expects VW to follow through on what the union sees as a commitment for it to represent workers in collective bargaining.

Other automakers, including Mercedes’ plant in Tuscaloosa, AL, and Nissan’s facility in Canton, MS, also are UAW targets for unionization.

Detroit automakers, as well as the transplants, want to keep their plants humming in 2015. In 2014, capacity utilization in the U.S. was a staggering 98%, up from 94% in 2013, according to WardsAuto data.

“The key to success in manufacturing is using your assets at a high rate, and (automakers) are all doing that now,” Cole says, noting the massive downsizing during the height of the recession, including shedding thousands of jobs and shuttering underutilized plants, placed most North American manufacturers in a better position.

“The dramatic downsizing brought capacity in line with the market,” he says.

If the UAW negotiations don’t result in a substantial shift in the North American manufacturing landscape, production in the region is projected to be 17,126,500 units in full-year 2015, with the U.S. accounting for 11,624,826 builds, according to a WardsAuto forecast.

Despite the large production volume, North American assembly plants will have enough capacity to complete the projected builds, according to WardsAuto data.

The only automaker that may experience a capacity crunch is Subaru, which has seen its North American sales grow like wildfire, putting it in danger of outgrowing its Lafayette, IN, plant. The automaker has announced an expansion at the facility, but it won’t be completed until 2016.

Automakers also have sources for additional volume in new Mexican operations. Mexico, with three new plants (Honda, Mazda, Nissan) opening in the past year and a half and four greenfield sites (BMW, Daimler, Kia, Nissan) coming in the next five years, will have a big increase in available production.

Capacity constraints may not significantly impact automakers this year, but suppliers could feel pressure keeping pace with demand.

Joe Hinrichs, Ford President-The Americas, says suppliers drastically downsized during the recession and now are trying to rapidly boost capacity.

“The OEMs went through major restructuring and the supply base went through massive restructuring, as well,” he tells WardsAuto. “In a relatively short period of time the industry has come back to 17 million units on a seasonally adjusted annual basis.

“It just takes one supplier not having the capacity and you can’t build a vehicle or a powertrain,” Hinrichs says. “So that’s probably the biggest issue, keeping up with the demand in the near term.”

Falling Gasoline Prices Put Pressure on Automakers

Sales also are expected to be brisk. North American volumes are forecast by WardsAuto to reach 19,367,000 units in 2015, including 16,380,000 in the U.S. Canada is projected to account for 1,865,000 and Mexico 1,122,000.

Ford CEO Mark Fields tells WardsAuto he expects U.S. vehicle sales to settle between 16.8 million and 17.5 million, with CUVs accounting for a big portion of the volume. That could change if certain dynamics play out in the marketplace, he adds.

“We’re seeing two things,” Fields says. “One is on the CUV, SUV and truck side of business. A lot of manufacturers during the downturn took out a lot of capacity, so I think we’re seeing that combined with the demand, we’re seeing very reasonable behavior in the marketplace and customers are getting good value.

“On the car side we’re seeing more aggressive tactics,” Fields says. “Some may be overt in terms of discounting, while others are adding equipment and not charging for it.”

Toyota recently addressed the swing toward light trucks and CUVs, saying it would work in the first quarter to adjust production to build fewer cars, as demand for models such as the Tacoma small pickup and Highlander CUV is spiking, leaving inventories thin.  

As automakers rush to meet growing demand, they must be cautious not to repeat some of the quality issues, which led to a massive number of recalls from nearly every major automaker in 2014.

Ford’s Fields recently announced the automaker would slow the pace of new-vehicle-launches, while Fiat Chrysler CEO Sergio Marchionne says recall activity may have gotten out of hand.

“It’s impossible to predict what the future will hold (on recalls). We may be at the peak, but I can’t call that,” Marchionne says. “The industry may have overshot the mark in terms of recall activity. We may have become hypersensitive. We have to see where it ultimately stabilizes.”

Profitability among North American automakers has rebounded since the recession, with some manufacturers regularly recording multibillion-dollar quarters. Government-imposed fuel-economy regulations combined with falling gasoline prices could lead to a drop in profitability.

CAFE regulations call for cars and light trucks to achieve 54.5 mpg (4.3 L/100 km) by 2025, which will require automakers to invest in expensive new technologies, leading to a price hike in vehicles.

But cheap gasoline prices have led consumers to snub hybrids and small cars for larger CUVs and SUVs, leaving automakers in a quandary.

“When you look at potential of 2025 CAFE standards and the path we’re on, this could be an interesting issue of having to build cars and trucks that people are not interested in buying, particularly if depressed fuel prices last for a long period,” Cole says. “The cost for the last few increments in fuel economy becomes pretty high.”

The effects of the push to meet CAFE standards could be lessened by a midterm review of the requirements, which could lead to more favorable fuel-economy targets for automakers.

While it’s possible the requirements could be eased following the review, it’s unlikely they will be completely discarded, Cole says.

“I don’t think CAFE will be reversed, but will be moderated,” he says.

Ford’s Fields says the effect of falling pump prices will be a topic of discussion during the midterm review.

“We think (the midterm review) is a great opportunity to talk about the feasibility and the timeframe to meet those requirements,” he says, noting Ford is on track to hit the 54.5 mpg bogey in 2025. “What I expect is we’ll have a very robust midterm review and be very data-driven around it.”

Global Unpredictability Threatens Industry

Other potential stumbling blocks include weak economic growth, continued economic malaise in Europe and a slowdown in China, plus potential terrorist activity.

“It’s one of the least predictable periods ever seen in terms of factors that could change the game,” Cole says.

Leadership among top North American automakers is stable, and most top executives have proven track records, which provide optimism for 2015. Of the leading automakers, the only leadership question is at FCA and the uncertain future of Marchionne.

Marchionne recently announced plans to step down as CEO in 2018, but the mercurial executive has been known to make unexpected decisions.

Cole expects Marchionne will remain in his role through this year, but says FCA could be the one North American manufacturer that makes a surprising move to improve its position in the global automotive market.

“With FCA, volume and global scale are real questions,” he says. “It wouldn’t surprise me to see them partner with a Chinese company. They have little presence in China and in Asia in general. It’s still a developing story.”

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