C.A.R. Management Briefing Seminars - Day 2

CENTER FOR AUTOMOTIVE RESEARCH
MANAGEMENT BRIEFING SEMINARS

Wrap It Up
By Steve Purdy
The Auto Channel
Michigan Bureau

Traverse City, MI – August 2016

Numbers, numbers, numbers – my eyes are glazing over.

The NADA (National Automobile Dealer’s Association) released their prediction for new car and light truck sales for 2016 – a solid and gratifying 17.7 million units, up incrementally from the 2015 record. Noting “six straight years of steadily rising sales,” NADA’s chief economist Steven Szakaly talked about pent-up demand being mostly satisfied now but with the average age of vehicles on the road still holding at over 10 years replacement need will remain strong. Helping drive sales are low fuel prices, rising employment and consumer confidence in the economy.

Some other numbers are encouraging as well. The American Automotive Policy Council notes that automobiles represent the largest manufacturing sector in the U.S. accounting for fully 3% of the nation’s GDP. The auto sector also represents the largest exporter at $775 billion/year in cars and parts.

We’re not talking about “powertrains” here so much any more. Rather, we now refer to “propulsion systems.” The former typically refers to an engine and transmission but those may not be essential anymore as the latter - fuel cells, battery electrics and perhaps other systems we’ve not thought of yet - emerge. Of course, for the foreseeable future we’ll still be driving cars and light trucks with conventional engines and transmissions. A few, probably very few, will be augmented by hybrid electrical systems. The dominance of battery and fuel cell electrics and other unconventional propulsion systems, if it ever happens, is well beyond where we can see now.

Here’s another number: Plug-in hybrids comprise just 0.35% of the U.S. vehicle market. Many automakers produce plug-ins, a more intense version of hybrid gas/electric automobiles, but they’ve yet to catch on. The cost of the extra content in the powertrain is hard to justify. Total alternative powertrain penetration in the U.S. is barely 4%. That leaves a long way to go to make a significant impact.

What is happening to the CAFE (Corporate Average Fuel Economy) numbers? Just a few years ago we were worrying about how automakers would manage to meet the standard of 54.5-mpg average in spite of confidence they can do so. Suddenly, we’re talking about a new number, maybe 50.8. What happened is, we the consumer, decided we like large cars and particularly pickups since fuel prices have slumped to all-time lows (adjusted for inflation) and since the OEMs are making such cool and marginally efficient bigger vehicles. EPA official Christopher Grundler insisted that is not the case.

The EPA, he said, is has no plan to reduce the CAFE standards. The whole structure is up for review next year.

We learned here in Traverse City that auto production in Mexico is expected to double over the period 2010 to 2020 according to a study by the Center for Automotive Research. Before you jump into the anti-NAFDA camp you’ll want to know that most of the increases will reflect production moves from Japan, Germany and South Korea, not the U.S. The impetus is not only lower labor costs but also Mexico’s unusual free trade position.

A traditional mid-conference treat – or tedium, depending on your view – is an address by Michigan’s governor. In this case, governor Rick Snyder took a break from trying to fix Flint’s water crisis to come to Traverse City and cheerlead for the industry. Our ever optimistic Governor Snyder touted the State’s successes, and they are plenty, while suggesting we all embrace changes that are inevitable throughout business. The governor also acknowledged the critical need for more engineers to fill ever-increasing vacancies at most of the auto industry’s facilities. After all, the vast majority of U.S. automotive R&D is still done in Southeast Michigan.

The governor may have summed up the feeling here at MBS when he said let’s “keep our foot on the accelerator, stay on the gas” while the industry and the state’s economy continues to improve. In the back of his mind, I’m sure, as it is in most of ours, is the question of when the next downturn will come. If we have learned anything over the past century of auto making is, it will come. After the last recession nearly killed the industry it appears most of the players, both major and minor, are better prepared.

The governor also took advantage of his visit to the conference to formally sign a Memorandum of Understanding on cooperation with Ontario. The two governments have been working on a plan to build a new bridge across the Detroit River for years now to help, among others, the auto industries of both countries.

One of America’s leading forecasters, Jeff Schuster of LMC Automotive thinks, as do some of his colleagues, the risk of recession is greatest within the 2019 time frame.