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A New Job Pattern for the Auto Industry


Bankruptcy and the recession have led to a restructuring that should leave
old bad habits in the rearview mirror

 

By Antonio Danova
Industry Analyst
IBISWorld
Santa Monica, CA

 

Automotive industry employment is expected to grow in the long run, but the restructured business models of the Detroit Three will prevent the domestic industry from reverting to the behavior that led to the predicaments exposed during the recession. Thus, the hiring capacity of the automotive industry will transition into a new normal, as the next era of employment trends looks to keep the automotive sector running efficiently. Up and down the sector’s supply chain, different industries reacted and responded differently to the events of the past five years. In order to elaborate on the differing effects on employment throughout the automotive sector, this discussion will look at three automotive industries whose supply ties bind them together, but whose post-recession reformations will impact job outlook in unique ways.

A multitude of external and internal economic forces have taken the automotive industry down a winding path over the past five years. Recently, the industry has experienced strong car sales for the first part of 2012. Some analysts forecast total sales will eclipse 14.5 million vehicles for the year. These positive estimates also come on the heels of two very successful years in 2010 and 2011. Consumer incomes rose and financing for new vehicles became more widely available, facilitating a growing enthusiasm for new car purchases, one that was pent up during the recession. On the other hand, the recent success also comes after years of severe turmoil. And even prior to the recession, all three domestic automakers had been enduring massive sales slumps for a number of years. Without proper revenue generation, profitability at the companies eroded and many began questioning the operational integrity of each firm.

When the recession struck in the second half of 2008, these issues were harshly exposed. During the downturn, many consumers chose to defer new car purchases, extending the ownership of their vehicles simply because they could not afford a new car. Additionally, havoc in the financial markets squeezed credit from the Detroit Three, causing the companies to suffer a drastic cash shortage. GM and Chrysler were essentially running on empty, to the point that bankruptcy became almost inevitable. And in the slow economy, when many Americans were already finding themselves out of work, the overriding concern with the potential downfall of one of the country’s most important industries was the effect on jobs. Layoffs had already occurred, but a further plunge into recession would exacerbate the problem. So, to prop these companies up and evade massive job loss, the Bush administration approved a bailout package on December 19, 2008. The plan gave total loans of $17.4 billion, taken from the bank bailout funds approved in October 2008, to GM and Chrysler.

Though the recession caused a great deal of financial turmoil throughout the industry, it also facilitated a complete overhaul of the way the automotive companies are run. Being a large component of the American economy for a long time may have made the industry’s largest companies complacent, overlooking changing market trends and disregarding longstanding operational issues. Now that car sales are up and many firms have restructured, the automotive industry in the United States is poised for a bright future, as this repositioning has already benefited total industry employment. IBISWorld data suggests that aggregate job growth from all three industries discussed in this report rose 3.3% and 5.0% in 2010 and 2011, respectively, and jobs throughout the automotive sector are persistently being added as consumers continue to flock back to the market. Total Employment

Employment trends provide a simple yet important glimpse into the performance of the industry’s largest companies; specifically detailing their operational strategies and capacity to hire more or less labor. And so—setting aside any political or social implications associated with the performance of the Detroit Three, the auto bailouts, the results of the upcoming 2012 Presidential elections, or the automotive industry itself—this employment discussion will emphasize the importance of this industry to the future of the American jobs market and to the continued recovery of the American economy.

 

Automobile and Light-Duty

Motor Vehicle Manufacturing

IBISWorld categorizes companies in the automobile and light-duty motor vehicle manufacturing industry as being primarily engaged in the final assembly of vehicles. Thus, industry employment numbers lie in the jobs at the assembly plants of the major automakers. Even prior to the recession, job growth in this industry was hampered by falling vehicle production in light of repressed car sales. According to Ward’s Auto, in the three years prior to the beginning of the recession in 2008 overall car sales only experienced one year of growth, a minimal increase of 0.8% during 2005. A number of factors can be attributed to the falling sales, but rising oil prices played a catalytic role. Consumers became unenthusiastic with the stale vehicle lineup that featured mostly inefficient SUVs and pickup trucks, the main product segment of the Detroit Three. With car sales down, automakers were forced to curtail production, cutting employment in the process.

 Automobile and Light-Duty Motor Vehicle Manufacturing Employment

This trend of job loss was all too familiar for the automakers once the economy began to swerve into recession. According to IBISWorld data, massive layoffs led to historic employment declines of 7.5% and 28.7% for the industry during 2008 and 2009, respectively. Compounding this onto the previous years’ losses, employment fell an alarming 9.7% annually to 109,931 employees in 2009, from 182,188 in 2005. In order to combat the drastic fall in car sales, operating costs had to be slashed, and employment suffered as a result. Conversely, the layoffs became somewhat of a necessary evil, one that would stabilize the balance sheets of the major companies, putting them back in a better position to hire in the future. Once the recessionary storm calmed, automakers were encouraged to ramp up production, assembling more vehicles to meet newly restored consumer demand. However, rather than returning to fuel-inefficient SUVs and light trucks, the Detroit-based automakers refocused output toward practical sedans, small cars and more compact crossover utility vehicles (CUVs). This strategy was met favorably by the public, and consumers began returning to the market in 2010. All of these trends helped industry employment return to an auspicious position. IBISWorld data shows that in the four years from 2009 up until the current year, jobs are expected to grow 5.8% annually to 137,134 employees.

The future of employment within this industry hinges on the automakers continued production of vehicles consumers want to drive, but also depends on automakers solving some internal cost concerns. For example, this industry is unique in that a significant portion of employees belong to the UAW. The union currently has about 390,000 active members and over 600,000 retired members. In general, the UAW, with the importance of its workers to the domestic automotive industry, has historically leveraged high wages and lucrative pension plans for their members. This still holds true today, as according to IBISWorld data the average wage per employee in this industry will eclipse $64,000 in 2012. Most of the employment of UAW workers is with the Detroit automakers. High legacy pensions, healthcare benefits and salary requirements ultimately put significant cost pressure on these companies. When restructuring of the automakers occurred in 2009, these UAW costs were cited as a disparity in the cost structure of the automakers, and one that would need to be significantly examined. Additionally, in 2007, the Detroit Three and the UAW agreed upon a contract that would lower wages and benefits for new hires and keep wages and salaries the same for tenured employees, effectively creating a two-tier wage system for the industry. This agreement helped automakers ramp up production and employment without incurring the typical expenses of more labor. However, the integrity of this system has been under scrutiny recently, and the UAW could push for a return to uniform wages. Thus, the long-term relationship between the domestic automakers and the union will play a tremendous role in the future cost structure and job outlook within this industry.US employment data for select domestic and foreign-based automakers.

Another growing trend that will impact the job outlook in this industry is the pace of foreign transplants. As the domestic automakers failed to make ends meet, many foreign-owned manufacturing companies capitalized on the opportunity to expand their US presence. The risk of the volatile currency exchange market, along with generally stronger US car sales, enticed foreign automakers to build where they sold. Industry stalwarts like Toyota and Honda made concerted efforts to open up more manufacturing facilities within domestic borders. Meanwhile, manufacturing companies less familiar to the country, such as Hyundai Motors, opened their first US plants. The trend of foreign automotive transplants in the US started almost 30 years ago; the presence of these companies has only grown stronger in recent years. Currently, 10 foreign-based companies operate 16 assembly plants in the US. While these foreign automakers did not entirely escape the turmoil of the US recession, their increasing presence has definitely helped buoy industry employment and will be a key factor in the future of American automotive jobs in the long run.

 

Automobile Parts Manufacturing

The automobile parts manufacturing industry supplies automakers with a wide variety of parts, from exterior products like wheels and mufflers to interior components like air conditioners and air bags. This industry’s major companies typically hold strong supply relationships with automakers in the US and typically locate in or near the same region where automobile assembly plants are. In some cases these companies are direct offshoots of an automaker, like Delphi Corp., which was spun off from GM, and Visteon Corp., which was spun off from Ford. Thus, the performance of this industry is predicated on demand for automobile parts from motor vehicle manufacturers.

Like the automakers, auto parts manufacturers had been cutting employment even prior to the recession because of slumping car demand. When production at assembly plants plummeted during the downturn, with alarming declines of 16.2% and 32.2% during the two recessionary years, auto parts manufacturing companies were forced to suspend production as well. Subsequent layoffs at these companies resulted in industry-wide employment losses of 4.0% and 27.6% in 2008 and 2009, respectively. In fact, total industry employment fell from 155,523 workers in 2005 to 104,033 in 2009. Unfortunately, these strong supply ties would ultimately prove detrimental to the operations of US auto parts manufacturers Delphi and Visteon, which moved in line with the downfall of their automaking corporate progenitors. Delphi, which had undergone Chapter 11 reorganization of its own in late 2006, suffered severely from the halt of production at GM. Visteon, meanwhile, filed for bankruptcy protection in 2009. Unlike their one-time parents, though, post-recession job growth has not moved as quickly, with expected annual growth of 2.2% from 2009 through the current year.Auto Parts Manufacturing Employment
Besides the downfall of domestic firms, heavy globalization has had a marked effect on the industry’s employment outlook. As discussed earlier, many foreign automakers penetrated the domestic market, in turn creating a substantial opportunity for foreign parts manufacturers associated with these companies, such as Denso Corp. and Magna International. In general, this increased influence of foreign-based manufacturers has enhanced industry performance overall; however, it has also taken away from the strength of domestic parts manufacturers in the market, leading to multiple plant closures at both Delphi and Visteon. Because of this, overall industry job growth potential has been muted in spite of higher overall revenue performance, as the domestic manufacturers have been attempting to keep operations efficient.

In addition, the segmentation of industry products manufactured in the US has been somewhat divergent recently. Many companies began outsourcing or discontinuing lower value-added products, as they could not compete against the low labor-cost producers abroad. In turn, domestic firms refocused efforts toward high value-added parts like air bags, air conditioners and exhaust systems, working closely with automakers’ engineering teams to meet specific production goals. By eliminating lower value-added products and the peripheral labor needed to produce them, parts manufacturers have retained their highest-skilled workers, those that command higher salaries. This drives average industry wages up, subduing the hiring capacity at each firm. According to IBISWorld data, average wages for the industry have already grown remarkably, from $45,682 in 2005 to $54,312 in 2012. As wage costs continue to rise, this may keep the rate of employment growth slower than in other automotive-related industries.

Number of US plants operated by select auto parts manufacturers.

New Car Dealers

New car dealerships act as retail outlets for the automakers, where dealership owners enter a franchise agreement to protect their exclusive right to sell a specific brand of vehicle in a specific location. Therefore, employment trends within this industry lie primarily in the trends in establishment numbers. Generally, the widespread nature of the industry, with its numerous locations and high total employment, really added to volatility in establishment closure trends and job data trends over the past few years. According to data from the National Automobile Dealers Association, the number of franchised new-car dealerships fell 3.3% annually from 2005 to 2011, with the recession having the largest impact on dealership closures. Falling vehicle production created a lack of inventory, eliminating the sales potential for many smaller dealerships. Those associated with GM and Chrysler were hit especially hard: 2800 dealerships carrying GM or Chrysler brands had franchise contracts revoked in the midst of the automakers’ restructuring plans. This had a striking effect on dealership employment. According to IBISWorld data, employment fell an astonishing 8.0% from 2005 to 2009 to 750,825 workers, down from about 1,138,000.

The industry has turned for the better recently, especially with consumer demand for new cars up again. However, new car dealerships have taken on an interesting new business model that has kept sales flowing while keeping operating costs down: internet-based retailing. Dealers have been increasingly seeking collaborations with car websites like Edmunds, Cars.com and AutoTrader to help increase traffic to their dealerships. Consumers can browse cars and ultimately purchase them online. This provides a faster sales vehicle than the traditional brick-and-mortar dealership platform, in turn moving inventory and lowering floor plan financing expenses. Floor plan financing typically requires dealerships to pay interest on unsold inventory. Internet-based retailing is a large reason why more than 1500 dealerships exited the industry in 2010 and why more consolidation is expected in the long run, despite higher industry revenue performance. In addition, dealerships also have begun focusing more on repair services and parts sales. Because virtually all new cars are sold with a manufacturer’s warranty, which only franchised dealerships can honor, dealerships carry a heavy competitive advantage in the repair services market. Thus, dealerships have been preparing for a service-oriented, internet-based future. By collaborating with car websites, adding more service bays and hiring more high-skilled technicians, strategies that have cut large portions of sales-department staffs in the process, dealerships have slowed the growth potential of total employment in this industry.

 

This article was first published in the 2012-2013 edition of the Motorized Vehicle Manufacturing Yearbook.


Published Date : 12/1/2012

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