Sales are peaking, fuel economy demands ramp up
Sales of cars and light trucks plummeted during the Great Recession and General Motors Co. and Chrysler emerged from government-back bankruptcies in 2009. Since then, total industry deliveries have surged, hitting a record 17.47 million in 2015, according to Autodata Corp.
Through the first nine months of this year, deliveries edged higher, up 0.5%, to 13.1 million. If that pace were maintained for the full year, another record would be set. But there were signs of weakness. There were monthly declines in August, September and October for total deliveries. Through October, total deliveries of 14.48 million were 0.2% lower than a year earlier.
Meanwhile, car deliveries noticeably weakened. Passenger car sales slid 8.9% for the first 10 months. The today’s buyers favor trucks: pickups, SUVs and the like. Those sales surged 6.9% during the first 10 months.
Whether or not 2016 produces another record, the big gains of the past several years are coming to an end.
For some, the outlook is a case of the glass being more than half full.
“Our underlying normative assumption is car sales are going to be just fine in 2017,” Gregg Sherrill, CEO of automotive supplier Tenneco Inc. (Lake Forest, IL), said in an interview following a speech at the Detroit Economic Club.
“We’re up there in those mid-17 millions,” he said. “Everybody is kind of talking is there going to be a downturn and I can’t predict that with any more accuracy than you could. We don’t see it. We still see consumer confidence where it should be, the age of the fleet where it should be. If it’s flattish…everybody should be pretty doggone happy.”
Outside the US, Sherrill said Europe is improving and China is still an expanding market. “The tier 1 cities are kind of parking lots right now, but tier 2, 3 and 4 cities are not,” he said of China. “There’s a lot of population out there, still a lot of room to grow.”
‘Stretched This Baby’
At the same time, the industry has been using leases and longer loans to maintain sales growth in the US. “We’ve stretched this baby as far as we can,” said Sean McAlinden, former chief economist of the Center for Automotive Research (CAR, Ann Arbor, MI). He spoke while still at CAR.
“We’re a cyclical industry. This is perfectly natural,” he said.
The industry is better able to withstand a sales slowdown than on the eve of the Great Recession, he said.
“Are we going to ride it out better? Sure,” McAlinden said. “This industry is a lot more efficient than the last time.”
The longer-term source of concern is meeting federal standards for fuel efficiency and emissions for the 2022 through 2025 model years.
Automakers have adopted lighter materials such as aluminum and high-strength steels (which are stronger than traditional steel, so less is needed for assembly) to reduce vehicle weight and improve fuel economy. Ford Motor Co. (Dearborn, MI) has introduced aluminum body F-150 and Super Duty pickups. General Motors (Detroit) brought out a Cadillac CT6 that includes a mix of aluminum and high strength steel. FCA US (Auburn Hills, MI), the former Chrysler, introduced a new Pacifica that utilizes high-strength steel and other materials, including magnesium, to reduce weight.
The vehicle makers also moved to make available gasoline-electric and plug-in hybrids as well as fully electric vehicles.
The question is whether customers will be willing to pay for the investment to meet the standards.
“Don’t extrapolate the last three or four years of progress for the next 10 years,” said Jay Baron, president and CEO of CAR.
“The consumer is not buying it,” McAlinden said. “The government forecasts the price of gasoline staying under $3 a gallon through 2025.”
CAR issued a study in September saying more than 1.13 million jobs could be eliminated under the most severe of nine different scenarios involving the fuel mandates. The job losses are worse under scenarios where fuel prices stay low and the cost per vehicle to meet the standards increases. The 1.13 million figure (910,140 automotive manufacturing job losses and 149,500 job cuts at dealerships) assumes a gasoline price of $2.44 per gallon (in 2015 dollars) and an additional $6000 per vehicle.
One of the nine scenarios, with a gasoline price of $4.64 a gallon in 2015 dollars and additional per vehicle cost of $2000, resulted in an employment increase. Even that was modest, with a manufacturing job gain of 103,620 and a dealership job increase of 41,400.
“The scenario combination of high fuel economy mandate costs and low gasoline prices can produce truly catastrophic job losses for the future of an economy still locked in a painfully long recovery from the 2008–2009 Great Recession,” according to the study.
“It is difficult to recommend the best public policies for accommodating the current fuel economy mandates for 2022–2025 in a moderate or low gasoline price future when some policies are considered politically infeasible.”
The standards are more stringent for cars than trucks, but automakers have a tough path to meet the standards for either. Detroit-area automakers GM, Ford and FCA rely on large pickups for the bulk of their profits.
“It’s going to get hard for trucks in the last three years” of the regulations, McAlinden said. “You have to boost fuel efficiency 20%. Trucks are sold on performance. If truck sales fall by 20–25%, the company is at zero profit,” he said.
Originally, the target of the regulations was for automakers to have a fleet average of 54 mpg (23 km/l) by the 2025 model year. The US Department of Transportation, the US Environmental Protection Agency and the California Air Resources Board more recently issued what’s known as a draft Technical Assessment Report (TAR).
That draft said the 54.5 mpg target wouldn’t be met because consumers are buying more trucks than originally estimated. The 54.5 mpg target figure assumed two-thirds of vehicle sales would be cars. In the first 10 months of 2016, trucks comprised 58.9% of light-vehicle sales, according to Autodata. The draft TAR assumes a range of 50–52.6 mpg (21.3–22.4 km/l). The regulations themselves weren’t changed in the draft report.
Automakers and suppliers have less time to recoup their investment in technology expenditures because of the upcoming standards, said Brett Smith, a CAR assistant director.
Companies, he said, are putting “money into six different baskets with expectations that three of them are going to pay off. You can’t keep changing technologies every two or three years. You don’t get paybacks anymore.”
The need for improved fuel efficiency is pressuring automakers. In the early 2000s, GM and Ford jointly developed 6-speed automatic transmissions. At the time, it was an unusual move for the two competitors.
Those transmissions “will be obsolete in the next two to three years,” Smith said. The automakers said in 2013 they’d work together to develop new 9- and 10-speed transmissions for cars, trucks, sport-utility vehicles and crossovers. A 10-speed transmission is available in the 2017 Ford F-150 pickup and 2017 Chevrolet Camaro ZL1 sports car. GM has said the 10-speed transmission will be available in eight more vehicles by 2018.
Adjustments will be made as new materials become more commonplace. For example, CAR’s Baron said, some tool and die shops have difficulty with high-strength steel. “Dies are breaking,” he said. “The steel is so strong, they’re wearing out the dies.”
Regardless, work will progress because it has to do so.
“We don’t see the regulations going away,” said CAR’s Baron. “The industry is investing. Engineers see the hurdles.”