United States light vehicle sales have expanded for seven consecutive years—the longest uninterrupted market expansion since 1917. The Center for Automotive Research (CAR; Ann Arbor, MI) forecasts the US motor vehicle market is reaching a plateau, even as several factors weigh in favor of continued growth, including:
- The index of consumer confidence is at a 10-year high;
- Real gasoline prices are among the lowest levels since 2003;
- Consumer credit is generally available, and interest rates remain relatively low;
- 2016 economic conditions were favorable:
– Real GDP grew at a 1.9% annual rate;
– The unemployment rate fell below 5%; and
– On average, private workers’ wage growth continued to out-pace price inflation.
Forecasts for 2017 show slightly improved GDP growth, and lower unemployment. Early 2017 total US light vehicle sales declined slightly; light truck sales increased by more than 6%, while passenger car sales fell by nearly 13%. Through March 2017, vehicle inventories remained at their highest level in over five years.
CAR expects 2017 may represent an inflection point where plateauing sales may begin to decline and US light vehicle sales will not continue to expand past 2017.
US light vehicle production is on a different trend than sales. CAR anticipates year-over-year growth of vehicle production for the next four years. Since 2015, US light vehicle output has been at maximum capacity, with capacity utilization rates for assembly plants averaging 95% (many plants are currently over 100% two-shift straight-time capacity utilization). There is little room for production to expand without investment in new plants or new assembly lines.
The White House wants to bring back US automotive manufacturing jobs—in part by renegotiating NAFTA and introducing corporate tax reform that includes a Border Adjustment Tax (BAT). Several automakers—including FCA, Ford, General Motors, Nissan, and Toyota—have recently announced job increases and plant upgrades in the United States. However, none has yet committed to a new US assembly plant. Given the 2009 market crash, automakers’ caution in expanding capacity at what may be the top of the market is understandable.
The US light vehicle market is highly cyclical; since the 1970s, the market has experienced four major cycles. Each cycle is unique in terms of economic and market conditions, but the troughs have one thing in common: the coincidence of high oil prices. Oil prices, however, do not fully explain the sales slumps, and do not necessarily predict US sales downturns. For example, the most recent oil price hike was in 2011; gasoline prices went from less than $3 per gallon to $4 within a year, but vehicle sales continued to grow coming out of the recession.
Looking beyond 2017, government forecasts show oil prices will remain at low levels for several reasons:
- The United States is now a crude oil net exporter. The current political environment incentivizes greater domestic oil and natural gas production by relaxing federal and environmental regulations.
- OPEC’s abilities to influence world oil prices is diminishing. North America’s oil production will soon be sufficient to supply its own demand. China, which is the second largest oil consumer, has increased its oil imports from Russia—which replaced Saudi Arabia as China’s top crude oil supplier in 2016.
- China is becoming the largest oil consuming country in the world, but per capita oil consumption remains much lower than in the United States. China is also promoting and utilizing alternative energy sources in the automobile industry with a goal not of reducing oil consumption, but rather reducing air pollution. China’s per capita oil consumption may never reach US levels.
- Finally, environmental awareness and energy efficiency is a global movement—even Saudi Arabia is looking for ways to reduce its oil dependency. Environmental concerns now outweigh worries over oil resource depletion. Alternative powertrain vehicles may eventually replace internal combustion engine vehicles in many global markets.
US Auto Industry Considerations
The US automotive industry is operating in unprecedented times. The following represent some of the key factors to watch.
Fuel Economy / CO2 and Electrification
While the US auto industry awaits the outcome of the mid-term review, global CO2 regulations will continue to drive increasingly challenging standards. Overall, manufacturers expect compliance costs to be higher and efficiencies to be lower than regulators estimate. A difference in expectations for efficiency gains leads to an uncertain “electrification tipping point,” where US regulators’ expectations for efficiency far exceed what industry finds to be required to meet standards. Such a shift in the need for electrification greatly alters the cost equation—and is far beyond what the current consumer market has shown willingness to accept. This electrification tipping point will be a critical guidepost in understanding the future market.
Further, greater fuel economy and lower emissions are not merely cost and efficiency problems; they are also a pathway problem. Each manufacturer is pursuing many technology pathways; no two manufacturers have the same product and technology portfolio, nor the same fuel economy strategy and technology costs. Therefore, suggesting a lowest cost for a technology or implementation strategy may be misleading. Depending on market position, customer expectations, and product mix, some automakers will bear a much greater implementation burden than others.
US vehicle production did not change much with introduction of the North American Free Trade Agreement (NAFTA) in 1994. NAFTA rules of origin are set at 62.5%, meaning that parts, components, and vehicles trade freely within the region if at least 62.5% of the content “originated” in Canada, Mexico, or the United States. Since the supply chains for passenger cars are often more global than those for trucks and SUVs, raising NAFTA rules of origin may be more difficult on NAFTA-produced cars. Trucks and SUVs may already be at higher content composition, and the result could be documenting and tracing more of truck and SUV content, and not physically moving much of the supply chain or assembly of these more regionally-focused vehicles.
Border Adjustment Tax
Given the highly-integrated production network, the Border Adjustment Tax (BAT) proposal that is expected to be introduced as part of comprehensive corporate tax reform poses a critical challenge to the domestic auto industry (as of the time of this writing no bill has been introduced). Preliminary estimates suggest that the impact of the BAT will be higher costs in the automotive supply chain, and the impact on individual automakers and suppliers varies widely depending on their manufacturing footprint, US sales level, and vehicle segments in which they have a presence.
Based on confidential financial data received from automakers representing over 50% of US light vehicle sales, CAR estimated the cost impact of the immediate imposition of the BAT. Holding currency exchange rates constant, CAR examined only a price response to the implementation of border adjustment to estimate consumer price changes. These changes are based on: vehicle manufacturers’ changes in effective taxable income, changes in auto manufacturers’ input costs from the automotive parts sector, and assuming no change in unit sales or domestic production or shifts in sourcing or production investments.
CAR estimates that the immediate responses to border adjustment would be:
- Automotive parts and materials prices would increase by 8.4%.
- US light vehicle prices would increase 5.6%.
- Average per vehicle price increases are estimated at $1970.
- Given 2016 US sales at 17.5 million, the price increase represents an aggregate $34.6 billion in higher costs to consumers.
Potential for Jobs to Come Back to the United States
Finally, CAR has identified three reasons to be pessimistic about auto jobs returning to the US in large numbers:
- Current talent shortages (the unemployment rate in the transportation equipment sector was 3.7% in 2016—fully one point lower than the national average); in addition, shortages are especially acute in skilled trades occupations.
- Global competitiveness—every auto production region sources from low-cost/best-cost countries; the US auto industry would be less competitive on a global stage without use of “best-cost” parts and components.
- The US light vehicle market is near the top of the cycle; manufacturers will be cautious about making greater US investments that could lead to an overcapacity situation as the market eventually slows or begins to contract.
Automotive industry strategies, including sales and production outlook and the implications of tax, trade, and fuel economy policies, will be among the key topics on the agenda at the 2017 CAR Management Briefing Seminars, July 31–Aug. 3 in Traverse City, MI. Executive management from automakers and suppliers along with leaders in finance, academia, workforce development, media, and government will be there to connect and discuss the issues affecting the industry today. More information is available at http://www.cargroup.org/mbs/