ANN ARBOR – U.S. light vehicle sales ended 2018 on a surprisingly strong note, and the 2019 outlook is mostly positive for the industry. Most forecasters expect companies to continue to post healthy profits and for U.S. sales and production to remain high, though down a few percentage points from the levels achieved in 2016 – the most recent peak.
The current economic expansion is just four months away from setting a record as the longest expansion in U.S. history, and auto sales and production have remained strong since 2009; however, signs of weakness are starting to appear as economic momentum slows, bond yields lag, stock prices struggle, and the yield curve has nearly inverted.
External shocks to the economy could come from a number of sources: trade policy, fiscal policy, a protracted government shutdown, the global economic slowdown, or a combination of all these factors.
Faced with these divergent possible paths forward, automakers and suppliers are displaying a mix of optimism and pragmatism at the 2019 North American International Auto Show (NAIAS). Much of the optimism focuses on new technology and partnerships, while market disruptions could come from many directions.
Potential for Success
Never before have automakers had to have such a diverse product portfolio offering various body styles, types of propulsion, and safety and comfort features. Automakers and suppliers are placing big bets on technology – from advanced propulsion and automation to the use of new materials and manufacturing processes. Much is changing about the product and the processes used to make it, but change also is coming in how consumers purchase and use vehicles, including new business models such as buying “mobility-as-a-service,” and that is driving new investments in ridesourcing (such as Uber and Lyft), ride sharing, and micro-mobility initiatives from automakers and new competitors.
￼The inherent risks across all of these investments are driving closer collaboration between automakers and suppliers, automakers and startups, and even among competing automakers. FCA and Waymo (Google parent Alphabet’s automated vehicle unit) have been collaborating for several years, and ridesourcing companies such as Uber and Lyft also have partners for development of automated vehicles, while BMW and Daimler recently formed a joint venture to offer mobility services.
This past October, we learned that GM and Honda had formed a partnership to invest in a purpose-built automated and electric vehicle through GM’s Cruise Automation. Moreover, earlier this week, we learned about Ford and VW’s tie-up to build commercial vehicles and medium-sized pickups and explore ways to develop electric and automated vehicles jointly. These are only a sample of emerging collaborations, and we can expect to see even more strategic partnerships and joint venture announcements throughout 2019.￼
Over the last few years, one by one, automakers have begun spelling out their electric vehicle (EV) strategies. Ford, for example, revealed that it will invest $11 billion to develop EVs by 2022. GM plans to launch at least 20 EV models by 2023. Also, Volkswagen announced plans to build an EV assembly plant in Tennessee. These announcements, if they come to fruition, will have tremendous impact on the automotive industry.
U.S. customers generally are not yet interested in EVs for, arguably, three reasons: initial purchase cost, range anxiety, and Infrastructure (lack of charging stations and speed of recharge). Each of these present enormous challenge, but progress continues. Vehicle electrification will move forward more rapidly in those countries with government support for financial and non-financial consumer incentives, charging infrastructure and battery research. While China and European countries have been more aggressive in pursuing policies to encourage plugin electric vehicles, recent U.S. federal regulatory strategy has shown less support for the development and adoption of EVs.
The auto industry is focused on predicting the “electrification tipping point,” that moment when technology and policy combine to make EVs mass-market ready. Whether that tipping point is in two years, five years or longer, manufacturers and propulsion suppliers seem all but certain it will come and have drastically shifted product development and investment to reflect this change.
Potential for Peril
The cyclical nature of the auto industry means that record years and healthy profits often instill worry instead of celebration among industry leaders – after all, what goes up, must come down.
The 2008-09 downturn brought the bankruptcies of Chrysler, GM, and countless automotive suppliers. Overcapacity heading into the downturn led to plant closings, early retirements, and massive layoffs.
Automakers and suppliers know a recession is coming and that they have to continue to invest in future technology and business models through the downturn or else be left in the dust. The companies are being proactive and protective as the signs of a slowing market take hold. GM’s announcement to not allocate product to three assembly plants and two powertrain plants in the United States and Canada is based largely on a rapid shift in consumer preferences away from sedans and toward cross-utility vehicles (CUVs) that now account for two out of every five vehicles sold in the United States.
Ford has announced they will stop offering sedan models in the U.S. market, and FCA is down to just three Chrysler and Dodge sedan models in the market. The trend toward CUVs is supported by the demographics of the older new vehicle buyer and relatively low fuel prices. Even if there is an uptick in fuel prices, CUVs are only marginally less fuel efficient than sedans and will likely remain strong in the market
U.S. light vehicle sales are expected to weaken slightly in 2019, and signs of slowdowns in China and Europe are emerging. Demographics and customer expectations are shifting rapidly, and automakers and suppliers need to be nimble and flexible to respond to these market dynamics. These shifts put plants, workers, and communities at risk as companies align their product lines and capacity to the market. While sales of electrified vehicles remain below four percent in the U.S. market, consumer acceptance is increasing, and battery technology is becoming cheaper and more capable. As the electrification tipping point nears, the risk to traditional powertrain producers, suppliers, plants, and workers increases.
President Trump’s approach to trade relations also poses significant risks to the U.S. automotive industry. Already, the President’s national security tariffs on steel and aluminum have made the United States the most expensive region in the world for these metals – leading to higher prices for consumers and lower profits for producers.
The U.S. tariffs on Chinese imports expanded to encompass virtually all automotive parts in September, and this, too, will affect consumer prices and profits. Passage of the recently-signed United States-Mexico-Canada Agreement (USMCA) is far from certain as Democrats in Congress seek to strengthen labor and environmental protections in the deal. If the USMCA process bogs down, the President may withdraw from the current North American Free Trade Agreement.
(NAFTA) which will create greater uncertainty for the industry. The Administration has also started the process of negotiating trade deals with the EU, Japan, and the UK – adding to uncertainty and risk for automakers and suppliers. Perhaps the biggest risk to the industry, however, is the potential for the President to impose additional tariffs on imported autos and parts as part of the current Commerce Department Section 232 investigation into whether these imports pose a national security threat.
The autos and parts tariffs will raise consumer prices – even for vehicles produced in the United States since the average car or truck made here contains 40 to 50 percent imported content. The Administration’s goal is to bring more manufacturing back to the United States’ shores, but as the industry is on the cusp of a downturn and no one knows if the tariffs will be in place over the long-term, a big uptick in investment and jobs is unlikely.
Changes to U.S. tax law are expected to produce smaller tax refunds this year, and that will have an impact on U.S. light vehicle sales, as will the government shutdown if it continues much longer.
Looking Ahead to 2020
In 2020, the NAIAS will not happen until June. In the 17 months from now until then, the U.S. auto industry is likely to achieve at least some new milestones, including perhaps the deployment of the first level 4 automated vehicles for public use without safety drivers on board. Automation will affect more than how we operate vehicles, however, and will continue to affect how we make them and begin to affect how we move parts and components around; this also will be affected by evolving trade policy.
Automakers and suppliers are not able to invest in every possible new technology or hedge every possible risk to the business. Success will require a comprehensive roadmap with contingency plans that plays to each company’s unique strengths, strategic partnerships, and an unwavering focus on building a future-proof business.
Carla Bailo is President and CEO of the Center at the Automotive Research.
Kristin Dziczek is Vice President of Industry, Labor & Economics at the Center for Automotive Research.
Richard Wallace is Vice President, Transportation Systems Analysis at the Center for Automotive Research.
Brett Smith is Director, Propulsion Technologies & Electrification Infrastructure at the Center for Automotive Research.