Risk and reward: Automotive industry economic trends and forecasts
INSIGHT ARTICLE |
- Production remains high for original equipment manufacturers and their suppliers.
- The industry is showing signs that it will be looking at a completely different supply chain model in the not-too-distant future; a model that will be driven by software companies.
- Mexico appears to be the strongest growth leader, with rising production rates and plans for adding more capacity.
- Talent availability is one of the biggest hurdles for the auto industry, and many companies are losing employees seeking better opportunities.
With auto sales in the past year hitting record levels, we will likely see that auto supplier sentiment is generally positive in the upcoming Manufacturing & Distribution Monitor report. Although growth rates are slowing in most regions and production is leveling off, strong sales are driving the upbeat outlook.
Revenue growth and profitability
Production remains high for OEMs and their suppliers, with auto sales forecast to top 18 million by 2018.[i] The Original Equipment Suppliers Association’s supplier sentiment index rose to 55, indicating a positive outlook by suppliers. SUVs, larger vehicles and luxury cars are selling strongly, due to dropping oil prices and low interest rates. But in the rush to meet demand, automakers and suppliers could run the risk of overbuilding inventories. A significant number of cars are coming off their leases in the coming years, but it is not clear that these cars will be replaced by contracts for new vehicles.
Millennials are less interested in buying cars than baby boomers, preferring the freedom of ridesharing over the hassle of ownership. But there is the possibility that this could change, as more millennials are buying homes[ii]—and with home ownership, cars often follow. Lending to buyers through auto dealership financing could come under some scrutiny, as the Consumer Financial Protection Bureau continues to act on what it is calling abusive financing schemes—a form of subprime lending—that are hiding auto finance charges and misleading consumers.[iii]
Technology and innovation
The 2016 Consumer Electronics Show looked more like an auto show, where the continually evolving in-car technology applications were showcased. Non-automotive companies such as Google and Apple are making applications for the connected-car trend; IBM is helping carmakers leverage data accessed from their vehicles to enhance service, sales and marketing efforts.
Eventually, the industry will be looking at a completely different supply chain model, one that is driven by software companies. It won’t happen in this business cycle—the major disruption may not arrive for at least ten years—but it will come. That is why General Motors is investing in a partnership with Lyft, the ride-hailing company, and buying Cruise Automation, a technology company that can transform conventional cars into self-driving vehicles. The Department of Labor is giving grants to companies that are developing an engine that could improve fuel efficiency by 50 percent or more[iv]—that is, for those vehicles that are not already running on battery power or hydrogen fuel cells.
Not all states can attract auto production; it usually is dependent on the right mix of location and local labor available. But a few states around the country have been quite successful in attracting auto assembly to their areas. Some locations with nearby ports—Charleston, South Carolina, for example—are particularly well-suited for international distribution and have been quite successful in attracting auto manufacturers.
The United States, however, is second in growth compared to Mexico, which appears to be the strongest growth leader, with rising production rates and plans for adding more capacity[v]; China is in third place for growth. South American production, on the other hand, continues to contract at an even higher rate than it did in 2015. At least one major automaker has postponed plans to build a plant in Brazil until that country’s economy recovers.
Employment in automotive manufacturing has risen steadily since mid-2009, but still falls short of the level seen in 2006, just before the recession.[vi] Talent availability is one of the biggest hurdles for the auto industry. Many manufacturers are conducting in-house apprenticeships and training rather than trying to find new personnel. In 2015, Japanese automakers had a quite positive effect on the U.S. economy, expanding its talent pool by 12 percent and increasing take-home pay by 20 percent.[vii]
Keeping both newer and older workers engaged is important, and to that end many manufacturers find that training, education and consideration of work-life balance issues are effective. Yet many companies are not investing in these areas, and are losing employees who are seeking better compensation opportunities; working under managers who lack good leadership skills; or experiencing overwork and job burnout[viii].
[i] Detroit Free Press
[ii] National Association of Realtors Home Buyer and Seller Generational Trends
[iii] Consumer Financial Protection Bureau
[iv] USA Today
[v] OESA Automotive Supplier Barometer
[vi] Bureau of Labor Statistics
[vii] Automotive News
[viii] Plant Services