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Original article URL: http://bridgemi.com/2014/02/is-michigan-in-another-auto-bubble/

Economy & competitive position

Is Michigan in another auto bubble?

Vehicle inventories for domestic automakers now exceed 100 days, leading to industry fears that an incentives war is on the horizon.  (courtesy photo)

Vehicle inventories for domestic automakers now exceed 100 days, leading to industry fears that an incentives war is on the horizon. (courtesy photo)

Sales remain brisk, gas prices are stable, auto loans are readily available and auto industry executives are as upbeat about the future as the Detroit Tigers heading into spring training.

Sounds like conditions that existed just over a decade ago when the auto industry was posting record sales but failed to see the pavement ending, doesn’t it?

As Detroit automakers head into their fifth year of recovery from a near-death experience in 2009, momentum is beginning to slow, leading to questions about whether the notoriously cyclical auto business is careening toward a ditch.

“We don’t know when the downturn will be, but we know there will be one,” said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor.

The auto industry had an 88-day supply of unsold vehicles on Feb. 1, the most since the depth of the 2009 recession, according to the trade publication Automotive News.

For the Detroit 3, supply was even deeper, at more than 100 days, the publication said. A 60-day supply is considered normal.

That’s a huge concern for Michigan, a state more closely tied to the fortunes of the auto industry than any other.

A lack of diversification

There has been a decades-long debate about the wisdom of being overly reliant on one industry. But now state officials want to put the pedal to the metal in supporting the resurgent auto business.

Speaking to an auto industry conference last fall, Gov. Rick Snyder downplayed economic diversification and said his administration planned to “double down” on auto industry investments.

“I’m proud to say we’re the auto capital. I’m proud to say we’re doing manufacturing.” It would be “dumb,” Snyder said, to walk away from that and “do other stuff.”

That could prove to be a risky strategy if the industry heads into another tailspin in the next few years.

No one is predicting a crash anything like what happened near the end of last decade, which saw Ford Motor Co. mortgage virtually all its assets to stay in business, and General Motors Co. and Chrysler Group LLC file for bankruptcy.

But some see potential trouble ahead. Automakers pushed sales to a record 17.3 million cars and trucks in 2000, in part by luring buyers into dealer showrooms with steep discounts and cheap financing.

Those incentives helped erode automakers’ profits, leaving them ill-prepared for the severe downturn a few years later.

Some analysts are worried that automakers are again trying to pump up sales with costly incentives as the growth rate slows in a maturing auto recovery.

“These are not the days of old, but the industry needs to be vigilant to not make the same mistakes of the past,” said Michael Robinet, managing director of IHS Automotive, an industry research firm in Detroit.

GM kicked off a nearly month-long Presidents’ Day sale on Feb. 4 offering some of the automakers biggest discounts in months. The automaker is discounting some pickup models by as much as $7,000.

Some analysts fear the deals could trigger an industry-wide incentive war. Maintaining price discipline has been a key element in domestic automakers’ return to profitability.

While incentive levels have been fluctuating in recent months, the average price of a new vehicle fell slightly to $32,391 in January from $32,855 in December 2013, according to Kelley Blue Book.

Among those cost-conscious buyers was David Conn, who owns an insurance agency in Tawas City, about an hour north of Bay City.

Conn traded in his 2005 GMC Yukon SUV with 190,000 miles for a new Chevrolet Silverado four-door pickup. He said his new truck gives him the roominess and hauling capacity of his old vehicle for less money.

“I wanted to buy another Yukon, but I couldn’t part with $60,000 to buy it,” Conn said.

The 2014 Yukon carries a base price of $44,455, but options can push the price far higher. The Silverado, sold in a variety of configurations, generally costs thousands of dollars less.

A maturing market

Some analysts say the auto industry’s big sales increases of the past few years are likely over.

U.S. auto sales are expected to rise 2.6 percent this year to 16 million cars and trucks, according to a University of Michigan forecast. Sales are forecast to reach 16.3 million vehicles in 2015, a 1.9 percent increase.

Those growth rates are far below the 7.6 percent growth in vehicle sales in 2013.

Sales and employment growth in the industry also are being constricted by automakers and suppliers that closed factories during the recession and are now running their remaining plants at or near capacity, Dziczek said.

“In order to build more cars and employ more people, we need more factories,” she said.

But Dziczek and others say it’s unlikely Michigan will see a building boom of auto-related plants. Many companies are still scarred from the near collapse of the industry during the recession and are reluctant to expand.

“I think everybody is managing their businesses more conservatively,” said James Kamsickas, CEO of the IAC Group, a major auto interior components supplier in Southfield. “The key word is discipline.”

As sales growth rates slow, automakers and suppliers are working harder to get more production from their existing facilities and work forces, Dziczek said.

The Center for Automotive Research forecasts that Michigan will add 8,000 auto and parts manufacturing jobs from January through the end of 2015. That’s down from 10,400 auto and parts manufacturing jobs produced in 2013, according to the Bureau of Labor Statistics.

“We are definitely slowing down,” Dziczek said.

A shift to Mexico

Increasingly, automakers are turning to Mexico as a production center for vehicles sold throughout North America. Auto production in Mexico is expected to jump 26 percent between 2013 and 2018, according to WardsAuto, an automotive data service.

That compares to production growth of just 4.4 percent for North America, which includes the United States, Canada and Mexico.

But industry supporters, including Gov. Rick Snyder’s administration and the Detroit Regional Chamber, are working to maintain and build the auto business in Michigan.

About 60 companies, business organizations, universities and local governments are part of the chamber’s MICHauto initiative, collaborating to promote jobs and investment in the industry.

Huge changes in the industry, including a demand for more fuel-efficient vehicles and the emergence of driverless cars, will create more opportunities for companies and workers.

That’s especially true in the research-and-development part of the business in Michigan, a top MICHauto official said.

“We have to make sure that’s protected and retained,” said Glenn Stevens, MICHauto’s vice president. “How people move in the future is going to change. Michigan has to play in that future.”

A recent Federal Reserve Bank of Chicago study found that 22 percent of all auto jobs in Michigan in 2012 were in research and development, up from just 6 percent in 1970.

That percentage hike was partly due to the huge loss of assembly jobs in the state. But R&D jobs also nearly doubled from about 30,000 jobs in 1970 to 60,000 in 2012.

Today, nearly half of all auto jobs in the state are in salaried positions.

“At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed,” the study said.

Michigan’s move

But Snyder wants to expand all types of automotive jobs in the state by capturing new investment from China and other places around the world. He recently named Nigel Francis, a former auto executive, as his state’s auto adviser.

“The automotive industry is our core industry in the state – our anchor and our means of moving forward economically into the future,” Francis said in a recent story in the Detroit Regional Chamber’s magazine.

But the industry at times has driven the state in reverse through its own mistakes, and because of economic and geopolitical crises beyond its control. And no one can predict when the next slump will occur.

“The cyclical nature of the auto industry is never going to change,” Stevens said. “What is different is that these companies are operating very, very lean. They are very careful about how they expand, add capacity and staff. They are in much better shape to get through a downturn.”

Rick Haglund has had a distinguished career covering Michigan business, economics and government at newspapers throughout the state. Most recently, at Booth Newspapers he wrote a statewide business column and was one of only three such columnists in Michigan. He also covered the auto industry and Michigan’s economy extensively.

6 comments from Bridge readers.Add mine!

  1. David Waymire

    Even more frightening is how the new business tax ties our state’s public goods to the profitability of the auto industry and other large manufacturers. The only business tax imposed is an “income” tax on C Corps, large companies generally traded on Wall Street. When the manufacturing sector goes into their typical cyclical free fall, so will the state’s budget — and we will see more schools and cities in bankruptcy, cuts to higher education, reductions in programs that help keep hospitals open and other vital functions of society.

    Smart tax policy calls for a tax that is low, broad and stable. Our business tax today is high, narrow and unstable. We will pay for it, too soon I’m afraid.

  2. AC

    For the last several years he big 3 have been extremely lax in their financing standards. Honda finance could only offer me an auto loan at an astounding 18%, and that’s after their finance department tried for two days to get me the financing. I walked into a Ford dealer and was financed at 0%, right away. A year later I bought a Chrysler product for a family member- same easy approval, same zero rate. I know this is anecdotal, but I know of many, many more similar situations.

  3. John S.

    The health of the state’s economy is tied to the health of its globally competitive multinational corporations, including especially the Big Three. The Governor’s approach seems sound–identify areas of the Michigan economy that enjoy a comparative advantage and do what’s necessary to hold onto those advantages. It’s more difficult to identify new areas of potential comparative advantage, and state governments (as opposed to the market) can get it wrong, wasting taxpayer dollars. With respect to smart tax policy, expanding the sales tax to include services is long overdue. It wouldn’t be popular, like an increase in the gas tax, but it’s the right thing to do.

  4. DougD

    This Governor and Legislature are repeating the mistakes of the past: rhetoric about diversification masking yet another doubling down on autos. They clearly are our “driving force” now and for the foreseeable future, but in the meantime we engage in tax cuts overall, continued pursuit of auto-related activities and failing to make meaningful investments in education and infrastructure. Our model needs to be new economy states, for example, Minnesota among several others, and not low cost manufacturing. That’s a direct route to low incomes, and is likely a race that we ulitmately lose in the end.

  5. Ron M

    The article is like many in the past, describing problems but not having any insight into solutions. The reason is I believe because most (not all) journalists are similar to most (not all) elected politicians. They are not trained or have much real world experience in solving complex problems and understanding how complex systems work.
    They focus on little issues, tell stories, display there ability to use lots of long words when a few well selected would be more appropriate. Running auto companies and auto suppliers is very complicated. It is not generally run by stupid people. The challange is to balance the investment with assets and people to meet an often cylical demand that is like forecasting the weather sometimes.
    What if we adjusted the munber of elected officals up and down based on the performance of the state on an annual basis. I think you woud hear a lot of “that’s not fair”. Yet these same people are quick to criticize the leaders of businesses. Same thing with news media, but the power of economics is slowly (some places faster) forcing them to staff and pay salaries based on annual decreasing demand for their product.
    The aerospace and defense industry (in which I spent 37 years) is similar to the auto industry but has many differences. The majority of the players learned long ago that there would be cycles and built strategies for plants and staffing with that in mind. We used a lot of outside contracting when business was “booming” so that we would not need to lay off as much or shut down plants when the business was down. The one part that did not learn that well was the Air Line industry who was more like the auto makers (some years of huge profits and then years of huge losses). However they were not able to raise ticket prices as easy as the car companies. I think that the current air lines that are left after all the bankruptcies and mergers are much better managed than in the past.
    Finally, a major difference was that the aerospace and defense industry was scattered throughout the United States (Seattle, Southern California, Texas, St Louis, Atlanta, New York and New England. The auto industry was concentrated in the Detroit area (leads to too much group think) much like we see today inside the beltway in Washington. By the way, I grew up in Detroit and almost all my relatives were in the auto industry in unions in the 50’s and 60’s (the golden age). Many of my classmates in high school and college ended up in the auto industry. There were not a lot of other options at the time.
    So, I agree with the governor that we need to invest in the R&D portion of the auto industry (mostly in the D-Development) and related products and services. Unfortunately, we will not need as many factory workers as in the past because of automation and other technologies. We need to “fix” that problem with a different set of solutions. And don’t knee jerk with “education”. The challange is education in what and what is the various “demand streams”? We have a tremendous shortage of young people (and not so young) going into “STEM” and other skilled trades.

  6. Charles Richards

    Mr. Haglund has some interesting figures about what percentage of auto jobs are in research and development and what percentage are salaried, but doesn’t provide any information about what percentage of Michigan’s jobs are auto related, or how that number has changed over the years. You would have thought that would have been important in an article about Michigan’s reliance on the auto industry.

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