Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
DETROIT, Michigan – The U.S. automotive industry has been on an impressive five-year run since the 2009 Great Recession, posting substantial profits and break-through technology achievements, all leading to record unit volumes in 2015. Even recurring business issues such as workforce readiness, challenging global market requirements, launch failures, product scandals, and nagging recalls can’t stem the industry’s rising tide.
This week Ford Motor posted its best February U.S. volume in 11 years, along with its best-ever month for SUV sales. Forecasts call for similar positive gains for automakers through 2017 at least. So, with all that good news…why worry? While there’s no need to abandon our expectation of continued strong momentum, here are several concerns that may cause a few headaches if left unchecked.
As vehicle costs soar, automakers must work to introduce new designs and technologies without pricing average car buyers out of the market. Automotive News recently reported that Ralph Gilles, Fiat Chrysler Automobiles global design chief admitted the cost of designing and manufacturing vehicles is spiraling out of control. “Cars are getting freakishly expensive, and the public isn’t willing to pay,” Gilles said. “It’s not sustainable.” The constant barrage of new technology – lane-keeping, park assist, speech recognition, blind-spot detection, user interface – creates consumer interest but also drives up costs as features become standardized. Historically much of the burden to reduce these costs rested with suppliers but today the responsibility to assign costs and prioritize technologies lies mostly with the OEMs. Affordability is key to future growth, and automakers must keep costs in line in order for average consumers to participate.
Higher rates of subprime auto loan delinquency are popping up. According to research agency Fitch Ratings, nearly 5% of subprime auto loans were delinquent by 60 days or more in 2015, the highest level since September 2009. Climbing car inventories and rising rebates only complicate the equation and, coupled with falling consumer credit quality, it could be a fly in the ointment as 2016 rolls on. Many lenders are now making longer term loans as credit is more readily available to consumers, which could create personal financial hardships if left unchecked. In most consumer cases the longer the loan term the worse the payment performance is.
The Detroit Free Press reports that the “total outstanding auto loans reached $1.04 trillion in the fourth-quarter of 2015, according to the Federal Reserve Bank of St. Louis, with about 20% or $200 billion classified as subprime or deep subprime.” The industry needs to monitor this trend.
We don’t know how the arrival of ride-sharing and the autonomous car will affect today’s booming unit volumes. Ride-sharing and the autonomous vehicle (AV) will both eventually have a profound impact on personal mobility and future auto sales here in the U.S. and globally. Will they negatively affect sales growth? When autonomous vehicles arrive in high volume next decade they will reshape everything from infrastructure to insurance to service models and more. Fleet sales are anticipated to grow dramatically but there remains much uncertainty at the consumer level. The overall economic trend will likely be favorable as new industry segments are expanded or created to support the autonomous vehicle. But we should prepare for sales to shift and possibly fall off as AV early adoption leads to more mainstream fast followers.
Mixed macro-economic indicators have begun to inject more uncertainty into the auto space. Since 2014 certain macro-economic trends have developed that are worrisome for the industry. One bellwether trend has been the economic relationship between new-home builds and new pickup truck purchases. The relationship between them has been eerily predictable for decades, with a 95 percent correlation. According to the U.S. Census, over the past fifty years as new home sales have grown, pickup sales have followed closely. That has all changed over the past few years. Today housing starts are mostly flat as truck sales have boomed anyway, which is an unprecedented inverse relationship. And historically most truck buyers have been contractors and other small-business owners, purchasing trucks to support their work needs. Now many consumers see trucks as more than a “utility” purchase as they proliferate upward into the luxury segment and, at times, cause unforeseen debt pressures on truck buyers.
Wage stagnation for hourly workers is a major economic hurdle. People need to be both employed and feel comfortable in their jobs in order to have the confidence to buy a new vehicle. Data going back to the 1960s proves average families have demonstrated a clear pattern when they buy a new car or truck: it typically occurs after the purchase of a new home and after they’ve gotten comfortable with the household cash flow requirements.
Today many workers see their 40-hour work week split between two jobs, and that dynamic does not always provide the comfort needed to make a new car purchase. Along with a complex underemployment trend, when you couple stagnant wage growth with mounting health care and education costs, there is little room for error as consumers consider the financial impact of a new car purchase. Add in the uncertain specter of retirement costs and the potential of another market downturn, and it creates significant pressure for the average U.S. family.
Though many of these issues transcend the auto industry, as leaders we must recognize their impact today as we plan for tomorrow. These economic hurdles do cause instability as we build the world’s first 21st century operating model with attributes of speed, flexibility, and productivity. But our market responsiveness and innovation will enable us to clear the hurdles as they arise.
Phil Biggs is Executive Vice President for the Nashville, TN-based technology company, NeXovation.
