The auto industry is a headline-grabber these days, for multiple reasons. Technology is revolutionizing the entire space. Globalization is altering the production base. Protectionism is threatening to upend the rules of the game. And at the same time, sales are sky-high, especially in the US. That’s leading to speculation about future direction. Some see an imminent recession; will sales be up, down or sideways?
The auto industry recovered long ago
First, a little perspective. Things today are a long way from the Detriot-3’s near-death experience in 2009. Back then, if it wasn’t apparent before, average people quickly got an appreciation of the vast and substantial linkages of the auto sector to the rest of the North American economy. Well, the sector has handily put those dark days behind it, becoming one of the first – and for awhile the only – sector to fully recover, an experience that was shared in the US, Canada and Mexico.
Sales are now about as high as they get in the US, and they are holding firm there – by all appearances, they’re on auto pilot. At the same time, the trend in Canada and Mexico has mostly been up. Combine these three, and the industry is going full-tilt to meet demand. Capacity utilization is way beyond pre-recession levels, and investment seems to be badly needed. But expansion plans have been thrown into confusion by neo-protectionism. ‘America-first’ policies threaten to change content rules, and in the meantime there’s heavy pressure to invest stateside.
This is a huge dilemma for any firm needing and intending to invest in the short term, and it clearly poses a much greater threat to smaller-scale or niche producers. Projects that are already in the works are being carried out, but where there are no shovels in the ground yet, from what we can tell, there is a lot of hesitation. Firms that were planning to invest in either Mexico or Canada are now worried about future access to the dominant US market. But for them, shifting investment into the US is no simple solution; that, too, may not be viable, as currency, labour and capacity costs could well be prohibitive, even allowing for recent US corporate tax reductions. What’s dangerous is that the negative effects on future plans are being masked by current investment activities that were planned some time ago.
US auto sales are red-hot
Sales have every reason to continue robust performance. The US auto market is highly correlated with activity in the housing market, where potential near-term growth is solid. Layer on the millions of millennials being lured into the work force by low unemployment conditions, and the new, higher incomes they are earning, and consumption activity is looking up. From today’s high auto sales levels, there is actually an upside.
Auto sales in Mexico not as hot
As noted Mexico has been doing well, but unit vehicle sales have now plunged in the wake of economic uncertainty. It’s sad that just as per capita incomes are rising to the point that Mexico is becoming a decent auto sales target, it’s being trade-targeted in a way that’s snuffing out the opportunity to export vehicles there. Canada’s situation is different; we are riding a credit bubble, so recent sales levels are not seen to be sustainable.
NAFTA talks are accelerating
Thankfully, it looks like NAFTA negotiators are moving toward resolution of the impasse. The US is reportedly lowering the North American content requirement from 85 to 75 per cent, and it seems that the requirement of 50 per cent US content has been scrapped. That’s a huge move in the right direction, and at present, the pressure is on to conclude the matter, with high-level talks now accelerating. We may soon be back to a clearer investment picture – and a more stable sales environment all around.
This couldn’t come soon enough, as higher interest rates are a headwind the industry is already dealing with, and there is more to come. This should be more than manageable with current employment growth, deep-pocketed corporations and peak levels of confidence. Onward ho!
The bottom line?
Sales may look smooth on the surface, but underneath, the industry has seen a fair amount of turmoil. If the policy rancor is resolved, the industry will be able to move back into a groove that promises a good few years of growth yet.