Here’s Why the Auto Industry Is Making a Full Recovery in the U.S.
The recession that kicked off in late 2008 and had the world fully in its grasp by 2009 took its toll on businesses across the economic spectrum. From airlines to restaurants, there were few, if any, that didn’t feel the effects either immediately or over time. The same is true with the automotive industry, which was heavily hit by the financial crisis and the resulting fall out. Big American auto makers like Ford (NYSE:F) and General Motors (NYSE:GM) either flirted with or dove headfirst into bankruptcy, only to be saved by government action and taxpayer dollars.
Although Ford and others have clawed its way back to solid financial footing, it could be said that the auto industry never fully recovered, and it’s possible it never will. Car makers are facing a drastically different landscape than they were looking at even five years ago, and some have been less willing to adapt than others. The advent of hybrid and electric vehicle technology, along with shifting consumer tastes, has seen the industry take a much different direction than some anticipated, and the trend toward economical products and sustainability appears to be here to stay.
Despite the effects of the recession — which are still lingering and creating drag on many aspects of the economy — the auto market has actually been doing fairly well. Of course, there are notable exceptions, as in the case of General Motors with its slew of recalls, which has all but decimated the company’s profitability this year. Aside from that, economist Jeff Schuster, who acts as senior vice president of LMC Automotive, believes the auto industry will keep seeing increased sales, particularly in the North American Market, all the way through 2020.
“We’re just in the heart of a very good marketplace right now,” Schuster told Automotive News.
Schuster’s predictions come in spite of sluggish sales and growth in almost every overseas market, with North America being the exception. This is an issue all auto makers have been dealing with, and was prominent in Ford’s last earnings report, which saw the company announce new measures to boost sales in Asia and South America.
Ford did see some growth in the Asian market, and even posted a profit in Europe, a first in a very long time for the American automaker. “I think the noteworthy thing is, with the exception of South America, we had improved results across all the other automotive business units, and we had a couple that were real stand-outs in record quarter profits in North America and in Asia-Pacific,” said Robert Shanks, Ford’s CFO.
Many overseas markets like Europe and Asia have been tough proving grounds for American car companies, which are more akin to building cars suited toward consumers in the U.S., and often face long commutes from suburban areas, and have the opportunity to take advantage of America’s robust highway and interstate system. European and Asian cities are more suited for public transportation, bicycles, and smaller cars — some of which we are starting to see enter the U.S. market. For example, Fiat and Mini are both gaining ground in America, as tastes shift towards smaller, more economical cars at the consumer level.
There are a number of factors that are making North America a healthy market for auto makers, not just the fact that Americans have a special place in their collective hearts for cars. One of the big caveats is the fact that many factories are slimmer, more streamlined and more productive than ever before. This is a result of the recession, when heavy cost-cutting efforts were put into place, and are now working in the favor of the car companies.
“We’re in a very different marketplace at a 17 million SAAR (seasonally-adjusted annual rate) than the last time we were at that level,” said Jeff Schuster, noting that changes since the recession have led to higher factory utilization and lower fleet sales.
Other factors that are bolstering the North America market — besides changes to the manufacturing line — are more consumer-centric. The recession has also had a ripple effect across the demographic spectrum, leading to many young adults delaying decisions like purchasing a home, or even getting married to continue living with their parents and save money. This has also had an effect on car sales, which has led to some of these young adults — who otherwise may be spending money on mortgages or other things — to seek out a vehicle.
The other end of the demographic spectrum, those looking at retirement, may also be entering the market for a new vehicle. In the face of a rough economy, some people have opted to continue working instead of retiring, having an impact on their consumer choices.
Of course, the actual job of moving vehicles from factory to consumers falls on the army of dealers spread across every corner of the continent, and the data seems to indicate that dealers are doing fine overall.
According to data collected from the National Automobile Dealer Association, employment at dealerships is up 3.4 percent, warranty work topped $14 billion, and profits as a percentage of overall sales stuck at 2.2 percent, the same as the year before. Car dealerships work on notoriously slim profit margins, and although the profit percentage didn’t see any growth, it was mostly due to increased competition amongst dealers, which is good news for consumers.
“Fierce price competition — whether from online research, a network of competing franchised dealers or compelling new vehicles — continues to dominate an industry with slim retailing margins,” said NADA chief economist Steven Szakaly in a press release.
Szakaly, like Schuster, expects the market to keep trending up as well. As the economy overall sees improvement, it’s good news for the auto industry in North America. “The economic recovery is continuing, and we expect a stronger housing market, improving job prospects and continued low interest rates for auto loans to boost sales this year,” says Szakaly.