LIMA — The automotive industry has made a strong comeback since the 2008 recession, but questions still remain about the future of the market.
After the recession hit, auto sales plummeted to their lowest rates in decades. But as the economy began to turn around, sales rose steadily. In fact, 2015 and 2016 broke sales records.
But in 2017, experts are noticing that the auto market is showing signs of a plateau.
Bernard Swiecki, senior project manager at the Center for Automotive Research, told the audience at the Regional Auto Growth Summit on Friday at Rhodes State College in Lima that the industry is struggling with capacity constraints. In addition, market shares by companies and the industry’s geographic footprint are steady, despite recent growth in Mexico. He added that expansion may still occur at existing automotive facilities, but it is unlikely that new plants will be constructed.
A LOOK FORWARD
CAR experts also estimated that vehicle sales will remain steady around 16 and 17 million for the next five years, and that U.S. vehicle production will stay around 12 million through 2022.
In the next few years, Swiecki said steady sales and production will “belie underlying transformation.” A rapid adoption of new technologies and materials will also take place, including emissions reductions, safety features, fuel economy, connectivity and autonomous capability.
But it’s not just the vehicles that will be changing. Swiecki said new production processes, technologies and capabilities will be “essential” to the automotive market. This will lead to constant demands on the region’s workforce abilities and availability.
“There’s great uncertainty,” Swiecki said of the future of the auto market.
Another uncertainty is the growth of electric vehicles. As of August, CAR’s research showed that electrified vehicles made up just 3.2 percent of the light vehicle market. But compared to August 2016, electric cars have seen an 11.9 percent growth in sales. This is the largest growth of any type of vehicle within the last year.
In forecasting the future of the auto industry, Swiecki outlined good news and bad news. The bad news, he said, is that motor vehicle demand is in decline. In addition, political turmoil in the U.S. has led to uncertainty about the market in the near future. Interest rates have also increased three times since 2016, consumer credit growth has slowed, and passenger car sales have continued to decline by double digits.
The good news is unemployment rates have dropped, reaching their lowest level since 2001 in May. Also, GDP growth is trending upward, labor force participation has improved, new vehicle prices are dropping and consumer confidence remains high, despite political turmoil.
The political turmoil Swiecki discussed centered mainly around the uncertainty with the North American Free Trade Agreement, which President Donald Trump has frequently called “the worst trade deal ever signed.”
Kristin Dziczek, director of the labor and education group at CAR, said NAFTA is a “desirable global export base for automotive and parts.” The U.S. has free trade agreements with 20 countries, making up 9 percent of the global light vehicle market. By comparison, Mexico has 17 FTAs and Canada has 12.
Forty percent of U.S. light vehicles exported in 2015 were shipped to NAFTA partners, and 50 percent of imported vehicles were from NAFTA partners. In addition, 75 percent of the value of U.S. automotive parts exports were shipped to NAFTA partners in 2015.
NAFTA-reliant states are also politically important, Dziczek said. For example, states that voted Republican in the 2016 election send a large share of their total exports to Mexico and Canada.
Round one of NAFTA talks revealed that the Trump administration is seeking to eliminate the trade deficit, restore “balance and reciprocity,” end currency manipulation and delete the Chapter 19 dispute resolution mechanism. On the flip side, Canada and Mexico said eliminating the trade deficit is “misguided,” and that eliminating Chapter 19 is a “deal-breaker.”
Mexico’s foreign ministry issued a statement saying that it wishes to stay in NAFTA, but it will “always put our national interests first,” and it will seek “a beneficial result whereby the three North American countries win.”
Round two of NAFTA negotiations saw a discussion on regulatory cooperation, and Trump continued threats to pull out of the agreement. Round three is scheduled for Sept. 23 to 27 in Ottawa, Canada.
The Peterson Institute for International Economics recently outlined four scenarios for how NAFTA talks may proceed.
The first is that Canada and Mexico give into U.S. demands, which is the least likely scenario. Other possibilities would be that the U.S. gives up on the demands that Canada and Mexico oppose, a deadlock leads to terminating NAFTA, or that talks continue to “muddle through,” with concessions on specific products and some modernization talks that last beyond December. The final option, which is most likely, means that no one gets what they want, but each party is able to claim a “win” on something.
Dziczek said there is a high risk of NAFTA falling apart. If this occurs, Mexico could talk with other trading partners to diversify trade and replace goods and services currently sourced from the U.S.
With the third round of NAFTA negotiations almost two weeks away, the U.S. auto industry will have to wait and see how the consequences of these talks could impact the market.
Reach John Bush at 567-242-0456 or on Twitter @Bush_Lima.