Chill wind blows through heart of US car industry

Detroit is in the grips of a car recession marked by the collapse of demand for traditional saloons, which accounted for half the market just six years ago

A transporter leaves GM's Lordstown plant. GM put five plants up for possible closure, potentially signalling a US recession ahead. AP

These should be boom times for Detroit; unemployment is at a half-century low, petrol is cheap and car sales in the US were near record levels last year.

Yet American vehicle manufacturers are closing factories, cutting shifts and laying off thousands of workers. The industry is behaving like a recession has arrived.

In one segment of the market, it has.

Detroit is in the grip of a car recession marked by the collapse of demand for traditional saloons, which accounted for half the market just six years ago. Buyers have made a mass exodus out of classic family cars and into 4x4s. Familiar saloon models such as the Honda Accord and the Ford Fusion made up a record low 30 per cent of US sales in 2018, and things will only get worse.

Sales of the passenger-car body style that’s dominated the industry since the Model T will sink to 21.5 per cent of the US market by 2025, according to researchers at LMC Automotive, relegating saloons to fringe products, Bloomberg reported. That leaves car makers with excess factory capacity that can turn out about 3 million more vehicles  than buyers want. And overcapacity is precisely what spurred losses the last time a recession wracked the industry.

“You could classify this as a car recession,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive.

It’s a situation that promises to put a dampener on the North American International Auto Show in Detroit this week, the last big show to be held in the chill of January.

In 2020, it switches to June to escape the cold weather and show off more products outside, including autonomous vehicles, according to AP.

The car dealers who organise the show hope the new format will entice notable dropouts - a group that now includes Mercedes, BMW and Audi - to return to an event that once commanded the full attention of the automotive world.

An optimist might seek solace in the better than expected profit prediction issued on Friday by General Motors. But a deeper look at the numbers reveals that the biggest contribution to the company’s rosy forecast was it plans to close five North American plants, which it said will help boost profit this year by as much as $2.5 billion.

The overcapacity plaguing US car makers is the equivalent of 10 excess plants, which would account for at least 20,000 jobs directly, and thousands more as it ripples through the suppliers and support services to the massive industry. “GM has taken some actions, but they still have some well-underutilised plants,” Mr Schuster said. “So we may not be done with this yet.”

One strategy for dealing with the collapsing car market in the past has been to stuff unwanted saloons into rental lots and other commercial fleets. That has only delayed today’s capacity crisis. Those lower-profit fleet sales have inflated the market, keeping US vehicle deliveries above 17 million for the last four years, even as sales to individual retail customers peaked three years ago.

“The car recession and the retail recession have already arrived in the sense that retail sales peaked in 2015 and have gone down ever since,” said Mark Wakefield, head of the automotive practice at consultant AlixPartners. “Cars have just been crushed.”

Many former passenger-car buyers have flocked to crossover 4x4s that offer more room and, these days, competitive fuel economy. The Chevy Malibu, a family saloon, gets combined city and highway fuel economy of 26 miles per gallon, or about 10km per litre. The Chevy Equinox, a small crossover 4x4, trails by only one mile per gallon.

There are signs drivers are even ditching saloons for big trucks. “Pickup buyers are trading in crossover SUVs and sedans,” said Sandor Piszar, director of marketing at Chevrolet, which is ramping up production of its new Silverado. Total US pickup sales grew 2 per cent last year, to 2.4 million vehicles, in a market that was otherwise flat.

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Outside Detroit, car executives are sticking with saloons. Between the US, Canada, Mexico and Puerto Rico, Toyota sells 375,000 of its Corolla compacts each year. The Camry saloon likewise moves in big, albeit shrinking, numbers. “We are not going to get out of that business,” Jim Lentz, chief executive of Toyota Motor North America, said last month. “We still see an opportunity there.”

Ironically, car makers have the last recession to blame for their current plight. A decade ago, when high petrol prices and a crashing economy left little demand for 4x4s, the auto industry suffered through layoffs, plant closings and, ultimately, the bankruptcies and bailouts of GM and Chrysler. Detroit  flipped its factories from making hulking 4x4s to sensible, petrol-sipping saloons.

“You had two quick, upward movements in gas prices in the 2000s that were like a one-two punch,” said Mr Wakefield, “and it was like a dog whistle went off, and you couldn’t sell” 4x4s. His firm helped guide GM through its 2009 bankruptcy. “It felt like gas prices would go up and stay high,” he recalled.

But now the market has flipped back, thanks to consistently low petrol prices, and much of Detroit is once again building too many of the wrong products.

In addition, the arrival of new technology is adding to pressure and not just in the US.

Daimler’s incoming chief executive officer said he’s open to working with other car makers and technology firms to share the burden of the industry’s costly tech shifts.

“We’re open to talk, if there are concrete topics and it’s a win-win situation,” Ola Kallenius said in Las Vegas this week. “But everything that’s important to our brand we’ll continue to do ourselves.”

Global car makers have stepped up alliances and collaboration projects in recent years, overcoming deep rivalries, to stem record investments in electric and self-driving cars as well as new digital services like ride-hailing. Daimler, maker of the world’s bestselling luxury-car brand Mercedes-Benz, is currently merging its car-sharing offerings with German peer BMW to boost scale. The competitors are also mulling potentially deeper tie-ups.

Sharing costs on making cars has been a key driver behind many alliances, including Daimler’s existing tie-up with Renault and Nissan. With the looming shift to electric cars, that pressure is only intensifying.

Daimler already cooperates with BMW on purchasing certain components, and the two teamed up in 2015 together with Audi to acquire digital mapping company Here Technologies.

Such alliances seem a long way off in America but some car makers are riding the current wave of pain better than others.

Fiat Chrysler Automobiles, which anticipated saloons’ death spiral by culling its car line-up in 2016, has largely sidestepped the restructuring pain GM and Ford are experiencing now. Instead of shutting plants or cutting shifts, it’s converting an engine factory in Detroit to make room for a three-row Jeep Grand Cherokee and tying its fortunes to an onslaught of 4x4s. The Jeep Gladiator, a truck version of the Wrangler, is due out in the second quarter of 2019. A retooled plant in Warren, Michigan, will produce the revived Jeep Wagoneer and Grand Wagoneer 4x4s.

Unlike the last time it ran into trouble, Detroit may have trouble finding friends in Washington or at the United Auto Workers (UAW) to help get through this tough transition. US President Donald Trump has gone on the attack, taking GM chief executive Mary Barra to task for her decision to close of four US plants. Even allies like Michigan Republican Debbie Dingell, a former GM executive, said last month that GM had made itself “the most thoroughly disliked company in Washington”.

The UAW has sued GM over its plant closings and is girding for a big fight at the bargaining table this year as it negotiates new contracts with US car makers that have begun behaving like the good times are already in the rear-view mirror.

“It’s a very bizarre environment right now because the general economic conditions are still quite favourable,” Mr Schuster said. “But it feels like we’re going back to that” dark period a decade ago.