The next American car recession has already started

The collapse of the sedan market has left Detroit automakers with too many plants

By Keith Naughton, David Welch & Gabrielle Coppola

These should be boom times for Detroit. Unemployment is at a half-century low, diesel is cheap and auto sales in the US were near record levels last year. Yet, American automakers 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 grips of a car recession marked by the collapse of demand for traditional sedans, which accounted for half the market just six years ago. Buyers have made a mass exodus out of classic family cars and into SUVs. Familiar sedan models such as the Honda Accord and the Ford Fusion made up a record low 30% 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% of the US market by 2025, according to researchers at LMC Automotive Ltd, relegating sedans to fringe products. That leaves automakers with excess factory capacity that can turn out about three 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 VP of forecasting at LMC Automotive.

It’s a situation that promises to put a damper on the North American International Auto Show in Detroit, the last to be held in the chill of January. In a bid to re-establish relevance, the annual car conclave is moving to June next year and will be reimagined as a chance for show-goers to drive new models in warm weather. The car dealers who organise the show hope the new format will entice notable dropouts — a group that now includes Mercedes-Benz, BMW AG and Audi AG — to return to an event that once commanded the full at tent ion of the automotive world.

GM says its plans to close 5 North American plants will help boost profit this year by as much as RM10.2b

An optimist might seek solace in the better than expected profit prediction issued by General Motors Co (GM). 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 US$2.5 billion (RM10.24 billion).

The overcapacity plaguing US automakers 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,” 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 sedans 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 SUVs that offer more room and, these days, competitive fuel economy. The Chevy Malibu, a family sedan, gets combined city and highway fuel economy of 26mpg. The Chevy Equinox, a small crossover SUV, trails by only one mpg.

There are signs drivers are even ditching sedans 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% last year, to 2.4 million vehicles, in a market that was otherwise flat.

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

Ironically, automakers 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 SUVs, 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 SUVs to sensible, petrolsipping sedans.

“You had two quick, upward movements in petrol prices in the 2000s that were like a onetwo punch,” said Wakefield, “and it was like a dog whistle went off, and you couldn’t sell” SUVs. His firm helped guide GM through its 2009 bankruptcy. “It felt like petrol 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.

Fiat Chrysler Automobiles NV, which anticipated sedans’ death spiral by culling its car line-up in 2016, has largely sidestepped the restructuring pain GM and Ford are experiencing now. Instead of shuttering 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 SUVs. 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 SUVs.

Unlike last time it ran into trouble, Detroit may have trouble finding friends in Washington or at the United Auto Workers (UAW) to help them get through this tough transition. US President Donald Trump has gone on the attack, taking GM CEO Mary Barra to task for her decision to close of four US plants. Even allies like Michigan representative 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 automakers 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,” Schuster said. “But it feels like we’re going back to that” dark period a decade ago.