Skip to main content
Bridge Michigan
Michigan’s nonpartisan, nonprofit news source

First-time donations are being matched!

There's no better time to become a Bridge Club member. Not only does your gift to our nonprofit newsroom help us grow our staff, but gifts from first-time donors will also be matched by the Herbert H. and Grace A. Dow Foundation and the Herrick Foundation.

Pay with VISA Pay with MasterCard Pay with American Express Donate Today

Is Michigan in another auto bubble?

Sales remain brisk, gas prices are stable, auto loans are readily available and auto industry executives are as upbeat about the future as the Detroit Tigers heading into spring training.

Sounds like conditions that existed just over a decade ago when the auto industry was posting record sales but failed to see the pavement ending, doesn’t it?

As Detroit automakers head into their fifth year of recovery from a near-death experience in 2009, momentum is beginning to slow, leading to questions about whether the notoriously cyclical auto business is careening toward a ditch.

“We don’t know when the downturn will be, but we know there will be one,” said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor.

The auto industry had an 88-day supply of unsold vehicles on Feb. 1, the most since the depth of the 2009 recession, according to the trade publication Automotive News.

For the Detroit 3, supply was even deeper, at more than 100 days, the publication said. A 60-day supply is considered normal.

That’s a huge concern for Michigan, a state more closely tied to the fortunes of the auto industry than any other.

A lack of diversification

There has been a decades-long debate about the wisdom of being overly reliant on one industry. But now state officials want to put the pedal to the metal in supporting the resurgent auto business.

Speaking to an auto industry conference last fall, Gov. Rick Snyder downplayed economic diversification and said his administration planned to “double down” on auto industry investments.

“I’m proud to say we’re the auto capital. I’m proud to say we’re doing manufacturing.” It would be “dumb,” Snyder said, to walk away from that and “do other stuff.”

That could prove to be a risky strategy if the industry heads into another tailspin in the next few years.

No one is predicting a crash anything like what happened near the end of last decade, which saw Ford Motor Co. mortgage virtually all its assets to stay in business, and General Motors Co. and Chrysler Group LLC file for bankruptcy.

But some see potential trouble ahead. Automakers pushed sales to a record 17.3 million cars and trucks in 2000, in part by luring buyers into dealer showrooms with steep discounts and cheap financing.

Those incentives helped erode automakers’ profits, leaving them ill-prepared for the severe downturn a few years later.

Some analysts are worried that automakers are again trying to pump up sales with costly incentives as the growth rate slows in a maturing auto recovery.

“These are not the days of old, but the industry needs to be vigilant to not make the same mistakes of the past,” said Michael Robinet, managing director of IHS Automotive, an industry research firm in Detroit.

GM kicked off a nearly month-long Presidents’ Day sale on Feb. 4 offering some of the automakers biggest discounts in months. The automaker is discounting some pickup models by as much as $7,000.

Some analysts fear the deals could trigger an industry-wide incentive war. Maintaining price discipline has been a key element in domestic automakers’ return to profitability.

While incentive levels have been fluctuating in recent months, the average price of a new vehicle fell slightly to $32,391 in January from $32,855 in December 2013, according to Kelley Blue Book.

Among those cost-conscious buyers was David Conn, who owns an insurance agency in Tawas City, about an hour north of Bay City.

Conn traded in his 2005 GMC Yukon SUV with 190,000 miles for a new Chevrolet Silverado four-door pickup. He said his new truck gives him the roominess and hauling capacity of his old vehicle for less money.

“I wanted to buy another Yukon, but I couldn’t part with $60,000 to buy it,” Conn said.

The 2014 Yukon carries a base price of $44,455, but options can push the price far higher. The Silverado, sold in a variety of configurations, generally costs thousands of dollars less.

A maturing market

Some analysts say the auto industry’s big sales increases of the past few years are likely over.

U.S. auto sales are expected to rise 2.6 percent this year to 16 million cars and trucks, according to a University of Michigan forecast. Sales are forecast to reach 16.3 million vehicles in 2015, a 1.9 percent increase.

Those growth rates are far below the 7.6 percent growth in vehicle sales in 2013.

Sales and employment growth in the industry also are being constricted by automakers and suppliers that closed factories during the recession and are now running their remaining plants at or near capacity, Dziczek said.

“In order to build more cars and employ more people, we need more factories,” she said.

But Dziczek and others say it’s unlikely Michigan will see a building boom of auto-related plants. Many companies are still scarred from the near collapse of the industry during the recession and are reluctant to expand.

“I think everybody is managing their businesses more conservatively,” said James Kamsickas, CEO of the IAC Group, a major auto interior components supplier in Southfield. “The key word is discipline.”

As sales growth rates slow, automakers and suppliers are working harder to get more production from their existing facilities and work forces, Dziczek said.

The Center for Automotive Research forecasts that Michigan will add 8,000 auto and parts manufacturing jobs from January through the end of 2015. That’s down from 10,400 auto and parts manufacturing jobs produced in 2013, according to the Bureau of Labor Statistics.

“We are definitely slowing down,” Dziczek said.

A shift to Mexico

Increasingly, automakers are turning to Mexico as a production center for vehicles sold throughout North America. Auto production in Mexico is expected to jump 26 percent between 2013 and 2018, according to WardsAuto, an automotive data service.

That compares to production growth of just 4.4 percent for North America, which includes the United States, Canada and Mexico.

But industry supporters, including Gov. Rick Snyder’s administration and the Detroit Regional Chamber, are working to maintain and build the auto business in Michigan.

About 60 companies, business organizations, universities and local governments are part of the chamber’s MICHauto initiative, collaborating to promote jobs and investment in the industry.

Huge changes in the industry, including a demand for more fuel-efficient vehicles and the emergence of driverless cars, will create more opportunities for companies and workers.

That’s especially true in the research-and-development part of the business in Michigan, a top MICHauto official said.

“We have to make sure that’s protected and retained,” said Glenn Stevens, MICHauto’s vice president. “How people move in the future is going to change. Michigan has to play in that future.”

A recent Federal Reserve Bank of Chicago study found that 22 percent of all auto jobs in Michigan in 2012 were in research and development, up from just 6 percent in 1970.

That percentage hike was partly due to the huge loss of assembly jobs in the state. But R&D jobs also nearly doubled from about 30,000 jobs in 1970 to 60,000 in 2012.

Today, nearly half of all auto jobs in the state are in salaried positions.

“At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed,” the study said.

Michigan’s move

But Snyder wants to expand all types of automotive jobs in the state by capturing new investment from China and other places around the world. He recently named Nigel Francis, a former auto executive, as his state’s auto adviser.

“The automotive industry is our core industry in the state – our anchor and our means of moving forward economically into the future,” Francis said in a recent story in the Detroit Regional Chamber’s magazine.

But the industry at times has driven the state in reverse through its own mistakes, and because of economic and geopolitical crises beyond its control. And no one can predict when the next slump will occur.

“The cyclical nature of the auto industry is never going to change,” Stevens said. “What is different is that these companies are operating very, very lean. They are very careful about how they expand, add capacity and staff. They are in much better shape to get through a downturn.”

We're not just a news organization, we're also your neighbors

We’ve been there for you with daily Michigan COVID-19 news; reporting on the emergence of the virus, daily numbers with our tracker and dashboard, exploding unemployment, and we finally were able to report on mass vaccine distribution. We report because the news impacts all of us. Will you please donate and help us reach our goal of 15,000 members in 2021?

Pay with VISA Pay with MasterCard Pay with American Express Donate Now