Cars might cost $50,000 on average by 2025. Vehicle sales in the United States may never bounce back to the levels of a decade ago. And electric vehicles aren’t likely to catch on with consumers for years, if at all.
So says Sean McAlinden, executive vice president of research and chief economist at the Center for Automotive Research in Ann Arbor.
CAR this week is holding its annual Traverse City Management Briefing Seminars, which attracts more than 1,000 top auto industry officials. Michigan Gov. Rick Snyder, Tennessee Gov. Bill Haslam and Roy Norton, Canadian consul general in Detroit, also are speaking at the conference.
McAlinden, a veteran industry analyst, spoke with Bridge in advance of the four-day conference and offered an unvarnished look at issues surrounding Michigan’s signature industry.
Bridge: We’re in the third year of an economic recovery. Are we seeing the full strength of the revamped auto industry as far as jobs and economic impact now?
A: Not yet. Our forecast is for 33,000 (Michigan) auto jobs from the end of 2011 through the end of 2015. There are three non-auto jobs created for every auto job so that’s more than 100,000 new jobs for Michigan.
Bridge: The auto industry is notoriously cyclical. When will we see the next slowdown?
A: According to our latest forecast, the peak will be sales of 15.8 million vehicles in 2016, then 15.7 million in 2017 and then we’ll fall below that in 2018 and 2019.
Bridge: That’s a fairly weak sales forecast for an industry that was selling 17 million cars and trucks a decade ago. What factors are influencing your forecast?
A: GDP growth, household formation and the unemployment rate. Underlying it is cars are more durable, prices are high and they will get higher, partly due to more regulations. Ninety percent of auto sales are replacement sales, and that’s really slowed down. I’m afraid we’ll never get back to 17 million in sales.
Bridge: The General Motors and Chrysler bailouts remain controversial and are an issue in the presidential election. What’s your view?
A: They were the right thing to do at the time. They saved more than 1 million jobs. We saw Lehman Brothers collapse. There was the risk of an industrial Lehman Brothers collapse with the auto industry that might have clobbered the rest of the U.S. economy.
Not enough concessions were made on the labor side of the house. But all in all, the speed of the bankruptcy and the planning that went into it were brilliant. It went so fast, the companies didn’t lose their customer base. The warranties were guaranteed. It worked. The companies can stand on their own now.
The bailouts could have been cheaper, but how could they have understood that under those extreme time pressures? It was the best government intervention into the private sector in peacetime in U.S. history. But it wasn’t perfect.
Bridge: Are there skills shortages in the auto industry? If so, where are they?
A: Most of the skills shortage we’re seeing now is in engineering, particularly electrical engineering. We have an oversupply of skilled trades, but we’re going to run out of those eventually.
Bridge: Ford and General Motors are making big money, particularly in North America, but their stock prices are down. Why is that? Can they recover?
A: Obviously Europe doesn’t look likely to improve for half a decade. That’s a drag on profits. (GM and Ford) both have big pension liabilities. And there’s fear the Chinese market may be shaky and less reliable in the future than it has been.
GM won’t see an improvement in its stock price until the government gets out (of its 26 percent ownership stake in the company).
We’re not that profitable of an industry. Toyota and Volkswagen are doing very well, but their profitability is below that of companies in other industries. Pharmaceutical companies have a terrible year when they make what we make (in a good year). Part of it is the auto industry’s large capital needs and regulation. That drags down everyone’s equity.
Bridge: New federal fuel efficiency standards will require cars and trucks to get a combined 54.5 miles per gallon by 2025. How will that affect the industry?
A: It will raise costs by $6,000 a vehicle by 2025, in today’s money. You will see $50,000 cars on average by 2025 -- $40,000 in today’s money.
Exotic materials (that are lighter and help fuel efficiency) cost more. That’s beginning to show up in the sticker price.
Twenty-three percent of the price of a car today is in regulatory costs. That could go to 40 percent. It’s a big worry for us.
Bridge: Your estimate of the cost of meeting the higher fuel economy standards has been controversial. Others have said your $6,000 per vehicle cost projection is too high.
A: It’s only been controversial with the environmental groups and the EPA. When we took our cost estimates to the car companies, they told us we were being wildly optimistic. They thought the numbers would be higher.
Bridge: Do you see any changes ahead in Michigan’s role as the center of the domestic auto industry?
A: Our companies right now are barely hanging on to 45 percent of the U.S. market. If the bailout hadn’t happened and Ford somehow had survived, the center of the North American auto industry certainly would have moved south.
The bailouts kept Detroit as the center of the auto industry. It certainly is the technical center with 45,000 engineers.
Bridge: How are the suppliers doing?
A: They’re doing fairly well on price and capacity utilization. They don’t trust the market and their customers. It’s a very international crowd. Sixty percent of the suppliers are international.
I can’t think of one troubled big supplier. The second tier of suppliers is working seven days a week. They’re wondering if we can or should open (closed factories).
Bridge: What’s the future market for electric, hybrids and plug-ins vehicles?
A: The market for pure electrics is still less than 1 percent by 2020. Until we get a price break (on the technology), plug-ins will be no more than 1 percent of the market. Hybrids will be 8 percent or 9 percent. Some think there will be big cost improvements in hybrids. We don’t see it. They’ve been out there 12 or 13 years and we haven’t seen any price reduction.
Bridge: Google and others seem to be making good progress on developing self-driving cars. When do you think we’ll see those on the road?
A: It’s a fantastic idea for the senior crowd. But my people (at CAR) say you can’t have autonomous and non-autonomous vehicles on the same roadway. They just won’t mix. The operating system change that will be needed (for self-driving cars) will be huge.
It might work for freight traffic. I think we’re likely to see autonomous freight trucks before we see autonomous cars. It could be in five years. We’ll see if we can live with that first.
Bridge: GM is experiencing more management turmoil with the departures of Dave Lyon, who had just been promoted to vice president of design at GM Europe, and chief marketing officer Joel Ewanick. What’s going on there?
A: It’s really hard to say. The problems with GM could have something to do with the government interference with the their ability to make the large-scale decisions they should be making. ... GM is capped at what it can pay its top 100 people. And it can’t restructure Europe as fast as it should.
GM hasn’t been forgiven by the public for being bailed out (by the federal government). Maybe the company didn’t restructure enough. I’m not sure it should have kept Buick and GMC. It could have used the Ford model of having just two divisions by keeping Chevrolet and Cadillac.
(GM CEO Dan) Akerson is famously known as being impatient. But he’s also seen possibly as a caretaker. Maybe they need a (Chrysler CEO Sergio) Marchionni type of guy.
Bridge: Ford superstar CEO Alan Mulally will retire at some point. Can Ford prosper without him?
A: Yes. There are only three options. (Executive vice president Mark) Fields. Does he have the confidence of investors and people in the company?
(Group vice president, Asia Pacific and Africa) Joe Hinrich is brilliant, but probably too young. Or they could find another Mulally from outside the company. Mark is a very bright guy. The bet is 65 percent that it’s Mark.
Rick Haglund has had a distinguished career covering Michigan business, economics and government at newspapers throughout the state. Most recently, at Booth Newspapers he wrote a statewide business column and was one of only three such columnists in Michigan. He also covered the auto industry and Michigan’s economy extensively.