Auto industry in for uncertain year

NOVI, Mich.—Projecting the future is never easy. And with uncertainty on a number of fronts, it's anyone's guess what lies ahead for the automotive industry.

Trade volatility between the U.S. and China, a new North American trade pact (pending approval) and new tariffs all bring a higher than usual level of uncertainty to the global landscape. And even though 2018 saw U.S. light vehicle sales rally for the fourth-biggest year on record, most are forecasting a dip for 2019.

Add it all up, like the experts at the Plastics & Rubber in Automotive conference did, and the result is clear: It's hard to tell exactly what 2019 has in store.

Chris Kuehl, managing director, Armada Corporate Intelligence, has a more optimistic outlook, largely driven by the fact that the U.S. economy is the largest in the world by far, making it the envy of international companies.

"We are a consumer-driven economy and we always have been," Kuehl said in his Jan. 15 presentation at the event in Novi. "It's one of the things that really colors what we do globally, and it's one of the reasons we have trade deficits. We like to buy things and we're very, very interested in buying things cheap and readily. It's one of the reasons countries like China and everybody else want to be in our market, it gives us a certain leverage."

How much leverage? Kuehl said that each state of the U.S. corresponds to another country. California has the same GDP as France. Canada's GDP fits into Texas, Kansas matches with the Czech Republic, Michigan was paired with Poland and Minnesota with Norway, to name a few.

"We have nearly a $20 trillion GDP," he said. "There is no country in the world that comes anywhere near us. China is about half of our size. If you took the other four of the top five economies, they all fit in the U.S. When you talk about unemployment rate or the growth rate or inflation, you almost have to break it down very quickly into every part of the country. Every state in the union corresponds to a country when it comes to GDP."

Trade impact

Perc Pineda, chief economist for the Plastics Industry Association, said he doesn't believe that tariffs are "right out" influencing the economy. Rather, it would depend on what kind of business model is being deployed by individual companies.

For instance, a turnaround retailer who is a strict importer from China would probably just tack on the 25 percent increase in duties. But an importer of materials and components to the manufacturing sector would be pricing itself out of the market if it tried the same tactic.

"Our trade dispute with China has been painful for the plastics industry," Pineda said. "It's been about the same for the rubber industry. It's almost like we're getting the same amount of restrictions from imposing higher tariffs."

On a more positive front, Pineda said the rubber and plastics industry stands to benefit from the U.S.-Mexico-Canada trade agreement designed to replace the North American Free Trade Agreement if passed by the legislatures of the three respective countries. Specifically, the stipulation requiring automobiles must have 75 percent of their components manufactured in the U.S., Mexico or Canada.

He added that the updated U.S.-South Korea free trade agreement also will benefit the rubber and plastics industries as it provides companies with greater access for U.S. exports, harmonizes testing requirements, recognizes U.S. standards for auto parts, requires improvement for corporate average fuel economy standards and stipulates that South Korea will improve long-standing concerns at customs.

"We have greater access to (South) Korea. This is a step in the right direction," Pineda said. "I think we will eventually increase our exports to (South) Korea."

President Trump's 25 percent tariffs on imported steel and 10 percent duties on imported aluminum have had a significant impact on auto makers. It remains unclear whether Mexico and Canada will follow in Brazil and South Korea's footsteps and receive an exception.

Kuehl said it is likely both countries—which along with South Korea and Brazil make up the top four exporters of steel into the U.S.—will receive an exemption if the USMCA is ratified.

But the tariffs overall have not succeeded in solving the problems of the U.S. steel producers, which Kuehl said have been hurt by government-mandated fuel efficiency requirements that took a significant amount of steel out of U.S. vehicles and a lack of development of oil pipelines which, again, consume a lot of steel.

"It has not done a lot for the domestic steel industry yet," Kuehl said of the tariffs. "The industry remembers 2002 when the U.S. had tariffs in place then too. Just about the time they started to expand and add capacity, the U.S. removed the tariffs. They're not going to do that again until they know for sure they have protection."

Global perspective

Resolution on the U.S./China trade war would be a welcome sight for the rubber and plastics industries. Kuehl, however, said it's not the only issue with the Chinese economy. The country has been vulnerable for years because investment has declined, primarily thanks to more competition and more stringent restrictions.

"China has a challenge with trying to replace a consumer nation like the U.S.," Kuehl said. "We're the country that invented the pet rock. Suppliers just supply stuff because they know we'll buy anything. The U.S. has to replace China as a source while China has to replace us as a destination, and that's a lot harder to do."

One country that could benefit from added tariffs against Chinese goods is India. Kuehl said India has been competitive with China when it comes to production, but always lost on transportation costs. However, the tariffs would suddenly put both countries on an equal playing field.

"China is desperately afraid of India," Kuehl said. "India is growing faster than China now and is set up to continue to do that if it manages to stay out of its own way, which it has managed not to do in the last few years."

Looking beyond the U.S. and China, Kuehl said globally things should return to normal after what he described as a stimulus year. The U.S. is in a stronger position when it comes to oil, now importing less than 5 percent of its domestic usage, down from 80 percent 10 years ago.

He added that the Saudis are now on the second half of their known reserves, while the U.S. has thus far exploited less than 5 percent of the known reserves in the Dakotas alone, meaning the U.S. will continue to play a disproportionate role in the oil world.

"Global economic outlook is looking decent," Kuehl said. "Not as impressive as 2018 was, but it's kind of returned to normal. 2018 was a stimulus year with the tax cuts, but the rest of the world also did a lot of stimulating. We're not likely to see the same in 2019. However, the Germans may decide to lower their taxes again."

As for the U.S., Kuehl said the economy has finally recovered from the 2008 recession and is optimistic that, even if a recession is in the near term, that it won't last long.

"Some conversation has begun about when the next recession will be," Kuehl said. "If it happens it will likely be a Fed-manufactured recession. Those tend to be short and sharp because they're provoked by the government trying to control inflation rates."

Sales outlook

Bernard Swiecki, director of the Automotive Communities Partnership for the Center for Automotive Research, said 2018 took an unexpected turn after most projections had U.S. light vehicle sales tapering off in the latter half of the year.

Instead, the industry rallied to the fourth-highest year on record at 17.3 million units sold, up 0.6 percent compared to 2017.

"That really is an unexpected outcome, but now these are different days," Swiecki said. "Typically you look at sales volumes, but to me now what we're selling and how much of what is more important than the total amount of what was sold."

Light trucks were what was sold—up 7.5 percent compared to 2017—while passenger cars dropped 13 percent. Crossover-utility vehicles dominated the industry, accounting for 37.7 percent of the total vehicles sold, and Swiecki said that will likely continue. Pickup trucks were next at 16.6 percent.

"The industry often either breaks even or loses money on sedan sales," Swiecki said. "The industry makes a much better profit on things that are utilities. They have higher transaction values, they have better profit margins and two-thirds of that value comes from the suppliers and not the OEMs. This says a good thing or two about the overall economy, that consumers are willing to buy these more expensive vehicles."

The electrified vehicle segment was the fasting growing one at 21 percent year-over-year increase. However, Swiecki said that segment still only accounts for 3.9 percent of the U.S. sales.

"Let's be honest here, when you're only 4 percent of the market, it doesn't take a huge unit difference to give you a big percentage change," Swiecki said. "But it tells you that these things are not dead. They underwhelm, but they're obviously not going away and with the explosion of vehicles coming out in 2020 and so on this segment is only going to increase."

However, despite the strong year, Swiecki said most forecasts are projecting U.S. light vehicle sales to fall at about 16.8 million units and then continue plateauing at about that level until the 2023-25 time period.

He added that with uncertainties on both the political and trade fronts, this year and the near term are harder than ever to project. But Swiecki shares Kuehl's optimism that if a recession lies ahead, it won't last long.

"If you're going to have a recession, this is the way to do it," Swiecki said. "A dip, but a minor dip, and continue to sell more vehicles that the industry makes money on."