NAFTA and the Auto Industry
By Pat McGibbon, Economist and Vice President of Strategic Analytics at AMT- The Association For Manufacturing Technology, which owns IMTS- The International Manufacturing Technology Show.
NAFTA has increased trade between the U.S., Mexico and Canada significantly over the past two decades, but some industries have benefitted more than others. The auto industry has certainly benefitted. Today, many of the cars sold in North America are also produced there. This is important to our industry because about one in four dollars spent on manufacturing technology in North America is an investment by the auto industry or its first-tier suppliers.
In early June each year, the Chicago Federal Reserve Bank produces an automotive conference at its satellite branch in Detroit—excellent speakers, excellent content. The consensus at this year’s meeting was that the auto industry has challenges in its future as demographics and technology suggest a significantly different landscape in the next eight to 30 years.
Demographics wreak the greatest havoc on demand for new cars. Young couples are waiting longer to get married. Marriage usually leads to buying homes, children and multiple vehicles for different schedules and larger families. Newer generations are waiting longer to drive, so families don’t need to buy additional vehicles for their kids. Even after they learn to drive, 20 and 30-year-olds are more likely to use Uber or rent by the hour at mass transit hubs and arenas. This phenomenon is not so much a generational issue as it is a financial one. The average dollar amount for a new car loan has risen by 20 percent in the past three years to just shy of $30,000, leading to the length of loans to grow dramatically in the past five years. Today, 80 percent of the car loans in place are for periods greater than five years. The only debt growing more quickly than auto loan debt is student loan debt, another financial stress for young adults looking to buy a car. As a result, analysts at the Chicago conference are projecting a cyclical peak in new auto sales in 2018 near 17 million units.
In the short-run, technology advances and CAFE requirements will encourage significant investment in new transmission and power train component design and production over the next eight years. Billions of dollars of new investment have been announced to address 10- and 12-speed transmissions and new transmission technology. Hybrids continue to represent a bridging technology from internal combustion engines (ICE) to totally alternative fuel technologies. Volvo recently pledged to transition 100 percent away from ICE-only vehicles to hybrids and electric-only units by 2019. Even with this change, Volvo doesn’t expect to move entirely away from combustion engines in their vehicles for well over a decade. The capital spending outlook by the auto industry appears to be promising in 2017 and 2018 related to product changes, but a cyclical downturn in sales would likely soften capital spending in 2019 and 2020.
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