Auto Industry Rebounds in North America

Auto Industry Rebounds in North America

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GM and Ford made an important discovery in 2010: proft. In the fnal tally for 2010, these two auto manufacturers reported combined profts of over $11 billion. That's not to say all will be a bed of roses up the road for an industry that can suddenly slow for many reasons. Gasoline prices and "psyche" over Wall Street's latest reading come to mind or get blamed quickly when things go badly. However, things are whole lot better than the last couple of years. George Magliano, director North American Automotive Research, HIS Global Insight serves as his frm's auto economist, crunching all the numbers and indicators as they relate to North American light vehicle sales. He spoke with MEXICONOW:

MEXICONOW: Eleven million units produced in a year represent the current "run rate" for the North American auto industry. In a previous decade that would have sparked panic. Now it does not. Why is it more acceptable?

George Magliano, director, North American Automotive Research, HIS Global Insight: The issue is the cost structure has changed tremendously for the better. At 11-and-a-half or 12 million units previously, you would have talked a lot about bankruptcy. But what has happened, frst of all, is that you have cut a lot of capacity -- a lot of unused assembly plant capacity. We've wrung out about fve million units over the course of a 10-year period of assembly plant capacity mostly in the United States. We've changed the labor costs variable. It has gone back to being a variable cost due to givebacks from the union. It used to be that because of the UAW contracts workers got paid up to 95 percent of their salary not matter what they did -- work or not. Now it is changing. The jobs bank is gone. In the future we will have a two-tier wage system with lower wages. So now, labor is a variable cost, not a fxed cost. Now we can match production to demand, rather than producing and giving it away. That is why we are making money.

With all the changes you mentioned, plus the ongoing refocusing by manufacturers, what are the implications for Mexico?

I see continued growth in Mexico. I think the issue -- or one of them -- is the production base on the auto side tends to be concentrated on about fve producers in the U.S. They need to get more producers down there (in Mexico). Today with the bankruptcy and some of the government bailouts it is politically incorrect to close more plants in the U.S. and ship them down to Mexico. If you want to grow the production base in Mexico, you need to attract the Koreans, you got to attract more Europeans, and you got to get new people in there.

You talk about industry growth in Asia. What are the prospects of Mexico exporting there? What about prospects of the Asians exporting vehicles to Mexico?

The issue right now is that Mexico is not really structured to be a global player like that. Until they do and change some of the designs -- you just can't sell a small car made in Mexico in China. It just doesn't work that way. You got to design a car; you got to design a car for their tastes and preferences. You got to have something pretty good to make it over there. They make enough small cars themselves. They don't need any more small cars over there. Right now, Mexico is not structured for that.

What about cars coming to Mexico from China and India?

It used to be seen as a threat, but it has gotten a lot lower. First of all, the product is not there yet to sell in North America. The product quality and drivability is not there. The Chinese have pulled back from their big views to sell in North America. I don't think the Chinese are going to come here any time soon because their market is growing by such huge leaps and bounds. Probably more cars from India -- the Tata and some of the cheaper cars on the global market could be an issue for sale in Mexico at the lower end. And, that is something that by 2015 or 2020 is something we might see. That is something that might be a threat to what has been going on in Mexico because the small cars made today in Mexico are mostly for sale in Mexico.

Looking at 2015, you declared that Mexico will be a "winner" in auto production by that year. On what do you base that?

I say this because of the tremendous amount of quality in Mexico and because the labor costs are lower on a high-quality workforce. That is the difference. It is not just people working for less money. You got people in the workforce and what they will do in these plants as far as work rules and how they will make the vehicles. It is top-notch at a reasonable price and that gives you good value.

Taking a look at the market shares in the U.S., you talk about credit worthiness. What must be considered about credit worthiness and credit availability, especially when it comes to considering U.S. auto market recovery?

The big sweet factor in our forecast for 2011 is that we see a slow credit cycle. Some of the other people in the credit markets see credit coming in a lot quicker in 2011. Their forecast is for 14 million units instead of 12.8. There is a big difference because of credit availability. What we are seeing is that it is a slow evolutionary, not revolutionary process. You get the jobs frst. You get people working. Then the credit starts fowing down from primeand near-prime and eventually to the sub-prime consumer. If you look at some of the numbers, those with 620 and below credit numbers at one time had a credit approval rate of about 70 percent for new car and truck loans. That was huge. At the lower of the credit cycle in the recession, that fell down to seven or eight percent. Now it is up to about 10 or 12 percent. Eventually in two years' time it should be up to about 30 or 40 percent approval rate -- something that is more normal. That is going to be a slow process, and that is what holds the volume of vehicle sales down.

Taking a look at all these market factors, what do Tier-I producers in Mexico need to understand about what is happening with the automotive market?

They should understand that these developments are good. The auto market has gotten better. They are making money. The assemblers are making money. You really don't have to cut your price to get the business. It is quality, on-time delivery and designing the product to go right into the car and truck and go right out the door. It is much more in the way of systems and doing business as opposed to just giving it away.

As you speak across the country to point to "Generation Y" as a wild card when it comes to the automotive market. On what basis do you draw that conclusion?

There is no loyalty there! Essentially they are a big group, but they don't have any money. They are not buying cars or trucks. They would like to have luxury cars as opposed to small cars. The manufacturers think they want basic transportation. Look at what Toyota has done with the Scion brand targeted mostly to the younger people. Nobody knows how to approach them. Anyone who knows how to go out there and capture them -- give them something they really want and priced at what they can afford -- that is where you will capture these people and try to keep them at a long time. These are people born between 1979 and 1994.

We've been talking about bottom lines, so please take us there in today's automotive industry.

We expect production in North America to return to about 16 million cars and trucks. We still import a lot of cars and trucks and that keeps a lid on domestic production. We see a shift of about 400,000 units out of Japan to North America, not sure as to where exactly, but the story is bright. We see Mexico peaking at up to 3.3 million units, a lot for export into the U.S., but much of that is tied into GM, Ford and Chrysler. It's going to be another 12 to 18 months during which demand is going to be below normal, but it is going to come back. We are a lot more proftable today. You cannot rely on what you did in the past as far as succeeding. The younger generation is not wedded to anybody. Whoever wins them is going to win in the future as well. We'll sell more cars at a higher price. The bottom line is we are a much more proftable business. And, if we are right, we are going to be a proftable business for a long time.