“This is the nightmare scenario for auto companies, which are being asked to make huge capital investments right before a slowdown in sales.”
President Donald Trump is asking U.S. automakers to invest in domestic manufacturing at a bad time.
Car sales have gained for seven-straight years after the U.S. auto bailouts and the financial crisis, a streak that’s close to running out of gas. That’s a recipe for trouble facing companies wary of undoing the painful but necessary steps they took to shut dozens of factories across the country, before and during a more than $70 billion government bailout.
New assembly plants cost General Motors Co., Ford Motor Co. or Fiat Chrysler Automobiles NV about $1 billion -- the sort of investment companies look to avoid making as a market peaks. And while factories boost jobs, economic gains from building them are being undercut by automation and pressure to compete with lower-wage countries including Mexico.
“This is the nightmare scenario for auto companies, which are being asked to make huge capital investments right before a slowdown in sales,” said Dan Luria, an analyst who has advised the United Auto Workers union. “It seems like hardly the time to spend billions on new plants.”
Trump dangled government concessions in a meeting Tuesday with the three automakers’ chief executives. Without providing details, the president promised in front of reporters to ease up on taxes and environmental regulations to entice them to build their first U.S. vehicle assembly plant in more than a decade.
A Strange Time
Trump wrote in a tweet before the meeting: “I want new plants to be built here for cars sold here!” His desires may fall on deaf ears, according to Steven Rattner, who led former President Barack Obama’s auto task force.
“I don’t think there is any possibility -- having survived a near-death experience -- that the car companies will build plants that they don’t need, simply to indulge the president,” Rattner said in a phone interview. “This all comes at a strange time.”
Along with car-parts companies they used to own, the automakers shuttered more than 100 manufacturing sites in the U.S. from 2004 to 2010, according to the Center for Automotive Research. Many of those closings occurred as part of the Obama administration-led restructurings of GM and Fiat Chrysler.
Mary Barra, GM’s CEO, called the meeting with Trump “constructive.” Ford’s Mark Fields praised the president’s withdrawal from the Trans-Pacific Partnership trade agreement, which he said failed to address currency manipulation, “the mother of all trade barriers.” Sergio Marchionne of Fiat Chrysler said he looked forward to working with the administration and Congress to strengthen U.S. manufacturing.
All three need more specifics before being able to determine whether building domestic factories will be worthwhile. The industry already struggles to make money on slow-selling passenger cars. It may have even more trouble if the president follows through on threats to tax imports from Mexico, where minimum hourly wages are less than one-sixth the average in the U.S.
“There are other things we don’t know about that are being talked about, in terms of tax reform and regulations,” said Michelle Krebs, a senior analyst for Autotrader. “Does that offset that? I don’t know.”
None of the CEOs who met with Trump on Tuesday promised to build a vehicle assembly in the U.S. Neither company has opened one since GM started production in 2006 at a Michigan factory now making Chevrolet Traverse, GMC Acadia and Buick Enclave SUVs.
“We’re going to make the process much more simple for the auto companies and everybody else that wants to do business in the U.S.,” Trump told reporters before sitting down with the CEOs. “I think we’ll go down as one of the most friendly countries, and right now, it’s not.”
After the U.S. auto market’s 68% surge since 2009, sales will be roughly flat through 2020, researcher LMC Automotive said in a report last week. After setting a record with nearly 17.6 million vehicles last year, the industry will keep coming up short of that level through the end of the decade, LMC said.
The recession-era retrenchment has contributed to automakers now running plants profitably, said Jeff Schuster, LMC Automotive’s senior vice president of forecasting. But that may change as vehicle sales taper off and the industry plans expansions.
By 2020, auto plants will run at about 85% of their capacity, getting closer to the cutoff line where some factories start to lose money, Schuster said. They’re at around 90% now.
Consumers also may pay a price, even on U.S.-built cars, if imported parts are taxed. Each Toyota Camry, the nation’s best-selling car the last 15 years, probably would cost about $1,000 more, according to Jim Lentz, CEO of Toyota North America.
“If prices start going up, consumers are going to start slowing down their purchases of the car,” Lentz said. “They won’t be able to afford it. That’s going to have us adjust our production schedules, and it’s going to have a negative impact on employment.”
Toyota announced its latest U.S. expansion on Tuesday, investing $600 million and adding 400 jobs in Vice President Mike Pence’s home state of Indiana. This will boost output of Highlander sport utility vehicles, rather than passenger cars that are built almost exclusively in the south, where auto workers aren’t unionized. Trump earlier this month attacked Toyota’s plan to supplement Corolla output in Mississippi with a new plant in Mexico.
But as the industry automates, factories don’t create jobs like they used to, said Marina Whitman, a professor of business administration and public policy at the University of Michigan.
“The American auto industry last year produced more cars than it ever had before, but they did it with somewhere between one-third and one-half the number of workers that they had decades ago,” said Whitman, who was an adviser to President Richard Nixon and GM’s chief economist from 1978 to 1992.
“The last thing the auto industry needs is more capacity.” she said.
By Jamie Butters, David Welch and Keith Naughton