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April 28, 2010

What’s ahead for the auto industry? A conference on the longer-term perspective

The last two years represent an extraordinary period for the U.S. auto industry. Gasoline prices rose fast during the first six months of 2008, topping out at a national average of just over $4 per gallon. Following the bursting of the housing bubble and the financial markets crisis, the economy slipped deeper into recession. Financing constraints for consumers and vehicle dealers as well as rising unemployment both contributed to a dramatic decline in motor vehicle sales (see chart 1). Towards the end of 2008 the Detroit carmakers went to Washington, hat in hand. Ultimately, GM and Chrysler received several tranches of emergency government funds to stave off collapse. After several unsuccessful attempts to restructure their business model, Chrysler (on May 1 2009) and GM (a month later) filed for bankruptcy (see this link for a detailed report by the Congressional Oversight Panel on the use of TARP funds in the support and re-organization of the Detroit-based industry) . Both companies emerged from a “quick-rinse” bankruptcy within 4 weeks, substantially restructured and with much reduced debt.

In the meantime, demand for cars remained extraordinarily low, averaging 9.5 million units during the first half of 2009. During the summer, a government-financed “cash-for-clunkers” program pulled up sales for a brief period. Since then sales have stabilized, albeit at historically low levels, averaging just under 11 million units during the first quarter of 2010. By most accounts, such a sales volume is below what is considered commensurate with replacement demand.

Recently GM announced it had paid back its remaining loans from the U.S. and Canadian governments. Chrysler stated it had operated profitably during the first quarter of this year (link to this story in WSJ from 04/22) . Finally, to the surprise of many industry observers, Toyota recently stumbled regarding the quality of its cars. Several major recalls were followed by Congressional Hearings during the month of February.

What are the lessons one can take away from this? To facilitate such a discussion, the Chicago Fed is holding a major conference on the auto industry. The event will take place at our branch in Detroit May 10 and 11, 2010 (follow this link to the conference website) . The meeting will focus on factors shaping the competitiveness of carmakers during the next decade. Four factors will receive special attention: the existing uncertainty regarding engine technology, the need for flexible production systems, the extent to which carmakers need to globally integrate their product strategy, and finally the importance of successfully managing the supply chain.

Steve Rattner, one of the key architects of the U.S. government’s auto industry restructuring efforts, will open the meeting with a keynote address. Other keynote speakers are Tom Stallkamp, Industrial Partner at Ripplewood Holdings, and Bob King, Vice President of the UAW. The program also includes topical sessions on the major changes of the last two years as well as the government’s regulatory efforts and programs in place (in Washington and Ottawa) to finance auto sector innovation.

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Posted by Testa at 9:31 AM | Comments (0)