Regulatory convergence in the Canada-United States automobile sector.

• Author: Porter, David
• Position: PROCEEDING OF THE CANADA-UNITED STATES LAW INSTITUTE HENRY T. KING Jr. ANNUAL CONFERENCE on THE CANADA-UNITED STATES REGULATORY REGIME: REVIEW, REFORM, RECOVERY: Cleveland, Ohio: April 8-10, 2010

Session Chair--David Porter

United States Speaker--Brett Smith

INTRODUCTION

MR. PORTER: Good afternoon. I am David Porter. I am a visiting professor at Case Western Reserve University School of Law, (1) and I just want to welcome everyone to this afternoon's session.

Brett Smith is our next speaker. He is a group director for the Automotive Analysts Group, Center for Automotive Research in Ann Arbor, where he has been since 2000. (2) Before that, he was at the University of Michigan's Office for the Study of Automotive Transportation, which is called OSAT. (3) For twenty years, he has divided his research efforts between automotive industry analysis and advanced power-train technology and strategy. He currently leads several research efforts on advanced power-train technology, including projects on energy storage, policy, and plug-in electric vehicle infrastructure issues. (4) He is also program director for the Business of Plugging In, a conference held annually in Detroit: He has authored numerous reports, ranging from materials for education and training to aftermarket strategies. I welcome Brett to give his presentation.

UNITED STATES SPEAKER

Smith, Brett *

MR. SMITH: Good afternoon, everyone. Thank you for the opportunity to be here. My research vice president, Sean McAlinden, intended to be here, (6) but unfortunately Sean truly fell off his horse last weekend. The good news is he is okay, so we can joke about it. The bad news is I have spent this week going all over the Midwest and coveting for Sean. I have gone through the industry, giving a background of just about every type of discussion you could have on the issues related to the industry. I am hoping to give you some of that background.

To give you a little bit of background about our organization, the Center for Automotive Research, as has been suggested, is a spinout from the University of Michigan. (7) We spun out from the University of Michigan back in 2000. We are a not-for-profit organization. (8) We still do, basically, the same work we did at the University.

At the University, we were too much like consultants for the academics. Now, in the not-for-profit world, we are too academic for the consultants, so we have had to find a niche in between the two of them.

The Center for Automotive Research focuses on a wide variety of topics in the automotive industry. We really pride ourselves on being a broad-based research group, funded by government (most of the time). Much of our financing is government focused. (9) However, we get other foundation and other government work.

We have four research groups. I am the director of the Automotive Analysis Group. (10) We also have the Labor and Industry Group. In addition, we have a Manufacturing, Engineering, and Technology Group and a Sustainable Transportation and Communities Group. (11) Those cover the four areas. We try to bring that research together in different conferences and different forums, for instance, like this one.

We have a program in Northern Michigan every August, in Traverse City; the program includes management-briefing seminars where we bring 1,300 to 1,400 automotive folks together to talk about the auto industry. (12)

Our job, in many ways, is to study the industry but it also entails taking opportunities, like this conference, to discuss the issues of the industry with the general public.

For twenty-seven years, we have joked around our office, unfortunately, that we have had to give the grim reaper speech. It has been a tough twenty-seven years overall in the auto industry. The last couple of years have been as tough as they come.

The "Big Leave" is what many have termed the mass exodus from Detroit of a substantial portion of the automotive industry. Approximately 117,000 people have left the Detroit Three in the last three years. (13) That is an enormous amount. All were difficult for the communities and states in the region to deal with; however, it is also a starting point. There may be a positive end to this recession. The recession has led to a complete restructuring of most of the industry. (14) It is now an industry that can compete globally on a permanent basis.

First, I would like to talk about macroeconomic trends that are affecting our industry. Some of those trends are turning. Some have not yet turned. We will move onto some other topics as we go.

Again, we think there is light at the end of the tunnel. We think there are actually some positive things happening in the auto industry. People are being hired, (15) and you see some positive information about it in the press. This week I saw reporting for two of the most disliked companies in our country due to the bailout: General Motors (GM) and Chrysler. (16) There is a third company in Detroit that is pretty strong: Ford is a company that has truly turned around without government money. (17) They are a company that has gone from having no product to boasting fabulous product, from no process to developing an incredible manufacturing process.

There are good things to talk about in Detroit and, generally, the auto industry in the Midwest. One of the things to be optimistic about is consumer confidence and sales. We are starting to see consumer satisfaction and confidence return. (18) That is a good sign for sales, as it is one of the key indicators.

Looking at the Dow Jones indicator, we lost an enormous amount of wealth. (19) Of course, we have gotten some of that back. However, we have not brought consumers back to a level where they are ready to jump in and buy automobiles in large volumes. Obviously, that is going to affect car sales for the next several years.

Another key factor used to assess car-buying ability is the strength, or in this case weakness, of the housing sector. You see some mixed results here. Certainly, you see the negative housing prices month-to-month for the period we just went through. However, in the last couple of months, you start to see that it is beginning to pick up. (20) However, on the realistic side, it is nowhere near where it needs to be to support an automotive market similar to what we have seen in the past.

Gross Domestic Product (GDP) growth, historically, has had to be above three percent for the auto market to grow. (21) We just recently returned to that level of growth. Again, we think there are things starting to happen in the automotive industry and the economy in general that make us think consumer confidence is up.

Used vehicle prices are also up. (22) For a while, it was very easy to get a used vehicle, because there was no demand. The decision to buy a new car was less appealing because you could get such a great price on a used vehicle.

In terms of vehicles per household, we currently have just over two per household. (23) Based on the data we have looked at, that number should hold steady for some time. That would potentially be a problem if not for one thing: we are adding many households. Household formation over the next ten or fifteen years is going to be very strong. That is a good sign for the industry.

Also, we notice in headlines this week that we continue to lose vehicle stock. We are taking older vehicles out of the market and putting new ones in. That is creating--we hope, we expect, we think--at least some inkling of demand going forward.

Remember, there is no substitute for vehicles. We love to talk about modern urban cities and the new way of living. Nevertheless, for a strong majority of people, the only way to get to work in the morning is by automobile. It is also interesting to observe that the percentage of Americans driving to work is the same now as it was in 1970.

We had a period from about 1995 where there was an enormous amount of sales, (24) which led to a huge bubble in the automotive industry. We are often asked if we are going back to those bubble levels, at roughly 17 million, or if we are going to have to get used to a market more in the range of 12 to 13 million.

Realistically, we think that bubble was unique. We are going to be paying that back for quite awhile. Our forecast is that we may get back up above trend, maybe in two or three years, but it is going to take time to get there.

As I was driving over this morning, I was talking to one of my former employees who works on Wall Street. We discussed the idea that this industry used to have trouble making money at 15, 16, or 17 million units. Now, with the restructuring, (25) they are talking about being profitable as an industry at 11 to 12 million units. That is lowering your profitability mark from 17 down to 12, which is a huge jump down for this industry. It was important that it happened. Part of the reason we see that trend fight now is that we think there has truly been a fundamental change in the industry.

Regarding employment, we hear so frequently about the "jobless recovery," (26) and in the automotive industry, that has definitely been the case. There has been a small rise overall in terms of manufacturing in the auto industry, but it has been a pretty slow one, and one that has us wondering where we are going.

IHS Global Insights, which forecasts average productivity estimates and unemployment, shows that employment is going back up. While employment may not return to the levels it was at before, it will eventually reach a fairly strong equilibrium.

It is interesting that, as we travel around the country, we find very different perceptions of the automotive industry. In the State of Michigan, we see a government that appears to want to get out of the automotive industry. (27) Other states, certainly in the south, believe it is a great place to be and want more of it.

What will drive this recovery is that we are now a low cost producer compared to some of the larger countries. We are still not a low cost producer compared to China and some of the very low cost countries, but compared to Europe, Japan, and Canada our costs are now very competitive. The...