Accelerating Opportunities in the Auto Industry

Feb. 13, 2012
Prepare now to take advantage of the opportunities and meet the challenges that will be part of the auto industry in 2012.

As I travel the country talking to company owners and business leaders, I emphasize avoiding the flashy crisis-of-the-day headlines and instead encourage listeners and readers to focus on the good economic news that doesn't always make the front page. For the auto industry, recent developments in U.S. consumer health are such good news.

The environment for the consumer is improving. Falling consumer loan delinquency rates, rising employment and retail sales and increased willingness by banks to make loans are signs of economic expansion. We expect this trend to continue as global economic conditions improve in 2012.

Personal bankruptcy filings fell for the first time in four years as economic conditions improved over the course of 2011. Filings were down 11.6% from 2010. The consumer-loan delinquency rate is at the lowest level since second-quarter 2007. These two facts alone should raise confidence about consumer health and demand in the coming year.

The Auto Industry

Our February 2011 forecast for North American automotive production was just 3.2% below the 13.1 million units actually posted for the year. There was no recession or double dip as many forecasted and others fretted about. The industry put together a solid recovery.

Selling into the United States is a winning proposition with production for the past 12 months at 8.4 million units and rising. Mexico is posting a solid growth rate at 13%, but that's likely to slow through the near term. Nevertheless, Mexico represents a sizeable market at 2.5 million vehicles, compared with Canada's 2.1 million vehicles.

The European Union is posting a solid 13.7% year-over-year gain in motor-vehicle manufacturing despite the constant worry about Europe's financial stability. Vendors selling into the EU market that were profitable in 2011 are likely to remain profitable in 2012 but should plan on an essentially flat production trend in 2012.

Brazil represents the only trouble spot, even with the annual production level 2.4% ahead of this time last year. The annual production figures have been in mild decline since August 2011, and they are likely to remain in decline through the first half of 2012. The drop-off in motor-vehicle production stems from Brazil's fight with inflation. The successful battle has dampened consumer demand.

The opportunities in this industry rest with consumer health and the availability of attractive financing rates, which won't be an issue in North America this year. The Federal Reserve Board announced in January continued low interest rates well into 2014.

Auto dealers and car buyers should benefit from the rates. Credit availability also is not likely to be a problem. U.S. consumer credit activity in the last three months of 2011 was 2.7% higher than the year before. Credit availability will not inhibit auto sales in the United States or Canada.

Make Your Move Items

The auto industry will provide solid revenue and profit potential in 2012 if manufacturers are prepared on two key fronts. First, expect increases in metals and chemicals costs, especially in the latter half of the year. The global economy will pick up speed in the second half, and the concurrent increased demand for raw materials will cause an overall rise in pricing.

The second front will be won as business leaders embrace internal efficiency efforts through increased training, process improvement or other automation enhancements. The efficiency gains now will help take the bite out of the inflationary pressures mentioned above and out of the coming increased costs for skilled labor.

Contributing Editor Alan Beaulieu is an economist and president of the Institute for Trend Research. He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business cycle trends.

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