- Overcapacity is crippling the US automotive industry during what should be a boom time for carmakers.
- Despite low fuel prices and low unemployment, the auto industry is laying off workers and closing factories.
- Carmakers failed to notice the move by customers away from sedans towards SUVs, meaning the industry is showcasing recessionary traits despite record sales in 2018.
The US economy, despite lingering recession fears on the horizon, is in good health. Gas prices are low, with oil staying down after record domestic production and the limited success of OPEC’s cuts to-date. US unemployment is low, at 3.9%, and wages are also up.
So why are automakers closing plants and cutting jobs?
The US-China trade war and car makers’ own missteps have made grim reading for the industry. Some of the world’s largest manufacturers seemed to miss out on the transition towards big, gas-guzzling SUVs in North America, according to Bloomberg.
Six years ago sedans made up almost half of the auto market in the US, but that’s no longer the case as SUV sales rocket. Car makers appear to have missed the boat and are now suffering from overcapacity — churning out three million more vehicles a year than are being bought — the same issue that hit the industry during the last recession.
The overcapacity plaguing US automakers is the equivalent of 10 excess plants, which would account for at least 20,000 jobs directly, Bloomberg said. A failure to identify a shift in consumer’s preference for roomier, and increasingly fuel efficient, SUVs has hit automakers hard. Bloomberg says car companies are now behaving as if a recession has already arrived.
Companies now are scrambling to catch up, axing sedan models and ramping up production of SUVs.
For context, General Motors announced it was closing six factories last year with thousands of jobs set to disappear in an attempt to raise profits at the company. It also cited higher raw materials costs due to trade war tariffs on key components such as steel.
Unlike Ford and GM, Fiat Chrysler dropped out of the sedan market in 2016 and its share price dropped. Almost two years later its value has almost tripled, surging 161%, while in the corresponding period Ford is down 27%.
Overcapacity issues have proved to be dark echoes of 2008 and the government led auto bailout with concerns that some of the US’s leading companies could be significantly behind the curve once again.