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Friday, June 18, 2010

The State of the Automobile Industry

This week, Elyse Cochran and I attended the Southern Growth Policies Board Chairman’s Conference. The Southern Growth Policies Board is a Think Tank based at the Research Triangle in North Carolina and is comprised of thirteen southern states. Each year one of the thirteen Governors serves as the Chairman of the Board. Due to Kentucky’s Gov. Steven Breshear being this year’s Chairman, the conference was held in Lexington, KY. The Chairman also chooses the conference theme. This year’s theme was Driving the Next 20 Years: Creating the New Automotive Industry in the South.

Given that our community sits between two major investments of automobile manufacturers, it seemed prudent to participate in this conference. After investing two days at the conference, I can confidently report, the investment was very worthwhile. In addition to hearing from community leaders throughout the south who have automobile manufacturing operations located in their communities, we also heard from the leaders of the companies as well – Toyota, Ford, Daimler. We heard from and interacted with research leaders such as Robert Geolas, the Executive Director of the Clemson University International Center for Automotive Research.

The topics included: An economic forecast by a leading economist from the Atlanta Federal Reserve Bank, a panel discussion on Seeding and Growing Automotive Plants, a panel discussion on Sustaining and Growing the South’s Supplier Base, a panel on Automotive Intelligence – The Southern Network for Research and Development, and a very interesting panel discussion that included Gov. Steven Breshear of Kentucky and West Virginia Governor Joe Manchin.

After looking at the US Auto Industry from a historical perspective, most of the industry insiders indicated that the effects of the recession have been more severe and more prolonged than any other time in the industry’s history. The industry literally hit a wall seeing sales drop from an annualized volume of 17 million vehicles per year to less than 10 million. Suppliers, who had enjoyed steady and predictable orders month after month and year after year, saw their orders drop in half almost overnight.

Although automobile sales are improving, the forecast for the next two-three years for annual sales remain between 11 and 12 million units. Manufacturers and suppliers have tremendous excess capacity for a number of years out. With KIA and Volkswagon coming online, any new major investments other than suppliers is not likely.

Throughout many of the presentations and panel discussions, the subject of “green” vehicles and “green” technology was plentiful. Electric vehicles and hybrid vehicles were commonplace in each and every session. Interestingly, the forecast / predictions on the level of market share these vehicle types would reach was all over the board. The most enamored industry representative for electric / hybrid vehicles claim that the US would see these vehicles reach 20% of all vehicles. The more skeptical industry representatives place the market share around 2% for these types of vehicles.

Even though consumer interest is high in the new technology, the high costs of batteries and the heaviness of batteries compounded with minimal availability of charging stations for plugging in will prevent widespread conversion to purely electric vehicles in the short-term. Hybrid drive trains and improved fuel economy for the latest improved combustible engines will grow faster than all electric vehicles.

Given the current sales forecast for vehicle sales is well below the industry high point of 2006, the industry has excess capacity from a manufacturing standpoint. And most would make the same argument for the suppliers of parts to the manufacturers. And the excess capacity exists without factoring the new Kia plant in West Point or the Volkswagon plant in Chattanooga. I would argue that this excess capacity is the reason more suppliers have not relocated or expanded into our region for supplying Volkswagon. As capacity is utilized, I believe new supplier activity will occur over time all around the 15 counties surrounding Chattanooga. We need to be ready for when that occurs.

One key takeaway from almost every presentation was the concern over workforce. Every executive from the industry discussed the continued struggle in having enough skilled employees. The discussion ranged from a lack of technical skill development to general work skills (punctuality, professionalism, dependability). Governor Manchin from West Virginia voiced great concern that in his state and most others, the collective investments in education were not producing adequate returns on investment.

And the industry leaders voiced that attracting suppliers and recruiting suppliers would continue to be a challenge due the availability of a trained or trainable workforce. More often than not the reference would be that a high school diploma was the minimal and that one or more years of training / education beyond high school was critical in an advanced manufacturing arena.

I have attended many conferences in my career. Some were more valuable than others. The investment of the last two days was very profitable. As we continue to prepare for economic expansion and investment related to the Volkswagon project, this conference provided invaluable insight into the automobile manufacturing industry.

1 comment:

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