2023 Automotive Insights Symposium Day 1 Keynote Transcript

KRISTIN DZICZEK: I'm Kristin Dziczek, policy advisor at the Federal Reserve. It's the 29th Annual Conference. I think this is my eighth as a speaker and maybe my 18th as an attendee. And so it's been a legacy that I picked up and decided to change quite a bit. So hopefully you guys like this and you'll be back next year on the 30th.

I do have to give you a disclaimer on my slides that any of the views that I express here are that they're mine. They're not those of the Federal Reserve Bank of Chicago or the Federal Reserve Board of Governors. I don't speak for Jerome Powell, and I try to be very, very careful not to speak for our president in Chicago as well.

You can put this slide up any year. Everything's changing, but this year it really felt true. In EVs, we've got a massive amount of new launches. We've got changes in sourcing these critical minerals and components, new chemistries, new formats, new and higher costs, new incentives in the IRA, new sales modes and relationships between automakers and their dealers.

They have other technologies besides EV that we're keeping an eye, on ADAS and automation, advanced computing in the software-defined vehicle, and production technology. As some of us saw on the Ford lightning tour yesterday, manufacturing looks a little bit different when they're making EVs and investing lots of money in these plants.

There's new investments, new plants, new firms, new trade agreements, new trade actions, new regulations that are coming for fuel economy for 2026 and beyond and other things that are happening, like supply chain disruptions, economic conditions, and building out a robust infrastructure for the grid and charging.

So are we really at that hockey-stick moment that we've been talking about for decades in the EV world? And I think we are. When I charted this out, it looks like a hockey stick. I am here showing you the market share of battery electric plug-in hybrid and fuel cell. Those are collectively plug-in vehicles.

SPEAKER 1: [INAUDIBLE]

KRISTIN DZICZEK: OK. That's production. They're not on all the screens yet, though.

SPEAKER 1: Are you on these?

KRISTIN DZICZEK: Yeah, I'm on these. So production, get that together. I'm going to keep talking because I've got this much time. So collectively, these battery electric plug-in hybrid and fuel cell vehicles, those are the ones that qualify for the IRA incentives. And we're going to call those plug-in vehicles.

So we saw an uptick in the last three years, during a pandemic, going from 2.1% share to 4.3% to 6.7% last year, so a real strong uptick. And if you follow that line up, we might get to about 30% by 2030. That's not a forecast. I put 30% there because that's where it looks like. We'll hear more about the forecast in the next session.

Plug-in vehicle volumes by company has been dominated by one company, Tesla, the big blue bars there. Tesla has had 70%-- a little bit more than 70%-- of the share of battery electric vehicles, but 62% share of plug-in vehicles and 49% last year. So they're starting to get competed with a whole host of new vehicles coming from other automakers.

In 2020, there were about 20 plug-in vehicles made in North America. By 2030, some estimates put it at around 200. That's a lot of investment in plants. That's a lot of change.

And a really great report that the Alliance for Automotive Innovation sponsored with Atlas Public Policy shows that $73.6 billion that Leslie referenced, a big uptick in announced investments in 2022. So big bets, lots of money and flagging optimism, according to KPMG.

Last year, survey in 2021, automaker executives who were surveyed thought that there would be a 52% share by 2030. Last year, in 2022, it was 35%. A little bit of optimism meets reality, but also that optimism may change when we get a little bit more clarity on what the IRA requirements will be.

IRA gives us a lot of incentives, a lot of carrots out there, and they're quite substantial and really could move the needle on EV production, battery component and mineral supply chain and adoption as well as many state incentives to anchor these investments in communities. We're going to go over some of that in my presentation now and then throughout the rest of the conference, of course.

And let's not forget in addition to IRA, there's the Infrastructure Investment and Jobs Act that has money for building out the charging network and the grid and the CHIPS Act and some other trade actions there.

And when you put them together, this is looking at profitability for motor vehicle and parts and industrial output. Industrial output's the white line, and usually those two move pretty closely together. In the 2008 and 2009 downturn, profitability took a big hit when industrial production fell. 2020, industrial production falls sharply and profits keep churning along.

And then we've started to see this widening diversion of profitability being much, much stronger. Some of that due to the supply constraints, of course, but that has many implications, not the least of which is for how they go into negotiations with the unions this fall and the summer and fall because very profitable companies will have a difficult time telling the union that they can't give them what they want.

There's a lot of hurdles ahead, and that might be part of why the optimism is fading. Demand is a big question. How strong is demand? Will it hold up? Is the pent-up demand what we think it is? Supply chains are moving a little better now, but is that a temporal point and it could be thrown off by a number of different factors? Commodity prices have been fairly volatile. They're looking a little better too, but that could change too.

We're hearing a lot from suppliers about labor shortages and difficulty getting workers to their plants and even some suppliers providing transportation to people. Higher costs across the board, including for consumers, higher rates, which makes both borrowing for consumers and dealers to fund their inventory, but also to fund these investments. Getting money is more expensive.

This is an administration that's working to disentangle the auto industry and many other critical industries from dependence on China. And that's going to be a pretty big challenge. As I mentioned, union negotiations, that's a hurdle to get over this year. Regulatory changes, and there's lots of other things that can happen, like a recession or escalating geopolitical conflicts in particular areas of the world and a whole host of other things that I've got my eye on and I think many of you do as well.

For this week's conference, though, we're going to talk about just two big issues, as Leslie pointed out, affordability and job quality, which are issues in and of themselves, but become even bigger issues when you put them in light of the EV transition.

So today's theme is "affordability." And I think many of you have seen these little side stickers to the Monroney sticker, where dealers were putting markup on vehicles, sometimes even double, what the vehicle's MSRP is, but fortunately, we're seeing the pressure let up a little bit. The dealer markups are becoming rarer, but prices are still rising.

And EVs have, up until now, had higher prices. That might be about to change with the new introductions and some of the manufacturing techniques and strategies that automakers are employing. And we're going to explore both of those issues in this afternoon's affordability panels.

And then tomorrow, we're going to look at jobs. Will there be more or fewer? Where will they be? What will they be like? What do we need to do those jobs? And it's such an important issue that we're going to spend all day tomorrow focused on that topic.

Now I'm going to show you some regular boring slides about the economic factors of sales, production inventory, supply chains, and capacity. So safe, reliable, affordable transportation matters. It matters to getting people to work for labor force participation. And what's concerning to me about this chart, the orange line and the blue line are public transit and other forms of getting to work other than in a car.

And what we see is a recovery, in passenger modes and passenger miles, for being in a vehicle and not a recovery for those transit and bus passenger miles have not come back. As I mentioned, employers are providing transportation to work. And yesterday, we visited the Ford facilities, and we got to watch the history of Ford Motor Company.

And if you know that history, you know that there were two benefits of Henry Ford's $5 a day. The first was he offers $5 a day and he gets a flood of applicants, all the workers he needs, and they don't want to leave. The second was that they could afford to build the cars they built. They could afford to buy the cars they built. So safe, reliable transportation matters, and that's why we're concerned about the affordability question.

When you take a look at what's happened to average transaction prices and inventory on month-over-month basis, we had that really sharp increase in average transaction prices in 2021, April to October, just 20% up in just a few months.

Since then, it's been up and down, up and down every month, a little bit looking like it's on a plateau, although yesterday's data was up. On the inventory side, of course, there's a strong drawdown, 1.2 million when plants were closed and we weren't making any cars, but inventories dropped another 1.9 million vehicles, or about 70%, in the 10 months between December 2020 and September 2021 as those supply chain disruptions started to bite.

Raw material prices have been elevated. They went up sharply in the pandemic, and they've been fairly volatile. They have come down a little bit, but they're not back down to where they were prior to any of this chaos. And I know we're going to talk about some of that on this afternoon's panel.

The share of vehicles that are considered luxury grows from about 12% to 14% to 17% during the pandemic, from 2020 to 2022. I know some of our presenters on one of the next panels will address the consequences of this high share and think about what that means for future used vehicles. If what we've produced in the last couple of years has been a rich mix, when that goes into the used market, that keeps used prices elevated as well.

Our friends at Cox Automotive report that the average monthly payment is a 20-year high at $762 a month, which includes financing. And when you look at the average finance rates, those two lines for 60-month and 72-month loans, they've been increasing sharply over the last few quarters, but we haven't seen a commensurate reduction in sales.

Anecdotally, we are hearing about more cash deals. And Pete may address some of that on this afternoon's panel. And where those 60- and 72-month lines ahead depends in part on what the Fed leadership does with the Fed funds rate. And I don't what they're going to do. I have no special insight to that, but here's what the Board of Governors tells us.

They put out a summary of economic projections after every meeting. So this is the December summary. Jerome Powell says there are no rate cuts in 2023 in the summary of economic projections. So going up in 2023 and then starting to come back down. The inflation data that's been received so far for Q4 shows a welcome reduction in the monthly pace of price increases, but it's going to take substantially more evidence to give confidence that inflation is on a sustained and downward path.

The thing on the right is the dot plot. If you're not familiar with this, I think it's one of the things that's pretty interesting. It shows where each one of the voting members thinks rates will be in future years. So after every meeting, you can go to the Federal Reserve website and see where they think things are going.

With increased model availability, we do see an increase in market share. There's about twice as many BEVs available in the market. And for a long time, the hybrid battery electric plug-in was tracking with real gas prices. And real gas prices, of course, increased in the last couple of years, but that share overall of electrified vehicles, so the plug-ins plus hybrids, has really grown and is now over 12%.

The battery electric vehicle prices are about 35% higher, as Leslie pointed out. And this is by month what the price premium is over the average transaction price. And it varies every month, based on what the mix of vehicles sold were, but we may be able to mitigate some of those higher battery electric prices with some recovery in the production and supply chain, moderating raw materials prices, cooler demand, and a more normalized mix.

Some of those new model introductions of 30,000 and below vehicles, $30,000 and below vehicles, and greater availability of those moderately priced EVs. Production efficiencies can help bring those prices down too, technological improvements, and the IRA MSRP caps of $55,000 for cars and $80,000 for all other vehicles may mean that BEV average prices will be coming down.

This is a great map, again, from the Alliance for Automotive Innovation that they have in their annual report, showing EV ownership is really concentrated on the coast and mountain states and among high-income households. So the darker the blue, the higher the income of the households in that area. And the higher the bar, the more EVs that there are there.

So those are also some of the states that have ZEV mandates, or zero-emission vehicle mandates. And many also offer local or state level EV purchase incentives. So now let's switch to some of the production and supply chain issues.

This is complicated. So there is a middle line there that yellow. If any of the lines are above the yellow line, that means that the transportation equipment sector is experiencing that issue more so than manufacturing in general. If it's below, that means that manufacturing in general is experiencing that issue more than transportation equipment.

So we can see that the lines are all crossing here, but increased underutilization due to insufficient materials and labor constraints in transportation, but orders and other factors have become less of a concern for transportation equipment. And that red line is the "other." And that was the pandemic, a whole host of other things. So we're kind of back to normal, back at the yellow line, but that labor thing is ticking up. And supply chain disruptions remain outsized impact on the transportation equipment production.

The supply chain pressure may be releasing-- this is the New York Fed's global supply chain pressure index. It is for all industries, not just for auto, but the net change has been positive. We're still not back to normal, which would be zero on this chart. And there's always potential for-- well, for it to improve, but also for more bottlenecks to surface.

When we look into shipping and logistics, here I'm showing the rail car loadings for motor vehicles and parts from January 2019 to December 2022. There's been a lot of volatility there as well. Recent rail car loadings are trending slightly upward. We have averted a rail strike, which would have been very devastating, but labor relations remain strained, both in rail and in ports. The port labor talks have been stalled and expected to go well into 2023.

Shipping container costs are down, but they're still above pre-pandemic levels. And there's a truck driver shortage. And we've talked to folks in shipping and logistics. There's premiums on warehouse space. Leasing is-- you can't get a lease for less than three to five years and labor constraints in the warehouses as well.

Coming back to capacity, production capacity utilization is fairly low. The two-shifts, straight-time capacity utilization remains below the 80% target, where usually that's what you have to be at to make money, but we're making money below that right now.

The concern that I have is that as battery electric vehicles ramp up, their capacity utilization in those plants is very, very low. About 3/4 of the plants that make an EV are below that 80% capacity utilization. And as EVs take over more of the market, we're going to lose that capacity utilization in the ICE plants.

So the rationalization of these plant investments may still be a few years out, but certainly an issue for union negotiations later this year, especially at Stellantis, which has already idled a plant at Belvedere. When they announced the idling, Stellantis said, the biggest challenge to the industry is increasing costs related to electrification of the automotive market.

Capacity is going to impact the supplier sector as well, where the BEV supply or ramp ups need to mirror production. And there could be concentrated market power in the hands of just a few who remain in the ICE side of the business, which will allow them to command higher prices. And they need to continue to invest to meet those higher and stricter fuel economy and greenhouse gas targets that will be coming.

We're going to get much, much more detail in the panels later today and the fireside chat tomorrow with Dr. Susan Halper from the OMB and Betony Jones from the Department of Energy, but I'm going to give you a high-level overview of what I see in the IRA.

So even though the IRA incentives went into effect a couple of days ago, January 1, we still don't have complete clarity as to what they're going to mean. Treasury has put out some of their guidance, but the guidance on components and critical minerals is not expected until March.

So January 1, many vehicles are eligible for up to $7,500 if their battery components and critical mineral contents requirements are met. If the MSRP is below those caps I mentioned earlier, if the buyer has an adjusted gross income below $300,000 for a household, $225,000 for head of household, and $150,000 for an individual and the battery's at least seven kilowatt hours.

There's also a new incentive for used vehicles, of $4,000 or 30% of the sales differential between a battery electric vehicle and an ICE vehicle. That's for used EVs that are at least two years old and cost less than $25,000, and the adjusted gross income caps are half of what they are for new.

Starting January 1 next year, they bring in a requirement that there can be no entity of concern battery components. And entities of concern include China, Russia, Iran, and North Korea. And we still don't exactly how that's going to get operationalized, but there can be none of that for the component side. And January 1, 2025, there can be no critical minerals or battery components sourced from any of those countries.

Of great interest, too, is the commercial green vehicle tax credits, up to $7,500 for light vehicles under 14,000 pounds, $40,000 for Class 4 trucks and above. It appears that there are no North American assembly requirements, critical minerals, or battery component requirements.

And interesting, the Treasury guidance says that leases will qualify. So the lease company will be able to get the incentive for those vehicles and potentially pass that along to consumers. That does open up access to imports and other vehicles that don't meet these more stringent requirements for consumer credits. So you may see a big shift to more leasing, especially in the BEV sector.

The Inflation Reduction Act also aims to lower production costs through a number of programs. The most critical one is the manufacturing tax credits, which is also known as 45x for the section of the tax code where that language lives. It's huge. It could be up to $45 a kilowatt hour. And a car has 80 to 100 kilowatt hour battery in it, $3,000 or $4,500 of incentive per vehicle in addition to the consumer or commercial credit that the buyer may get. So this is on the production side.

There's also a 10% credit for costs incurred in producing critical minerals. That's a really big line item in the IRA. There's also grants and credits and loan programs to invest in or convert or expand or re-equip plants to make EVs, batteries, and components through the domestic manufacturing conversion grants, the advanced energy project credit, and a rejiggering of a long-time program, the Advanced Technology Vehicle Manufacturing Loan Program.

I wanted to make a little note in the bottom. Let's not forget that we spent $1.2 trillion on infrastructure, which has some funding in it for charging grid resilience, clean hydrogen, and, of course, upgrading our roads, bridges, and other critical infrastructure, which if you live in Detroit, you know we need that.

So the Federal government's really making a substantial investment in US manufacturing, innovation, and investment. And just yesterday, at the Three Amigos Summit in Mexico City, there was a combined commitment to a task force for exploring near shoring and opportunities to bring some more of the supply chains, particularly for autos, back to North America.

But as a country we're really playing catch up. Other countries have higher EV production, higher adoption in their market, more battery plants, greater control of the battery component and critical mineral extraction refining and processing supply chain.

And so I'm sure many of you are familiar with that saying of, the best time to plant a tree was 20 years ago. And the second best time is now. So this is really-- plant the trees now, is what this administration has put forth.

And as I already mentioned, those excluded entities portion of the consumer EVs incentives, that's pretty important, particularly as it relates to China. China produces 80% of global battery cells. And they've invested, for many, many years, in critical minerals mining, refining, and processing across the globe, in Congo, in Australia, in Indonesia, all over.

They are the dominant investor in domestic and foreign cobalt extraction and processing. They control 61% of global lithium refining and 100% of natural graphite processing for battery anodes. And there's really a global lack of sufficient mining processing and refining.

Some of the things that Senator Manchin was concerned about was accelerating the permitting for mines. Mines take years to come online, years to permit. And even once a mine opens, it's two to three years before they're producing battery-grade materials.

Recycling is going to be key, and it's part of the IRA as well, but it's not sufficient in these early years when there are few vehicle batteries available to recycle and many of the ones that are available are a different chemistry than the recyclers are aiming for, and we don't have enough reclaimed minerals or those batteries might be put to second use as well.

So Inflation Reduction Act's regulatory phase, that we're still in, is really going to be critical to determine how the foreign entities of concern will be implemented. The government's also addressing semiconductor competitiveness, with the CHIPS Act and $52 billion for domestic chip production.

And in addition, there's a little-known department within the Commerce Department, the Bureau of Industry and Security, that's ramping up the enforcement actions and other things to try to keep China from gaining advanced semiconductor technologies that would not only give them a commercial advantage, but a military one as well.

We're going to turn now to this other important issue. And if you know me, you know this is an issue near and dear to my heart as a girl from Flint, the union negotiations. There's going to be new leadership at the helm versus the last time they negotiated contract. At the UAW, there is this one member, one vote that may lead to more populist leaders and a return to a more adversarial labor management relations. And we still don't yet who the new president will be.

The 2021 strike at John Deere is particularly important, I think, where members rejected two agreements before they ratified a deal with substantial pay raises and a return of the cost-of-living allowance, which went away in UAW Detroit three contracts back around the bankruptcy.

And there's currently an eight-month strike at Case New Holland that the UAW is involved in, where they rejected a tentative agreement earlier this week. Usually, those contracts don't get rejected. They have in a few of the more recent rounds of negotiations, but that's a real critical thing.

I have been looking at what the local unions are submitting to the bargaining convention and what kinds of issues are important to them. EVs, jobs, job quality, and organizing new plants. Organizing new plants can't be solved at this table. Job security, especially for propulsion and power train workers, wages, return of COLA, maintaining their excellent health care, helping temporary workers become permanent workers, overtime pay, which right now is only paid over 40 hours versus eight hours in a day. They want more vacations and holidays. They want to change profit sharing. They want to have more control over outsourcing and insourcing.

So there's a lot of things on the want list, but there's some considerations. As I mentioned, new leadership not only at the UAW but also Unifor and the automaker side of the table. That UAW president and one of the vice presidents and a regional director, those have gone to runoffs which will be decided in March this year.

And we have very, very profitable operations on the D3 side for more than a decade. So, again, hard to say. It's hard to give into these union demands. We're in a high-inflation environment where workers really do want to have some protection through something like COLA, where the companies have been resisting bringing that back and a lot of economic uncertainty ahead.

The UAW contracts expire on the 14th of September, Unifor just a few days later, on the 18th. We'll look for negotiations to open in the handshake sometime in June or July.

Usually they pick a target around Labor Day, and then we're off to the races. And I'm thinking about next year's conference. Can we focus on these contracts and what happened or will it not be done yet in January? And it may not be done yet. So I think we're going to have an extended, drawn-out process to bring these agreements to fruition.

So I know the next panel is outlook. And I don't have an independent forecast of the outlook, but I wanted to bring some context from some of the other outside forecasters who aren't on our panel. So for context, 2019 was an over 17 million year. 2020, right at 14.6; 2021, 15.1; and we're well below that for 2022.

On the right side, this chart shows the range of the blue chip consensus, the top-10 average, and some of the forecasters that I'm watching, but a range from 14.3 to 16.7. And how many times did the forecasters revise their outlooks last year? They were revising in November still. So there's still just not a lot of clarity going forward of where things are going to be.