Automotive Insights Symposium: The Future is Electric
The uncertainty surrounding the Covid-19 pandemic was a common thread that ran through the presenters’ discussions at the 27th Annual Automotive Symposium held virtually on January 13, 2021. Manufacturers, suppliers, product planners, industry forecasters, and policymakers agreed that the uncertainty about the virus and the effective rollout of vaccines are the biggest issues currently facing the automotive industry. While light vehicle sales finished 2020 relatively strong in December with a 16.3 million seasonally adjusted annual rate (SAAR), total calendar year sales of 14,463,935 were down 14.7% compared with 2019. But even in the face of pandemic-induced uncertainty, the automotive industry showed its resiliency, as it has done for over 100 years, with sales and production bouncing back much more quickly than many thought possible. Nevertheless, throughout the day, contributors highlighted that other issues remain that, if left unaddressed, will create longer-term challenges for the industry.
The availability of skilled labor to keep plants operating remains an immediate concern, as well as an increasing demand for engineers and product developers to incorporate rapidly changing technology into new products. There currently exist a number of infrastructure deficiencies that need to be addressed before many of the new technologies that will lead the industry into a new generation of electrified and automated automobiles can be implemented. They include such things such as widespread access to the internet and wide-band communications capabilities, an expanded electrical grid necessary for the successful expansion of electric vehicles, a well-defined and high-quality network of roads and bridges that can support a fleet of autonomous vehicles, and an efficient combination of mass transit and personal transportation options.
Finally, panelists stressed that global trade needs to be made more equitable, with agreements that create increased efficiencies, open access to markets, and a seamless flow of goods, services, and labor around the world. All of these issues remain necessary components for the future success of the automotive industry and its ability to address environmental concerns while still meeting consumers’ personal mobility needs.
Paul Traub, senior business economist at the Federal Reserve Bank of Chicago, Detroit Branch, opened the symposium with an update on the U.S. economy focusing on gross domestic product (GDP) before transitioning to a discussion on structural changes in the demand for automobiles. The U.S. economy was down 3.5% in 2020.1 Personal consumption, which bounced back strongly following the onset of the pandemic, did not recover enough to avoid finishing 3.9% lower than in 2019. Private domestic investment also finished the year lower, declining 5.3% driven by declines in nonresidential investment (–4.0%), which included an $81.8 billion decline in inventory investment. However, all was not a loss in the private domestic investment sector as residential investment increased three of the four quarters, finishing the year up 5.9%. The trade sector saw the U.S. trade deficit grow in 2020, reaching $925.8 billion dollars, a new record high. The only full sector of the economy that saw growth was the government sector, which increased 1.1% as federal consumption and investment increased 4.4%, offset by a decline in state and local government activity, which contracted in aggregate by 0.9%.2
Turing his attention to the automotive industry, Traub discussed structural changes in the long-run demand for automobiles that have resulted in slower sales growth, which became most evident starting in calendar year 2000. Using the change in peak-to-peak sales dating back to 1960, Traub showed how in past sales cycles demand grew at about 130,000 units per year from 1970 through 2000. After sales reached a new high of 17.4 million units in 2000, it took 16 years for the industry to reach another record year, hitting 17.5 million units in 2016, an increase of just 100,000 units. This equates to an annual growth rate of just 6,250 per year from 2000 to 2016. Traub pointed to structural changes, including a declining growth rate in household formation, smaller household sizes, a decline in the growth of licensed drivers, and leveling off in the growth of vehicle miles traveled. Traub shared his belief that these structural changes have had a significant impact on the long-run demand for new light vehicles.
Auto production and sales outlook points to a slow recovery in 2021
In the morning sessions, Emily Kolinski Morris, chief economist at the Ford Motor Company, and Haig Stoddard, industry analyst at Wards Intelligence, emphasized high production levels, with demand returning faster than expected. While Kolinski Morris had previously predicted that 2020 would be a year of “tentative stabilization,” the auto industry came to a sudden unexpected halt, with production and consumer demand falling to unprecedented lows during the first half of the year as a result of the pandemic. However, sales came back faster than expected, and although virus conditions are still severe, industry sales finished strong in 2020. Nevertheless, the lingering economic impact from 2020 is expected to dampen volume in the first half of 2021.
Reflecting on 2020, Stoddard observed that sales volumes averaged half of each month’s starting inventory since July, resulting in an inventory-to-sales ratio that is significantly lower than before the pandemic (and implies inventory is down 30% compared with pre-pandemic levels). Production capacity constraints on strong selling vehicles—especially pickups—result in inventory struggling to catch up with demand. However, excluding pickups, Stoddard said he expects comfortable levels of inventory by 2021:Q2.
Furthermore, Stoddard observed that while crossover vehicle growth continues, this growth has decelerated compared with previous years. Eighty percent of the market was comprised of trucks, with full-size truck sales increasing rapidly. The market share of premium-priced vehicles continued long-time growth, partly because of fewer car models available, especially economy-priced models. Stoddard said he expects more new vehicle redesigns in 2021 and 2022; however, a large portion of these new vehicles will be electric, which are predicted not to significantly raise total vehicle demand.
Stoddard also shared forecasts for North American sales and production. His outlook for North American (United States, Canada, and Mexico) sales predicts it will take four years from 2020 until the demand in North America reaches 2019 (pre-pandemic) levels, and sales are forecasted to continue year-over-year increases through 2025. While retail sales volume returned to pre-pandemic levels in September, fleet sales—especially the rental segment of fleet sales—are still meager and are holding total sales below pre-pandemic levels. Transitioning to auto production, Stoddard forecasted that North American production will accelerate to pre-pandemic levels faster than sales, topping 2019 numbers in 2022. Besides rising demand, production gains are also driven by an increased capacity and local sourcing. Looking specifically at the United States, Stoddard predicted that if demand increases faster than expected, U.S. production could get back to pre-pandemic levels in 2021, further supported by new plants and increased capacity at existing plants that are raising manufacturers’ potential.
Innovation and public policy will help accelerate vehicle electrification
The first panel of the afternoon, moderated by Chicago Fed Detroit Branch vice president and regional executive Rick Mattoon, featured John Bozzella, president and CEO of the Alliance for Automotive Innovation, and Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association. Both Bozzella and Wilson emphasized there is a clear, unified voice among manufacturers in support of public policy that promotes a safer and cleaner vehicle future, along with the necessary steps needed to support the transition to electric vehicles (EVs).
Bozzella shared his belief that the auto industry is in a transformative moment. For example, some see the potential for 100% autonomous vehicles, which would help eliminate driver error crashes by providing a seamless traffic flow. In addition, the industry is working to eliminate CO2 emissions while supporting a vibrant workforce across the United States. Bozzella, however, stressed that the ambitious visions of the auto industry must converge with reality. Despite the industry’s strong response to the Covid-19 pandemic, economic, political and environmental uncertainties still loom large, and business models are disrupted in the face of this uncertainty and rapid technological change.
Bozzella’s approach toward filtering ambitions through realities includes setting an “innovation agenda.” He listed several questions that could define the framework of the industry’s agenda. First are supply chain questions, such as how the workforce should evolve in response to technological changes. Bozzella emphasized the need to incentivize research and development, modernize regulatory approaches for modern technology, and support manufacturing investments by retooling supply chains.
The private sector and the federal government should also be motivated to bolster consumer awareness and involvement around EVs, according to Bozzella. Incentives, such as tax credits or vouchers, are essential steps in achieving the industry’s goals and must be accompanied by sizable infrastructure investments so roads can support new technology. Bozzella said the United States is on the right track, with plans to invest heavily in EVs to support the auto industry’s vision of an electric future.
Wilson agreed that the auto industry is moving toward a fully electric future. This was supported by an announcement after the symposium by General Motors to phase out gasoline and diesel powered vehicles by the year 2035. She also argued for equal access to investments among suppliers to reach the end of the transition to full electric that makes sense for the entire economy. Wilson emphasized legislative opportunities, such as a revised surface transportation reauthorization bill, to support safety, lower emissions, and infrastructure as a crucial means of supporting the transition to electric and the auto industry’s efforts to find and retain skilled labor.
Wilson listed four priorities for the auto industry: manufacturing incentives for electric and hydrogen vehicle research and development, investment in worker training programs, consumer purchase incentives and education for electric and hydrogen fuel cell vehicles, and infrastructure investment for autonomous electric and hydrogen fuel cell vehicles. These urgent priorities, coupled with regulatory certainty, performance-based requirements, the realization of the full potential of internal combustion engine efficiency, and a transition timeline, would help the United States retain its advantages in the auto industry.
When asked about which incentives need to be put in place and how these incentives should operate, Bozzella answered that the private sector and the government need to align around a singular audacious goal—namely, how to achieve zero net carbon. He noted the auto industry is already seeing alignment, and now alignment is needed across the entire economy. Bozzella and Wilson also agreed that manufacturers and the government must raise consumer awareness to increase the demand for electric vehicles and that consumers must accept this new technology as helpful.
When asked about ensuring that all industry actors are on the correct timeline, Bozzella admitted this remains a concern. However, to achieve consistency between the private sector and the government, Bozzella called for certainty in the overall policy framework and the recognition that the entire economy is needed to grow the current 2% of electric vehicles on the road to 100%. While consumer awareness is building, Bozzella acknowledged the private sector and government have no shortage of work ahead. Wilson responded by arguing for the federal government to work with states to ensure the industry is on the same path, along with the government working on an international basis to ensure uniform standards across countries.
Fuel economy and consumer preferences
The second panel of the afternoon, moderated by Brett Smith, director of technology at the Center for Automotive Research, featured Julia Rege, vice president of energy & environment at the Alliance for Automotive Innovation, and Brian Daugherty, chief technology officer of the Motor & Equipment Manufacturers Association. While Rege and Daugherty said they are excited about current propulsion technology and optimistic about the future of electric vehicles, they also noted the many challenges ahead as the automotive industry adapts to rapid technological advancements.
Rege said that the auto industry is undergoing significant transformation and added that she is content with its progress over the last several decades. With improvements of 30% in fuel efficiency, which she argues is better for consumers and emissions, along with 40 current models of electric vehicles and a predicted 125 models of EVs by 2025, Rege said she remains optimistic about the future of the auto industry.
Daugherty echoed Rege’s enthusiasm and said he is excited about new display technology and new human-machine interfaces. Daugherty said he is also optimistic about EVs, especially considering hundreds of billions of dollars of predicted global investments in them. He added that he is also enthusiastic about new technological changes in hybrids and internal combustion engines, which he expects will remain in production for years to come. Hybrid vehicles that employ a combination of battery and gasoline power have a large role in the industry, according to Rege and Daugherty, as they offer a compromise to consumers who may be reluctant to buy EVs due to concerns as about such issues as limited range.
To Daugherty, however, the most critical factors in determining the tipping point for a sharp increase in electric vehicle demand are the prices of EVs, available infrastructure, and customer preferences. Daugherty cited the need for price parity between EVs and internal combustion vehicles, which current tax benefits are to some extent helping to achieve. He also argued for adequate infrastructure, such as charging stations, to support these vehicles. Finally, he said, customers must commit to these products and shift their preferences from internal combustion vehicles to electric.
Rege predicted that a sharp increase in electric fleet vehicles would be transformative to the market, and new EV models suggest market conditions are changing. Daugherty agreed, adding that suppliers can work with fleets to replace internal combustion and hybrid vehicles with fully electric vehicles. This, coupled with the auto industry’s push for more user-friendly vehicles, can help push consumers towards electric vehicles.
However, Daugherty admitted the transition to EVs will not be without challenges, as the industry must adapt to rapid advancements in new technology. Despite this, the auto industry’s current technological landscape provides huge opportunities for suppliers to continually develop new technology and gain market share. Daugherty also noted that for the United States to maintain its position as a leader in technology, EVs, and better fuel efficiency, a skilled workforce is necessary, although many manufacturers and suppliers are struggling to fill shortages of skilled workers.
While the methods of achieving the auto industry’s goals are different, Rege said there is unity behind agreed standards that improve efficiency and reduce greenhouse emissions. Beyond this, the industry is united behind the shared desire to reduce cost, seek improvements to infrastructure that supports electric vehicles, and shift consumer preferences toward electric vehicles.
The final panel of the day, moderated by Kristin Dziczek, vice president of industry, labor & economics at the Center for Automotive Research, featured former Governor of Missouri Matt Blunt, president of the American Automotive Policy Council (AAPC), Mary Lovely, senior fellow at the Peterson Institute for International Economics, and Andrew Koblenz, executive vice president of legal and regulatory affairs and general counsel of the National Automobile Dealers Association. Blunt, Lovely, and Koblenz all emphasized the automotive industry’s need for global trade agreements that promote open access to markets and an equitable flow of goods, services, and labor around the world.
Koblenz and Lovely commented that protectionist tariffs, such as tariffs on auto parts and raw materials, implemented during the Trump administration, were harmful to the auto industry and to consumers. On top of these effects came the pandemic and recession. Lovely noted that it will take time before the industry’s production levels and labor markets can return to pre-pandemic levels. However, in addition to time, Lovely argued that policy needs new approaches to labor markets besides tariffs. She expressed her hope that the Biden administration will support auto workers and help them succeed in the global economy, while also acknowledging the rapid technological change in the industry.
Reflecting on the previous administration, Blunt said former United States Trade Representative Robert Lighthizer changed the prism through which Congress thinks about trade. While he said he does not expect congressional Republicans to be anti-trade, he does expect them to be more skeptical about trade agreements and provisions. He said he expects most Congress members to focus more on the contents and implications of trade agreements and their effects on the auto industry. Koblenz also acknowledged that attitudes toward trade are shifting rapidly in Congress and said he sees Katherine Tai, chief trade counsel for the U.S. House Committee on Ways and Means, as a sign of future stability and predictability.
When asked about the impact of the United States-Mexico-Canada Agreement (USMCA), Blunt replied that he wanted to preserve market access to Canada and Mexico and thus supported the agreement. Blunt also emphasized the importance of a strong North American auto platform, while acknowledging that its implementation will be challenging. Lovely also said she supported the USMCA, and that it might be the model for the United States moving forward. She also emphasized the importance of the North American auto platform, arguing that a strong production network is the best tool to compete against Asia. Lovely shared that while most of the activity that left China moved to other parts of East Asia, some activity moved to Mexico, which benefits the United States. At a minimum, however, Lovely stated that the industry and Congress must review the USMCA critically and honestly.
In response to a question about future trade relations with Europe, Blunt answered that in his view, it is clear there is no intention to implement a new free trade agreement for the first few years of the Biden administration. Blunt said that for the auto industry, he hopes there will be a freer EU trade agreement. He also stated he is firmly opposed to the broad use of Section 232 tariffs—part of the Trade Expansion Act of 1962 that authorized tariffs for national security.
As for predictions for the Biden administration, Blunt said he expects no significant change to trade policy. He noted that both Democrats and Republicans understand how important the auto industry is to the national economy and said he expects strong support for the sector from President Biden. Koblenz predicted improvements in the functioning of the World Trade Organization and a series of unilateral, bilateral, and multilateral trade activities. Like Blunt, he said he does not expect any significant policy changes, but added that he does expect a more traditional approach to trade. Lovely concluded that the Biden administration will focus more on climate change and said she hopes the administration approaches this issue in such a way as to mitigate border taxes.
To sum up the day’s discussions, our panelists agreed that the automotive industry showed its resiliency throughout the global disruption caused by the Covid-19 pandemic. Auto industry representatives expressed optimism about the industry’s future, yet also acknowledged the many challenges that lie ahead, such as the limited availability of skilled labor, the need to navigate rapid technological change, the need for infrastructure investments to support new technology, and the need to establish trade policy that promotes open access to markets. These issues must be addressed as the industry moves toward an electric future.
1 2020:Q4 estimates were not released at the time of the conference but were updated for this post.
2 GDP values are expressed in inflation adjusted 2012 dollars. Percent changes are annual differences.