Sales and Spending Improve as Automotive Sector Recovers

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Researched by Industrial Info Resources (Sugar Land, Texas)--Slightly more than a year ago, the automotive sector in the United States was lost and floundering. Two of the three American automakers were in bankruptcy proceedings, the foreign automakers had halted most of their spending, and the plant closings, job losses and supplier bankruptcies within the sector were mounting on a daily basis. However, since that time, the majority of the sector has managed to turn itself around. Sales are once again on the rise, electric vehicles will be debuting in the fourth quarter, and spending has begun again in earnest.

Attempting to grasp the sheer size and relationships of the automotive sector is a daunting task, one that no one has been able to accurately perform. The complex and ever changing tier structure of suppliers is simply too large and involved to grasp. Tier-one suppliers can also be tier-two or tier-three suppliers given certain circumstances, and many suppliers immediately subcontract out orders upon winning the bidding process, never actually manufacturing the parts they are supposed to provide, but having another company perform that task for them.

Thus, when hundreds of automotive parts suppliers went under during the recession, the automotive sector was capable of simply looking elsewhere for the parts they needed and moved on. While sales were slow during much of the recession and both General Motors Corporation (Detroit, Michigan) and The Chrysler Group LLC (Auburn Hills, Michigan) entered and exited bankruptcy, the sector as a whole simply reduced production, laid off workers and closed plants, essentially closing up the ranks to wait for the economic situation to improve.

Now that the economy is recovering, the sector has managed to improve sales dramatically with a smaller workforce. While the annual sales numbers will still be down from previous years, J.D. Power and Associates (Westlake Village, California) recently reduced its annual forecast for automotive sales for 2010 from 11.7 million vehicles to 11.6 million. These numbers are expected to improve in 2011. J.D. Powers is anticipating that 13.2 million light vehicles will be sold in 2011, which will mean sales will continue to improve for the automakers through next year, provided this estimate holds true.

As a result of the predicted improvement in the overall sales situation, the automakers have responded with increased capital expenditures. Currently Industrial Info is tracking $3.5 billion automotive sector capital and maintenance projects in the U.S. and Canada that will begin construction in the coming months. While this is not as high as spending was before the recession began, it is a move in a positive direction for a sector that had cut spending to the bare bones when the economy was in trouble.

Toyota Motor Corporation (NYSE:TM) (Toyota City, Japan) and its United States subsidiary Toyota Motor Manufacturing North America (Torrance, California) have restarted construction a $1.3 billion grassroot assembly plant in Mississippi. Ford Motor Company (NYSE:F) (Dearborn, Michigan) is going to spend $500 million to retool its Kentucky SUV assembly plant, and GM is allocating more than $500 million to either retool or expand plants in both the U.S. and Canada in coming months. Struggling Chrysler is also getting into the act, allocating $350 million for expansions or retools in Illinois and Indiana. Both the major automakers and the tier suppliers are once again allocating hard-earned funds to improve or expand their plants, a good sign that the sector feels recovery will continue in the months to come. The automotive sector added more than 20,000 jobs in July and saw a 5.3% increase in durable-goods orders during the same month. While these jobs gains are nothing compared to what was lost over the past two years, it shows the sector is growing once again. As the overall economic situation continues to improve, and as automotive sales improve along with it, the sector will continue to add new jobs.

The automotive sector has had a good scare for the past two years. This may well have been the wakeup call that the automakers needed to make the necessary changes to their organizations. We will have to see if the automakers actually learned the hard lessons the recession should have taught them, but even with sales and spending improving, the sector is a long way from total recovery.

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Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.