Restructuring and Car Sales Drive Employment Growth
Despite a rough few years with massive job losses, the auto industry is slowly beefing up production and workforces.
By IBISWorld Analyst Antonio Danova
Although the automotive industry has been a hot topic over the past five years, discussions have focused more on the monetary losses and bailouts while somewhat overlooking industry employment trends. Fortunately, auto industry employment is expected to improve in the long run, and the restructured business models of the Big Three domestic automakers (GM, Ford and Chrysler) will prevent the domestic industry from reverting back to the predicaments exposed during the recession. Thus, the hiring capacity of the industry will transition into a new normal, as the next era of employment trends seek to keep the automotive sector running efficiently.
Recently, the industry has been revving its engines, posting strong car sales in Q1 2012. Some analysts forecast total car sales will eclipse 15.0 million for the year. These positive estimates also come on the heels of successful years in 2010 and 2011. Consumer incomes rose and financing for new vehicles became more widely available, facilitating a growing enthusiasm for new car purchases, which had been put off during the recession. The recent success also comes after years of severe turmoil during the recession, though, and even prior, the Big Three had been enduring massive sales slumps for a number of years. Without proper revenue generation, company profitability eroded and skeptics questioned the operational integrity of each firm.
When the recession struck in the second half of 2008, many consumers chose to extend the life span of their existing vehicles simply because they could not afford a new car. Additionally, havoc in the financial markets squeezed credit from the Big Three. GM and Chrysler were essentially running on empty, to the point that bankruptcy became almost inevitable. Recessionary conditions were already leaving Americans without work, but the potential downfall of one of the country’s most important industries emphasized the concern of unemployment. To prop these companies up and evade more massive job loss, the Bush administration approved an auto industry bailout package on December 19, 2008. The plan gave loans totaling $17.4 billion to GM and Chrysler.
Financial turmoil aside, the recession also facilitated a complete overhaul of the way the automotive industry is run. Being a significant and long-standing component of the American economy may have made the industry’s largest companies complacent, overlooking changing market trends and disregarding prevalent operational issues. Now that many firms have restructured and car sales have improved, the US automotive industry – its employment included – is poised for a bright future. IBISWorld data suggests that aggregate job growth from all three industries discussed in this report rose 3.3% and 5.0% in 2010 and 2011, respectively, and jobs throughout the automotive sector are persistently being added as consumers continue to return to the market.
Employment trends provide a simple, yet important look at the performance of the industry’s largest companies, specifically detailing their operational strategies and capacity for more or less labor. And so, past bailouts and upcoming Presidential election aside, this report drives home the importance of the auto industry to the future of the American job market and the recovery of the American economy. The following discussion will look at three automotive industries whose supply ties bond them together, but whose post-recession reformations will impact the job outlook in unique ways.
Automobile and Light-Duty Motor Vehicle Manufacturing
Companies in the Automobile and Light-Duty Motor Vehicle Manufacturing industry primarily complete the final assembly of vehicles. Thus, industry employment numbers lie in the jobs at the assembly plants of the major automakers. Even prior to the recession, job numbers in this industry were hampered by falling vehicle production in light of repressed car sales. According to Ward’s Auto reports, in the three years prior to the recession, overall car sales only experienced one year of growth, a minimal increase of 0.8% in 2005. A number of factors contributed to the falling sales, but rising oil prices played a catalytic role. Because the main product segment of the Big Three at the time featured mostly gas-guzzling SUVs and trucks, sales slowed significantly. Automakers were forced to curtail production, cutting employment in the process.
The trend of job loss was all too familiar for the automakers once the economy began to swerve into the recession. According to IBISWorld data, massive layoffs led to historic employment declines of 7.5% and 28.7% during 2008 and 2009, respectively. Compounding this onto the previous years’ losses, employment fell an alarming 9.7% annually on average from 182,188 workers in 2005 to 109,931 in 2009. Conversely, the layoffs became somewhat of a necessary evil that would stabilize the major companies’ balance sheets and put them in a better position to hire in the future.
Once the recessionary storm calmed, automakers were encouraged to ramp up production, assembling more vehicles to meet newly restored consumer demand in 2010. Rather than returning to fuel in efficient SUVs and light trucks, though, the Big Three refocused on practical sedans, small cars and more compact crossover utility vehicles (CUVs). This strategy was met favorably by the public, and consumers returned to the market. The renewed spending, in turn, helped industry employment grow 5.8% annually on average from 2009 to 2012 to 137,134 workers.
Future industry employment hinges on automakers’ ability to no only produce vehicles consumers want to drive, but also solve some internal cost concerns. This industry is unique in that a significant portion of employees belongs to the United Auto Workers union (UAW). The UAW currently has about 390,000 active members and more than 600,000 retired members, the majority of which are with the Big Three. Because its workers are so important to the domestic automotive industry, the UAW has historically leveraged high wages and lucrative pension plans for members. These still hold true today: According to IBISWorld data, the average wage per employee in this industry will eclipse $64,000 in 2012.
High legacy pensions, healthcare benefits and salary requirements ultimately put significant cost pressure on the major automakers. When restructuring occurred in 2009, these union costs were cited as a disparity in the cost structure of the automakers and would need to be examined. Back in 2007, the Big Three and the UAW actually agreed on a contract that would lower wages and benefits for new UAW hires and keep wages the same for tenured employees, effectively creating a two-tier wage system for the industry. This agreement helped automakers ramp up production and employment without incurring the wage expense increases it would have in years prior. The integrity of this system has been under scrutiny recently, though, and the UAW could push for a return to uniform wages. Thus, the long-term relationship between the domestic automakers and the union will play a tremendous role in the future cost structure and job outlook of the industry.
Another trend impacting the job outlook is the pace of foreign transplants. Although automotive transplants started arriving almost 30 years ago, their presence has grown significantly inrecent years. As domestic automakers struggled, many foreign-owned manufacturing companies capitalized on the opportunity to expand their US presence. The volatile currency exchange market, along with generally stronger US car sales, enticed foreign automakers to build closer to their US customers. Industry stalwarts like Toyota and Honda made concerted efforts to open more US manufacturing facilities, while companies less familiar in the country, such as Hyundai Motors, opened their first US plants. Currently, 10 foreign-based companies operate 16 assembly plants in the United States. While these foreign automakers did not entirely escape the turmoil of the US recession, their growing presence has helped buoy industry employment and will be a key factor in the future of American automotive jobs.
Automobile Parts Manufacturing
The Automobile Parts Manufacturing industry supplies automakers with a wide variety of parts, from wheels and mufflers to air conditioners and air bags. This industry’s major companies hold strong supply relationships with US automakers and typically locate near assembly plants. In some cases, these companies are actually direct subsidiaries of an automaker, like Delphi Corporation under GM and Visteon Corporation under Ford. Thus, the performance of this industry largely depends on motor vehicle manufacturers. Like the automakers, auto parts manufacturers were cutting employment even before the recession because of slumping car demand. When production at assembly plants plummeted at alarming rates of 16.2% and 32.2% during the two recessionary years, auto parts manufacturing companies were also forced to suspend production. Subsequent layoffs at these companies resulted in industry-wide employment losses of 4.0% and 27.6% in 2008 and 2009, respectively. Total industry employment fell from 155,523 workers in 2005 to 104,033 in 2009.
Strong supply ties with automakers proved especially detrimental to Delphi and Visteon, which moved in line with the downfall of their associated automakers. Delphi, which underwent its own Chapter 11 reorganization in late 2006, suffered severely from the halt on GM’s production. Visteon filed for bankruptcy protection in 2009. Unlike their automaker affiliates, post-recession job growth has not moved as quickly, with estimated annual growth of only 2.2% from 2009 to 2012.
Similar to penetration by foreign automakers, foreign parts manufacturers associated with these companies, such as Denso Corporation and Magna International, took the opportunity to focus more on US production and sales. In general, the increased influence of foreign-based manufacturers has helped generate greater sales and jobs for the US industry; however, it has simultaneously taken business away from domestic parts manufacturers, which have been forced to shut down plants in response. Because of this shift, overall industry job growth potential has been muted.
In addition, the segmentation of industry products manufactured in the United States has been somewhat divergent recently. Many companies began outsourcing or discontinuing lower value-added products because they could not compete against producers with cheaper labor abroad. In turn, domestic firms refocused efforts on high value added parts, such as air bags, air conditioners and exhaust systems, working closely with automakers’ engineering teams to meet specific production goals. By eliminating lower value-added products and the peripheral labor needed to produce them, parts manufacturers have retained their highest-skilled workers. Because these workers command higher salaries, the average industry wage has gone up, effectively subduing hiring capacity at each firm. According to IBISWorld data, average wages for the industry have grown from $45,682.00 in 2005 to $54,312.30 in 2012. With wage costs remaining high and even continuing to rise, employment growth may be more restricted in this industry than the others.
New Car Dealers
New car dealerships act as retail outlets for the automakers, entering a franchise agreement to protect their exclusive right to sell a specific brand of vehicle in a specific location. Therefore, this industry’s employment trends coincide with those of dealership numbers. Because this industry is so widespread, with its numerous locations and high total employment, dealership closures and employment trends have been volatile over the past few years. According to data from the National Automobile Dealers Association (NADA), the number of franchised new-car dealerships fell 3.3% annually on average from 2005 to 2011, with the recession having the largest impact on dealership closures. Falling vehicle production created a lack of inventory, hurting sales potential for many smaller dealerships. Simultaneously, falling consumer disposable income and sentiment stalled spending at dealerships. Those associated with GM and Chrysler were hit especially hard: 2,800 dealerships carrying GM or Chrysler vehicles had franchise contracts revoked in the midst of the automakers’ restructuring plans. This event had a striking effect on dealership employment: According to IBISWorld data, employment fell an astonishing 8.0% per year on average from about 1,138,000 workers in 2005 to 750,825 in 2009.
Although the industry has been faring better in line with improved car demand, many new-car dealerships have altered their business models to keep sales flowing and operating costs down. Dealers have been increasingly collaborating with car retailing, classified and info websites like Edmunds.com, Cars.com and AutoTrader.com to help increase traffic to the dealerships. Consumers can browse cars and ultimately purchase them online, providing a faster sale than the traditional brick-and-mortar dealership platform. The online platform effectively helps move inventory and lower floor plan financing expenses, which typically requires dealerships to pay interest on unsold inventory.
At the same time, Internet-based car sales is a large reason why more than 1,500 brick-and-mortar dealerships closed in 2010 and why more consolidation is expected in the long run, despite stronger revenue performance. In addition, dealerships have been pursuing other revenue streams to offset slow car sales, so they have begun focusing more on repair services and parts sales. Because virtually all new cars are sold with a manufacturer’s warranty, franchised dealerships carry a heavy competitive advantage in the repair services market. The moves toward e-tailing and repair services have, in turn, cut large portions of dealerships’ sales departments, hampering growth in overall industry employment.
To download full research reports for the industries discussed in this article, click on the report titles below.
SUV & Light Truck Manufacturing, Car & Automobile Manufacturing, Auto Parts Manufacturing, New Car Dealers