Regional President Speech

CONFERENCE ON GEOGRAPHY OF AUTO PRODUCTION— WILL DETROIT CONTINUE TO BE THE INDUSTRY’S HUB? FEDERAL RESERVE BANK OF CHICAGO – DETROIT BRANCH Detroit, Michigan November 3, 2003 ..................................................................... Opening Remarks It is my pleasure to welcome each of you to our workshop concerning the future of the auto industry in the Midwest. Today’s meeting is the second in a series of events that we are hosting to help us under- stand the dynamics of change in Midwest manufacturing. I am especially attentive to the issues addressed in this series, because, as you look around the U.S. you’ll find few, if any, regions that are as tied to manufacturing as our own. States in the Seventh Federal Reserve District produce 18 percent of U.S. manufacturing output with only 13 percent of the country’s population. Durable goods production is even more concentrated here. We produce, for example, disproportionate amounts of steel and farm machinery. But, as all of us here readily recognize, our greatest contribution is in the auto industry: we produce 40 percent of the nation’s motor vehicles and equipment. The manufacturing sector has been significantly impacted by the recent recession. National manufac- turing employment ended each of the past five years lower than the previous year, and has declined for 38 consecutive months. The Midwest preceded the nation into the 2001 recession, and manufacturing employment has been falling longer in the region. At the Chicago Fed, we recently initiated this project in order to improve our understanding of the cur- rent trends in the manufacturing sector, both nationwide and in the Midwest. Is manufacturing at a “crossroads,” or merely experiencing a “bump in the road?” In particular, are recent weaknesses in per- formance attributable to transitory, cyclical factors such as a worldwide recession and a high-valued dollar? Or does the growth of low wage economies overseas, including China, presage a structural change where domestic production activities will accelerate their migration overseas? The implications 172 Michael Moskow Speeches 2003 for the Midwest’s income and population will differ under alternative scenarios. Answering these ques- tions will help the region’s industry and public policy leaders decide what is their best response. Today’s meeting focuses on the challenges facing the U.S auto industry and what these challenges imply for the Midwest. This industry employs more than 1.3 million workers nationwide and is so large that gross motor vehicle output alone represents more than 3 percent of the US economy. This encom- passes output from large assembly plants as well as that from supplier plants which feed the assembly locations everything from raw materials to pre-assembled subcomponents like dashboards and seats. During a typical recession, purchases and production of cars and trucks tend to react much more sharply as consumers re-align their spending with diminished prospects for employment and income growth. As the old saying goes, “When the economy sneezes, Detroit catches a cold.” Of course, the most recent recession proved the adage that there is no such thing as a “typical reces- sion.” Despite some periods of slowing, light vehicle sales have largely been strong throughout the recession and subsequent recovery. To put recent sales in perspective, sales in the mid-1990s were fair- ly steady around a 15 million unit annualized rate; after the start of the recession in 2001, there was only one quarter when sales dipped below 16 million units. However, this is not to say that Detroit has been problem-free. The traditional Big Three saw only mod- erate — if any — sales gains and lost market share to foreign nameplates. Their market share has declined from 73 percent in 1996 to 60 percent so far this year. Also, the Big Three used sizeable sales incentives to help spark sales, which significantly reduced the profit margins on the vehicles sold. But, faced with high fixed costs for labor, plant and equipment, it was less expensive to produce vehicles and sell them with heavy incentives than it was to shut down plants. To be sure, domestic automakers have faced some disadvantages beyond their control. Aside from recent developments, exchange rates movements during the last few years put the Big Three at some degree of a cost disadvantage and contributed to a strong rise in import sales. Import market share rose from 12 percent of U.S. light vehicle sales in 1996 to 20 percent of sales so far this year. Also, soaring health care costs increased the burden of so-called legacy costs, or benefits paid to retirees, which in turn contributed to the Big Three’s high fixed cost structure. But, the Big Three’s sharpest market share losses have come as foreign automakers introduced new products. For most of the 1990s, the Big Three enjoyed unfettered dominance in the surging light truck market. In recent years, though, most foreign nameplates have developed their own SUVs and pick-up trucks to combat the domestics’ large market share. Looking back now, it appears as if the Big Three’s strong performance in the 1990s might have been largely due to having a hot product at the right time. The growing popularity of light trucks is just one small part of how the auto industry has changed over the last two decades. Perhaps a more significant change was foreign automakers’ decision to build pro- duction operations inside the U.S. Only 21 years ago, Honda Motor Company opened its first U.S. car assembly plant. Now, foreign nameplates produced in the U.S., often called transplants, are responsible for a quarter of U.S. light vehicle output. As foreign nameplates expanded their transplant production and a strong dollar supported import sales gains, the U.S. auto industry became much more competitive. Michael Moskow Speeches 2003 173 Along with becoming more competitive, the U.S. auto industry has experienced gradual changes in its geography. Specifically, foreign nameplates’ domestic production capacity has been slowly expanding the so-called auto corridor south. Honda opened its first U.S. assembly plant in Ohio, near the heart of the auto corridor. But, more recently, they opened a plant in Alabama, Nissan opened one in Mississippi, and Toyota announced its intention to construct a truck plant in Texas. By extending the corridor further south and west, the newly built assembly plants could begin shifting the center of gravity within the auto corridor further south. This shift could pose a challenge to the continued role of the Midwest as the hub of this industry Increased transplant production raises another challenge for the industry: excess capacity. According to some estimates, the auto industry has the capacity to produce around 20 million units per year in the U.S., about 3 million units above the average sales pace in the last three years. The question now seems not if, but when and where capacity reductions are going to occur. The Midwest could be adversely affected if reduction efforts are disproportionately taken by the Big Three, since they have a larger share of their plants in the region. The recently ratified contracts between the UAW and the Big Three plus Delphi and Visteon included agreements on near-term plant closures, affecting approximately 12,000 jobs and primarily closing plants located in the Midwest. So, in light of all these challenges, it is useful for us to take stock of how these changes will affect U.S. manufacturing at large, and the auto industry in particular. We have come here today to ask: What will the industry’s structure look like in the future? Will domestic producers continue to lose market share? How will the industry’s geography — both domestic and international — change? Will the Midwest continue to be the hub of the industry? And finally, how do these changes relate the broader question of whether the recent downturn in manufacturing is cyclical or structural? I think that we have assembled a great panel of academics, analysts, industry insiders, and policymak- ers to address these questions. And, I would like to call on you in the audience to be active participants in the discussion during the course of this conference. I look forward to a lively exchange of ideas. Thank you for joining us today. The views presented here are my own, and are not necessarily those of the Federal Open Market Committee or the Federal Reserve System. 174 Michael Moskow Speeches 2003

Michael Moskow (2003, November 2). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20031103_michael_moskow

@misc{wtfs_regional_speeche_20031103_michael_moskow,
  author = {Michael Moskow},
  title = {Regional President Speech},
  year = {2003},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20031103_michael_moskow},
  note = {Retrieved via When the Fed Speaks corpus}
}