This article was originally published in The Hill on January 26, 2018:
It was no surprise that Detroit’s auto chiefs were among the first to visit newly-minted President Trump, who had taken shots at them throughout his campaign regarding jobs and Mexican-based vehicle production.
The Detroit CEOs, who represent Ford, General Motors (GM) and Fiat Chrysler Automobiles (FCA), had to see this day coming. They arrived Tuesday at the White House under starkly different circumstances than their predecessors.
In dire straits, the automaker CEOs who visited newly-inaugurated President Obama in 2009 came begging for government help, which was ultimately granted, but not before GM and Chrysler (now FCA) were forced into bankruptcy. Times have changed.
Today, the Detroit automakers are financially healthy, the strongest they’ve been in ages. However, financial health in the cyclical auto business is both fragile and fleeting.
After two years of record vehicle sales and profits, the current cycle has likely run its course. Sales probably peaked last year.
Cox Automotive, which operates consumer shopping sites Autotrader and Kelley Blue Book, is forecasting healthy new car sales in 2017 — around 17 million — but down from the back-to-back records of nearly 17.5 million in 2015 and 2016, respectively.
Last year, achieving record sales required more effort and more money. Vehicle inventories rose throughout the year, despite ever-richer incentives and cash rebates.
Higher inventories of unsold cars forced some automakers to curtail production at times, laying off American workers temporarily or even permanently.
Not properly managed, slowing sales, rising inventories and increasing incentives can quickly lead an automaker into dark times, forcing them to shutter plants as they did during the Great Recession.
Building more U.S.-based plant capacity, as the president wants, could lead to unintended consequences that jeopardize the automakers’ financial health, putting more jobs at risk.
We, for one, were happy to see the Detroit Three in D.C. this week. After months of sniping at the automakers via Twitter, we welcome President Trump’s invitation for serious discussion.
Few know exactly what was said once the doors were closed, but we’re hopeful the president listened as much as he talked in order to understand the very complicated, global nature of the auto industry and the risks of unintended consequences.
We’re hopeful the auto executives and the Trump team focused on the American consumer — the demand side of the equation.
The best path to solid job creation and retention is creating healthy consumers with both the desire and the means to buy the cars and trucks the automakers produce.
A recent Autotrader study found, based on population, new car sales in the U.S. could have been far higher. In 2016, it took 38 million more people of car-buying age to equal the number of cars sold in 2000 — roughly 17.5 million.
If U.S. consumers were buying at the same rate they did 16 years ago, annual vehicle sales could be closer to 20 million. What’s holding us back? Many consumers are frozen out of the new car market because of affordability.
Costs for housing, education and health care, as well as new cars, have far surpassed wages, which have barely budged in the past 25 years. With unemployment hovering close to 5 percent, jobs are less the issue than good-paying jobs.
While car prices haven’t risen as much as consumer goods and services, they have gone up significantly and are likely to rise further with the addition of technologies and features required by U.S. regulations. The average transaction price for a new car in December 2016 was $35,309, according to Kelley Blue Book.
The Trump administration has promised to reduce regulations as a carrot to the auto industry for creating more jobs in the U.S.
However, the administration’s threat of sizeable border tariffs will add significant cost to many vehicles and, importantly, could severely limit vehicle choice, as some makers may choose to cancel a product rather than swallow the cost of importing from Mexico or building in the U.S.
The threat of a 35 percent border tariff is a headline maker, but we hope honest conversations between the automakers and the new administration will deliver the best solution.
The Detroit Three carmakers are in good financial health today, but actions that adversely affect the consumer could quickly put an end to that.
This country needs a healthy auto industry, a key driver of the entire economy. Focusing on what’s good for car buyers is the best way to ensure we have that.
Michelle Krebs is senior analyst for Autotrader, the most visited third-party car shopping site. Autotrader is a Cox Automotive™ brand. For more information, please visit https://www.coxautoinc.com/.