Automakers near full strength but face new reality

DETROIT — The Detroit 3 are weeks away from having their U.S. production back at full strength, and some other automakers are already there. But the industry isn't just picking up where it left off in March.

Budgets have been cut. The supply chain is more vulnerable. The U.S. economy is officially in a recession, and the Federal Reserve, warning that the recovery won't be quick, projects that the unemployment rate will still top 9 percent by year end.

"This is the biggest economic shock in the U.S. and the world, really, in living memory," Fed Chairman Jerome Powell said at a news conference last week. "We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months."

The U.S. auto industry's unprecedented restart has moved quickly and encountered only minor setbacks, such as parts shortages caused by Mexico reopening later. Most plants making popular, high-profit vehicles are running around the clock again, and no major outbreaks of the coronavirus were reported — either among auto workers or in the surrounding communities — in the weeks after production resumed.

New safety protocols have resulted in fewer and shorter production stoppages than feared, fueling optimism that any resurgence of the virus would be less disruptive to auto manufacturing, though showroom traffic could suffer.

"There's a threat of demand being impacted by another wave of the pandemic," Cox economist Jonathan Smoke said, "which at this point seems to be playing out, at least in the southern half of the United States, and/or a worsening economy."

Fiat Chrysler Automobiles expects to be back to its pre-pandemic operating schedule next week. General Motors said it would be at regular production levels this month, and Ford Motor Co. is targeting July 6.

At GM's pickup plant in Fort Wayne, Ind., an overtime shift scheduled for Saturday, June 13, was postponed to Saturday, June 20, because of Mexico's slower restart.

"We're still targeting to be at normal capacity by the end of June or sooner if possible," GM CFO Dhivya Suryadevara said last week. "But obviously, it's a fluid situation."

Nissan Group and Volvo last week reopened the last U.S. auto assembly plants that were still down. On that basis, at least, the industry has gotten fully back on its feet.

But for automakers now carrying billions of dollars in additional debt, the shutdown and restart have resulted in leaner operations likely to last well beyond the pandemic.

For now, there is plenty of demand for the vehicles automakers are building because dealerships' inventories were thinned during the eight weeks that plants were dark. But beyond that, they're no longer producing for a U.S. market generating about 17 million new-vehicle sales a year.

GM is prioritizing pickups and SUVs, making them in the most popular trims and colors first. The automaker also is exploring ways to get vehicles to dealerships faster. Some dealers worry they'll sell out of certain models before more arrive.

"We're working the order book with the dealers to make sure we're prioritizing cash returns and not recommending configurations that are slower-moving," Suryadevara said.

The shutdowns wiped out about 2.8 million vehicles in scheduled North American light-vehicle production in the first half of the year, according to LMC Automotive. Full-year 2020 output likely will fall by 3.4 million vehicles, or 21 percent, compared with 2019, LMC said.

GM has not provided a timeline for deliveries to dealers, but some have said they expect to get their first post-shutdown shipments in the next couple of weeks.

"You just need to make every pickup truck you can right now, especially if you're GM because they were shorthanded going into COVID because of the strike" by the UAW in the fall, said David Whiston, senior equity analyst for Morningstar.

"Longer term, what remains to be seen is, what's the fate of something like just-in-time and inventory management and supply chain management?" he said.

After automakers fill dealers' orders and satisfy pent-up demand, sales likely will level out until unemployment improves, Whiston said. "The big overarching question is, what does everything look like nine to 12 months from now, assuming no second COVID outbreak?"

Bank of America Merrill Lynch forecasts that U.S. sales will plunge about 25 percent in 2020 to 12.7 million vehicles, although it expects a recovery in 2021 to roughly 14.5 million. John Murphy, the bank's senior auto analyst, expects inventory to reach normal levels this fall, he said on a conference call with reporters last week.

Demand largely depends on the severity of the recession, said Tyson Jominy, vice president of data and analytics for J.D. Power. It will be "shaped by how deep the economic situation gets for consumers, what the federal government may do for stimulus — both broader economic as well as specifically to the auto industry," he said.
Smoke, the Cox economist, said some of the strength the industry felt in April and May likely was a result of consumers receiving federal stimulus checks. Smoke said the possibility of another stimulus program is a "wild card" that could influence consumer demand later in the year.

Automakers have been pulling back on the aggressive discounts and no-interest financing offers that got them through a hectic March and April as stay-at-home measures are lifted and people return to work. J.D. Power said automakers' incentive spending during the week ending June 7 fell to $4,347 per vehicle, the lowest level since mid-March.

Still, Smoke believes consumers will place more value on their vehicles and could decide to upgrade as the pandemic plays out.
"They're moving from what was previously an assumption that I'm primarily using this vehicle for daily commuting, to now I need a vehicle that potentially is going to be the only way my family goes on vacation," Smoke said during a webinar last week with Bank of America.

Parts shortages because of the pandemic might motivate automakers to reduce the complexity of their lineups and prioritize configurations that sell quickly.

For all automakers operating in the U.S., there were more than 605,000 configurations built in 2019, excluding vehicle color, according to J.D. Power. Thus, each unique configuration accounted for an average of only 22 retail sales.

Unwanted configurations usually sit on a dealership's lot until they can find a buyer with the help of generous incentives at the end of the model year.

GM said it has begun eliminating configurations and aims to reuse and share more parts across brands and segments. The simplification effort could be a long-term strategy to cut costs, Suryadevara said.

"We're just scratching the surface of that," she said. "And as we go forward here, as the market continues to get more competitive, we're going to have to make sure that we are as efficient as we can be."

Vince Bond Jr. and Michael Martinez contributed to this report.