A Crucial Component of the US Economy
The US motor vehicle industry directly and indirectly accounts for a major component of the US economy. Besides the large number of people directly employed in car manufacturing and car spare part manufacturing, production of motor vehicles has a large-scale impact on revenue and employment in a number of other sectors, including the aluminum, chemical, glass, paint, petroleum, plastic, robotics, rubber, steel and tire industries. Trends in motor vehicle demand also impact numerous sectors of the service economy, ranging from auto insurance to car repair shops to towing companies. Government revenues (from car registrations, e-checks, license issuances, sales taxes, tolls, traffic tickets and more) are also impacted by changes in motor vehicle demand and in driving habits.
US production of motor vehicles fell from around 11-12 million units per year in the 2003-2007 period to just 5.7 million units in 2009, when the US economy witnessed a major recession. Production has since recovered, and hit 11 million units in 2013, and will likely have surpassed that total in 2014 when final numbers are released.
Until the 1980s, the US was the unsurpassed global leader in motor vehicle production. More significantly, locally headquartered companies Chrysler, Ford and GM (known as the “Big Three”) essentially spurred global motorization in the first half of the 20th century. In particular, Ford’s Model T and assembly line production innovations transformed the global automobile industry. The massive size of the US economy combined with the advent of the country’s interstate highway system led to increasing demand for cars in the US, giving the “Big Three” producers access to a globally unmatched national market for motor vehicles for many decades.
However, in the 1980s, Japan’s export-oriented motor vehicle industry started to produce more cars than the US. Both countries switched their world leading position many times thereafter, until 2009, when China became the world’s largest motor vehicle producer. China will now keep this leadership position for many decades due to that developing country’s much larger population and much faster GDP growth.
Japanese auto companies such as Honda, Nissan, Mazda and Toyota still hold a reputation of superior quality to US auto companies in the minds of many consumers. This reputation developed in the 1980s and 1990s, when cars made by Japanese companies were often technologically superior and more reliable in comparison to cars made by US companies. Consumer satisfaction surveys and ratings frequently supported this fact. Japan also spurred the large-scale use of robotics in motor vehicle manufacturing. Industry experts do not think there is any major quality difference between Japanese and US cars today, but several decades of such perceptions are difficult to change. Both Japanese and US made cars are considered to be significantly technologically superior to Chinese made cars, which are often very basic due to the need to sell to a poorer local demographic.
Till 2009, GM had been the world’s largest motor vehicle producing company for many decades, but Toyota overtook it in importance in that year. Since then, the two companies have traded places for top spot, and Germany’s Volkswagen is also now vying for this position.
Although the US has been the largest or second largest motor vehicle producing nation for most of the past century, it still runs a sizable trade deficit in motor vehicles due to the country’s sizable market. Bordering Mexico is the largest eternal supplier to the US market. Numerous motor vehicle producing companies from around the world have set up manufacturing sites in Mexico, attracted by the country’s low-cost labor force and proximity to the large US market.
US demand for motor vehicles fell from the 16.5-17.5 million unit per year range in the 2003-2007 period to around 10.5 million units in 2009 at the height of the country’s major economic recession. Demand has since recovered in tandem with the overall US economy, and totaled about 16 million units in 2013. In 2014, demand is likely to have exceeded 16.5 million units.
There are number of trends that suggest that 2015 will see even stronger US demand for motor vehicles:
- Continued low gasoline prices. Most industry experts think that $100 a barrel oil prices are now a thing of the past, and some even think that prices will fall to well below $50 a barrel and remain there for a while. At the time of writing this post, prices were just under $50 a barrel. Saudi billionaire prince Alwaleed bin Talal recently stated that $100 a barrel oil prices will never occur again. For more on the reasons behind the sharp decline in global oil prices during the past year, see our December 11, 2014 blog post on that subject. In 2014, demand for less fuel-efficient pickup trucks and SUVs already saw strong growth due to the lower gasoline prices during the second half of the year. If fuel prices continue to drop significantly, 2015 could see record demand for those types of vehicles.
- The US Federal Reserve is expected to slowly start raising historically low interest rates around mid-2015. This process will continue for a few years, and many consumers will likely purchase cars earlier than planned in order to avoid paying thousands of dollars more in interest fees when purchasing cars on installment plans.
- The US economy is expected to continue to perform favorably in 2015 based on recent trends.
In the longer run, however, it is unlikely that the US motor vehicle market can consistently exceed sales of 15 million units per year. The trend among the young is reverse migration to cities (greater use of public transportation) and less interest in driving. Increasingly bicycle friendly cities, many newer car sharing (e.g., Car2Go, Zipcar) and ride sharing (e.g., Lyft, Sidecar, Uber) options, upgrades in public transportation infrastructure (light rail, perhaps bullet trains), telecommuting options and increasing environmental awareness all suggest that the golden age of motor vehicle ownership in the US is history.
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