Even before the Great Recession, it seemed that the U.S. auto industry was in its death throes. Two of the big three automakers — Chrysler and General Motors — went bankrupt and needed a government bailout.
Yet less than 10 years later, the auto industry is back on its feet and is on track to sell nearly 17 million light duty vehicles in 2015. Adding Canada and Mexico to the list, the number of cars and pickups will close in on 20 million.
However, that growth may soon stall. There is a perfect storm of three factors closing in on the automobile industry;
- Fuel prices have fallen
- Corporate Average Fuel Economy (CAFE) standards are tightening
- The UAW wants repayment for their help in the resuscitation of the auto industry.
Falling fuel prices
The immediate impact of gasoline below $3 per gallon has the industry seeing a steady and sure increase in the number of consumers trading up to bigger, more luxurious car models that also tend to be "gas guzzlers." This demand had the greatest impact on hybrid and all-electric cars — a sector mostly targeted to buyers with concerns of future operating costs.
Even though the oil industry is volatile — an incident in the Middle East can disrupt international oil prices overnight — there is near unanimity in predictions that the price drop in crude oil will be around for a while.
As auto sales surged starting in November for luxury cars and muscle cars, behind the glee are shivers of fear.
CAFE is scaring automakers again
New CAFE standards go into effect in 2016, jumping up to 34.1 miles per gallon for light vehicles (cars, SUVs, CUVs and light pickups). This means that the average miles per gallon for each manufacturer's fleet must at least 34.1 mpg.
But, Raj Nair, director of Global Product Development at Ford Motor Company, warns that either or both of those goals, may not be possible as consumer interest in large, gas-fueled cars, expands.
"It becomes a market distortion if regulatory requirements don't match consumer demand," Nair said. "Automakers like Ford have based their planning on a combination of higher fuel prices and tightened mileage and emissions standards."
Ford's warning should not be taken lightly. In 2014, sales for Toyota's Prius, the most successful hybrid on the market, dropped 13.5 percent in November, and for the year (excluding December) was down a total of 11 percent.
According to Nair, the reason is obvious: "Certainly, low fuel prices make it hard to sell (alternate-power) vehicles like hybrids and electrics."
Volkswagen of America spokesman Mark Gillies, when talking about both Volkswagen and Audi said, "We were selling about 23 percent diesel across the entire fleet. But in the last couple of months that has dropped to about 16 percent as gasoline prices have dropped."
The UAW demands
United Automobile Workers President Dennis Williams said during his inauguration speech: "No more concessions. We are tired of it. Enough is enough. We are all committed to eliminating the two-tier system."
According to Williams, the system was put in place during the near-collapse of the auto industry in 2007, as part of the plan to get Chrysler and GM out of bankruptcy. Ford also got the give-back to keep them competitive. Tier 1, for new workers, pays about $20 per hour, while Tier 2, for veteran employees make around $27 per hour.
Williams said it was an experiment that no one knew if it would succeed. Now, with automakers posting huge profits, Williams wants to end the practice. He said the membership of the UAW should have a "reward" in the next four-year contract.
A perfect storm?
With low fuel prices, tightening efficiency standards and contentious worker relations, is the auto industry headed for trouble?
Most observers agree that the manufacturers will do everything possible to avoid a strike by the UAW. The industry is in recovery, but just like the oil markets, it won't take much to set it back.
That leaves the problem of consumers investing in gas-guzzlers just as CAFE standards are forcing auto makers to build more fuel-efficient vehicles. Today, thanks to the nearly-decade-old downsizing, automakers are flexible enough to meet changing consumer demand.
The question is, will the same government that saved the auto industry now put it into a chokehold?
