Rick Haglund: Automakers face huge losses, hit pause on electric vehicles

May 2, 2020 5:13 am

Robots assemble a 3.5 liter engine at the Ford Engine Plant in Lima, Ohio on March 28, 2014. | Mark Lyons/Getty Images

Way back in January 2020 B.C. (Before Coronavirus), automakers were enjoying healthy sales and working feverishly to transform themselves into major producers of electric and self-driving vehicles.

“It seems like three months ago, I couldn’t go to an external presentation that wasn’t focused on electrification,” said Joe Zaciek, research and industry analysis manager at the Original Equipment Suppliers Association in Southfield.

Now automakers and their suppliers are just trying to figure out how they’re going to make it through the year as the rapid spread of COVID-19 has forced them to shut their factories, dried up sales and clouded their futures.

Electric vehicle development and other spending have been put on hold while automakers hoard cash to ride out the pandemic.

The COVID-19 pandemic also could shake up the global structure of the auto industry and accelerate the installation of robots and other automation in auto factories, threatening thousands of good-paying jobs.

“You don’t have to send a robot home if there’s a pandemic,” said Jack Caporal, an associate fellow at the Center for Strategic and International Studies in Washington, D.C. Caporal spoke this week at an auto industry webinar sponsored by the University of Michigan’s Transportation Research Institute. 

Some see a repeat of the dark days of a little more than a decade ago when General Motors and Chrysler (now Fiat Chrysler) were saved from extinction by federal bailouts totaling $80 billion.

One analyst said Ford, which this week reported a first-quarter loss of $2 billion and said it was likely to lose $5 billion in the second quarter, should consider a merger, possibly with Volkswagen.

“There’s a lot of concern about how long these automakers can last,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor.

But the Detroit automakers might be able to get through the current crisis more easily than they did during the Great Recession, depending on how long the pandemic lasts and how soon consumers return to dealer showrooms.

“I think we’d all like to get back to work soon, but we have to do it safely,” Ford Executive Chair Bill Ford Jr. said on “60 Minutes” last Sunday. “And that’s not a political question. That’s really a scientific question.”

Fiat Chrysler, Ford and GM have billions of dollars in cash reserves and said they have been able to line up enough financing to get them through the year in the event of a long shutdown. Plus, their businesses were much healthier going into this crisis than at the start of the Great Recession.

“There’s a lot of differences from 2009,” Dziczek said. “The credit markets are working. They didn’t in 2009. There are a lot of reasons to think this is not going to play out in the same way.”

Her major worry is the health of the suppliers because auto assembly lines can’t run without the parts they manufacture. Most suppliers are still getting paid for parts already delivered, but that will end soon.

“Once mid-May hits, the revenue stops,” Dziczek said.” That’s what really does us in.”

In March, prior to the massive industry layoffs, Michigan had 131,300 workers in auto parts manufacturing, more than three times the 39,600 workers employed in motor vehicle manufacturing.

Over the past several decades, the auto industry has evolved into a global enterprise, with parts and vehicles being built and sold in a variety of countries through a complex web of supply and distribution chains.

That’s resulted in more choices for consumers and lower vehicle prices than if all cars and trucks sold here were U.S.-built, Dziczek said.

But the loss of American auto jobs to Mexico, China and other low-cost countries have fed a growing backlash against economic globalization. That’s leading to more regional trade pacts requiring automakers to build much of what they sell in the various regions.

A new United States Mexico and Canada Trade Agreement (USMCA)is scheduled to take effect July 1. Under the agreement,  automakers will be required to boost North American content in their vehicles from 62% to 75% and pay workers who build up to 45% of vehicle parts at least $16 an hour in order to avoid tariffs.

Combined with those mandates, the COVID-19 pandemic could strike a blow against globalization as automakers seek to reduce their exposure to production interruptions and climate change.

“A regional approach cuts down on the supplier carbon footprint,” Caporal said. “It shrinks supply chains and protects against stronger storms and pandemics. 

“Regionalization is the name of the game,” he said.

COVID-19 also is inflaming trade tensions with China as the Trump administration seeks to blame the country for the pandemic, making life more difficult for automakers and suppliers.

China and the U.S. in January signed a Phase 1 trade agreement, designed to ease tensions in a growing trade war between the two economic superpowers. But some experts say the goodwill generated by that agreement has been lost in the pandemic blame game and will be difficult to restore.

“The Phase 1 agreement wasn’t much of a pause. It didn’t by any means end the trade war with China. It’s very much in place,” said Alan Deardorff, a U of M trade economist. 

Dziczek said her confidence that Detroit’s automakers will pull through the pandemic is based on the industry’s long record of surviving natural disasters that periodically close plants, and life-threatening financial crises that hit the industry about once a decade.

“The auto industry is no stranger to crisis,” she said. “There’s always one.”

Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.

Rick Haglund
Rick Haglund

Rick Haglund writes the "Micheconomy" column for the Michigan Advance. He's a former reporter and business columnist for Booth Newspapers, now the MLive Media Group, with extensive experience covering Michigan’s economy and the auto industry. He now works as a freelance writer based in Southeast Michigan.