Michigan auto sales perking up, but blow to industry could last through 2022
September 7, 2020
While Michigan’s auto industry is recovering more quickly than predicted, it suffered an economic blow due to the coronavirus that will likely linger for years.
Total new vehicle sales are down 25% this year, total annual production estimates have shrunk by about 4 million vehicles and there are fewer automotive jobs in Michigan than there there have been in any year since 2009, Center for Automotive Research President and CEO Carla Bailo told the Michigan Legislature’s Joint Select Committee on the COVID-19 Pandemic Wednesday.
“We expect (a full recovery) is going to take about another two years,” Bailo said. “That’s predicated on a continued recovery throughout this year. Should we have another hit in the fall, we’ll have to adjust those numbers.”
Still, there is a feeling of optimism in dealer lots across the state, especially used ones, and although automakers have relied heavily on creditors in order to maintain cash flow during unprecedented shutdowns — to the tune of nearly $16 billion in the case of GM — they too seem to be forward looking and proud of the quick changes made to return plants to operation.
Recovering demand has percolated upward through the complicated, multi-national supply chain. Production plants are bending and stamping steel nearly as fast as before the pandemic, suppliers are filling trucks and the government in Lansing is taking its cut.
Automakers and suppliers have invested in personal protection equipment, assembly-line adjustments to increase social distancing, pre-shift health screenings and temperature readings at plants.
“Manufacturing, specifically auto production, recovered much more rapidly than expected,” Michigan Chief Economist Eric Bussis said at an Aug. 24 state revenue conference in Lansing where he revealed the pleasant surprise that Michigan has $200 million more in the coffers than forecasters originally projected.
After shutting down in late March due to the coronavirus pandemic, plants went silent, white-collar workers began logging in from home — where many remain today — and new-car-haulers were parked, empty. Layoffs, however, were minimal.
Michigan’s economy leans heavily on its Big Three, Fiat Chrysler, Ford and General Motors. According to a 2019 Detroit Chamber of Commerce study that analyzed 2017 data, the automotive manufacturing sector directly employed 158,000 workers and contributed $1.1 billion in taxes to state government. Those figures don’t include ancillary business, like logistics or packaging companies and auto dealers that contributed another $2.6 billion in taxes to Lansing and supported 300,000 jobs in 2017.
The auto industry needed to get back to work in order for Michigan’s economy to avoid an insurmountable financial blow. And it has.
“Even in the tumultuous downturn that commenced in the Great Recession of 2008, we did not see a complete shutdown,” Detroit Regional Chamber Vice President of Automotive and Mobility Glenn Stevens Jr. told the Michigan Legislature’s Joint Select Committee on the COVID-19 Pandemic Wednesday, Sept. 2. “Remarkably, the industry has not seen a significant surge of bankruptcies or failures.”
Gov. Gretchen Whitmer on May 18 gave the auto industry the green flag to commence production and it did so amid a thick fog of uncertainty, Bussis said.
“We weren’t sure how many people would be buying vehicles nationally and how much we would need to manufacture,” said Bussis, who’s also the state Department of Treasury director of revenue and tax analysis. ” … We were very concerned that the manufacturing sector was see significant downturn over the summer and that has not been the case.”
“In July, motor vehicle production in the state of Michigan was 174,138 total units, an increase of 37.6% from a year ago,” said a summary report on production provided to MLive by the Office of Revenue and Tax Analysis. “ … Michigan’s rebound was much stronger than the national trend. Nationally, motor vehicle production was up 17.4 percent from a year ago.”
Still, there’s trepidation in the industry.
Despite consistent new vehicle monthly sales increases through August, overall sales are down significantly.
“Compared to last year, light vehicle sales in August were still down by 11% overall, according to the Office of Revenue and Tax Analysis summary. “Domestic car and light truck sales decreased 19.3% and 7%, respectively, from the year ago levels.”
And the possibility of layoffs due to cost cutting remains a strong possiblity. Ford last week announced plans to cut it’s white-collar workforce by 1,400 jobs.
At a small used dealership in Royal Oak, few-year-old vehicles line the parking lot surrounding a tiny showroom on North Main Street.
Business “dropped dead” about mid-March and remained that way until May, said Natalie Lingeman, a nine-year-employee and the assistant manager at Victory Motors.
“It was really quiet over the first few weeks and then it was like the faucet turned on,” Lingeman said. “We just started getting a ton of traffic. Numbers were definitely up, people wanted to put bigger down payments down, it just seemed like there was a lot of money flowing.
“The last couple weeks, we’ve seen a little bit less traffic but we’re still up in numbers.”
The dealership averages sales of up to 40 vehicles per months.
Victory Motors only finances customers who are employed, so the extra $600-per-week unemployment money from the federal government that lasted through July likely didn’t play a role in the uptick. Lingeman believes the lump sum stimulus checks and money people saved by forgoing vacations due to travel limitations made a used-car purchases more feasible.
Similar spending trends have followed in the real estate market.
Due to early hiccups in the new-car production supply chain that occurred as plants reopened and the shutdown, Lingeman said some buyers began looked at used vehicles where inventory was more plentiful.
“We’re optimistic it’s going to keep trending this way,” Lingeman said. “We’ve seen ’book’ values trending upwards, so that usually means the market is still good.”
Record sales tax revenue
While used-vehicle sales don’t have an immediate impact on the balance sheets of automakers, they generate sales taxes for state government just the same.
Bussis said sales tax revenue generated from both new and used vehicles sales in June eclipsed $100 million for the first time in a single month since 2003, and that “record” pace has continued through August, based on preliminary data.
“A lot of that does look like there’s a pretty strong rebound in the used car market, so that won’t help new vehicle sales” Bussis said. “The used car market is contributing a lot to that bump.”
Auto sales tax revenue was down about $100 million between April and May, compared to 2019, but boomed to $89 million above the prior year’s take in June and July.
About 25 miles west of Victory Motors at a new and used dealership in Walled Lake, Shuman Chrysler Dodge Jeep Ram owner Robert Shuman is also talking about the quick recovery.
Sales of both new and used vehicles were “pretty rough” in March and April, but “started to come back in May” and were “tremendous” through June and July, Shuman said. “Sales-wise, both new and used remain strong. In August, I think there were some little inventory issues but we’re starting to get a lot more shipments from the manufacturer and so we feel we’re in very good shape going into September.”
While there were short-term layoffs, Shuman said the dealership used Paycheck Protection Program coronavirus funds to bring back the entire workforce by late May. Some chose not to return to work due to health concerns and were replaced.
Shuman said Michigan is a hot market for leasing, which contributes to new vehicles sales totals, since the state only charges sales tax on the value of the lease period, rather than the total value of the vehicles, which is how other states, like Ohio, handle taxation.
Years to recover
When it comes to publicly traded companies like Ford and GM, beating financial projections is counted as a ’win.’ For GM, that ’win’ cost the company nearly $800 million in losses during the second quarter, and $1.9 billion for Ford.
Brian O’Connell, regional director for state government relations, said GM employs nearly 50,000 Michigan workers and is the state’s largest employer.
Because of the global nature of the company, GM began experiencing “significant” effects of the coronavirus even earlier than other U.S. companies when the illness arrived in Korea and China leading to plant shutdowns prior to March.
The virus began to emerge in Michigan as some of those overseas plants were already reopening. The result was a significant drop in sales in Michigan and across the globe.
“On the bright side, overall sales are showing signs of recovery,” O’Connell told state legislators Thursday. “Especially retail sales, which improved from April’s 35% decline to May and June where our over-the-year declines were only down 20%.
“It’s hard to imagine the good news is we’re only down 20%.”
Due to the lost revenue, GM is postponing, and sometimes eliminating, new vehicle launches and investments in technology and facilities improvements.
“Michigan was hit really hard early on in the recession,” said Mike McWilliams, an economic forecasting specialist with Research Seminar in Quantitative Economics at the University of Michigan. “The auto sector was no different than anything else initially, but we have seen jobs come quicker than many other sectors.
“As of the data in July, it looks like we’ve recovered eight in 10 jobs, so it’s been good on the jobs front and production has been picking back up.”
Economists credit the ability to return to manufacturing work safely for the quick rebound in production.
“We have implemented strict safety protocols of mandatory masks, temperature checks and hand cleaning,” O’Connell said. “To date, we have not had a transmission of COVID in our manufacturing facilities where employees are following the safety guidelines and protocols.
“Now, have we had employees that have it? Yes, but it was when they were home over the weekend, not working.”
Union officials in late June did call for the suspension of operations at GM’s production plant in Arlington, Texas after an outbreak there, but GM officials said the cases arose from transmissions that didn’t occur at work.
“These are very challenging times, but first and foremost is our commitment to creating a safe work environment,” Ford spokesman Daniel Flores told MLive. “If our team is not safe, then we will not be building vehicles for our customers and dealers.”
Jobs and production are directly linked to demand, “and on the demand for new autos side, we’ve been pleasantly surprised with how auto sales have rebounded a little better than what we thought,” Bussis told MLive. “They’re certainly not back to where they were pre-pandemic but better than where we expected them.”
Michigan’s chief economist said auto sales had maintained “historic levels” for the last three years and were expected to “plateau in 2020.”
“I don’t expect it to come back to those levels of light vehicle sales until maybe 2022,” he said.
COVID-19 PREVENTION TIPS:
In addition to washing hands regularly and not touching your face, officials recommend practicing social distancing, assuming anyone may be carrying the virus.
Health officials say you should be staying at least 6 feet away from others and working from home, if possible.
Use disinfecting wipes or disinfecting spray cleaners on frequently-touched surfaces in your home (door handles, faucets, countertops) and carry hand sanitizer with you when you go into places like stores.
Michigan Gov. Gretchen Whitmer has also issued executive orders requiring people to wear face coverings over their mouth and nosewhile in public indoor and crowded outdoor spaces. See an explanation of what that means here.
Additional information is available at Michigan.gov/Coronavirus and CDC.gov/Coronavirus.
For more data on COVID-19 in Michigan, visit https://www.mlive.com/coronavirus/data/.