Longer US auto factory closures bodes poorly for trade

This article by Reynolds Hutchins originally published on JOC.com.

Automakers in the United States are keeping plants closed longer during regularly scheduled intermissions this summer because of declining auto sales - a move expected to accelerate the decline of vehicle exports and auto part imports.

The shuttering of many plants for three weeks and more, opposed to the traditional break of one or two weeks, bodes poorly for the country's third-largest export and its second-largest import, along with the ports and carriers that depend on them. Manufacturers use the summer break to to perform routine maintenance and keep inventories in check.

Analysts have said there will not be any reprieve for automakers or their part suppliers this year, even after operations rev back up next month. Last year, US vehicle sales were up less than half a percent, auto part imports declined by a third of a percent, and roll on, roll-off (ro-ro) passenger vehicle tonnage increased just 3.6 percent after falling double-digits the year prior, according to data from PIERS, a sister product of JOC.com.

"Demand is not going to be strong enough this year. Auto sales are actually falling this year and I'm going to say auto parts imports will fall as well," said JOC.com senior economist Mario Moreno.

US imports of auto parts have slipped 1.9 percent year over year in the first half to 478,220 TEU, according to PIERS.

Not everyone will feel the heat this summer, though. A bust for automakers is a boom for the automotive aftermarket, which imports replacement parts and accessories for vehicles. Healthy auto part imports from that sector could help stabilize what has become an increasingly unsteady trade.

The largest automakers in the United States have been reluctant to openly discuss the factory intermissions planned for this summer. One major manufacturer told JOC.com under the condition of anonymity, however, that factory workers at its primary vehicle assembly plant "could be out for three weeks, some out for more."

Officials at ports with strong ties to the auto industry told JOC.com they are still not sure what sort of impact the longer summer break will have on cargo volumes, either vehicle exports or auto part imports.

"We have not felt any decline," said Richard Scher, spokesman for the Port of Baltimore, the nation's No.1 automobile port. Scher said that the outlook for 2017 is also positive, adding: "Through May of this year, we are currently up 2 percent from last year at this time."

Other port officials were less confident. "We'll have a slowdown this summer because some of the premium auto manufacturers are doing some model changeovers, specifically BMW," said Jim Newsome, president and CEO of the South Carolina Ports Authority. About 70 percent of the vehicles BMW makes at its Greer, South Carolina, plant are sent to foreign markets through the Port of Charleston. Newsome, however, said he was not sure what sort of impact the BMW plant's summer intermission will have on the port's July container traffic.

A longer summer break has come as no surprise to analysts, considering how poorly the auto industry has been performing lately. There were roughly 17.46 million light vehicle units sold in the United states in 2016, up 0.34 percent over 2015, according to Moreno.

US auto sales fell 3 percent in June, the sixth consecutive month of declines. The so-called Big Three automakers - Ford, General Motors, and Fiat Chrysler - all reported year-over-year sales drops last month. Ford's sales were down 5 percent; GM, 4.8 percent; and Fiat Chrysler, 7.4 percent. By the end of the year, total US auto sales are expected to decline 2 percent to 17.1 million units, according to Moreno.

"Looking even farther ahead, the numbers are not very encouraging," he said. "There's a very modest recovery in 2018, but you're going to see further declines in 2019, 2020, 2021. Drop, drop, drop for the next three years."

The numbers have not been much better for auto exports to markets overseas. Ro-ro tonnage for US passengers vehicle exports fell 10.95 percent year over year in 2015 and increased just 3.6 percent year over year in 2016, according to PIERS data. Though the figures through May this year are up 15.9 percent, contributing economic factors are not optimistic.

"It seems like pent-up demand that built up during the recession has already played out," said Moreno. "I think a lot of people that wanted to buy a car a few years ago, who didn't have the credit or the down payment, they finally did it. That means that pent-up demand is already done."

Political turmoil in Washington and expectations that turmoil is not going anywhere anytime soon has also dampened consumer confidence, he said. Consumers simply are not in the mood to purchase new vehicles and they are holding on to old vehicles for longer than ever before, Moreno said. The average life of a car in the United States is now around 11.5 years.

With auto sales, go auto part imports, Moreno said. "When sales for vehicles goes up, demand for containerized imports of auto parts goes up as well. They're connected. But, demand is not going to be strong enough this year."

Auto part imports fell a third of a percent last year and Moreno said they fell another 4 percent year-over-year in the first quarter. He said he expects total auto part imports to fall for the entire year, as well.

It is a market driven primarily by demand from the big automakers who need the parts to supply their plants in the United States, but the original equipment manufacturers (OEMs) are not the only players in the field. The automotive aftermarket, a $70 billion industry, is probably driving what little growth there is in auto part imports, according to Steve Hughes, an automotive aftermarket consultant at HCS International.

"Whenever there is a lull in new car manufacturing or too much inventory on the lots or the sales aren't there, the aftermarket parts business actually flourishes," said Hughes. "People are repairing their cars, not buying new cars. Those cars need to be maintained. That's where the aftermarket parts business comes in: tires, brakes, wiper blades."

The figures for auto tire imports bear out Hughes' remarks, according to Moreno. In the first quarter of 2017, auto tire imports were up a tenth of a percent, despite declines in other auto-related cargo traffic.

"These are new tires, but they are sold to any customers. They're not actually used for production. If you want to replace your tires," said Moreno.

The aftermarket is more resilient, Moreno and Hughes said. PIERS figures back this up, with containerized imports of tires declining more slowly than autoparts, down 1 percent year over year in the first half to 272,111 TEU.

"It was a little bit flat, it was growing last year, but a little bit flat. But I expect it to do well. The aftermarket has always done well, especially during tough economic times," said Hughes, adding that "90 percent of the replacement brake jobs done in the US are done at independent repair shops. They're importing them from aftermarket manufacturers."

Hughes shared Moreno's forecasts for the auto industry over the next few years as consumer confidence dwindles, spending dries up, a possible recession looms in the future, and technological disruption like autonomous vehicles becomes widespread. That's why Hughes said it is important that anyone looking over the trade figures, especially for auto part imports, recognize there are two distinct markets at play.

"You have to look at these as two distinct streams. You have the aftermarket parts business, then you have the OEM car manufacturers and their parts stream. The new car market, I feel that's in for major disruption in the next 10 years," Hughes said. "The aftermarket industry is huge and the demand is huge."