With the auto industry cranking up again, carmakers are offering a flurry of deals to bring shoppers back, a strategy that could fire up the chilled U.S. economy if it works.
Rather than slash prices, the 21 automakers selling in the United States offer low interest rates and long repayment plans to rebound from March and April's business plunge.
Just when the auto plants will regain full output depends on when consumers are willing to buy again following the national shutdown meant to stymie the coronavirus outbreak.
Consumers entered the lockdown in decent financial shape. If motorists start spending again, auto sales could quickly rev up the coronavirus-slowed economy, particularly in the Southeast’s auto-making states.
Many U.S. cities only now have let nonessential businesses open. Car plants, including the dozen located within five hours of Nashville, are reopening, too. Analysts figure as the 1-million-employee U.S. auto-making sector ramps up, the massive spending for steel, glass, microprocessors, chemicals, plastic, fabric, aluminum, wire and other vehicle components can lift the economy.
Of course, that lift depends on consumer spending. If Americans sit this out, an auto-led recovery could sputter.
“The real test will come not in the second or third quarter. It is the fourth quarter and the first half of 2021 that will tell the tale," Philadelphia-area economist Joel Naroff says in a client letter. “That is when governments will have exhausted their funding and will be reducing support for the economy dramatically. Businesses and households will have to be standing on their own or they will sink quickly.”
Although the plants are opening, some big-population states are still keeping auto dealerships on lockdown. That shows the economy won't rebound at the same pace in each region.
"For the manufacturers the difference between now and say the end of the year is the way the national economy is going to reopen," said Christopher Low, chief economist for Memphis-based First Horizon, the state's largest homegrown bank.
"In some states it's already possible to go down to a dealership and buy a car," Low said. "In other states, including California and New York, the dealers are still closed. Buying a car is quite difficult at the moment.'’
Even when those car lots do reopen, business bankruptcies could gut jobs and consumer confidence.
"The risk is that if the majority of the economy takes too long to reopen there will be bankruptcies and companies going out of business," Low said, noting analysts estimate 6 million to 10 million jobs could vanish in bankruptcy.
For now, the auto industry is marching forward.
"The bottom line is we’ve got to go in, wake this plant up and get it running," said Mike Herron, chairman of the United Auto Workers local union at General Motors 5,000-employee plant in Spring Hill, Tennessee. "We’re in a cyclical industry. It’s always been this way. But this plant and this industry will survive.”
No price cuts yet on car lots
In the dozen weeks before the national lockdown, lenders booked about $150 billion in new-auto loans, bringing total consumer automobile debt to $1.3 trillion, reports the Federal Reserve Bank of New York.
But once mayors and governors across the land issued shelter-in-place orders, consumer spending fell. April new-auto sales dropped about 25% compared with a year earlier. Today, car lots are full of unsold vehicles, but prices aren't falling.
“People who are buying are still paying” regular prices, said Karl Brauer, executive publisher of market guides Kelley Blue Book and Autotrader.
Automakers have bet consumers will turn to auto loans at low interest rates. Car dealers note auto sales didn't stop in March and April.
“We didn’t lay off a single employee," said auto dealer Kent Ritchey, president of Memphis-based Landers Group, whose Mid-South dealerships employ 453 people and sell new brands including Audi, Buick, Cadillac, Chrysler, Dodge, Ford, GMC, Jeep, Jaguar, Land Rover and Volkswagen.
“If it continues like it is right now we’ll be OK," Ritchey said. “When this all broke out in mid-March, virtually every dealer I know had too many vehicles or certainly had more than they wanted. If I don’t get another new car for 45 days (delivered by the automakers), I’m going to be the happiest car dealer in America."
With the supply coming into balance, what dealers will need in future weeks is quick deliveries of the bestselling models. What usually sells best are the vehicles most recently given fresh looks and electronics.
In Tennessee, for example, Nissan Smyrna plans for a refreshed Rogue sport utility, probably starting in the third quarter, while the Cadillac XT5 sport utility, a mainstay at GM Spring Hill, is due for a new 2-liter engine. In Chattanooga, Volkswagen will scale up for the newly launched Atlas Cross Sport.
“You’re probably going to be able to find what you want,” Brauer said, referring to shoppers looking online and on car lots for popular models.
Even so, some models could be in short supply in the coming weeks. Anti-virus measures meant to help protect employees could slow output, especially in the first weeks when workers adjust to the changes.
“I don’t like them. The team members won’t like them. But this is what we have to do. People are dying from this thing, and we have to stay safe,” said Herron, chairman of UAW Local 1853 at Spring Hill. “General Motors and the United Auto Workers worked closely in partnership with medical professionals to ascertain the safest way to build cars. ... The local union and the international union put the safety of our workers first and foremost. That is our highest priority.”
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