State of the Auto Industry

Michigan and the auto industry have been intrinsically linked ever since Charles Brady King steered the first horseless carriage through the streets of Detroit in March 1896. Now, 120 years later, the Motor City remains the epicenter of a global industry.

 Since achieving statehood more than 175 years ago, Michigan has stood for many things. Most prominent among them are economic strength and productive career opportunities. Timber, metals, and chemicals set our industrial foundation in the 19th century; then came marine-craft motors, land-based vehicle engines, and public and private transportation equipment. Early successes in pairing engineering and entrepreneurial genius with capital and automation processes proved decisive in linking Michigan’s dynamic population growth to rising industrial might.  

Today, most domestic industries, as well as U.S. partners in global trade, identify the core of America’s auto industry with Detroit and Michigan — automotive design, vehicle output, sales, plant engineering, and transportation-related technologies. As we zip through the second decade of the new century, to what extent does this historical reputation remain accurate or deserved?

Regardless of its historical prominence, questions concerning Michigan’s role in the 21st century increasingly focus on the size of our auto industry. How large is our automotive sector, directly and indirectly, relative to the entire economy of our state?

To answer this question, let’s quantify size by measuring the auto industry’s contribution to employment, income, and Gross State Product. In light of heavy body blows delivered to the overall Michigan economy by the Great Recession of 2007-09 (Detroit and GM bankruptcies in particular), knowing these economic figures will help define the long-term fiscal stability of Michigan finances.

After all, in addition to its imprint on the private sector of the U.S. economy, the core auto industry alone generated $135 billion in tax revenue in 2012, representing 13 percent of total state revenue and 2 percent of federal tax revenue.  

Investors and venture capital funds have often viewed Michigan as too dependent on the fortune of a single and capital-intensive industry. Such an assessment has two elements of economic truth. One is that automobile manufacturing in Michigan — even in distressed times — accounts for more than 7 percent of GSP, far higher than in any other state.

A second vulnerability is that Michigan’s chief export (the motor vehicle) is a durable good carrying a high price tag. Today, especially, this means that quality improvements that extend a car’s average life span from five to 11 years, accomplished in just 40 years, also make it easier for consumers to postpone vehicle replacement in hard times.

The ability of households to delay vehicle purchases is the seminal feature rendering Michigan’s economy more sensitive to business cycles. States with greater balance among industries or with economies more reliant on services, such as health care and education, tend to exhibit less volatility in output, employment, and income.A perfect example of this occurred in between 2007 and 2009, when real GDP for the United States dropped 3.1 percent, whereas Michigan’s real GSP fell 11.3 city of Detroit’s bankruptcy was hastened by a 60 percent collapse in U.S. auto sales, and it took six years to recover lost sales volumes. Meanwhile, tax revenue to support counties, local municipalities, and school districts plunged, causing widespread budget chaos. 

What follows is a two-part overview of the size of our auto industry in comparison to the total Michigan economy. First, we look at the automotive sector as a stand-alone share of income, employment, and GSP. Then, a more encompassing view adds the impact of firms and industries that supply the automakers, as well as those that purchase the output of automakers to sustain their own sales and livelihoods.


Better, Faster, Cheaper

In 2013, personal income in Michigan totaled $432.6 billion, up 3.8 percent from 2012. The direct contributions to Michigan’s total personal income from automotive manufacturers (vehicle bodies, trailers, and parts) exceeded $33.5 billion, up nearly 6.0 percent from 2012. As a result, Michigan’s narrowly measured automotive sector accounted for 7.7 percent of total state income. What’s especially noteworthy about our key industry is its exceptional level of productivity.  Consider the portion of our workforce devoted to motor vehicle output averag-
ed approximately 151,000 employees in 2013. This represents 2.9 percent of total Michigan employment.

How could 2.9 percent of the state’s workers account for 7.7 percent of Michigan personal income? That’s 2.5 times the share of state income that one would expect, given the share of state employment comprised by autoworkers. 

The answer is that manufacturing-based jobs are typically more productive than work in the services, retail, wholesale, or government sectors. Studies and reports published by the Federal Reserve, the U.S. Department of Commerce, and the U.S. Labor Department support this conclusion. Wage, salary, and benefit compensation data reveal that, every year, manufacturing industries add greater value to their
output, owing to superior amounts of investment capital placed at the post of each average production worker. 

Sophisticated tech-tools include an impressive spectrum of equipment, ranging from robots and computers to automated assembly lines and quality assurance processes. They confer extra productivity on each worker. Automation enables fewer workers to do things “better, faster, cheaper.” And because productivity is a measure of output per hour, the average autoworker reaps the reward in hourly pay, along with benefits and bonuses. In essence, the skill and education levels required in the automotive industry today are considerably above average. As we know, this fundamental advantage dates back more than a century to Henry Ford’s $5-a-workday miracle that brought so many autoworkers into the region’s assembly plants.

Various researchers have documented the comparative productivity advantages of being employed in auto manufacturing. According to analyst Jeffrey Holt, “the 1.1 million American auto manufacturing workers in 2005, on average, received wages that were 11 percent higher than the U.S. average (mean) hourly wage, or $20.53, compared to $18.21.”

Similarly, the study indicates the “largest cohort in the auto manufacturing industry were ‘team assemblers’ who accounted for 211,000 workers (nationwide) in 2005, or 19 percent of total industry employment. Their mean hourly wage was $15.31, or 18 percent above the ‘across-industry’ mean hourly wage of $12.50.” 

Clearly, wages and salaries — whether measured hourly or annually — cannot alone result in such a disproportionate share of personal income accruing to a single sector of Michigan workers. Still, the positive compensation gap bestows considerable personal income advantages, as persistently higher earnings and benefits (including annual bonuses from profit sharing formulas in contract agreements) augment personal saving and investment portfolios. Consequently, households in the auto sector of Michigan’s economy accrue higher net worth, total assets, and income received as dividends, interest, rentals, and capital gains, compared with workers in most other industrial and service sectors.

Next, we turn to the more comprehensive view of Michigan’s motor vehicle industry.

No man or woman is an island, nor is any industry independent of its suppliers or distributors. The era of vertically integrated firms has largely dissipated. Firms are more focused. The automakers have consolidated product manufacturing and scaled back the number of suppliers and dealerships. They now outsource many of the highly specialized components installed on vehicle assembly lines. Today’s assembly-plant automation relies heavily on just-in-time processes, aided by computer networks. Similar advances in telecommunication and transport enable the movement of final shipments to warehouses, ports, and dealerships. 

Consequently, there’s an impressive array of ancillary industries tied to the well-being of Michigan’s automakers. Employment at firms that furnish raw materials is tenfold that of the automotive business itself. The same holds true at retail and wholesale ends of the sales chain, including advertisers, dealerships, car haulers, car washes, car financiers, car repair shops, recyclers, and an array of other business sectors.

In order to better visualize such industry connections, auto analysts sometimes refer to firms that supply vehicle manufacturers with equipment, expertise, and financing as the “upstream” portion of vehicle-making. By extension, the “downstream” portion involves activities occurring when automakers sell their products, for example, to dealerships. A tally of the footprint associated with normal operations of a profitable Michigan auto industry must incorporate portions of jobs and incomes created in both upstream and downstream industries.  


Manufacturing Jigsaw

Putting a vehicle together means assembling between 10,000 and 80,000 parts, depending on the purpose and complexity of the vehicle. A small, conventional passenger car might require 10,000 independent components, while a luxury vehicle, truck, or Formula One racer might require five to eight times that number of parts.When measuring the size of the automotive industry, this kind of specialization matters.  Specialists in electronics, communication devices, seating, wiring, and so forth must design, order, construct, and ship entire packages to be installed on the auto assembly line. These inputs from suppliers (and, in turn, from their suppliers) — say, from castings, coal, iron, and steel to the molded body frame — determine the true reach and impact of the automotive industry in MichiganAccording to research by A.T. Kearney Inc., a global consulting firm with offices in Southfield, “every job in the core auto industry leads to more than four additional jobs in upstream or downstream industries.” Kearney has studied this facet in all major economies, from Japan, Korea, and Germany to Brazil, India, and China. If these relationships hold, then the Michigan effect is this: Our core 151,000 motor vehicle industry jobs involve the livelihoods of at least another 600,000 workers in the state, bringing the total employment impact to three-quarters of a million workers, or 18 percent of total employment in Michigan.

As it stands, there are 14 major categories of production activity associated with motor vehicle manufacturing. The U.S. Bureau of Economic Analysis is currently updating a matrix that presents 400 industries in the country. These 400 industries are listed down 400 rows and across 400 columns. Each cell formed by the matrix shows the dollar value of commodities used in creating the product or service of an industry shown in the column. The matrix is called an input-output, or I-O table (updates are scheduled for 2015).

Here’s an example of how it works. Pick one of the 14 categories comprising the auto-manufacturing sector, say No. 2: “Light truck and utility vehicles.” When we scan the value of all inputs appearing down the 400 rows within that column, we note that the “Light truck and utility vehicle” industry purchased $1.7 billion worth of goods from an industry called “Truck transportation.”

In all likelihood, the purchase of truck transportation (a service) was essential in bringing necessary parts and equipment to an assem-
bly plant, either in Michigan or elsewhere. Hence, truck transportation serves as one of the auto sector’s supplier industries — just as iron, steel, or insurance would be among the other suppliers.

Analogously, there are “downstream users” of the assembled vehicle. One such user is the “automotive repair and maintenance” industry. It actually depends on nine of the 14 components of auto manufacturing. This particular user shelled out in excess of $11.1 billion to parts-makers in the auto industry, largely to purchase replacements for old, broken, or defective equipment.  Chief beneficiaries of payments coming from firms in the “auto-servicing” industry, meanwhile, include those automotive manufacturers making “steering, suspension components, brake systems, electrical and electronic equipment, and gasoline engine and engine parts.”

In 2012, the I-O table showed the size of Michigan’s core motor vehicle industry at $31.6 billion.  That represents 46.4 percent of Michigan’s entire manufacturing sector (a far greater share than in any other state) and 7.6 percent of all industries in the nation. I-O analysis also expands the industry core by accumulating indirect impacts, linking downstream suppliers to final (upstream) consumer sales.

Viewed in this way, we develop a multiplier effect that approximates 1.32. In other words, national economic turbulence that directly affects output and sales in the auto industry (whether boom, bust, floods, or strikes) results in an extra 32 percent volatility. Consequently, the earlier noted 7.6 percent direct impact now becomes a 10 percent overall impact on Michigan.

Here’s how a multiplier effect of 1.32 works: Five of the largest non-auto manufacturing groups, affected by swings in motor vehicle activity, are “motor vehicle parts dealers” (i.e., 9.1 percent of that industry’s input is auto-based); “other nongovernment services” (6.4 percent); “truck transportation” (4.5 percent); “machinery” (4.3 percent); and “waste management and remedial services” (3.4 percent).

Hundreds of other industries, some encompassing thousands of small to medium- sized firms, are variously affected by fluctuations in the motor vehicle industry. Summing these partial industry impacts and applying the percentages against the presence of those industries in Michigan gives us a reading on total employment, income, and GSP impact.

Looking at southeast Michigan, total GDP in the seven counties comprised 52.4 percent of the state of Michigan (as of 2012). That’s $218 billion in overall output as of 2012 (and $227 billion in 2013). In essence, the region represents more than half the state’s GSP.

Actually, metro Detroit’s automotive industry constitutes a very robust 67.2 percent of Michigan’s total automotive production value, including vehicle output, as well as serving as a magnet for incubating R&D, vehicle testing, servicing, and product marketing. Employment effects are disproportionately large, as well, given the region is home to the administrative headquarters of Chrysler, Ford, and General Motors.  


Michigan’s Return to Prominence

Half a century ago, when Michigan’s Big Three, along with American Motors, held more than 70 percent of U.S. auto sales, our state boasted well above national average wages, benefits, and per capita income levels, along with rapidly rising population, employment, and wealth. The mid-1960s were robust for Michigan, and the state consistently accounted for 3.7 to 4.3 percent of the nation’s GDP.

Today, with the Big Three’s share of U.S. vehicle sales hovering around 50 percent, Michigan’s slice of the nation’s GDP has diminished to between 2.5 and 3.1 percent. Our per capita personal income, on average, is 10 percent below the national average; our unemployment rates are perpetually 1 to 2 percentage points higher than the national average; and our overall population growth, as of 2012-13, has just turned
positive after 16 consecutive years of net out-migration and a full decade of outright population loss (Michigan’s population declined from 10.1 million in 2005 to 9.9 million in 2013).  

The loss of economic clout correlates with the fact that Michigan’s motor vehicle and equipment industry accounted for 11 percent of total wage and salary employment in the state in 1978. That share had fallen to 5 percent by 2005. It slipped yet again during the traumas of the extended Great Recession in Michigan, from 2007 to 2010.

Fortunately, a national economic recovery and major state legislative reforms have enhanced Michigan’s prospects. Vehicle sales for the U.S. have risen from 10.4 million units in 2009 to more than 16 million units in 2014. Motor vehicle manufacturing accounted for 7.2 percent of the state’s total GSP in 2010, which was far higher than any other state, with Michigan leading the nation at $28 billion in motor vehicle manufacturing output.

Two years later, in 2012, Michigan ranked ninth among the states in its manufacturing industry’s share of total output, with motor vehicle output having risen to 7.6 percent of total state output (GSP). At the same time, Big Three profits have returned to record levels and now provide generous annual bonuses to their workforces.  

Will this restorative trend for the size and strength of Michigan’s auto sector continue? Three factors support an affirmative response. First, Michigan is now a right-to-work state, placing the state’s auto plants and suppliers in a competitive environment that can reverse attrition of workforce and technology to states where right-to-work already took hold. These states, mostly in the South, have experienced phenomenal gains in motor vehicle output and have added hundreds of thousands of automotive industry jobs over the past 30 years. Michigan, at last, has taken a giant leap at leveling the playing field.  

Second, Michigan’s 15 years of trial by fire have focused management minds on meeting challenges head-on and devising long-term, rational strategies to gain and retain customers. Prolonged work stoppages are seen as suicidal; their absence in Michigan should stabilize growth and profitability in the industry. 

Third, auto industry workers and executives are unlikely to ever again accede to the imposition of ruinous regulations set by government. Average mileage standards mandated on fleets of vehicles sold by the automakers during the prior century distorted the investment, production, and profitability curves for U.S. firms.

Today, federal regulators have doubled the mileage mandates, with a 2025 compliance date. As of late 2014, these requirements appear unattainable without jeopardizing the lives of customers and the viability of U.S. carmakers. This time, automakers, their stockholders, and workers will most likely win the rejection of the mandates as they stand.

In summary, we shouldn’t be discouraged by traumatic events of the recent past. The past 100 years have seen many challenges to our state’s auto sector. Auto firms, along with their managements and competitors, have come and gone. Massive consolidations have occurred, affecting the number and size of our automakers, as well as their supplier firms and financiers.  Yes, there have been numerous hurdles. Michigan’s auto industry, for example, was forced to accommodate sudden transformations required by wartime exigencies — complete shifts in plant assembly lines to produce combat vehicles, aircraft, and other weaponryYet, the auto industry rose to the challenge with innovations and flexibility. It has managed more so than ever to adjust to ever-changing consumer tastes and preferences for cars and trucks, accommodating unprecedented volumes and burdens ordered by legislation, courts, and government regulators.

As history has shown, Michigan’s entire automotive industry prospers when our national economy is strong and residents are confident. Auto sector profits will rise, along with employment in its affiliated sectors, as long as inflation is low and trend growth rates for household income, saving, wealth, and real purchasing power are rising at least 2 or 3 percent each year. 

On a global scale, rising wealth in Asian markets, as well as free market countries in Europe, Central America, and South America that are relatively absent of public sector subsidies and government programs, portend even greater growth trends for the U.S. auto industry. In the end, only a thriving, competitive private sector can generate prosperity for Michigan’s most reliable and resilient industry, which has survived more than a century of economic calm and tempest. db