Manufacture This

The blog of the Alliance for American Manufacturing

Declining auto sales are leading to layoffs, which may impact overall factory job growth.

For seven years, the U.S. auto industry has been a bright shining light for the U.S. economy.

Strong, steady sales led to big job growth. About 40 percent of overall manufacturing employment gains in the past two years came from auto-related industries. Roughly 80 percent of factory job growth last year and the first quarter of this year came from autos.

Now auto sales are slowing down. It’s probably nothing to panic over —this isn’t the same sort of crisis that the industry faced in 2008.

But still, the sales slowdown is leading to layoffs. General Motors is cutting production at four plants, creating about 4,400 layoffs. Fiat Chrysler laid off 1,300 workers in Detroit. Meanwhile, 1,400 of Ford's salaried employees have accepted buyouts or early retirement packages.

This is … troubling for manufacturing. As the Brookings Institute noted this week, without autos driving job growth, it’s unclear whether others in the manufacturing space will be able to pick up the slack, especially since auto production also helps create so many jobs throughout the supply chain.

But that’s not the only big news sending shockwaves through the industry.

On Tuesday, Ford announced that it will build the next-generation Focus in China, instead of Mexico as originally planned. The announcement likely signals that U.S. automakers will look to China as a big part of their production strategy in the years ahead. Here’s The New York Times with more:

Ford Motor’s plans to build its popular Focus compact cars in China, rather than Michigan or Mexico, is a milestone in China’s automotive rise. Chinese auto industry leaders praised the move as long-awaited confirmation that the country’s factories have become as efficient and high-quality as those in the United States and Europe.

The question now is how political leaders greet the development, amid rising skepticism in the United States over Chinese trade policies and the benefits of free trade in general.

President Trump has been critical of both trade with China and the offshoring of auto production. In fact, one of the first things he did after taking office was meet with the chief executives of the Big Three — Ford, GM and Fiat Chrysler — to encourage them to build more auto plants in the United States.

Trump also threatened to impose tariffs on autos made in Mexico, and even took early credit for a decision by Ford to keep production of the Lincoln in Kentucky instead of moving it to Mexico.

Perhaps wanting to soften the blow of the China news, Ford also announced on Tuesday that it will invest $900 million in a Kentucky factory to build its full-size Ford Expedition and Lincoln Navigator SUVs, which will preserve about 1,000 jobs.

Not everybody believes that Ford's decision to move production to China is a game-changer. Cars are bulky and hard to move. Automakers typically prefer to sell their vehicles where they manufacture them to keep shipping costs low.

But workers in auto-manufacturing communities are adjusting to these cyclical booms and busts. And there’s no doubt automakers see a future in China.

General Motors already exports the Buick Envision to the United States from China. Cadillac makes its CT6 Plug-in hybrid in Shanghai. Once production gets going, the Focus is expected to “more than triple” China’s exports of cars to the United States.

China has been working for years for this moment. As the Times reported, Beijing “has put very heavy pressure on Western automakers to transfer their latest, most cutting-edge technology to China as a condition of doing business.” Many automakers — including GM and Ford — are planning to shift research and development there.

Factory pay in China is much lower compared to the United States, and auto parts are also cheaper “partly because China’s steep tariffs make it impossible for multinational manufacturers to compete in the Chinese market unless they produce in China.”

“Ford’s decision could shift work away from American auto parts factories, which are heavily concentrated in Ohio, Indiana and southern Michigan,” the Times reports. “The Focus made in Michigan currently has 40 percent of its parts manufactured in the United States and another 26 percent in Mexico, where business activity tends to involve a lot of the materials imported from the United States. By contrast, United States government data shows that only 2 percent of the (China-made Buick) Envision’s parts come from the United States.”

We probably shouldn’t worry too much about the recent decline in auto sales, especially after such a strong period of growth. Sales will eventually pick back up.

But when they do, will American automakers decide to ramp up production in Michigan — or shift more work to China? And what might happen to American manufacturing if auto production moves overseas?