Howes: What comes next when blistering auto sales slow?

Daniel Howes
The Detroit News

The race is on to post the best year in auto sales — maybe ever.

With one month left in the year, automakers peddling metal in the rich U.S. market are barreling toward the 17.4 million-unit record set in 2000, the high point in a cycle that culminated nine years later in union concessions and two of three Detroit players going bankrupt.

This time should be different, at least in the near term. Too many positive economic factors are buoying auto sales: low interest rates; cheap gasoline and the likelihood it will stay that way for some time; an aging fleet, pushing 11 years on average, bolstering demand.

The outlook arguably is even brighter around here. Cheap gas means buyers are more likely to plump for roomier pickups and SUVs, Detroit specialties. A stumbling Volkswagen AG, laid low by a self-inflicted diesel scandal likely to run for a long time, offers opportunities to steal sales.

But we’re at the top of the cycle, folks, almost the seventh year of consecutive year-over-year sales gains. If the history of this business and its resilience prove anything, it’s that the top of the cycle is never permanent. Neither are competitive missteps because conditions, and sometimes leadership, change.

Ever since the United Auto Workers and Detroit’s three automakers emerged from the largely self-induced hell of restructuring and bankruptcy following the global financial meltdown, the overriding question has been: Can they manage prosperity?

That point is more salient now than anytime since 2009. Because General Motors Co. and Ford Motor Co., in particular, are riding a multi-year string of generating fat profits in North America — the best since, ahem, the industry posted record sales of 17.4 million units 15 years ago.

Because pushback from UAW members forced company bargainers to cough up richer bonuses and larger base-wage increases than industry experts (and top union bargainers, by the look of things) expected from this fall’s contract talks to produce.

Because a company like Ford says that its new four-year UAW contract increases its labor costs a mere 1.5 percent and “puts Ford on common footing with its domestic competitors regarding overall labor cost structure.” Notice the adjective: “domestic.”

No mention of anything close to cost parity with the foreign-owned competition operating in the United States — you know, the competition that controls roughly 55 percent of the U.S. market and sets the standards for all-in labor costs, manufacturing efficiency and, often, quality.

With the exception of Daimler AG’s non-union Mercedes-Benz down South, which makes GM look like Toyota in terms of managing labor costs, the rest of the foreign rivals still will enjoy a cost advantage of $8-to-$10 an hour, Ford conceded in a conference call. So much for “closing the gap” with the competition.

Fatal? No, but it is directional evidence of challenges ahead because nothing stays the same in this business — not momentum, not management, not macro-economic conditions, not governmental regulatory regimes that are poised to make doing business more costly and more criminally fraught.

Just this week, a comprehensive highway bill unveiled on Capitol Hill proposed increasing civil penalties to $105 million from $35 million for automakers who fail to disclose defects to federal regulators and the driving public. More regulatory pressure, in the wake of scandals involving VW, GM and others, is inevitable.

A so-called “Mid-Cycle Review” of tough federal fuel economy regulations looms in Washington. Ranking auto executives privately express deepening concerns their engineers will not be able to meet fanciful targets set by bureaucrats who don’t know the business or its technological capabilities. Nor can they dictate consumer demand, however much they wish they could.

For now, consumer tastes are favoring the metal that makes money for automakers, fattens executive bonus checks and swells hourly profit-sharing payouts instead of pleasing politically correct regulators, their patrons and the environmental lobby.

Don’t expect that to last, because it never does. Managing prosperity means more than getting what you can while you can, a mantra repeated during the recently concluded ratification drives for this season’s contracts.

It means satisfying current demand, staying smart and flexible, avoiding the kind of epic mistakes like the ones dogging VW, and planning for the time when those conditions change. Because they will.

Detroit historically hasn’t been good, at all, at this. The record year of 2000 obscured a broken business model and created a false sense of security shattered by the frantic labor concessions of 2007 and the slide to insolvency a year later.

If there really is a New Detroit Auto Industry, the next rough patch will be the best chance to prove it.

(313) 222-2106

Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.