Big Questions Are Hanging Over the Auto Industry

hanging all over. This is the steady march toward autonomous vehicles, a change that will have profound implications not just for the industry but for society as a whole. Welcome to Benchmark. I'm Scott Landman, economics editor with Bloomberg News in Washington. We're recording this just as the latest stats on auto sales cross US the wire, showing that consumers are increasingly abandoning Sedan's and sales overall we're underwhelming this past month.

On top of that, we have an endless flow of news about Tesla, electric cars, driverless vehicles, and changing fuel economy standards. Fortunately, we have someone with us who can help make sense of all this. Ellen Hughes Cromwick is a senior economist at the University of Michigan. Energy Institute. Previously, she was chief economist at the U. S. Commerce Department, and she was also chief economist at Ford Motor Company

for eighteen years. Ellen, thanks for joining us on Benchmark. Great, thanks, God appreciate it. Ellen. I thought we'd call this four big questions facing the auto industry. We have consumer tastes changing, we have tariffs, electric vehicles, autonomous vehicles. Obviously we could talk about a lot more, but let's start with those four. Before we get to those topics, can you give us some sense of how important the auto industry is to the U. S. Economy and to the global economy. Great,

thanks Scott, Yes, it is very important. Let me first say that, you know, if you look at just the new vehicle market globally this year, probably you know, close to a hundred million units will be purchased by consumers in all countries, all markets. That would represent about two trillion dollars of spending at an average vehicle price, you know, around twenty so just taking the new vehicle market globally, wow,

it is a large market. If you look at all vehicles on the roads globally, awards indicate Hates that as of last year there were about one point three billion cars, utilities, and trucks. That's both retail units bought by private buyers in the retail market as well as commercial buyers, whether

they're fleets or you know, government purchases. Um. So that one point three billion cars, utilities and trucks, along with the new vehicle sales and then all the services that we buy, you can imagine that that two trillion of new purchases, you know, goes up from there, possibly as high as seven trillion. I know that the CEO of Uber was recently interviewed by Bloomberg and I think he put a total size of the market at seven ellen.

Those are pretty big numbers. So when we're talking about the US economy, about what percentage does the auto industry represent, again, coming back to the new vehicle market, three to four percent of g d P, right, so it's pretty significant just and just talking about new vehicles. Let's move to our first topic, which is new vehicle the new vehicle market.

It's the beginning of the month, which is when automakers report their monthly sales and and something that's really caught my eye in recent months is that, you know, not only have sales been kind of flat overall, But we're seeing this huge change in consumer tastes. You know, sales of traditional sitan's like a four door Sedan, Honda Court that sort of thing. Those are really going down and

SUVs are just going way up. I know this has been kind of going on for a while, but it just seems to be getting more and more pronounced lately.

Why is this happening and what implications does this have for the industry in the ECONO, this has been a trend in place for now more than a couple of decades, and the market in consumer case of just really gravitated towards this very attractive package of a crossover or what you call an suv, whereby there's just more space, there's um a just a much better set of attributes in in those types of vehicles. You know, a lot of

women like to be higher up when they drive. I mean, they just like to have a better viewpoint when they're driving, and they are very much attracted to those types of vehicles. So it's it's a trend, it's been in place. It you know, we can see it in some other markets as well. There is a a lot of buyers in China. I will say, however, that I love the sedans, and they like long vehicles, and they have different taste and

preferences than what we see in the US. And as you know, in Europe, because fuel taxes are much higher than they are here in the US, there is a demand for a well contented UH car rather than a crossover and an suv because the fuel cost is just so much higher because of taxes. And what is the economic impact if any of you know, all these automakers that are kind of being maybe caught a little flat footed right now, are sales lower than they otherwise could be?

Is or are these sales kind of a lost cause that maybe, um, you know, some some companies were not able to switch over fast enough to SUVs. I think that most of the most of the major manufacturers have UH lineups that really meet those consumer case and preferences. What they're doing now is turning to electrified vehicles. And by electrified vehicles, i'm referring to plug in hybrid electric

vehicles and battery electric vehicles. Plugins have an internal combustion, you know, gasoline fueled engine along with an electric motor, and those plugins do allow for recharging of the vehicle a battery electric vehicle does not have a gas powered engine. It is only fueled by batteries that are recharged. Both those UM plugins and electric battery electric vehicles are really

where the manufacturers are now turning. And that's going to be very exciting because it will offer up the investing that they're going to be doing now to open up the gateway to more autonomous vehicle content and having an electrified platform upon which to put the connected and automated vehicle content is really the avenue that they're pursuing for many, many different reasons. Let's take one at a time. Let's uh, we did want to talk about electric vehicles, electrified vehicles.

What is the state of that market right now? I know the sales have been increasing, and there's been predictions for years that there's that they're going to take off. I think your listeners will be surprised to learn that the growth of electric or electrified vehicles is very high, in the double digits globally. UH. Right now, as of two thousand eighteen, we estimate that there are about five million units on the roads UH when this year comes to a close, and that would include one point nine

million units of sales this year. Some of it is because there are policy stimulus UM tools in in play, particularly in China and in Europe, where some subsidies or credits or registration exemptions are available to buyers. But even so, I think, you know, what's fascinating about this is that the trend toward electric vehicles is tied to this future

of autonomous vehicles. And you know, what we're learning is that, you know, automotive manufacturers recognize the simplicity of the engineering in an electric vehicle and why that serves as a very efficient platform upon which to put this autonomous content. So in other words, you know, they kind of have to make a capital spending decision to really focus on the electrified platform and not the internal combustion engine. Let's

just talk about the electric vehicle side of it. How much capital spending will automakers be putting in towards, you know, making that transition and figuring out how to build these vehicles in the next five to ten years. I don't have an estimate for you on that directly. You know, it would be great to UM have that number. I think all of us are trying to trying to figure that out. But is it going to be a significant

amount of significant portion of what automakers are spending. Yes, and I would add to it that you know, it's going to be capital spending on electrified and then add to that the spending that they're doing to put connected and automated vehicle content into the video. It's really both of them together, is just absolutely and I think they're they're joined at the hip that that both of them, you know, combined are really going to be their strategic focus.

And if you you look at some of the popular press about how many electrified vehicles will be coming out between now and the number of of you know, vehicles really skyrockets, and uh, that's going to require retooling plants and reconfiguring and making sure that you know, they've got

capital efficiency in these plants over time. So is there going to be the kind of what we might call creative destruction of a lot of kinds of parts makers and the formation of new companies or recreation of companies to perform these tasks and to make these new parts and other technologies that are that will be needed. Oh, Scott,

you just hit you hit the point directly. Absolutely. I think that we're going to see a lot of uh, the so called Chumpeter creative destruction, and it's already happening in some respects. I mean, you think about what Tesla has accomplished. They have really in a trend setter in developing a giga factory, a battery pack that lays horizontally on the platform of their electrified vehicles, and really reaching

out to develop charging infrastructure for their buyers. And now that I think generated a lot of disruption and you know, kind of aha moments among the traditional automakers to say, yeah, this really is going to happen. And I wanted to mention Scott that one of the reasons why this trend seems to be much more apparent and perhaps happening at a faster pace than than what some analysts may think, is that the cost of the battery cells and the battery packs for these vehicles is coming down at a

faster pace. Already, we're seeing potential, you know, cost structures that um get us to a point where the retail price of a battery electric vehicle is coming very close to a comparable internal combustion engine vehicle, and that that'll really be an important tipping point because if you know, consumers walk into the dealership and they see that there's more price parity between these two types of vehicles. Um, you know, it may just tip the scale to get

them to buy electrified vehicles. Well, that might not be the only tipping point when it comes to vehicles. When we look at autonomous vehicles, another tipping point may very well be do you even need a car? Do you even need your own car? Ellen, When you look out at the auto industry and these trends in electrified vehicles and autonomous vehicles in the next years, do you see

sales increasing, decreasing, or or or slowing. The scenario that that we're working on kind of goes like this, that we're in a period now where there is this manufacturing and kind of physical transition toward electrified vehicles that is

really being fostered by two developments. One is this reduction in the battery cost, which is critical, and then the second one is the fact that we are seeing automakers recognized that they need to have the electrified platform in order to put the autonomous content and features onto it for a lot of engineering and economic reasons. Those are really married together. When we look at all of the testing and software or development for autonomous content in a vehicle.

We see that that's going to take a longer period of time. We need to have many more simulations, many more miles of testing, and also a regulatory structure. We really don't have substantive regulations yet for connected and automated vehicles. That all is going to take a more extended, you know, period of time to to really play out. So this really this transition you know, I think will take place

over the next ten to fifteen years UM. Now, could there be periods when it, you know, happens more rapidly, absolutely, especially if the cost per mile traveled goes down because of shared car sharing and other mobile apps that really bring to the for if that cost per mile traveled falls as more autonomous content is putting these vehicles, then you know, you really need fewer units to be honest.

All right, Well, let's go back from the future to the present to something that's not a simulation, and that is the trade war that we're finding us in now at the behest of President Donald Trump, something we frequently talked about on this podcast. At this point, the President has been threatening tariffs on imported automobiles. He hasn't quite followed through on that global threat yet, although it does

seem to be still very much there. Ellen, if we were to see a true ratch it up of tariffs on cars coming into the US, replete with reciprocal or retaliatory tariffs from other countries, how much of a disaster would that be for the global economy? When consumers go out and buy vehicles, you know, that's a big decision for by for for people here in the US, but really across the world, and in the short run, you know, consumer demand for a large, durable good can be very

price sensitive. Now, the US Commerce Department started their investigation last May to determine whether imported cars and components were really a threat to national security and worthy of a of an import tariff as much as twenty five You know, it's not like Lee's at an auto manufacturer in Europe would pass along all of that cost to the buyer. But even if it was half of that tariff um, I do think it would disrupt demand quite a bit

here in the US. Is that something that would cause a recession or be a strong factor that would that would add to the risk of a recession? I don't think it's um at that level of disruption. I think it would be part of a broader sentiment shift associated with all the uncertainty that this tariff cabal has caused for consumers and businesses. And you know, right now we're in the middle of this tariff you know, kind of novel and uh, we just don't know what the ending

is likely to be. And it's partly that uncertainty that can tip the economy. I've got my favorite data buffet of you know, about twenty indicators that I look at, and you know, the ones that are most concerning can be you know, very fast shifts in consumer and business sentiment. We go from being overly optimistic to overly pessimistic. And once that starts, it can happen very rapidly in a matter of a few months. And that's when businesses stop

capex and consumers lock up their wallets. And so I think there is a risk of that type of disruption. It's big more than just autos, however, it's more along the lines of, you know, we were not quite sure if we are going to have a North American um, you know, trade deal, whatever we want to call it. Not sure if we're going to prosecute um you know section to thirty two of the trade law which would encumber our imports from Europe and and also more terroriffts

from China. It's it's a very long list of elements that generate uncertainty and therefore you know, tax our decisions to buy, invest, and undertake any type of economic activity. That's the to me, that's the big risk for a recession. And I know a lot of economists are talking about I know could my concerns it could happen, happened much faster than maybe, you know, the broad set of indicators tell us today. Well, Ellen, on that optimistic note, maybe

we should end there. Ellen Hughes Cromwick, thank you very much for taking the time to talk about the auto industry and the global economy. I really learned a lot today. Thank you, Scott. I appreciate it. Benchmark. You will be back next week. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com or Bloomberg app, as well as podcast destinations such as Apple Podcasts, Spotify or

wherever you listen. We'd love it if you took the time to rate and review the show, so more listeners can find us and you can find us on Twitter, follow me at scott Landman and our guest is at Ellen Hughes c r o M. Benchmark is produced by Toford Foreheads. The head of Bloomberg Podcasts is Francesca Levy. Thanks for listening, See you next time.