of more than $105, seriously undermined Americans’ ability to afford the industry’s relatively thirsty vehicles. In response, the Obama Administration rolled out new
fuel efficiency standards in 2011. Under revised Corporate Average Fuel Economy (CAFE) regulations, fuel-efficiency standards are to improve in annual increments. The end goal is an industry-standard average fuel economy of 54.5 mpg for all cars and light-duty trucks by 2025. The first test arrives next year, when automakers’ combined car and light truck fleets in the United States must average 34.1 mpg. The past five years have had automakers, especially the
Detroit Three, restructure their offerings in an effort to meet these more stringent standards. While each of the industry’s product lines (vans, trucks and SUVs) has experienced the introduction of more fuel efficient models, innovation has been especially focused on CUVs, a subsegment of SUVs. Whereas traditional SUVs are fully enclosed vehicles similar to station wagons but built on a light truck chassis, CUV models are similar in form but built on a passenger car chas- sis. Although CUVs lack the towing and off-road capabilities of SUVs, they offer superior gas mileage and safety charac- teristics, and consumers have taken note. This relatively new line of vehicles is expected to account for 46.8% of all SUV and light vehicle sales in 2015, led by models like the Honda CR-V, Ford Escape and Toyota RAV4. Nonetheless, the more recent uptick in traditional SUV sales has been driven by different criteria. While SUVs have also become more fuel-efficient, the sale of these bigger vehicles has been driven by the combination of a strengthen- ing economy and low prices at the pump. Indicative of the growing affordability of SUVs, sales of luxury models have risen 16.8% from August 2014 to August 2015 according to Motor Intelligence.
Success Hinges on Fuel Prices, Labor Relations While the world price of oil is expected to trend higher over the next five years, it is projected to remain low relative to historical highs. The persistence of low oil prices will con- tinue to drive the demand for the larger vehicles in the SUV and Light Truck Manufacturing industry. Over the five years to 2020, industry revenue is expected to rise an average of 3% per year to reach $186.1 billion. Industry profitability is expected to widen as sales of high-margin SUVs and light trucks rise.
However, challenges are expected to remain. Although low oil prices have fueled growth, the increased sale of big- ger vehicles has the potential to drive down the average fuel economy of new vehicles sold. SUVs and light trucks have lower fuel efficiency than compact cars. With truck and SUV sales well outpacing those of cars in 2015, the average mpg of new vehicles sold this year is on pace to decline from 2014, according to the University of Michigan’s Transporta- tion Research Institute. The continuation of strong SUV and light truck sales will pressure automakers to innovate in order to meet government-mandated CAFE standards. While the movement of oil prices and the health of the economy are ultimately beyond the control of automakers, their success may hinge on one variable over which they exert significant influence: employment. After gutting produc- tion rolls during the recession, employment has trended upward in four consecutive years, rising at an average rate of 5.5% per year over the four years until 2015. The future of employment within this industry hinges on the automak- ers’ continued production of vehicles consumers want to drive, but also depends on automakers solving some internal cost concerns. For example, this industry is unique in that a significant portion of employees belong to the United Auto Workers Union (UAW). The union currently has about 400,000 active members and over 800,000 retired members. In general, the UAW, with the importance of its workers to the domestic automotive industry, has historically leveraged high wages and lucrative pension plans for its members. This still holds true today, as the average wage per employee in the SUV and Light Truck Manufacturing industry will eclipse $84,857 in 2015 according to IBISWorld data. In 2007, the Detroit Three and the UAW agreed upon a contract that would lower wages and benefits for new hires and keep wages and salaries the same for tenured employees, creating a two-tier wage system. As the current round of negotiations between the Detroit Three and UAW continues, US-based automakers will try to retain flexibility as workers push for a return to uniform wages. Failure to reach a new agreement that tempers cost pressures could see more plants relocate abroad. Therefore, the long-term relationship between domestic automakers and the union will play a tremendous role in the future profitability and job outlook within the SUV and Light Truck Manufacturing industry.
15 — Motorized Vehicle Manufacturing 2015
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