PANAROMA The US automotive sector: a risky recovery ?

The automotive industry in the United States, the "backbone of American industry" according to Barack Obama, was on the verge of bankruptcy at the time of the financial crisis, with a drop in sales of 35% between 2007 and 2009. It then underwent drastic restructuring of its companies, with actory closures, massive redundancies and significant federal support, with $80 billion injected into the Big Three (Chrysler, Ford and General Motors). Since then, the automotive industry has been aided by a highly incentivising "cash for clunkers" programme, by a level of household consumption which has recovered over the last few years thanks, amongst other things, to the drop in unemployment, as well as by tempting consumer finance arrangements. Employment in this sector has started to rise again, as has investment and expenditure on research& development (R&D). A virtuous circleseems to have been established. But we will see that this recovery is not without danger, which could eventually dent the virtue in this circle. Amongst these dangers are a median salary that is still below its pre-crisis level, consumer loans granted to risky borrowers (subprimes), the significant increase in payment defaults and the probable end of cheap loans. To this is added a strong trend amongst new generations of consumers, who increasingly often prefer to use alternative modes of transport, a trend that manufacturers are nevertheless gradually
integrating within their product lines through large increase in their R&D expenditure.

INTRODUCTION

The automotive sector is often cited as an example to illustrate the resurgence of the US economy since the crisis. The latter particularly affected this industry, with sales collapsing by half. The automotive industry, which represented the omnipotence of the US economy, is therefore recovering from a very low
position. Indeed, the large US automotive groups owe their salvation to the federal government. This was a painful process, with the large manufacturers undergoing radical slimming and some of them being sold to foreigners. Nevertheless, the US economy recovery, which is pulling the automotive

sector in its wake, is strong, as underlined by the dynamics in investment and recruitment, but also and particularly in sales. Conditions now seem favourable: the automotive groups have had their finances cleaned up and there is sustained household consumption. But this rude good health should not hide the weaknesses and underlying risks: the worldwide economic environment remains uncertain and certain excesses of the past now appear to be resurfacing, particularly in matters of automotive credit. 2015 is therefore a transitional year: will automotive sales, the momentum of which partly results from credit conditions that are favourable to households, suffer from the expected tightening of the US Federal reserve's monetary policy? Are sociological and consumer-behaviour changes an inhibiting factor for this industry? What should this economy do to renew itself? To answer these questions, we will first explain
this strong recovery and its causes. We will then analyse the risks associated with this recovery. Lastly, we will address the strategies established by the automotive manufacturers to deal with this new configuration.