The auto industry faces challenges worse than in 2008, lawmakers say

Auto manufacturing plants across the United States are resuming operations Monday, but it’s unclear whether production and consumer demand will ramp up enough for them to survive without federal aid.

If automakers fail to successfully restart — and bring in some much-needed cash, it could mean the loss of thousands of jobs and an economic crisis for the industry integral to North America. And it could force Congress and the Trump administration to step in with money.

“If we have to close again? Good luck. You’ll see a lot of [auto suppliers] will go out of business,” said Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, which is in constant contact with U.S. and Mexican automakers given the close ties between the three countries.

So far, the auto industry has refrained from asking the Trump administration or Congress for aid during the coronavirus pandemic, but the decline in auto production and sales has caught the attention of lawmakers on Capitol Hill.

A bipartisan group of more than 50 lawmakers from car-producing states last week put Congress on notice that the auto industry, which was left out of House Democrats’ $3 trillion stimulus, will need economic help as part of any future pandemic relief packages. Their main focus, auto industry sources in touch with lawmakers say, is to build demand for autos, which could come from offering some form of incentives for Americans to buy a new car.

“America’s motor vehicle industry must remain the heart of our nation’s manufacturing capability. The projected economic fallout for the industry is grave,” wrote lawmakers, including Michigan Reps. Debbie Dingell (D) and Fred Upton ®.

“In some regards, challenges the industry face exceed those of the 2008 financial meltdown,” the lawmakers wrote.

The U.S. auto industry is particularly sensitive to the word “bailout,” given that an $80 billion bailout was given in 2009 to help automakers restructure during the financial crisis.

Industry leaders do acknowledge that the coming weeks will determine if they need some form of stimulus to get past the fallout from the pandemic.

“Congress isn’t rushing to do something on the stimulus side because we really aren’t sure what we need at this point. We need to see how the market and consumers react and then see what the auto sector might need,” said Cody Lusk, president and CEO of the American International Automobile Dealers Association.

As the restarts begin, the auto industry faces other challenges to succeed besides possible federal aid, including its heavy reliance on its partners in Mexico and Canada. Many other industries will be watching as they become a test case for how industries will reopen in coming weeks amid the ongoing pandemic.

“If the auto industry can’t sustain a restart, I can’t imagine what you’ll be seeing in retail, restaurants” and for office workers, Volpe said.

Plants across North America have been shuttered for almost two months, as the three countries have grappled with hundreds of thousands of confirmed cases of the coronavirus, particularly in areas where the auto industry has a large presence like Michigan and throughout Mexico.

Production of autos, including trucks, has plummeted during the pandemic. F igures released by the Federal Reserve on Friday showed that if production levels for April continued, only 180,000 cars would be produced in 2020. Based on February production, the Fed had projected that more than 11 million cars were expected to be manufactured this year.

Overall, the output of autos and parts fell by more than 70 percent in April, according to the Fed.

Automakers expect figures from May and early June to be more telling on the state of the industry with production restarting and consumer demand expected to steadily increase.

“I’m not shy about saying we cannot afford to stay closed much longer. And if you’re still sputtering along in the second week of June, we have a real risk of default,” Volpe said.

Automakers in the U.S., Mexico and Canada have extremely complicated supply chains, with no single car fully made in the United States. A car and its parts have often crossed the U.S.’ northern and southern border multiple times before it reaches a dealership for sale. That’s why any hold-up in one country could cost millions of dollars in losses for automakers across the continent.

All eyes have been on Mexico, where manufacturers have been particularly concerned about how the country’s response to the virus could delay reopening. The Mexican government just last week announced plans to include the auto industry as an essential industry, but there has been mixed messaging over whether they will be able to restart production Monday along with manufacturers in the U.S. and Canada.

On Friday, Mexico said it would allow the auto industry to resume on June 1, but would let companies start sooner if they have the approved safety measures in place.

A hard-and-fast June 1 date would have been “really bad in terms of the supply needed for production at the Detroit Big Three [Ford, General Motors and Fiat Chrysler] and more broadly in the U.S.,” an auto industry source said.

Mexican officials say the country is experiencing its peak of virus transmission, with the total number of confirmed cases surpassing 45,000. Still, the country this week will ease lockdown measures in areas where there are no confirmed cases of the virus and plans to do a wider reopening on June 1.

Mexico is also under pressure from U.S. and Mexican business leaders to not let the regional supply chains fall apart, especially at a time when U.S. officials are weighing how to stop offshoring U.S. jobs, particularly to China, after the pandemic.

“If American auto sector starts making cars next week and they can’t get their Mexican supplies, that will do irreparable harm for those suppliers, many of which are American companies operating in Mexico,” Volpe said.

“If you hold up or stop an assembly line, they’ll source from someone else and you’ll never see that business again,” he added.

Auto and parts manufacturers in all three countries acknowledge that there’s a heavy load on them as they push to reopen for good and gradually ramp up production. Manufacturers have been in close contact with unions and government officials to ease the anxiety workers will feel in returning.

Auto industry sources say they’ve crafted “Covid-conscious workplaces,” which will include a 30-minute break between shifts, distanced workstations and personal protective gear for employees. Some manufacturers have already begun opening in recent weeks with those protocols, which were crafted with the United Auto Workers.

“There are going to be hiccups from time to time, but our guys [auto and parts manufacturers] are confident they can make this work in this new world of social distancing manufacturing,” one auto industry source said.

Meanwhile, automakers are bracing for additional stress to come in July, when President Donald Trump’s signature trade deal with Mexico and Canada goes into effect. The deal, known as USMCA, includes complicated new rules for how autos can qualify for reduced tariffs in the region.

The North American auto industry as a whole has repeatedly asked the three governments to hold off on implementing the new rules, which will require costly and time-consuming changes. So far, the three countries haven’t made any formal announcements, but auto industry officials expect some level of flexibility.

“You’re not just automatically flipping a switch and everything goes back to 100 percent, so we’re focused on getting there,” Lusk said. “USMCA is a headache, but it’s a down-the-road problem.”