Speaker 1: The automobile industry is critically important to economies around the world,
Speaker 1: and it's being buffeted from all sides. In the US,
Speaker 1: consumer tastes have dramatically shifted, forcing manufacturers to retool their
Speaker 1: product lines. Tesla is shaking up how the world looks
Speaker 1: at electric cars. President Donald Trump is threatening tariffs on
Speaker 1: imported autos in a bid to protect American jobs and
Speaker 1: hanging all over. This is the steady march toward autonomous vehicles,
Speaker 1: a change that will have profound implications not just for
Speaker 1: the industry but for society as a whole. Welcome to Benchmark.
Speaker 1: I'm Scott Landman, economics editor with Bloomberg News in Washington.
Speaker 1: We're recording this just as the latest stats on auto
Speaker 1: sales cross US the wire, showing that consumers are increasingly
Speaker 1: abandoning Sedan's and sales overall we're underwhelming this past month.
Speaker 1: On top of that, we have an endless flow of
Speaker 1: news about Tesla, electric cars, driverless vehicles, and changing fuel
Speaker 1: economy standards. Fortunately, we have someone with us who can
Speaker 1: help make sense of all this. Ellen Hughes Cromwick is
Speaker 1: a senior economist at the University of Michigan. Energy Institute. Previously,
Speaker 1: she was chief economist at the U. S. Commerce Department,
Speaker 1: and she was also chief economist at Ford Motor Company
Speaker 1: for eighteen years. Ellen, thanks for joining us on Benchmark. Great, thanks,
Speaker 1: God appreciate it. Ellen. I thought we'd call this four
Speaker 1: big questions facing the auto industry. We have consumer tastes changing,
Speaker 1: we have tariffs, electric vehicles, autonomous vehicles. Obviously we could
Speaker 1: talk about a lot more, but let's start with those four.
Speaker 1: Before we get to those topics, can you give us
Speaker 1: some sense of how important the auto industry is to
Speaker 1: the U. S. Economy and to the global economy. Great,
Speaker 1: thanks Scott, Yes, it is very important. Let me first
Speaker 1: say that, you know, if you look at just the
Speaker 1: new vehicle market globally this year, probably you know, close
Speaker 1: to a hundred million units will be purchased by consumers
Speaker 1: in all countries, all markets. That would represent about two
Speaker 1: trillion dollars of spending at an average vehicle price, you know,
Speaker 1: around twenty so just taking the new vehicle market globally, wow,
Speaker 1: it is a large market. If you look at all
Speaker 1: vehicles on the roads globally, awards indicate Hates that as
Speaker 1: of last year there were about one point three billion cars, utilities,
Speaker 1: and trucks. That's both retail units bought by private buyers
Speaker 1: in the retail market as well as commercial buyers, whether
Speaker 1: they're fleets or you know, government purchases. Um. So that
Speaker 1: one point three billion cars, utilities and trucks, along with
Speaker 1: the new vehicle sales and then all the services that
Speaker 1: we buy, you can imagine that that two trillion of
Speaker 1: new purchases, you know, goes up from there, possibly as
Speaker 1: high as seven trillion. I know that the CEO of
Speaker 1: Uber was recently interviewed by Bloomberg and I think he
Speaker 1: put a total size of the market at seven ellen.
Speaker 1: Those are pretty big numbers. So when we're talking about
Speaker 1: the US economy, about what percentage does the auto industry represent, again,
Speaker 1: coming back to the new vehicle market, three to four
Speaker 1: percent of g d P, right, so it's pretty significant
Speaker 1: just and just talking about new vehicles. Let's move to
Speaker 1: our first topic, which is new vehicle the new vehicle market.
Speaker 1: It's the beginning of the month, which is when automakers
Speaker 1: report their monthly sales and and something that's really caught
Speaker 1: my eye in recent months is that, you know, not
Speaker 1: only have sales been kind of flat overall, But we're
Speaker 1: seeing this huge change in consumer tastes. You know, sales
Speaker 1: of traditional sitan's like a four door Sedan, Honda Court
Speaker 1: that sort of thing. Those are really going down and
Speaker 1: SUVs are just going way up. I know this has
Speaker 1: been kind of going on for a while, but it
Speaker 1: just seems to be getting more and more pronounced lately.
Speaker 1: Why is this happening and what implications does this have
Speaker 1: for the industry in the ECONO, this has been a
Speaker 1: trend in place for now more than a couple of decades,
Speaker 1: and the market in consumer case of just really gravitated
Speaker 1: towards this very attractive package of a crossover or what
Speaker 1: you call an suv, whereby there's just more space, there's
Speaker 1: um a just a much better set of attributes in
Speaker 1: in those types of vehicles. You know, a lot of
Speaker 1: women like to be higher up when they drive. I mean,
Speaker 1: they just like to have a better viewpoint when they're driving,
Speaker 1: and they are very much attracted to those types of vehicles.
Speaker 1: So it's it's a trend, it's been in place. It
Speaker 1: you know, we can see it in some other markets
Speaker 1: as well. There is a a lot of buyers in China.
Speaker 1: I will say, however, that I love the sedans, and
Speaker 1: they like long vehicles, and they have different taste and
Speaker 1: preferences than what we see in the US. And as
Speaker 1: you know, in Europe, because fuel taxes are much higher
Speaker 1: than they are here in the US, there is a
Speaker 1: demand for a well contented UH car rather than a
Speaker 1: crossover and an suv because the fuel cost is just
Speaker 1: so much higher because of taxes. And what is the
Speaker 1: economic impact if any of you know, all these automakers
Speaker 1: that are kind of being maybe caught a little flat
Speaker 1: footed right now, are sales lower than they otherwise could be?
Speaker 1: Is or are these sales kind of a lost cause
Speaker 1: that maybe, um, you know, some some companies were not
Speaker 1: able to switch over fast enough to SUVs. I think
Speaker 1: that most of the most of the major manufacturers have
Speaker 1: UH lineups that really meet those consumer case and preferences.
Speaker 1: What they're doing now is turning to electrified vehicles. And
Speaker 1: by electrified vehicles, i'm referring to plug in hybrid electric
Speaker 1: vehicles and battery electric vehicles. Plugins have an internal combustion,
Speaker 1: you know, gasoline fueled engine along with an electric motor,
Speaker 1: and those plugins do allow for recharging of the vehicle
Speaker 1: a battery electric vehicle does not have a gas powered engine.
Speaker 1: It is only fueled by batteries that are recharged. Both
Speaker 1: those UM plugins and electric battery electric vehicles are really
Speaker 1: where the manufacturers are now turning. And that's going to
Speaker 1: be very exciting because it will offer up the investing
Speaker 1: that they're going to be doing now to open up
Speaker 1: the gateway to more autonomous vehicle content and having an
Speaker 1: electrified platform upon which to put the connected and automated
Speaker 1: vehicle content is really the avenue that they're pursuing for many,
Speaker 1: many different reasons. Let's take one at a time. Let's uh,
Speaker 1: we did want to talk about electric vehicles, electrified vehicles.
Speaker 1: What is the state of that market right now? I
Speaker 1: know the sales have been increasing, and there's been predictions
Speaker 1: for years that there's that they're going to take off.
Speaker 1: I think your listeners will be surprised to learn that
Speaker 1: the growth of electric or electrified vehicles is very high,
Speaker 1: in the double digits globally. UH. Right now, as of
Speaker 1: two thousand eighteen, we estimate that there are about five
Speaker 1: million units on the roads UH when this year comes
Speaker 1: to a close, and that would include one point nine
Speaker 1: million units of sales this year. Some of it is
Speaker 1: because there are policy stimulus UM tools in in play,
Speaker 1: particularly in China and in Europe, where some subsidies or
Speaker 1: credits or registration exemptions are available to buyers. But even so,
Speaker 1: I think, you know, what's fascinating about this is that
Speaker 1: the trend toward electric vehicles is tied to this future
Speaker 1: of autonomous vehicles. And you know, what we're learning is that,
Speaker 1: you know, automotive manufacturers recognize the simplicity of the engineering
Speaker 1: in an electric vehicle and why that serves as a
Speaker 1: very efficient platform upon which to put this autonomous content.
Speaker 1: So in other words, you know, they kind of have
Speaker 1: to make a capital spending decision to really focus on
Speaker 1: the electrified platform and not the internal combustion engine. Let's
Speaker 1: just talk about the electric vehicle side of it. How
Speaker 1: much capital spending will automakers be putting in towards, you know,
Speaker 1: making that transition and figuring out how to build these
Speaker 1: vehicles in the next five to ten years. I don't
Speaker 1: have an estimate for you on that directly. You know,
Speaker 1: it would be great to UM have that number. I
Speaker 1: think all of us are trying to trying to figure
Speaker 1: that out. But is it going to be a significant
Speaker 1: amount of significant portion of what automakers are spending. Yes,
Speaker 1: and I would add to it that you know, it's
Speaker 1: going to be capital spending on electrified and then add
Speaker 1: to that the spending that they're doing to put connected
Speaker 1: and automated vehicle content into the video. It's really both
Speaker 1: of them together, is just absolutely and I think they're
Speaker 1: they're joined at the hip that that both of them,
Speaker 1: you know, combined are really going to be their strategic focus.
Speaker 1: And if you you look at some of the popular
Speaker 1: press about how many electrified vehicles will be coming out
Speaker 1: between now and the number of of you know, vehicles
Speaker 1: really skyrockets, and uh, that's going to require retooling plants
Speaker 1: and reconfiguring and making sure that you know, they've got
Speaker 1: capital efficiency in these plants over time. So is there
Speaker 1: going to be the kind of what we might call
Speaker 1: creative destruction of a lot of kinds of parts makers
Speaker 1: and the formation of new companies or recreation of companies
Speaker 1: to perform these tasks and to make these new parts
Speaker 1: and other technologies that are that will be needed. Oh, Scott,
Speaker 1: you just hit you hit the point directly. Absolutely. I
Speaker 1: think that we're going to see a lot of uh,
Speaker 1: the so called Chumpeter creative destruction, and it's already happening
Speaker 1: in some respects. I mean, you think about what Tesla
Speaker 1: has accomplished. They have really in a trend setter in
Speaker 1: developing a giga factory, a battery pack that lays horizontally
Speaker 1: on the platform of their electrified vehicles, and really reaching
Speaker 1: out to develop charging infrastructure for their buyers. And now
Speaker 1: that I think generated a lot of disruption and you know,
Speaker 1: kind of aha moments among the traditional automakers to say, yeah,
Speaker 1: this really is going to happen. And I wanted to
Speaker 1: mention Scott that one of the reasons why this trend
Speaker 1: seems to be much more apparent and perhaps happening at
Speaker 1: a faster pace than than what some analysts may think,
Speaker 1: is that the cost of the battery cells and the
Speaker 1: battery packs for these vehicles is coming down at a
Speaker 1: faster pace. Already, we're seeing potential, you know, cost structures
Speaker 1: that um get us to a point where the retail
Speaker 1: price of a battery electric vehicle is coming very close
Speaker 1: to a comparable internal combustion engine vehicle, and that that'll
Speaker 1: really be an important tipping point because if you know,
Speaker 1: consumers walk into the dealership and they see that there's
Speaker 1: more price parity between these two types of vehicles. Um,
Speaker 1: you know, it may just tip the scale to get
Speaker 1: them to buy electrified vehicles. Well, that might not be
Speaker 1: the only tipping point when it comes to vehicles. When
Speaker 1: we look at autonomous vehicles, another tipping point may very
Speaker 1: well be do you even need a car? Do you
Speaker 1: even need your own car? Ellen, When you look out
Speaker 1: at the auto industry and these trends in electrified vehicles
Speaker 1: and autonomous vehicles in the next years, do you see
Speaker 1: sales increasing, decreasing, or or or slowing. The scenario that
Speaker 1: that we're working on kind of goes like this, that
Speaker 1: we're in a period now where there is this manufacturing
Speaker 1: and kind of physical transition toward electrified vehicles that is
Speaker 1: really being fostered by two developments. One is this reduction
Speaker 1: in the battery cost, which is critical, and then the
Speaker 1: second one is the fact that we are seeing automakers
Speaker 1: recognized that they need to have the electrified platform in
Speaker 1: order to put the autonomous content and features onto it
Speaker 1: for a lot of engineering and economic reasons. Those are
Speaker 1: really married together. When we look at all of the
Speaker 1: testing and software or development for autonomous content in a vehicle.
Speaker 1: We see that that's going to take a longer period
Speaker 1: of time. We need to have many more simulations, many
Speaker 1: more miles of testing, and also a regulatory structure. We
Speaker 1: really don't have substantive regulations yet for connected and automated vehicles.
Speaker 1: That all is going to take a more extended, you know,
Speaker 1: period of time to to really play out. So this
Speaker 1: really this transition you know, I think will take place
Speaker 1: over the next ten to fifteen years UM. Now, could
Speaker 1: there be periods when it, you know, happens more rapidly, absolutely,
Speaker 1: especially if the cost per mile traveled goes down because
Speaker 1: of shared car sharing and other mobile apps that really
Speaker 1: bring to the for if that cost per mile traveled
Speaker 1: falls as more autonomous content is putting these vehicles, then
Speaker 1: you know, you really need fewer units to be honest.
Speaker 1: All right, Well, let's go back from the future to
Speaker 1: the present to something that's not a simulation, and that
Speaker 1: is the trade war that we're finding us in now
Speaker 1: at the behest of President Donald Trump, something we frequently
Speaker 1: talked about on this podcast. At this point, the President
Speaker 1: has been threatening tariffs on imported automobiles. He hasn't quite
Speaker 1: followed through on that global threat yet, although it does
Speaker 1: seem to be still very much there. Ellen, if we
Speaker 1: were to see a true ratch it up of tariffs
Speaker 1: on cars coming into the US, replete with reciprocal or
Speaker 1: retaliatory tariffs from other countries, how much of a disaster
Speaker 1: would that be for the global economy? When consumers go
Speaker 1: out and buy vehicles, you know, that's a big decision
Speaker 1: for by for for people here in the US, but
Speaker 1: really across the world, and in the short run, you know,
Speaker 1: consumer demand for a large, durable good can be very
Speaker 1: price sensitive. Now, the US Commerce Department started their investigation
Speaker 1: last May to determine whether imported cars and components were
Speaker 1: really a threat to national security and worthy of a
Speaker 1: of an import tariff as much as twenty five You know,
Speaker 1: it's not like Lee's at an auto manufacturer in Europe
Speaker 1: would pass along all of that cost to the buyer.
Speaker 1: But even if it was half of that tariff um,
Speaker 1: I do think it would disrupt demand quite a bit
Speaker 1: here in the US. Is that something that would cause
Speaker 1: a recession or be a strong factor that would that
Speaker 1: would add to the risk of a recession? I don't
Speaker 1: think it's um at that level of disruption. I think
Speaker 1: it would be part of a broader sentiment shift associated
Speaker 1: with all the uncertainty that this tariff cabal has caused
Speaker 1: for consumers and businesses. And you know, right now we're
Speaker 1: in the middle of this tariff you know, kind of
Speaker 1: novel and uh, we just don't know what the ending
Speaker 1: is likely to be. And it's partly that uncertainty that
Speaker 1: can tip the economy. I've got my favorite data buffet
Speaker 1: of you know, about twenty indicators that I look at,
Speaker 1: and you know, the ones that are most concerning can
Speaker 1: be you know, very fast shifts in consumer and business sentiment.
Speaker 1: We go from being overly optimistic to overly pessimistic. And
Speaker 1: once that starts, it can happen very rapidly in a
Speaker 1: matter of a few months. And that's when businesses stop
Speaker 1: capex and consumers lock up their wallets. And so I
Speaker 1: think there is a risk of that type of disruption.
Speaker 1: It's big more than just autos, however, it's more along
Speaker 1: the lines of, you know, we were not quite sure
Speaker 1: if we are going to have a North American um,
Speaker 1: you know, trade deal, whatever we want to call it.
Speaker 1: Not sure if we're going to prosecute um you know
Speaker 1: section to thirty two of the trade law which would
Speaker 1: encumber our imports from Europe and and also more terroriffts
Speaker 1: from China. It's it's a very long list of elements
Speaker 1: that generate uncertainty and therefore you know, tax our decisions
Speaker 1: to buy, invest, and undertake any type of economic activity.
Speaker 1: That's the to me, that's the big risk for a recession.
Speaker 1: And I know a lot of economists are talking about
Speaker 1: I know could my concerns it could happen, happened much
Speaker 1: faster than maybe, you know, the broad set of indicators
Speaker 1: tell us today. Well, Ellen, on that optimistic note, maybe
Speaker 1: we should end there. Ellen Hughes Cromwick, thank you very
Speaker 1: much for taking the time to talk about the auto
Speaker 1: industry and the global economy. I really learned a lot today.
Speaker 1: Thank you, Scott. I appreciate it. Benchmark. You will be
Speaker 1: back next week. Until then, you can find us on
Speaker 1: the Bloomberg terminal, Bloomberg dot com or Bloomberg app, as
Speaker 1: well as podcast destinations such as Apple Podcasts, Spotify or
Speaker 1: wherever you listen. We'd love it if you took the
Speaker 1: time to rate and review the show, so more listeners
Speaker 1: can find us and you can find us on Twitter,
Speaker 1: follow me at scott Landman and our guest is at
Speaker 1: Ellen Hughes c r o M. Benchmark is produced by
Speaker 1: Toford Foreheads. The head of Bloomberg Podcasts is Francesca Levy.
Speaker 1: Thanks for listening, See you next time.