Manufacturing renaissance in Detroit

While the US manufacturing industry is now a shadow of its former self, its recent growth has played a big part in the nation’s economic recovery.

Manufacturing is currently the strongest sector of the economy, generating around $1.6 trillion and growing by 9.1% in the first three months of the year, while US gross domestic product (GDP) grew by 1.8%. It now accounts for 12% of GDP.

However, despite this rebound, the rate of growth in manufacturing averaged just 1.8% over 2008, 2009 and 2010, according to the Alliance for American Manufacturing (AAM).

Many argue that the recent strength of the sector is attributable to the resurgence in auto-production, following the much-controversial - but undoubtedly much-needed - bail-out of the car industry during the recession. Also helping things in the background – as well-known economist Paul Krugman recently pointed out in the New York Times – is the weak dollar, which has given allowed that industry to recover part of its cost advantage.

While the debate regarding the size of government subsidies continues, few can contend that the firms could have survived without help. So, as auto firms attempt to regain their global market share, efficiency is the key word, as these once-struggling companies begin to prosper and scale back government loans.

Increased efficiency is also being seen in the new vehicles being produced, as the industry attempts to gain a foothold in the era of the electric/hybrid car.

In a period of elevated petrol prices and heightened awareness of green technology, carmakers around the world have adopted more energy- and cost-efficient vehicle technology that combines conventional internal combustion engine systems with electric propulsion systems.

Hybrid cars (part electric, part petrol) represented fewer than 3% of all cars and light trucks sold in the US in 2010. However, a manufacturing renaissance in Detroit is expected to vastly bolster the amount of these eco-friendly vehicles on American roads.

Recent JD Power estimates point to a hybrid car sales making up 7% of the car market by 2015, versus 2.2% in 2007. Additionally, small car production is expected to increase significantly.  This could be an opportunity, as high technology and innovation plays to US manufacturing strengths. But Detroit´s past decadence revealed how slow they can be to change. Time will tell if it can capitalize on this opportunity.

Ford already has a hybrid (Ford Fusion) on the market and is currently working on an all-electric version of its Ford Focus car, which is expected to be on the market in late 2011. General Motors (GM) is already rolling out its all-electric Chevrolet Volt nationwide. Meanwhile, Chrysler is reported to be returning to the hybrid market in 2013 (after discontinuing production during 2008) with a hybrid version of its 300 sedan.

However, as the country begins to adopt more environmentally-friendly technology – with the Obama administration proposing to raise the Corporate Average Fuel Economy (CAFE) to 62 miles per gallon (mpg) by 2025 (from the 35 mpg target due in 2016) – automakers are becoming increasingly concerned at how this will affect prices and, in turn, sales.

Hiking up the CAFE rapidly could add as much as $10,000 to the selling price of a new car, the sector has warned, reducing sales by as much as 25%. As a result, the industry could lose over 200,000 jobs that it has fought hard to regain after the downturn of the industry in the last decade (5.5m jobs have been lost over the past ten years, says the AAM).

The Alliance of Automobile Manufacturers warned regulators that they “need to ensure that their standards do not result in vehicles that consumers cannot afford.”

Lastly, while the Japanese earthquake in March seems to have weighed on US manufacturing as a whole, it did provide a small fillip for the main auto producers. Thus, Japanese producers lost 4.5 percentage points (pp) of the global market share (sales) in April due to ongoing disruption at many plants, while Detroit's Big Three (Chrysler, GM and Ford) gained 3.2pp, showing that the disaster has had a short-term adverse effect in the US.