Coming back online
Tennessee auto sector ready to ramp back up, but will consumers buy?
Ever since Tennessee emerged as a major car-making state, its automotive sector has avoided Detroit-style busts. But this time, Tennessee took the deep plunge. Almost all of the state's 100,000 auto industry workers were idled in March, April and into May under shelter-in-place orders to help fend off the coronavirus pandemic. The wave of temporary layoffs crippled spending and led to lost tax revenue, forcing mayors throughout the state to begin figuring out what to cut from municipal budgets. Just how deep the budget cuts must be still isn't clear.
Carmakers in Alabama, Georgia and Kentucky have begun to ramp up vehicle assembly lines, while their General Motors, Nissan and Volkswagen rivals in Tennessee trail by a week or two.
Several weeks must pass before the Tennessee auto economy rolls again and the full decline in state and municipal tax revenue is known, particularly in the automotive manufacturing belt running from Clarksville to Chattanooga. “There's really no doubt that automotive manufacturing has taken a more significant hit than other sectors or manufacturing overall,'' said Bradley Jackson, chief executive of the Tennessee Chamber of Commerce & Industry in Nashville.
“It really ripples through when you have major manufacturing facilities closed for a period of time. You have to look at the taxes that are not going into the economy,” Jackson said, noting the state's 10 largest manufacturers pay about 70% of the sales and use taxes collected by Tennessee state government.
Tennessee weathers Detroit-style bust
Recessions have hammered Tennessee factory towns before. Almost 50,000 jobs vanished statewide between 2008 and 2010 in all manufacturing sectors. One decade later, analysts call this coronavirus-related downturn different for its severity.
Nearly the entire auto industry statewide was closed, unlike the 2008 recession. Back then, bankrupted Chrysler and General Motors scoured Detroit. Yet the downturn grated less harshly on the so-called transplants, the foreign-based automakers making cars and trucks in the American South. That meant the 2008 downturn was less harsh on Tennessee's auto industry. Tennessee's sizable auto-parts sector feeds components to the transplants, including Honda, Hyundai and Mercedes in Alabama; Kia in Georgia; Toyota in Kentucky and Mississippi; BMW and Volvo in South Carolina; and Nissan in Mississippi and Tennessee.
Even as GM was reorganized under bankruptcy laws in 2009, transplants expanded. Nissan ramped up Leaf electric car output south of Nashville at Smyrna. Volkswagen launched its East Tennessee megacomplex at Chattanooga. Toyota landed the Corolla assembly line at Blue Springs, Mississippi. Kia went into West Point, Georgia. Honda scaled up a new Civic plant at Greensburg, Indiana. This time, Tennessee experienced the sweeping setback known in boom-and-bust Northern car towns. What's more, Tennessee never was more reliant on automotive jobs, a result of the transplant expansions and the wave of parts-makers that followed VW into the state.
By late April, nearly half the 352,000 state residents who had filed for unemployment compensation amid the pandemic lived in upper Middle Tennessee. This region, anchored by Nashville, accounts for a third of the state's jobs but showed disproportionately more layoffs. That's in large part because Nashville's huge hospitality sector shut down as did the automotive industry that has emerged in Middle Tennessee, Jackson said. Jackson stopped short of describing this as a full-blown Detroitstyle
recession. Those are brought on by financial storms that take years to weather — such as the 2008 contraction in consumer credit. This time, shelter-in-place orders cut consumer spending and triggered layoffs. With those shelter orders lifting now, people can resume jobs and spending again.
"This has been an extraordinary event,'' Jackson said. “It's a pandemic. We should have a faster bounce back, but I think how fast it is will depend'' — on whether people spend income at pre-crisis levels.
What comes next is up to the public
Although assembly lines are beginning to ramp up, auto executives are uncertain when full output will return. Consumers will dictate the industry's vitality, said Karl Brauer, executive publisher of market research guides Autotrader and Kelley Blue Book.
“Maybe I'll be more careful with my money this year,” Brauer said, summarizing one American viewpoint that could stifle auto sales.
A key yardstick auto executives watch is annual sales of new vehicles in the United States. Before the crisis, some analysts predicted sales
could top 2019's 16.9 million-vehicle level. If the pandemic leaves consumers cautious, however, 14 million or fewer vehicles might be sold, Brauer said.
A 12% to 18% drop in auto sales for the year likely will cut into autoworkers' overtime pay, reduce demand for temporary workers who can comprise as much as 10% to 25% of a plant's labor force, and in turn reduce demand for components made in the supply plants. The end result: Less consumer income and reduced tax revenue. Although about 70% of Tennessee's factories kept running as essential businesses, including the chemical, food and medical device plants at Memphis, the car industry is now so big it can nick into state tax revenue whenever it shuts down. "The legislature may be forced to look at adjusting the budget," Jackson said.
Consumer confidence drives car sales
Analysts right now are unsure which American will emerge this summer — the spender or the saver. One dire forecast shows 12.8 million auto sales in 2020. The research firm J.D. Power's latest report calls for 14.8 million auto sales. Trying to lure shoppers, carmakers are beginning to roll out incentives. Deals are not wild. It's not like 1986, when some Cadillac dealers awarded each buyer of a new $19,000 Deville one free Yugo, a $4,000 subcompact car imported from Eastern Europe. Deals today shave about $1,000 to $2,000 off the typical $38,000 new vehicle.
What's common now are terms like Nissan's. Its lending arm will defer loan payments for three months. Honda offers $1,000 price cuts on many models. Chrysler charges no interest for 84 months on some vehicles. One of the better deals: VW'S. It'll waive loan payments six months for buyers who lost jobs in the pandemic.
What's not taking shape, at least not yet, is a big price war. Automakers instead are figuring their next step. Two tests face them.
Late model cars coming off of leases generally compete with new cars; 2017 was a big year for three-year leases. Dealers will be showered with 2017 models. At the same time, most dealer lots already are full of new autos, including 2019 models left unsold when the pandemic shut down the economy, Brauer said. To meet the tests, automakers will offer deals on some models to make sure dealers can sell them, and hold on to prices where demand for the vehicle remains strong. “It's going to be different for every brand and every model,'' Brauer said, referring to incentive levels.
What automakers still need to know is the consumer's mood.
In recent weeks, sales volumes rose for lower-priced sedans, instead of $50,000 pickup trucks full of expensive options. It's not clear a new frugality swept the nation, although some economists contend it has, and will last into 2021, especially if the national economy rebounds slowly. That's possible.
“It wasn't just the industrial portion of the economy that shut down in March and into April. Non-manufacturing also cratered,” Philadelphia-area economist Joel Naroff reported to clients, noting the widely-watched Institute for Supply Management index has fallen to an 11year low. “With order books thinning, conditions are likely to worsen over the next few months, despite the beginnings of the economy reopening.”
Naroff cautioned clients. More than 30 million people have filed unemployment claims. Low jobless rates won't appear soon. “This is going to be a very long process that should stretch through the summer,” Naroff said of a jobs recovery. “And that assumes no major resurgence in the number of new (coronavirus) cases and deaths."
La Vergne's come back
Even with the uncertain economic outlook, Americans could shake off the frugal mindset as they put the shelterin-place mandate behind them.
In Middle Tennessee, La Vergne
Mayor Jason Cole said spirits rose when Nashville-based tire maker Bridgestone Americas' 1,000-employee plant reopened in April. “You could see it and know the difference was there in the traffic in the streets and the attitudes around town,” Cole said. “The families that have people who work there, they turned a little more upbeat, a little more hopeful. That's their livelihood.”
While the economy gains speed, La Vergne is preparing to trim its 2020 municipal budget. Most restaurants served takeout food and deliveries, a boon for sales taxes, but the city of 36,000 population is situated close to big factories that shut down for the pandemic, including the 7,000-employee Nissan Smyrna assembly complex.
The state government sent $820,000 in assistance, part of a program to aid cities during the pandemic. However, the aid won't replace all the lost tax revenue. Cole said the General Fund for regular services such as police, fire and parks will contain an estimated $23.5 million this year, compared to $25 million last year. City leaders most likely will compensate. “We are proposing a conservative budget with capital spending being held off until January so we can have a better look at our situation,'' Cole said.
While work linking city government services to the fiber optic cable will continue, La Vergne likely will postpone ordering a hotel tax audit and hold off plans for capital spending on public works gear and a new vehicle for the planning department.
“I think going through the pandemic, every mayor in the country is learning something new from this,” Cole said. “One big takeaway for me is how strong our community is. People really stepped up and came together to make it through this.”
Now, with the economy reopening, Tennessee's automotive belt is waiting to see how quickly it puts behind it the state's first Detroit-style automotive crash.