US Car Makers Crank Out Cars Around the Clock; Who is Buying the Cars?

US car makers are cranking out cars three shifts a day. The goal is to run plants around the clock, 365 days a year, even eliminating breaks.

Please consider Open All Night: America's Car Factories.

Nearly 40% of car factories in North America now operate on work schedules that push production well past 80 hours a week, compared with 11% in 2008, said Ron Harbour, a senior partner with the Oliver Wyman Inc. management consulting firm.

"There has never been a time in the U.S. industry that we've had this high a level of capacity utilization," he said.

But fresh from a near-death experience during the recession, auto makers are reluctant to put money into bricks, mortar and machinery that could become a drag on profits if car sales fall. Volkswagen new $1 billion Chattanooga, Tenn., factory recently cut 500 workers after sales of its new Passat sedan swooned.

Through a series of agreements negotiated with the United Auto Workers union, the Detroit Three now can schedule work at night and on weekends without paying as much in overtime as they would have in the past. Adding a third shift, as many plants have done, also reduces overtime. Overtime pay also starts after 40 hours a week, not after eight hours a day as in the past. On top of those savings, a newly hired Big Three factory worker now earns about $15 an hour versus $28 an hour for veteran workers, under postrecession labor pacts.

Toledo factory managers recently changed break schedules to squeeze out even more production. Instead of shutting down the assembly line eight times a day for routine breaks, they have hired extra workers to fill in during breaks, so the line doesn't stop running.

GM is running six of its U.S. plants through the night on three-shift schedules. Last year, GM produced 3.24 million vehicles in North America compared with 4.52 million in 2007—when it had five more assembly factories.

Ford has gone a step further, adding a fourth crew of workers at some engine and transmission plants to keep those factories running 152 hours out of the 168 hours in a week.

The techniques have helped expand production by 600,000 vehicles during the past 15 months—the equivalent of about three assembly plants, says James Tetreault, Ford's vice president of North America manufacturing. Ford doesn't plan to build a new North American assembly plant, he says.

"In an ideal world, we'd like all our plants to run around the clock, 365 days a year," says Mr. Tetreault. "That would be a financial dream. But we don't know how to do that yet."

Who is Buying Cars?

So who is buying new cars? It's not millennials struggling to find a job, loaded up in student debt and delaying family formation.

The Wall Street Journal reports Who's Buying 'Youth' Cars? Seniors.

In recent years, auto makers have developed a bevy of pint-size models like the Chevy Sonic, Fiat, Ford Fiesta and Kia Soul, and promoted them using social-media, music festival sponsorships, and in some cases, daredevil stunts. To hype the new Chevy Sonic, General Motors Co. filmed the subcompact parachuting out of a plane for an online campaign aimed squarely at 18-to-30-year-olds.

But the largest customers for these cars, about 42% of buyers this year through May, are closer to retirement age, according to registration data compiled by car-shopping website Edmunds.com. The proportion is up from just 29% five years ago.

Meantime, the percentage of 18- to 34-year-olds buying new subcompact cars fell to 12% through May, down from 17% in 2008, according to registration data.

Of course, 50 and 60-somethings are some of the biggest buyers of all cars.

"The baby boomer generation is the largest cohort in the marketplace," Kia's Mr. Sprague said. "Just by virtue of their numbers being so large, we'll continue to see them skew the data for a long time."

Last year, buyers 55 and older accounted for more than 40% of all new car sales, up from 33% in 2008 while buyers between the ages of 18 and 34 represented only 12% of new-car purchases. And that is down from 14% five years ago, according to Edmunds.com.

Auto makers' big prize is the "Millennial Generation"—that group of consumers in their 20s and 30s whose numbers could rival the postwar baby boom that has dominated the auto market for decades.

Millennial Generation "Big Prize"

As more and more seniors stay employed longer (because they have to),  the demand for cars has kept pace. I keep wondering how long that can last. The average age of those working at fast-food restaurants is telling.

There is no pent-up demand that I can see, at least in the age group of those buying.

Auto makers are targeting the big prize, the millennial generation, and curiously even youth cars are not going to the youth. And I do not think they will.

The generation of millennials is nowhere near as big as the boomers, and as a class, the millennials are struggling in low-pay jobs (if they can find work at all), and burdened down in student debt to boot.

And look at the pay differential of the car makers: $15 an hour for new workers versus $28 an hour for veteran workers.

Most importantly, a secular shift in attitudes towards cars and debt have changed. Millennials are not boomers nor do they have boomer attitudes. Carmakers should enjoy the boom while it lasts. The "big prize" is not around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com