Automobile production has become a major industry in the Sixth District and has significant impact on the economic health of the region. Recently, the near-term outlook for several regional assembly plants brightened because of two major developments. The first development was a stronger-than-expected rebound in national vehicle sales at year-end. The second piece of positive news concerned changes in the production mix announced by some regional auto manufacturers. Additional facilities recently opened or scheduled to begin production also bodes well for the future of the auto industry in the region.

National vehicle sales rose in December, up to 11.2 million units compared to 10.9 in November 2009 and 10.3 million in December 2008. Although economic uncertainties such as high unemployment and low consumer confidence will likely continue to pressure auto sales, the reported progress is encouraging.

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The national economic downturn had a drastic impact on auto production and auto assembly utilization rates. According to MonthlyAutocast.com, national and Southeastern plants' utilization rates, defined as the share of vehicle production volumes to plants' capacity, dropped to 42 percent in early 2009. By the fourth quarter of 2009, however, utilization rates climbed to over 60 percent as most automakers rebuilt vehicle inventories depleted by the "cash for clunkers" program. According to Cliff Swenson, editor of MonthlyAutocast.com, December 2009 capacity was 71 percent, a bit higher than in November, but still anemic at best. Swenson noted that although at year-end dealers were keeping leaner vehicle inventories, with business picking up, a need to rebuild inventories, and higher exports, he estimated that capacity utilization rates will steadily rise in the next two years.

Favorable developments for changes in the production mix of several automakers have also brightened the near-term outlook for auto production. According to the December 2009 sales report from JD Power & Associates, the sales pace of fuel-efficient autos like the Nissan Versa, Honda Fit, and others far outperformed the year-over-year 7 percent increase for all vehicles.

Additionally, several new facilities have begun or will soon begin vehicle production in the region—for example, Kia in West Point, Ga., and Volkswagen in Chattanooga, Tenn. Increased assembly will not only result in additional jobs at the plants themselves but for suppliers as well. Auto industry employment trends from the U.S. Bureau of Labor Statistics show the importance of auto assembly production in job creation at the companies of parts suppliers. According to BLS data (NAICS 3361 and 3363), one job in an assembly plant supported 2.8 jobs in motor vehicle parts industries during 2008. These facts are confirmed by many communities in the region that have seen the spread of jobs in the parts suppliers industry around the fastest-growing regional assembly plants.

The chart below gives an outlook for regional auto production:

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Highlights regarding future auto production in the region:

  • According to MonthlyAutocast.com, future production estimates for eight regional producers are much higher than the depressed volumes reported in 2009. Several regional auto producers recently announced plans to adjust their production mix to rapidly changing vehicle demands.
  • Automotive News reported that Mercedes Benz USA announced plans to produce its C-class sedans at its plant in Vance, Ala., with expected production starting in 2014. The Vance plant currently produces the M-class SUV and R and GL crossovers, with some shipments exported to Europe. With a nearly 60 percent utilization rate, during 2009 this plant produced about 91,000 vehicles, far below the 150,000 assembled a year earlier.
  • In late 2009, Kia Motors, a subsidiary of Hyundai, started production of its Sorento crossover at its West Point, Ga., plant, with an annual estimated production of 100,000 vehicles by late 2010. This is a sister company to the Montgomery, Ala., plant that assembles the Hyundai's Sonata and Santa Fe models. Currently, demand for Hyundai vehicles is strong with some models taking market share from discontinued domestic models.
  • Nissan plans to add capacity for a new wave of light commercial vehicles, including the Leaf, the nation's first electric vehicle, which would start production in late 2011. According to company officials, Nissan is expanding its Canton and Smyrna, Ga., facilities to update its production mix to more fuel-efficient vehicles. This news is important for a regional company with the largest output (about 500,000 vehicles scheduled to be assembled in 2010).
  • Decisions for Toyota's Tupelo, Miss., plant are wild cards in the regional production game. News reports from Tokyo are pointing to the company's continued interest in adding production in the United States, its largest and most profitable market. The $1.3 billion plant was to open this year and produce the Prius, but these plans were cancelled in late 2008 as fuel prices dropped and vehicle demand weakened.
  • Volkswagen is opening a $1 billion facility in Chattanooga, Tenn., in 2011 and plans to employ 2,000 workers. Production plans are supported by recent strong demand for VW products and by company officials recently stating plans to more than double its sales in the United States.

The outlook for the automobile industry in the Southeast, like the outlook for the nation, shows signs of a slow recovery.

By Gus Uceda, a senior economic research analyst in the Atlanta Fed's research department