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March 22, 2023

In Focus: U.S. auto imports The Road(s), Less Traveled

The most recent Flexport Trade Activity Forecast (TAF) projects real U.S. auto imports to return to, if not slightly exceed, pre-pandemic levels in seasonally-adjusted value terms over the next five months. The industry was among the hardest hit by the pandemic. Here we look at issues it faces now that we are on the other side, which also tie in to our recent work on nearshoring and inventories.

If you’re in the U.S. and it’s a weekday, it’s more likely than ever in the post-war era that you are working at home. That’s a potentially distressing sign for the auto industry, which is just beginning to see semiconductor supply recover – however haltingly – after shortages caused massive disruption to car production during the pandemic.

Why is it potentially distressing?

The blue line in the chart below is the estimate of vehicle miles driven per month, indexed to the annual monthly average for 2019. At this point, the v-shape to the left should look familiar to readers who follow economic indicators. What is perhaps unique is the apparent ceiling now in place. There have been a few months since the onset of the pandemic – September ‘21, January and February ‘22 – when that ceiling has been tested, only for the numbers of miles to either stagnate or fall back again. The latest figures, for December, were revised downward and now come in at 3.2% below 2019 levels.

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For car makers, a ceiling on miles driven is roughly equivalent to a ceiling on new car sales, which have also been more-or-less stuck below 2019 levels. The fewer miles people drive, the longer their cars last. Without a sudden influx of first-time buyers into the market, demand largely becomes a product of replacement, i.e. consumers buying new cars to replace old ones. Longer lasting cars equals lower levels of replacement buying.

Commuting is not the largest contributor to miles driven, but it is significant, accounting for around 30% of the pre-pandemic annual totals. The latest American Community Survey from the Census Bureau, released in September 2022 with responses from 2021, estimated the number of people working from home nearly tripled from 2019 to 27.6 million. More recently, a study of job vacancies shows that those in the U.S. offering fully remote or hybrid work increased from around 2% in 2019 to above 12% in early 2023, with the largest increases in San Francisco (up to near 30%) and Boston (near 25%).

So, if this trend is permanent and perhaps even accelerating, what replaces replacement demand, at least in the near term? We can start with inventories, a particular area of interest of late. BEA data show them down to around 109,000 vehicles in January, an 84% drop compared to the 2019 average and well below the post-financial crisis peak of 1.28 million in February 2014.

Telework or not, there will still be new car sales. Presumably that will, in turn, require a greater number of imports for re-stocking.

As for replacement demand, the industry may yet find it in new demand for electric and hybrid vehicles. The International Energy Agency, a global think tank and forecaster, noted in a September 2022 report that the U.S. lags China and the EU in shares of EVs on the road. The Inflation Reduction Act (IRA) looms here. It contains subsidies and tax credits for domestic EV production and for imports from countries with which the U.S. has trade agreements, but it would be difficult to assess its impact even if implementation weren’t a moving and contentious target in Washington.

Yet even before the IRA, there was a nascent shift underway in trade flows, namely EV imports from Mexico. Starting in January 2021, when the Mach-E SUV began rolling off the assembly line at Ford’s plant in Cuautitlan, U.S. EV imports from Mexico have averaged 3,664 per month to the period ending December 2022. A number of car manufacturers, including Tesla and Volkswagen, have already broken ground on EV plants in the country or announced plans to do so in the coming years, as have parts suppliers, including battery makers.

As we wrote here last month when we looked at top-line trade data for evidence of nearshoring, there were likely to be movements underneath. This appears to be one. How the industry, overall, adjusts inventories at a time of uncertain demand – and how it impacts near-term imports – remain open questions.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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