A Breakdown of the U.S. Auto Industry: History, Economics, & Investing Dynamics

The automobile industry makes up a substantial portion of the U.S. gross domestic product each quarter. As such it captures a great deal of attention from investors, politicians, and economists for its driving forces across the economy. Since the first automobile, auto manufacturing has grown to become a substantial contributor to the U.S. economy with General Motors, Ford, and Fiat Chrysler rounding out the big three.

Ford is well known for creating the first automobile and the process of manufacturing through the assembly line. The term auto or auto sector however can at times be difficult to differentiate in the vast ocean of economic data and investing options. Below is a breakdown of some key insights on the auto industry including how it can be analyzed differently by economists versus investing analysts.

History

Near the end of the 19^th century, several companies dabbled with automobile manufacturing but the automobile industry didn’t really take off until the Ford Company created the first Model T from an assembly line in 1913. Assembly line manufacturing was a groundbreaking development that made automobiles affordable for consumers and allowed Ford to improve working conditions for employees while simultaneously increasing the volume of its automotive production per day.

The industry has gone through several ups and downs including effects from the 1930s Great Depression and a post-2008 Financial Crisis fallout that resulted from default carryovers. What has emerged in the 21^st century is a strong auto industry led by three top manufacturers in the United States: General Motors, Ford, and Chrysler.

Economics

In the United States, economic data is tracked by monitoring companies and industries using the North American Industry Classification System (NAICS). This classification system helps produce the Bureau of Economic Analysis’ quarterly gross domestic product report which identifies the auto industry's contribution primarily through the detailing of durable, motor vehicles and parts.

Consequently, motor vehicle performance also affects other major sectors such as transportation, petroleum, and food and beverage. It can also be broken down further for NAICS classification in the areas such as new car dealers, used car dealers, general automotive repair, industrial design services, and sales financing.

Economic Data

In 2018, motor vehicles and parts accounted for $521.5 billion of the $20.58 trillion in total U.S. GDP. This translates to 2.5%.

The Organisation Internationale des Constructeurs d’Automobiles (OICA) ranks the United States as the second-largest producer of automobiles, second only to China in the number of motor vehicles produced per year. In 2019, the U.S. had an annual production of 10.88 million passenger and commercial vehicles combined. China topped this list with 25.72 million.

Further data from OICA shows the U.S. ranking sixth in 2019 for total passenger car production alone at 2.5 million. China topped the rankings of this list with 21.36 million passenger cars produced, followed by Japan, Germany, India, and South Korea.

The U.S. automotive sector employs over 2.8 million people and pays around $130 billion in annual compensation. Thus, its human resources also have a big impact on the economy.

Economic Trends

As a large part of all economies, auto manufacturing gets a lot of attention. Two areas where it was receiving the most attention in 2019 include the production of electric cars and international tariffs. International tariff issues across North America were resolved but new and existing import tariffs for European and Chinese automakers could significantly upset production and profits. Meanwhile, electric car production is also taking a larger share of the overall market which has its own effects.

Investing Dynamics

When it comes to investing in the auto industry, most analysis boils down to the Global Industry Classification Standard (GICS). Comprehensively, within the 11 broadest GICS sectors, auto falls within consumer discretionary. Classified as consumer discretionary, auto stocks tend to rise and fall with expansions and declines in the U.S. economic cycle. Thus, consumer discretionary items and auto stocks do the best when the economy is expanding and peaking and these stocks do the worst when the economy is contracting and in a recession. Mainly this is because like all discretionaries, consumers and businesses spend more in this area when they have a surplus and cut spending in this area first when income is tight.

Looking a little deeper, GICS also breaks out consumer discretionaries into automobiles and components which can be further segregated into just-auto components and automobiles. In the subindustry GICS classification, GICS also provides for auto parts and equipment, tires and rubber, auto manufacturers, and motorcycle manufacturers. These delineations can be especially helpful for investors looking to invest in specific areas of the auto market.

Many investment managers may also use these classifications in various ways to form mutual fund and exchange traded fund (ETF) universes that form the basis for managed fund investing.

In the investing world, auto indexes can also be a byproduct of GICS classifications. Across the investing industry, the top, passive auto index ETF investment is the First Trust NASDAQ Global Auto Index Fund (CARZ).

The top companies by weight in this fund include:

• Tesla
• Daimler AG
• Volkswagen AG
• Toyota Motor Corporation
• Honda Motor Co., Ltd.
• Hyundai Motor Company
• Geely Automobile Holdings Limited
• Kia Motors Corporation
• Ford Motor Company
• Bayerische Motoren Werke (BMW) AG

Other notable companies in the index fund include Subaru, Nissan, General Motors, and Porsche.