The Automotive Industry Today
By Robert R. Ebert, Ph.D.
Buckhorn Professor of Economics
It has all the makings of a dramatic tragedy. A hero turns villain, later reforms but finds the virtuous rebirth is ignored by the populous and ends up dying a slow, pathetic, and lonely death. The “hero” and “villain” here would be one of the icons of America's Twentieth Century industrial might- the automobile industry.
The death of the United States auto industry may not be imminent, but the rest of the “villain” and reform scenario might well apply to Detroit's “Big Three” auto makers. (It should be noted that although Chrysler is owned by DaimlerChrysler of Germany, for historical comparison purposes, in this article it is considered part of the domestically based auto industry.)
Market Share Decline
Figure 1 reveals the tragedy of Big Three market penetration in the United States. At the beginning of the 1950s, the Big Three commanded 87 percent of the U.S market, with independent manufacturers such as Studebaker, Packard, Kaiser-Frazer, Nash, Hudson, and Willys accounting for the remainder. Imports had an infinitesimal part of the market. As the independents lost ground the imports began to take up the slack and an increasing share of the market. By the late 1960s, not only European imports such as Volkswagen, but also the Asian builders were becoming major market forces. Figure 1 does not show all of the Asian builders, but Toyota and Honda of Japan and Hyundai-Kia of South Korea exemplify the rising power of the Asian builders.
The decline of the Big Three, therefore, has persisted for about forty years. In 2006, Automotive News reports the Big Three had 55 percent of the U.S. market. For the month of December 2006 alone, the Big Three dropped to 53.5 percent of the market.
What Happened?
It is not necessary to dwell extensively on what caused the decline in the Big Three. Quality, safety, and production problems plagued the U.S. firms from the 1960s on. Ralph Nader's book Unsafe at Any Speed awakened public interest in automotive safety and caused consumers to cast a skeptical eye on the products of the Detroit automakers (Nader).
By the late 1980s and early 1990s it was clear the Big Three had fallen behind in production efficiency as well. The Japanese builders - in both their Japanese and their U.S. plants - had embraced the concept of lean production. Firms utilizing lean production techniques use multi-skilled workers at all levels of the design and production process. These versatile workers are matched with highly flexible and increasingly automated machines to produce high volumes of vehicles in great variety. By contrast, U.S. producers in the late 1980s were still married to old-fashioned massproduction techniques, which utilized narrowly skilled professionals to design products made by unskilled or semiskilled workers tending single-purpose machines. The result was that by 1986, in some General Motors plants it was taking over 40 hours to assemble a car while Toyota was doing it in 18 hours (Womack, et.al., 12-13, 81).
Reforming the Beast
Whatever their past indiscretions might have been, the U.S. Big Three began to reinvent themselves with improved production techniques and greatly improved product quality. By the turn of the millennium, lean production and just-in-time inventory systems were the word of the day in many U.S. Big Three auto plants.
Table 1 shows the dramatic progress made by the Big Three in assembly efficiency just since 1998. In fact, in 2005, five of the top ten most efficient North American auto assembly plants, measured in Hours per Vehicle (HPV), were those of the Big Three, including the two best, the Ford Atlanta facility at 15.37 HPV and General Motors'S Oshawa plant at 16.08 HPV (Harbour).
The quality of Big Three vehicles has improved dramatically, especially over the past decade. For example, in the 2000 Vehicle Dependability Study by J.D. Power and associates covering three year old cars, twenty-one brands of cars scored above the industry average of 448 problems per 100 vehicles. Seven of those brands were U.S. makes, but the best of the U.S. seven was Lincoln with 337 problems per 100 vehicles and it ranked number eight (Lexus was best at 216). The overall quality improvement in vehicles was evident in the 2006 Vehicle Dependability Study where 13 brands scored above the industry average of 227 problems per 100 vehicles. Lexus continued to be number one with 136 problems, but Mercury, a Ford brand, was second with 151 problems per 100 vehicles, and six of the brands scoring above average were built by the Big Three (Power, 2000 and 2006).
The Road Ahead
With the Big Three quality and production improvements being so dramatic, one is tempted to ask, “Is anyone paying attention?” Certainly it is not the consumer. Figure 1 attests to the fact The Big Three have not been able to attract buyers for their vehicles in sufficient volume to arrest their decline in market share. In 2005, the top five best selling cars in the U.S. were Japanese brands with the Toyota Camry being the best seller of all, and only eleven of the top 20 best selling autos were Big Three makes (Wards, 2006, 29).
However, in 1993, three of the top five best selling makes were Big Three brands, with the Ford Taurus ranking first, and fourteen of the top 20 were made by the Detroit producers (AAMA, 1996, 24).
With the decline in market share has come a decline in the financial fortunes of The Big Three. A detailed analysis of their finances is beyond the scope of this article. However, it can be observed that GM lost $8.6 billion in 2005 and Ford lost over $12 billion in 2006. (Final GM financial data for 2006 were not available at the time of the writing of this article.)
So, here are the questions that face The Big Three in their home market as they enter 2007:
• Will the new products GM, Ford, and Chrysler are bringing to the market over the next couple of years tweak the interest of U.S. buyers?
• Does GM's profit of $529 million (adjusted net income) in the third quarter of 2006 signal a turn around in its financial fortunes? In other words, can Rick Wagoner's plans save GM?
• Will a new CEO, Alan Mulally, and restructured debt with a new $23 billion re-financing package be enough to save Ford?
• Will the shedding of legacy costs through the buy outs of thousands of Ford and GM workers yield the desired cost savings?
• Will Ford sell Jaguar and Land Rover, and if so, who would buy them?
• Will DaimlerChrysler yield to pressures to shed itself of the troublesome Chrysler operation? Who would buy it?
• Will production cuts at the Big Three in early 2007 ripple through the economy? What will the impact be on the firms' financial bottom lines?
• Will Toyota overtake GM as the world's largest motor vehicle producer in the near future or will it stumble?
• Will recent quality problems tarnish Toyota's image and sales success?
• Will Toyota's CEO, Katsuaki Watanabe's efforts to improve production efficiency pay off?
• Perhaps the biggest question of all: will General Motors, Ford, and Chrysler have the vision and resources to stop playing “catch up” to the Asian producers and be able to think outside the box and, for once, leap frog the competition with attractive products and innovative technology to start taking back some market share?
The Tragedy of The Big Three has been building for a half century. The final chapter has yet to be written. How these questions are answered will determine whether this “Tragedy” has a happy ending. Let's hope it does.
Table 1: Hours per Vehicle- United States Automotive Assembly Plants
1998 2005 Percent Change
DaimlerChrysler 33.86 23.73 -29.9%
Ford 24.87 23.77 -4.4%
General Motors 31.98 22.42 -29.9%
Honda 21.41 21.43 -------
Nissan 19.20 18.93 -1.4%
Toyota 21.63 21.33 -1.4%
Source: Harbour Consulting
Works Cited
American Automobile Manufacturing Association (AAMA). Motor Vehicle Facts and Figures 1996. Detroit, Michigan: America Automobile Manufacturers Association, 1996.
Automotive News. Selected issues and the annual Market Data Book.
Harbour Consulting. “Productivity Gap Among North American Automakers Narrows in Harbour Report 2006.” Press Release, June 1, 2006.
Nader, Ralph. Unsafe at Any Speed. New York: Pocket Books, 1966.
Power, J.D. and Associates. “2006 Vehicle Dependability Study,” accessed at http://www.jdpower.com/global/press-release/pressrelease. asp?StudyID=1160 on December 18, 2006.
Power, J.D. and Associates. “2000 Vehicle Dependability Study,” accessed at http://www.jdpower.com/global/press-release/pressrelease. asp?StudyID=486 on December 18, 2006.
Shirouzu, Norihiko. “As Rivals Catch Up, Toyota CEO Spurs Big Efficiency Drive.” WallStreet Journal, December 9, 2006. A1.
Ward's Motor Vehicle Facts and Figures 2006. Southfield, Michigan: Ward's Automotive Group.
Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine that Changed the World. N ew York: Rawson Associates, 1990.
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