Blowing Exhaust: Detroit’s Woes Belie a Healthy U.S. Auto Market

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Introduction

Recent news from the automotive capital of Detroit has beengrim. General Motors and Ford, the two largest U.S. automobilecompanies, have lost billions of dollars on their North Americanoperations in 2005 and 2006. Pinched between rising costs anddeclining market share, the two companies have announced that theywill eliminate 60,000 jobs between them during the next severalyears. Either or both could face bankruptcy. Meanwhile, Delphi, amajor parts manufacture and GM spin-off, filed for Chapter 11 latelast year. The struggles of those companies have prompted headlinesabout the decline of the U.S. automobile industry and calls forWashington to come to its rescue.

Although complaints about unfair competition from abroad areless shrill than in the 1980s, foreign producers have not escapedcriticism. The chief executive officers of General Motors andChrysler recently complained that an allegedly undervalued yengives vehicles imported from Japan an unfair price advantage of asmuch as $3,000 per vehicle.1 Sen. Carl Levin, a Democrat from Michigan, chargedat a hearing in February that Detroit-based automakers face unfairforeign competition. "They are competing with currency manipulationby other countries, including China, Japan and Korea, which givestheir vehicles and other products an unfair price advantage in ourmarket," Levin said in a statement.2 And the United Auto Workers union, whichrepresents workers at GM, Ford, Chrysler, and several parts'producers, has called for a federal "Marshall Plan" to aid thosecompanies.3

Despite the news from Detroit, the U.S. automotive industry ishealthy. Both domestic sales and output of cars and light trucksare at or near record levels. All of the top 10 selling models ofcars and light trucks are produced at U.S. plants employing overone million Americans, which is the same level of industryemployment as in the early 1990s. And several companies haveannounced plans to expand or build new production capacity in theUnited States beginning this year.

What has changed over the past few decades is the relativemarket share of each producer. Foreign nameplate producers haveearned larger shares of the market--mostly through production attheir U.S. facilities, but supplemented by modestly increasingimports--while GM, Ford, and the Chrysler division ofDaimlerChrysler (the Big Three) have lost domestic market share.The reasons for these shifts are varied but have to do withdecisions made at the individual company levels regarding productdesign, market focus, and the wages and benefits of theirrespective labor forces. The shifts have nothing to do with allegedunfair trade practices.

The financial woes of a few companies operating in a healthy,competitive market do not justify intervention by Washingtonpolicymakers but are the market's way of providing feedback aboutthe decisions of those firms. It is not the role of the governmentto rescue companies that have made relatively bad decisions.Healthy competition ensures that best practices are emulated, leadsto gains in productivity and innovation, and provides Americanautomobile consumers with greater choice, better quality, and morecompetitive pricing.

A New and Improved U.S. Automobile Market

Over the past few decades, the U.S. automobile market has beentransformed for the better, from what was the preserve of anunderperforming domestic oligopoly into a thriving, globallycompetitive, consumer-driven marketplace. In 1965, importsaccounted for about 5 percent of U.S. vehicle sales, but theyachieved a nearly 25 percent share by 1980, as consumers soughtalternatives to Detroit's limited offerings.4

In the face of growing import competition and more demandingconsumers, the Big Three diversified and improved their productlines from the low point of the 1970s. As style, quality, and fuelefficiency improved, the Big Three's share of the U.S. marketrebounded as well. On the cost side, the U.S.-Canadian Free TradeAgreement of 1988 and the North American Free Trade Agreement of1993 enabled domestic automakers to fully integrate their NorthAmerican operations with Canada and Mexico, leading to moreefficient production and higher-quality vehicles.

Meanwhile, foreign producers began supplementing their exportsto the United States by establishing U.S. production facilities.The first foreign-owned automotive plants in the United States werebuilt in the 1980s as part of a strategy to avoid trade barriers onimported cars, but the rationale changed over the years as theadvantages of employing skilled Americans to produce high-qualityvehicles close to the world's largest market became apparent. Witha tariff of only 2.5 percent on imported cars and minivans, and anabundance of cheap labor and lower-valued currencies in othercountries, foreign automobile manufacturers continue to expand andinvest in new production facilities in the United States. In thehighly competitive automobile industry, a successful strategyinvolves something other than finding the cheapest productionplatform from which to export. The fact that imports now merelysupplement U.S. production of foreign nameplates-- rather than theother way around--attests to that fact.

In 2004, 16.9 million light vehicles were sold in the UnitedStates, of which 2.4 million, or 14 percent, were imported fromAsia, while 3.5 million, or 21 percent, were Asian nameplatesproduced in the United States.5 Of the nearly 1.7 million Toyotas sold in the U.S.market in 2004, nearly 3 of every 4 were produced in the UnitedStates, which was a greater share than in the previous year. Over81 percent of the nearly 1 million Hondas sold in 2004 wereproduced in the United States, which was an increase from the 78percent rate attained in 2003. Nissan's U.S.-produced vehiclesaccounted for 86 percent of its U.S. sales in 2004, which was a bigshift from the 66 percent rate of the previous year.6

In fact, each of the top 10 selling cars and top 10 sellingtrucks (pickups, SUVs, and minivans) in the first half of 2006 isproduced at facilities in the United States.7 Toyota Camry, Honda Accord, ChevyImpala (GM), Ford Taurus, Nissan Altima, Ford Explorer, ChryslerTown & Country, and the other models that round off the mostpopular 20, regardless of the location of company headquarters, areproduced in U.S. plants by American workers who contribute to thelocal, state, and national economies through their employment,expenditures, and taxes.

Today, as in years past, the Big Three still dominate domesticproduction, but the foreign-owned share continues to grow. In 2004,foreign-owned plants accounted for 28.7 percent of the 12 millionvehicles produced in the United States that year. The leadingforeign-owned producers were Toyota (1,247,708 vehicles), Honda(814,620), and Nissan (754,716). BMW, Fuji-Subaru, Mitsubishi, andMazda each produced about 100,000 to 150,000 vehicles. Incomparison, GM produced 3,597,917 vehicles domestically in 2004,Ford 3,056,530, and DaimlerChrysler 1,894,211.8

Likewise, while foreign nameplates have been capturing a largershare of the U.S. market, only Toyota's share ranks among the BigThree's. In the first half of 2006, GM sold the most light vehiclesand accounted for nearly 25 percent of the market. Ford followedwith an 18 percent share. Toyota ranked third with a 15 percentshare, and Chrysler accounted for 14 percent.

The growth of a foreign-owned but domestically based automobilemanufacturing sector has further blurred the lines between "us" and"them." Indeed, the very notion of a Big Three automobile industryhas virtually ceased to have any real meaning. One of the BigThree, Chrysler, merged with the German automaker Daimler Benz in1998. GM, which just sold its 20 percent stake in Fuji HeavyIndustries (makers of Subaru), holds a 12 percent equity stake inIsuzu and a 3 percent stake in Suzuki. Ford owns one-third ofMazda's equity. And DaimlerChrysler, which just sold its 37.5percent stake in Mitsubishi Motors, holds 85 percent of MitsubishiFuso Truck and Bus.

Meanwhile, each of the Big Three has deeply integrated itsproduction supply chains with operations in Mexico and Canada underthe successful North American Free Trade Agreement. Japanese-,German-, and Korean-owned automobile factories in the United Statesemploy American workers, pay domestic taxes, invest heavily in newequipment, research, and development in their American plants, andbuy huge quantities of parts from producers in the United States.Parts suppliers have tended to migrate along with the assemblyplants. The Japan Automobile Manufacturers Association estimatesits members spent $45.2 billion on vehicle parts from U.S.suppliers in fiscal year 2004.9 And that figure should grow in light of new plansto construct or expand production facilities in the United States.Honda has announced plans to build a new plant with the capacity toproduce 200,000 vehicles per year, which will employ 2,000 workersin Greensburg, Indiana. And, a Chinese-owned company purchased therights from a British company to produce MGs in Oklahoma.

In the face of dramatic changes in ownership and market share,overall domestic U.S. automobile production has remained remarkablysteady. From 1970 to 1993--from the heyday of the Big Three throughthe year before NAFTAwent into effect--the average number of motorvehicles assembled in the United States each year was 10.4 million.From 1994 through 2005, the number of vehicles assembled per yearrose to an annual average of 12.1 million10 (see Figure 1). Not only are morevehicles being assembled than in the past, but the production ismuch more stable. During the earlier period, the standard deviationof output from year to year was 15.4 percent of average production,reflecting sharp swings in production in response to the businesscycle. Since 1993, the standard deviation has dropped to only 3.3percent of average production.

Domestic output of motor vehicles and parts has actually enjoyeda healthy increase since 1993 even if employment has not. In 2005,U.S. factories were manufacturing 68 percent more motor vehiclesand parts in volume terms than in 1993. That compares with a 56percent increase in U.S. manufacturing output overall during thesame period.11The number of workers employed domestically in the production ofmotor vehicles and parts was 1,098,200 in 2005, down from a peak of1,313,600 in 2000 but still above average employment levels in theearly 1990s.12In light of increasing output, any decline in employment in thedomestic automobile industry has been because of risingproductivity and efficiency in the industry, not because of anoverall decline in the industry's fortunes.

The biggest beneficiaries of a globally competitive U.S.automobile industry have been U.S. auto-buying consumers.

motor vehicle assembies

Increased competition has blessed automobile consumers with morechoice, better quality, and protection from rising prices. Since1993, during a period when the general price level has risen by38.2 percent, the price level of new vehicles has risen acumulative 4.1 percent--an annual increase of a mere 0.3 percent.In contrast, during that same period, the price level for healthcare services has risen by 70.4 percent and for education by 102.4percent.13 Thesame global competition that has made life more difficult forcertain U.S. automobile makers has kept a lid on the pricesmillions of American families pay for a new car or light truck.

What's Really Ailing the Big Three

The troubles confronting the Big Three and Delphi clearly do notreflect a general malaise in the U.S. automobile market, but ratherspecific problems besetting those companies. As one Toyotaexecutive accurately summarized, "The [U.S. automobile] market ishealthy, though shifting."14 Amid these shifts, some representatives of theDetroitbased part of the U.S. automobile industry seek to attributetheir woes to unfair foreign trade practices, most notably currencymanipulation. But currency values have no direct impact oncompetition that is mostly domestic in nature. Japanese and Koreanproducers in the United States reap no competitive advantagesvis-a-vis the Big Three if the yen or won is undervalued. And evenif those currencies were intentionally undervalued, the fact isthat both appreciated considerably against the dollar between 2002(when the U.S. dollar peaked against most major currencies) and2005. The yen appreciated by 12 percent and the won by 18 percent,yet the Big Three's share of the U.S. light vehicle market declinedfrom 62.3 percent to 58.2 percent over this period.15 Clearly, something otherthan currency values explains the shift.

One explanation for the Big Three's declining sales is thattheir collective emphasis on the pickup truck and SUV market hasleft them vulnerable to changing consumer demands, inspired largelyby rising fuel prices. In 1990, cars accounted for 64 percent ofGM's motor vehicle output and 58 percent of Chrsyler's. Of the BigThree, only Ford produced more trucks than cars in 1990. But by2003, truck production accounted for 64 percent of GM's output, 74percent of Ford's output, and almost 80 percent of Chrysler'soutput. 16

Over the past couple of years, SUV sales have dwindledsignificantly. In the first six months of 2006, full-size SUVs aredown 19.3 percent and mid-size SUVs are down 8.3 percent from thesame period last year.17 And U.S. pickup truck sales have declined 12.5percent in the first half of 2006, relative to the same period in2005.18 Analystshave suggested that some of the Big Three's more fuel-efficientpassenger cars have been experiencing sales increases lately butthat it will take some time for consumers to overcome theirassociation of the Big Three with larger cars, SUVs, and pickuptrucks.

Another reason for the declining fortunes of the Big Three hasto do with the union work rules with which production must comply.The Big Three have been committed to labor contracts that requirethem to support laid-off workers at 95 percent of salary, plusbenefits, for the length of the contract. Facing these constraints,the Big Three opted against cutting back production and closingplants during the recession of 2001 and in the wake of theSeptember 11 attacks, when demand for automobiles was tailing off.To sell their excess supply, the Big Three offered major discountsof up to $6,000 per vehicle or interest-free financing for up to 72months.19 Boththe steep discounts and the cost of providing free loans in anescalating interest rate environment significantly eroded thecompanies' earnings.

The costs of high wages and extraordinary benefits, incurredpursuant to union contracts, are perhaps the most significantexplanation for the weakened state of the Big Three. While all ofthe Big Three's U.S. facilities are organized by the UAW, none ofthe U.S. facilities fully owned by Japanese, Korean, or Europeancompanies employs union labor. According to a UAWdocument titled"The Union Advantage in Pay and Benefits," wages and benefits forthe average union worker in the private sector totaled $31.94 perhour in 2004, compared to $22.28 per hour for the typical nonunionworker. 20 Thedifferential is even more pronounced for workers in thegoods-producing industries (as opposed to services-producing).There, the typical union worker receives $35.78 in hourlycompensation, while a nonunion worker receives $24.90.21 All of this amounts toabout a $1,000 per vehicle labor cost advantage for U.S.foreign-nameplate producers. 22

Beyond the distortion in costs attributable to current wages andbenefits, the financial performance of the Big Three is seriouslyhampered by mounting health care, pension, and other nonwage costs.GM CEO Richard Wagoner estimates that every GM vehicle built inNorth America includes $1,525 of health care costs, typically morethan the value of the steel in the same vehicle.23

As relative newcomers to U.S. production, the foreignnameplateproducers are not burdened with the health care and pensionrequirements of so many retirees. The Automotive Trade PolicyCouncil, a representative organization of the Big Three, estimatesthat the average health care cost per Big Three vehicle is $1,220,while the comparable cost for the foreign-nameplate producers is$450.24

The one legitimate trade-related complaint made by the Big Threeis not about imports but about exports. U.S.-based automobilemanufacturers do face tariff and nontariff barriers when exportingU.S.-made cars to several major foreign markets, including Japanand South Korea. But potential sales in those markets, even underideal free-trade conditions, are simply not large enough totransform the fortunes of Ford and GM. Larger American-stylevehicles are simply not attractive to consumers in such denselypopulated markets, and even less so as already high gasoline pricesclimb even higher in those markets. The U.S. government shouldcontinue to press our trading partners to lower their barriers tocars from the United States, but the misguided trade policies ofother countries do not justify adoption of equally misguidedpolicies by our own government.

Conclusion

There are plenty of valid explanations for the relative declinein market share of the Big Three automobile producers. "Unfairtrade" is not among them. But complaints about foreign competitionand calls for action are not an idle threat.

In the early 1980s, Congress bailed out a faltering ChryslerCorp. by guaranteeing a huge package of loans. To preserve themarket share of the Big Three U.S. automakers, GM, Ford, andChrysler, the Reagan administration bullied Japan's government intorestraining the number of cars its producers exported to the UnitedStates. In the 1990s, the Clinton administration attemptedunsuccessfully to force the Japanese into a form of managed trade.Intervention today would be as unnecessary and as potentiallydamaging as it was in the 1980s and 1990s.

Policymakers in Washington would be foolish to intervene in amarket that is working so clearly in the interest of the largemajority of Americans. What may be good for the short-run interestsof certain U.S.-headquartered automakers would almost certainly notbe good for America as a nation.


1. Sholnn Freeman, "GMInvestors Show Frustration," Washington Post, June 7, 2006, p. D2.;and Erin Mays, "Yen rate gives Japanese automakers unfairadvantage, Chrysler's LaSorda says," Autoblog, June 3, 2006,available at www.autoblog.com/2006/06/03/yen-rategives-japanese-automakers-unfair-advantage-chryslers/.

2. Office of Sen. CarlLevin, "Statement of Senator Carl Levin at the DPC OversightHearing on Trade Policy and the U.S. Automobile Industry," PressRelease, February 17, 2006, available at www.senate.gov/~levin/newsroom/release.cfm?id=251708.

3. Jeffrey McCracken, "UAWLeader: Solutions to Problems Are Political" Wall Street Journal,June 13, 2006.

4. Ward's AutomotiveYearbook, 2005, p. 239.

5. Ward's AutomotiveReports, "Ward's U.S. Light-Vehicle Sales by Brand andGroup-December 2005," January 9, 2006, p.1. Light vehicles includepassenger cars, minivans, SUVs, and most pickup trucks. Lightvehicles accounted for 98 percent of total U.S. vehicle sales in2004.

6. Ward's AutomotiveYearbook, 2005, p. 241-242.

7. Ward's AutoInforBank,"Ward's 10 Best Selling U.S. Cars and Trucks, 6 months 2006,"http://www.wardsauto.com/.

8. InternationalOrganization of Motor Vehicle Manufacturers, "Motor VehicleProduction in the United States by Manufacturer," available athttp://www.oica.net/. Vehicles includecars, light commercial vehicles, heavy trucks, busses, andcoaches.

9. "Growing Investment andEmployment in America," Japan Automobile Manufacturers Association,2005, p. 8, http://www.jama.org/. The figures applyto the Japanese fiscal year 2004, which covers April 2004 throughMarch 2005.

10. U.S. FederalReserve Board, "G. 17 Industrial Production and CapacityUtilization, Table 3, Motor Vehicle Assemblies," www.federalreserve.gov/releases/g17/table3.htm.

11. U.S. FederalReserve Board, "Industrial Production: Market, Industry Groups, andIndividual Series," series G3361T3 for "Motor vehicles and parts"and series B00004 for "Manufacturing," available at www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt.

12. Bureau of LaborStatistics, U.S. Department of Labor, "Employment, Motor Vehiclesand Parts, NAICS Code 3361, 2, 3," http://www.bls.gov/.

13. Consumer PriceIndex--All Urban Consumers (Current Series), http://data.bls.gov/cgi-bin/dsrv?cu.

14. Sarah A. Websterand Joe Guy Collier, "Cars sales gain on trucks in May," DetroitFree Press, June 1, 2006.

15. Currency valuescome from Federal Reserve Statistical Release G.5A, "Annual ForeignExchange Rates." Market share data compiled from figures in Ward'sAutomotive Yearbook 2005, p. 242 and Ward's Automotive Reports,January 9, 2006, p. 1.

16. Stephen Cooney andBrent D. Yacobucci, "U.S. Automobile Industry: Policy Overview andRecent History," CRS Report for Congress, April 25, 2005, p.27.

17. Don Hammond, "Trendtoward Smaller Cars is Leaving SUV's Behind," PittsburghPost-Gazette, July 11, 2006.

18. Poornima Gupta,"Slow Truck Sales Add Pressure on Detroit Automakers," Reuters,July 10, 2006.

19. Cooney andYacobucci, p. 44.

20. United AutoWorkers, "The Union Advantage in Pay and Benefits," http://uaw.org/organize/advantage.cfm.

21. Ibid.

22. Paul S. Kersey, "AHard Pill for UAWMembers to Swallow," Mackinac Center for PublicPolicy, September 2, 2003.

23. Ibid., p.44.

24. Ibid.