Mass Motorization and Mass Transit: An American History and Policy Analysis

8. The Competitive Difficulties of the U.S. Automakers

EIGHT The Competitive Difficulties of the U.S. Automakers In the wake of the gasoline price surge of 2004–2007, the American automobile industry has experienced financial difficulties strikingly similar to those experienced by street railways following World War I. The automakers’ recent revenues have been insufficient to support the cost structures created during the golden days when they dominated the U.S. market and enjoyed much larger sales volumes. The proximate causes of the automakers’ present financial difficulties are the oil shock associated with the war in Iraq, reduced demand for the full-sized passenger vehicles that were once the bread and butter of General Motors, Ford, and Chrysler, and the loss of sales and market share to import competition. Starting from a 15 percent market share in 1973, imports sales rose to a 26 percent share of domestic passenger car sales in 2003.∞ This trend has continued, resulting in credit downgrades for General Motors and Ford and a wave of plant closures and layoffs. A handful of production statistics will illuminate the cause of U.S. automakers ’ competitive difficulties. Over the past 20 years, the number of passenger cars built by the U.S. automakers for sale in the United States has declined 53 percent. During this same period, domestic truck production increased 143 percent—a large increase, but on a relatively small base. The increase in domes- 190 ⴗ U.S. MOTORIZATION IN HISTORICAL CONTEXT tic truck production was insufficient to offset the decline in domestic passenger vehicle production, with the result that total domestic vehicle production still declined almost 5 percent while the U.S. population was increasing 35 percent.≤ This long-term downtrend was amplified further by the impact of the Iraq war on oil import prices and the impact of Hurricane Katrina on Gulf Coast gasoline production and nationwide fuel prices. The result for October 2005 was a year-over-year sales decline of 24 percent for GM and 20 percent for Ford. Daimler-Chrysler reported a 4 percent sales gain, and Japanese automakers reported gains of 10–12 percent.≥ But GM sales were rebounding by 2007, and there were strong indications that the Mercedes-Chrysler marriage was not an easy one. In any case, what seems clear is that the long-term erosion of domestic passenger car sales has left the U.S. manufacturers with a sales mix that is heavily loaded with SUVs and pickup trucks. This is a commercial advantage in good times but a risky sales mix in a world that is prone to episodic spikes in the price of gasoline. The Underlying Causes of the Automakers’ Financial Distress The international motor vehicle marketplace of the twenty-first century is brutally competitive. But the same cannot be said of the U.S. market in the 1950s and 1960s. The consensus of most economists is that market power was highly concentrated in the postwar automobile industry and that General Motors was the nation’s overwhelmingly dominant automaker. It is also widely agreed that GM’s competitors practiced follow-the-leader pricing, creating a domestic market characterized by oligopolistic competition. This was possible because competition based on product innovation slowed dramatically after 1930. As David Mowery and Nathan Rosenberg have observed , ‘‘The fundamental architecture of the automobile was achieved by roughly 1925, an enclosed steel body mounted on a chassis, powered by an internal combustion engine. And by the end of the 1930s, as Raff and Trajtenberg show in their analysis of change in the performance and other attributes of automobiles, the rate of improvement in product characteristics had virtually ceased.’’∂ Technological stagnation is not an accurate characterization of the automobile industry today, but economist Lawrence J. White argued that it was an accurate description of the industry between 1946 and 1970. Based on the industry ’s oligopolistic tendencies and its follow-the-leader pricing, White described the American auto industry of the late 1960s as a ‘‘technologically stagnant industry in terms of its product.’’ He noted that ‘‘cars are not fundamentally different from what they were in 1946; very little new technology has been THE COMPETITIVE DIFFICULTIES OF THE U.S. AUTOMAKERS ⴗ 191 instigated by the industry. The product has been improved over the last twenty years, but these have been small improvements with no fundamental changes. The sources for these improvements have often been the components suppliers, rather than the auto companies themselves...