May
Chrysler files for Chapter 11 Bankruptcy protection
Today’s most striking headline indicated that the smallest of the Detroit’s big three – Chrysler filed for Bankruptcy protection. While Chrysler’s story is interesting on its own and an alliance with Fiat is imminent which will be supported by Govt funding upto $4.7 b dollars, this article takes a look at the state and causes for the seemingly terminal decline of the US Auto industry.
To quote President Obama,
General Motors Corp., Chrysler LLC and all those with a stake in their survival need to take more hard steps to help the struggling automakers restructure for the future.
Let us examine the causes of this decline first -
- Car registrations in USA - a statistic which has shown a net YoY increase for the last 100 years, even during the 1929 Great depression – today is in decline. The trend of growth faltered in the 1990s itself and in the 2000s, the trend is in decline. Essentially, the pie which was growing for the last century, suddenly stopped growing or even started marginally shrinking.
- Failure of the US Auto industry to react to this change – The big three should have anticipated this long ago. When the industry stops growing the drivers of the industry change and survival in that industry becomes dependent on superior performance, cost efficiency and most importantly for the auto industry, technological superiority. Detroit’s big three - GM, Ford and Chrysler didn’t see this coming and/or didn’t react to this swiftly.
- Declining market share of the Big 3 in USA – Just 25 years ago in 1984, the Big 3 from detroit -commanded an 80% market share. However in 2009, that marketshare has fallen to 45% . Cars made by foreign manufacturers have made huge inroads into the US auto market. Particularly Toyota and Honda, whose growth has been spectacular have pushed the Big 3 on the backfoot with their focus on technological superiority along with affordability.
- Green car conundrum - Obama’ while announcing the first bailout package in February demanded that the US Auto industry should focus and lead in the Green car revolution. In line with this, the American automakers created a lineup of electric and hybrid cars. However, with the global economic depression pushing the oil prices down alongwith the plummeting consumer confidence has raised questions about the economic feasibility of these costly products . Hence, huge investments into technological research regarding green cars is in danger of not giving immediate or short term financial gains or market-speculator support.
- Auto unions – Today, the auto unions are so powerful in the USA, that they force the big 3 to produce only a product mix of the highest profit cars leaving the auto industry without a product line up for changing market conditions. What we mean over here is that the consumer preferences keep changing – from big gas guzzlers in 2004 to high efficiency vehicles with fluctuation in oil prices and to low cost cars due to the global economic meltdown. Clearly, as we were taught in our Economics in HR course at IIM Calcutta, the bargaining power of the Unions has reached such levels that it has started to harm the interests of the car makers. The government’s failure to reign in these auto unions is a big cause of concern for the US based car makers.
- VAT tax disadvantage – The VAT tax allows the foreign companies to subsidize exports while taxing imports. As this article indicates, VAT tax puts US automakers at a huge disadvantage and cost the industry $327 billion for 2006 in terms of lost productivity. Such losses can be taken when market conditions are good, but in a depression type scenario, the opportunity cost borne by the industry due to such policies is like a death knell, even for the biggest of the firms.
- The Cost component to this piece:
Labor cost per hour, wages and benefits for hourly workers, 2006.
Ford: $70.51 ($141,020 per year)
GM: $73.26 ($146,520 per year)
Chrysler: $75.86 ($151,720 per year)
Toyota, Honda, Nissan (in U.S.): $48.00 ($96,000 per year)
- Thrust on quality, or the lack of it - US automakers did not pay enough attention to quality. It was a common observation among consumers that the US cars break down more often than their Japanese counterparts. Such things were unnoticed till the 80s but today in the era of tough competition, things like these become the decision making points for the prospective new vehicle buyer.
Clearly, all these causes did not shoot up overnight, they grew into giant monsters gradually over 15 years. But today, they have become a huge roadblock. Can the US auto industry respond, is there a way out , or does the future look pitch dark for the great US auto giants? Check the 2nd article in this series by me to find out!
(Facts/ quotes from: Strategic disadvantage, Auto-Report , Chrysler bankruptcy , Money Central report about Obama, Financial Times)
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5 Responses to “US Auto Industry – Is it in terminal decline?(1/2)”
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Very rightly said. The US auto had a history of great innovations, but it had a very gradual but significant decline over the past few years/decades. The unions as you pointed out, plays a very imporant factor too, and it is a testimony to the inefficiency and corruption on the part of the government.
Imagine a normal US citizen hitting the matka by grabbing a job in the Auto industry, and attaining a virtual social security over the rest of his life !
To me, the scene is very similar to the Govt undertaken organizations in our own country. However, we have not seen such outcomes as yet over here, thanks to the increased competition and the Govt’s response to act on it.
A very informative article indeed. The US car manufacturers have been outdone by foreign car manufacturers and now even American People do not buy Big 3’s cars. Big Problem and probably no solution.
There is a stage in the growth of any firm, which i like to call “King Kong”. A basic methodology follows the rise of most firms..an idea to capture a market segment..expansion of segments..and trial of new ideas on established markets which lead to further expansion of older segments and induction of newer segments based on advantage derived from competencies of older segments. A stage comes when a firm grows so big that it starts operating irrespective of the market. In other words..the market needs it more than the firm needs the market. Thats the King Kong stage. Though at this point it is critical that the King Kong closely examines its competitors..especially newer and leaner ones looking to rise. Thats where the American auto industry failed. They failed to see the importance of capitalizing on their lion share by further improving quality. Japanese firms struck precisely at this point and the King Kong was so lost in its glory and old plaudits..it failed to see…it was soon gonna be just another chimp..and a new King Kong came along..
Just to add few points,
1.one of the crucial reason for the disasster casued for fall of 3 giants is the overall labour wages in US.
The basic wages given by all the companies whether its a one of gaint three or an asian comp (like totyota & honda) are the same. But there is diff in the overall wages given by these comp (as mentioned in fig by author). So from this diff has come up?
The GM/ford/Chrysler have been present since more than a century in US , it caused into having older workforce with them and more pentioners with them when compared to Toyota and Honda.
It has resulted into this drastic diff in the wages which costed the 3 giants!
2.Secondly, UAW played a very key roll in this heavy downfall!!
UAW (United Auto Workers) which showed its very first presence in 1950’s starting in GM itself, and later gaining sucess year by year it started dominating the mnfg insutry (specially Auto industry)
GM/Chrystler/Ford workers were part of UAW where as japanese comp didn’t allow such unions in their comp.
Playing a key role, UAW has apporved very heavy demands from the comp , like, the package for retired/layed off workers apart from pention. In which comp has to deposit the money to provide the future earning options for the workers. such things have costed the american comp badly!
3.This mightsound as repeatition,but couldnt resist to write it down. Giants never forcasted the coming race! GM being the first comp in 1950 to think of a hybrid vehicle , but couldnt take it forward. When Asian comp started launching Generation 2 hybrid vehicles , these comp were still manufactuing the gas guzzling SUVs!!!
now it has become more diff for GM or chrysler t compete with the Asian comp( rather now frm here i should call asian comps as the Giants)
3.Also ppl are gettingmore reluctant to go for cars manfg by the comp which are quite near to the bankruptsy! as they are worried abt the future support, creating more challenge to the US auto comp!