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Summary
The U.S. automobile industry is in a crisis. V igorous import
competition, drastic shifts in consumer preferences, and anemic
f inal sales combined to make 1980 and 198 1 two of the most
difficult years in the industry's history. The current picture is
bleak: literally hundreds of thousands of people have lost their
jobs; communities dependent on the industry have suffered
devastating losses in employment and financial resources all the
domestic producers have suffered major financial losses; large
facilities have permanently closed. Future prospects are uncer-
tain. If the industry is to survive, the next five years will see
. ,
wrenching changes in its productive and financial base as new
product technologies are introduced, manufacturing plants are
r etooled; and new relations are established among management,
labor, and government.
Given its size and scope, it is not surprising that the auto
industry has long been accorded significant public attention.
Recent events have prompted debate about the current crisis and
appropriate courses of action. Three alternative lines of inter-
pretation can be distinguished; as defined in Chapter 1, they can
be summarized as follows:
Transient Economic Misfortune. Proponents of this view argue
that while the current crisis is a serious misfortune, it is
temporary. The essential problem is a lack of small-car capacity;
its solution is sufficient time and money to realign the product
line.
.. . . .
N atural Consecuence of Maturity. Based on theories of the
.
product life cycle, this view treats the current crisis as one
episode in a long-term shift of production out of this country to
lower-cost sources of supply.
Fundamental Structural Change.
This view challenges the
notion that technology is stable. It envisions a period of rapid
innovation in products and processes, where competitive
advantage will depend on the ability to innovate.
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2
These three interpretations make different assumptions about
the competitive cost (and quality) position of U.S. production and
the role of technology in competition. Moreover, they have quite
different implications for public and private policy. This report
places the cost and technology issues in their historical context
and examines evidence on the character of recent innovation and
the U.S. auto industry's relative competitive position. It should
be noted that the report makes no attempt to estimate the com-
parative advantage in U.S. automobile production in the sense of
classical economic trade theory (e.g., the ratio of U.S. costs of
auto production relative to U.S. costs of other goods, compared
with similar ratios for other countries). Rather, the report
examines the competitive position of the U.S. producers relative
to their major competitors within the auto industry. The focus is
not only on costs of production but also on product quality and the
role of technology and innovation in competition.
THREE HISTORICAL THEMES
A basic premise of this report is that the nature of the current
crisis in the automobile industry, the specific problems faced, the
patterns of observed response, the barriers to adjustment, and the
strengths and weaknesses of domestic firms can be understood
only if one first understands something of the history of the
industry. Chapters 3-5 of the report sketch out three themes
that have characterized the evolution and development of the
industry in the United States: the convergence of technology, the
internationalization of markets, and the growth of public demand
on the industry.
Convergence in Technology
Anyone trying to buy a car in 1905 was confronted by
considerable variety: steam cars, electric cars, cars powered by
gasoline, cars with three or four wheels, open-air cabs, closed
carriages, all manner of mechanical principles. By 1973 that
technological diversity had disappeared. To be sure, there was
immense variation in styling, but the underlying technology had
become standardized. This standardization of technology
r effected a change in the character of innovation as well as a
particular pattern of competition.
From an early stage in which technical change was rapid and
fundamental, the industry evolved to a point where technical
advance was incremental and almost invisible. Competition was
oriented toward the mass market where cost, styling, and
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acceptable levels of performance were the basic dimensions of
competition. In contrast to the European market where
technology-based competition led to technological diversity,
convergence in technology in the United States reflected a
market where product technology was competitively neutral.
Internationalizatio n
Until the last decade the evolution of the U.S. automobile
industry was largely determined by political and economic forces
specific to the North American continent. In the last few years,
however, the relevant industry boundaries have expanded
dramatically. There have been two interrelated changes: (1 )
dramatic shifts in the volume and pattern of world trade and (2)
growth in the number of viable competitors worldwide.
As played out in the United States, internationalization
occurred primarily in the small-car segment through import
penetration; the U.S. response has been conditioned by a legacy of
large-car production. Large cars were associated with luxury and
prestige and commanded premium prices; in terms of cost,
however, small cars were just about as expensive to make; the
result: small cars, small profits. With little incentive, U.S.
producers did not develop products to compete directly with the
imports until the late 1970s. Internationalization has confronted
U.S. producers with competitors operating with a very different
competitive tradition and experience. It is now clear that success
in small cars requires different capabilities than success in the
large-car segment; attaining parity in subcompacts with foreign
producers involves far more than realigning the product line.
Public Demands on the Industry
During the last 10 years the development of automotive compe-
tition and technology has been strongly influenced by
government mandate. Social demands on the industry are not
new; manufacturers have long had to meet both the demands of
the marketplace and the requirements of changing social
expectation.
From the early years of the industry up to World War Il.
market demands and public demands coincided. In the 1950s and
1960s, however, perceptions shifted and new public demands were
imposed. Concern for safety, pollution, and energy efficiency led
to a variety of government initiatives. The specific form that
evolved--mandated standards and agency regulation--reflects
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4
public perception of the industry as a "bad guy" and the tension
between divergent social and market demands.
In addition to specific government policy directed at the
industry, the postwar era has demonstrated the impact that
general policy measures can have. In recent years, for example,
the sensitivity of the industry to general economic conditions and
the stance of fiscal and monetary policies has been underscored
by record high interest rates, sluggish economic growth, and
falling real income. Coming at a time when the industry's need
for resources to meet new competitive demands has been at an
all-time high, the depressed state of the automobile market has
dealt the industry a severe blow.
Competition in the U.S. auto industry has undergone funda-
mental changes in the last 10 years, primarily because of
increased market penetration by foreign manufacturers and
drastic shifts in the price of oil. The events of the 1970s con-
fronted a mature industry used to competing on the basis of scale
economies, styling, and dealer networks. It was an industry in
which technology in particular and manufacturing in general had
become competitively neutral. It was an industry increasingly
subject to government mandates, competing on an international
basis with new competitors who emphasized superior manufac-
turing performance. Moreover, growing incentives for new
technology have created the opportunity, even the necessity, for
competitive advantage through innovation.
As we noted at the beginning, there are wide disagreements
about the meaning of the current crisis. The three categories of
interpretation sketched out in Chapter 1 differ in the
assumptions made about the relative costs and quality of U.S.
products and the stability of technology. Chapters 6-9 present
evidence that bears on these issues.
Product Cost and Quality
Our analysis of productivity and product cost makes use of a
variety of sources of information, including government reports
and other published analyses as well as studies conducted within
companies in the industry and made available by members of the
panel. (Where use has been made of internal company analyses,
trip reports, or other "industry sources," these have been
explicitly noted.)
Based on a variety of approaches and data sets, we find that
the Japanese have a significant landed-cost advantage. Although
differences in the two systems of production make precise com-
parisons difficult, the Japanese advantage is likely to fall in the
range of $750 to $1500 per small vehicle. Evidence on the cost
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differences from publicly available information is presented in
Appendix A. While the data presented there are consistent with
the finding of a sizeable cost advantage for the Japanese, the
precise order of magnitude and the confidence that industr y
members of the panel place in the cost difference (i.e.,
$1200-$1500) comes more from internal studies using confidential
and proprietary data. The Japanese advantage reflects
differences in prices as well as productivity. Compared with the
U.S. firms, the major Japanese producers (Toyota, Nissan, etc.)
have significantly higher overall productivity (total employee
hours per vehicle); some estimates put the productivity difference
as high as 40-50 percent. Employee cost per hour worked in Japan
is about 50-60 percent of the U.S. average.
The analysis of cost and productivity has implications for
comparisons of profitability between U.S. and Japanese auto
companies. Because the Japanese firms sell their cars in the
United States at prices that are comparable with prices for U.S.
cars, the cost advantage of the Japanese gives them a higher
margin of profit on cars sold in the United States than that of the
U.S. manufacturers. Evidence presented in Appendix A suggests
that the Japanese firms use less capital per vehicle produced, so
that the rate of profit measured as a return to capital would also
be higher for the Japanese manufacturers. Thus, whether
measured as a return on capital or as a margin of profit on sales,
the Japanese producers earn higher profits on their U.S. sales than
their U.S. counterparts.
Existing evidence suggests that in the late 1970s the Japanese
achieved a noticeable edge in assembly quality ("fits and finishes";
since 1980, U.S. producers have made improvements in quality
performance. Consumer ratings of vehicle condition at delivery
and counts of defects per vehicle shipped in 1979, for example,
show a significant import (i.e., Japanese) advantage; on a scale of
1-10, imports rated 7.9, while domestics averaged 6.4. When
asked, "Would you buy the same make or model again?," 77.2
percent of domestic subcompact buyers answered yes; among
import buyers the comparable percentage was 91.6.
Despite the popular image of Japanese superiority in advanced
technology, explanation of the Japanese productivity advantage
seems to be more a matter of differences in management--
process systems, workforce management--than superior automa-
tion or faster work pace. Because of a production control system
that emphasizes minimum inventory and elimination of downtime
and a job structure that places responsibility for quality on
workers, the Japanese operate processes at a high level of good
output over extended periods of time. While several elements of
the Japanese system are refinements of practices developed in the
United States, certain critical aspects of their approach are
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accorded much less emphasis in U.S. practice. The policies and
procedures connected with workforce management are a case in
point.
The labor-management relationship established in the 1 930s
had its roots in the early years of the industry. The innovations
in machinery and process design of the World War I era were
accompanied by a system of workforce management char-
acterized by highly structured rules and procedures. Planning and
control of work were vested in staff groups far removed
(organizationally) from the process. Workers were not involved in
production beyond a narrow range of assigned tasks. The
principal connection between the worker and the firm was the
supervisor, and the relationship was essentially adversarial:
supervisors were under pressure to meet production and cost
targets, and that pressure for production at low cost was trans-
mitted to the work force.
Unionization of the industry in the 1930s introduced a system
of industrial jurisprudence into the workplace and changed the
terms and conditions of employment in many ways. But the basic
relationship between the worker and the firm remained adver-
sarial in nature. Changes in the character of competition in the
1970s have highlighted weaknesses in that kind of relationship: it
inspires no loyalty or commitment, and it fails to tap information
and experience in the work force.
The last few years witnessed important changes in the
employment relationship. Since the early 1970s, General Motors
(GM) and the United Auto Workers (UAW) have worked to develop
"quality of working life" programs; various approaches have been
developed and extensively diffused in the organization. During
the past year, "employee involvement" programs have been
initiated at over half of Ford's facilities; Chrysler also has
developed such efforts in connectic~n with its O' tA I itV_i mnr~v--
ment efforts.
~~ -a ~ r ~~~
The kinds of changes under way are akin to a cultural revolu-
tion; where attitudes are deep seated, a true reformation is likely
to require some period of time. Yet recent events suggest a
good measure of adaotabilitv in the collective bargaining
_ , ,
relationship and thus reason for optimism.
TECHNOLOGY AND COMPETITION
A key issue separating the alternative interpretations of the
industry's present and future condition is the role of technology in
competition and the character of innovation. The "transient" and
the "maturity" perspectives assume a stability in technology, that
is, a relatively standardized technology that changes only incre-
mentally and that is competitively neutral.
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This description fits the condition of the industry prior to the
initial OPEC shock of 1973, but there is some evidence that the
role of technology in competition is shifting. Using the data
before (1977) and after (1979) the Iranian oil shock, we find a
substantive shift in the market's valuation of technology.
Performance and technology characteristics associated with new
Designs "package efficiency, driving range, diesel engines,
front-wheel drive) carried premiums in 1979, while the same
characteristics were discounted in 1977.
In terms of market premiums the evidence implies that
technology became more visible in the aftermath of the Iranian oil
shock and a more important aspect of competition.
. · . .
.
.
If technology becomes a more critical element of competition,
innovation is likely to become more rapid and fundamental.
Indeed, it appears that the development of product technology in
the 1970s constitutes a sharp reversal of the pattern of technical
change that dominated from 1900 to 1950.
The earlier era was dominated by standardization: first in
engines, then the chassis, then components. In the 1 970s,
however, innovation spawned diversity in engine configuration,
control systems, drive trains, and materials.
The pattern of technical development suggests that innovation
is becoming less incremental in its impact on the production unit.
Recent changes have not just refined existing ideas but have also
introduced new concepts; downsizing, trans-axles, and new
materials are examples. Future technologies carry the possibility
of significant change in production facilities; advanced engine
concepts, materials, and control systems require radically
different equipment, skills, and organization.
Increased diversity and increasingly radical innovation leave a
k ey assumption of the "transient" and "maturity" perspectives--
stability in technology--open to question. Because future
development is uncertain, and because some systems (at least in
small cars) have achieved dominance (front-wheel drive, four-
cylinder engines), it is not possible to make precise and definitive
statements about the course of technical change. If the incentive
for innovation remains strong, however, it is likely that the
market will see increased diversity of technology as new designs in
engines, bodies, and other systems compete for market
acceptance. If so, we may be at the beginning of a period of
intense technology-based competition.
CONCLUSION:
THREE SCENARIOS AND THEIR IMPLICATIONS
This report identifies the historical context and the industry's
current position in terms of product cost and quality and
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technology. Evidence on the three main lines of interpretation is
presented, but the report draws no strong conclusions. Some
evidence in favor of all three interpretations has been found, and
there have been a number of assumptions made along the way. To
f urther identify the implications of alternative patterns of
development, the concluding chapter of this report presents three
scenarios of the industry's f uture based on the three lines of
interpretation.
The scenarios depict possible chains of events and the likely
impact of those events on broad public policy options. While the
scenarios are intended to offer a realistic assessment of the
development of the industry under given assumptions, they are not
based on an extensive analysis of business strategy. And although
some' very general views about public policy are indicated, an
in-depth analysis of policy options was not carried out. The
strategies of particular firms and detailed policy analysis ar e
important areas for further work but were outside the scope of
this report.
The three scenarios have quite different predictions for the
future evolution of the industry.
Transient Economic Misfortune: The United States maintains a
viable domestic industry, but the U.S. share of value-added
declines, competition occurs much as before on the basis of
styling, scale economies, and distribution.
Natural Consequence of Maturity: Local content of U.S. sales
declines substantially; 65 percent of all cars sold in the United
States are produced in foreign countries; U.S. firms survive but
with substantial offshore production and only sDecialtv vehicle
production in the United States.
~ . .
-A ~r~ ~ ,~
fundamental Structural Change Industry moves from full-line
products and cost competition to more performance-oriented
competition; the United States recoups market share with
innovative vehicles, but the U.S. share of value-added declines
because of losses in standard models.
Using two general categories of policy measures ("internal"--
deregulation, tax incentives: "external"--temoorarv nol Irish tn
——7 —-' ~~ ^ - _& ~ ~—~& ~& 7 —~~ ~~
reduce imports), it is clear that predictions about the impact of
policy depend on what scenario is assumed to pertain.
. . . . . . .
.
internal policies have a major impact under the "transient"
scenario, while both internal and external policies have a major
impact under "restructuring."
. . . .
~ However, without permanent
restrictions on trade, policy has no lasting impact under the
"maturity" scenario; cost disadvantages in standard models are too
large to be overcome through investment.
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9
A s in the case of public policy, implications for management's
competitive and organizational agenda are somewhat different
under the three scenarios. Under "maturity" the key to compe-
tition is the ability to manage a worldwide production and
distribution system, with worldwide sourcing and technical
innovation that extends and refines existing concepts. Under
"restructuring" the essential tasks are improving quality and
productivity in existing models and the development and
introduction of radically new products and processes. These
differences in competitive environment should not be glossed over,
but it is also clear that both of these challenges require
substantial changes in the way the business is managed. Som e
critical elements of that change are as follows:
An emphasis on manufacturing as a major competitive factor.
· A more open agenda between management and labor.
· A move to engage the work force (all levels) in the
competitive activities of the firm.
· An increased emphasis on the management of change;
greater adaptability and openness to innovation, both organiza-
tional and technical.
For both public and private policy, prediction about what will
be effective depends fundamentally on what is assumed about the
industry's development. Both carry the potential for significant
influence on the future of the industry. The future of the industry
is by and large in the hands of its participants--the firms, the
unions, the suppliers--but public policy has a critical supporting
role to play, particularly in mitigating risks and facilitating
necessary change during the period of transition.
Representative terms from entire chapter:
public demands
