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1 The U.S. Auto Industry in Crisis The U.S. automobile industry is in a crisis. Vigorous import competition, drastic shifts in consumer preferences, and anemic algal sat=;' ~~lilbillt:U LO make luau ana Ale 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 f acilities have permanently closed. I IOi~l 5;=l#-C ^tY\l-tr~~ ~ ~~1~ IRON __~1 1~^ ~ ~ ~ .~ are ut'u=l Elm. 1I one 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 retooled; and new relations are established among management, labor, and government. Even in a time of general economic malaise, trouble in the ~ . _ ~ ~ ~ . . . . auto industry carries special weight. For more than half a century, the automobile--both as an artifact and as a business nexus--has played a significant role in the social and economic life of the nation. It uses 42.3 percent of all the oil consumed in America and accounts for roughly 15 percent of the average household budget. The factories that produce it and the busi- nesses that service it employ a full 15 percent of the working population. When sales reach the low levels experienced in the last two years, the effects on employment and on communities where automobile production is important can be substantial. US the thousands of people on indefinite layoff and the record high unemployment rates in numerous Midwestern cities clearly demonstrate. ~ . Future prospects , _ ~ ~ throw ~ 1_~ ~ :~ I _ ~lv<:n Ine size ano importance of the industry, past and present, it is little wonder that political leaders have long accorded it unusually close attention. Nor is it any surprise that concern for the future has made it among the most regulated of industries. But to view the automobile business as the most 10

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11 "American" of our heavy industries, accurate as that view might be, is still to understate its place in our national life. The industrial base that has grown up around automobile production possesses an immense strategic value of its own. Because of its size and technological sophistication, the manu- facturing capacity of the industry can be turned, as it was during World War II, to the production of military equipment. And as recent events have shown, even the coming of the nuclear age has not diminished the critical reliance of the military on electro- mechanical equipment. The strategic value of that industrial base is by no means limited to such applications. Ongoing process innovations, which enhance current products and make possible the creation of new ones, and competitive pressures for efficient production have made the industry a prime consumer--and a major stimulant--of technological advance. In recent years the auto companies have played a key role in the evolution of CAD/CAM (computer-aided design/computer-aided manufacturing), laser technology, new m aterials, industrial robots, and a host of other such develop- ments. As Abernathy (1980) has argued, the existence of a set of customers demanding high performance in their cutting-edge technology and deeply committed to such innovations in their early stages are often of determinant importance in the development of new technology. It is, therefore, of no little consequence to the nation when the automobile industry finds itself in trouble. As in the past with good fortune, so with present problems, it has presaged change in other sectors. . . .. .. . . - ~ Defining that trouble accurately, pinpointing its causes, and prescribing appropriate remedies have within the recent past come to occupy a prominent place on the public agenda. Heated debate about the automobile industry is of course not new, but it has taken on a new urgency during the last two years. In an important sense this escalation of argument is the direct result of events in the oil market during 1979. Although OPEC and rising oil prices have affected the industry since the oil embargo of 1973, the revolution in Iran marked a genuine turning point. OPEC seized the opportunity presented by substantial reductions in supply and strong upward pressures on spot market prices to double (and, in some cases, to more than double) the price of crude oil. As a result, gasoline prices in the United States rose sharply throughout 1979. Even so, there were widely publicized lines at U.S. gas pumps during the spring and summer. In effect, these developments laid to rest any lingering hope that the power of OPEC was on the wane or that oil prices might fall significantly in the future. With changed expectations about the future course of the price of gasoline and heightened concern

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12 about interruptions of supply, American consumers abruptly demonstrated a shift in market preference toward smaller, more fuel efficient cars--sometimes domestic, if available; but imported, if not. Some have argued that the unexpected surge in gasoline prices coupled with a shift in consumer preference away from inter- m ediate or larger cars is primarily responsible for the current difficulties in the industry. In testimony before the Subcom- mittee on Trade of the House Ways and Means Committee, Abraham Katz, Assistant Secretary of Commerce for Trade, made the following observation: Early in 1979 . . . a sudden disruption in OPEC oil shipments and large OPEC price increases led quickly to sharp increases in the price of gasoline and to renewed are ct.~+i~r, lir`~ ~~C`~lVII A111~. - - ~ Consumers reacted by shifting toward small, fuel-efficient cars. Small car sales jumped to a 57 percent share of the market in 1979. U.S. small car production ran virtually at capacity, but was unable to keep up with demand. With an inadequate supply of domestic small cars, many consumers turned to imports, the traditional source of small, fuel-efficient cars. Their present success in the United States is a case of being in the right place at the right time with the right product. ~ . It is also apparent that a good part of the U.S. auto industry's plight reflects the overall state of the economy. Automobile sales are sensitive to changes in interest rates and the growth of real income. The decline in real income in recent years, high interest rates, and generally sluggish economic activity have reduced demand for automobiles to very low levels. Coming at a time when major changes in product mix and new capital invest- ments are required, the recession has made adjustments much more difficult. Thus, while the gasoline price shock of 1979 and shifts in consumer preferences may have affected the relative demand for domestic production, the low overall level of demand must be weighed as a major factor. It would be unwise to assume that the only problem is a lack of market growth. Moreover, as far as competition with imports is concerned, more is involved than simply the size of American cars or their fuel efficiency. Perceived differences in product quality between domestic and imported cars also are at work. Some analysts have suggested that a comprehensive statement of the industry's problems must start with the recognition that, as in American industry generally, lack of investment, a faltering work ethic, excessive regulation, and the declining growth in pro-

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13 d uctivity are all responsible in one degree or another for deteriorating product quality. The firms, the UAW, and the government have all been the subject of criticism in the public debate over the industry's condition. Failure to exploit long available technology, generous collective bargaining agreements, inattention to market develop- ment, a confusing welter of regulation, high absenteeism, artificially low gasoline prices, among other things, have all been cited in one place or another as causes of the current situation. Whatever the mix of truth and error in all this finger pointing, one thing is reasonably clear: Detroit's troubles are not just the result of any single discrete, isolated cause, such as an inappropriate product mix. To understand the difficulties accurately, we must focus our attention on the interplay of causes within the whole complex productive federation of the industry. We must seek to understand the roles played by each of the participants in that federation and, more than that, the ways in which the decisions of one influence and affect all the others. Accordingly, we intend to address ourselves in this report to the general competitive status of the U.S. automobile industry. Though we recognize the effects of oil prices, regulation, and widespread economic stagnation on the fortunes of the industry, we also feel that much of its current plight is the result of factors internal to the industry and its productive confederation. To say this is not to argue that such things as the doubling of gasoline prices in one year are of little moment. It is, instead, to argue that the situation is an exceedingly complicated one--one that cannot be ameliorated simply by a realignment of the standard product line of U.S. manufacturers. The capacity to innovate successfully, in technology and in organization, is also necessary if those companies are to be truly competitive on an international basis. We cannot, however, undertake this report as if alternative interpretations of the industry's present and future condition were not already available. At the risk of some over- simplification, we have organized those lines of interpretation into three distinct groups and have structured the report so as to sort out the evidence that bears on them and on their underlying assumptions. The first of these categories of interpretation we have labeled "transient economic misfortune"; the second, "natural consequences of maturity"; and the third, "fundamental structural change." A brief word about each is in order. The first view, long popular with officials of the Carter administration, is that the current crisis in the automobile industry, though a serious-'misfortune, is nonetheless temporary. Since consumers shifted to imports only when the domestic producers were unable to supply enough small, fuel-efficient cars

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14 and since the expansion plans of the domestic producers are known in advance, the end of the crisis can be predicted quite accurately. If American manufacturers can, as planned, turn out between 6.5 and 7 million small cars per year by 1985, American consumers will happily return to the fold--or so runs the argument of "transient economic misfortune." Missing, of course, is any convincing reason to believe that the domestic producers know exactly what to produce, that what they produce will be competitive, or that their competitiveness--even if achieved-- will persist into the future. A different interpretation is offered by those who see in the current problems of the auto industry the "natural consequences of maturity." This view, based on theories of the product life cycle in international trade, treats the development of such products as the automobile, computers, or television sets as a predictable sequence of stages from an uncertain technological "infancy" to a highly standardized technological "maturity." As production requirements change over the course of the life cycle, countries that enjoyed an advantage in the early stage of evo- lution will lose it at a later stage. Indeed, one of the main predictions of life-cycle theory is that the location of production will shift over time as the Droduct matures and its t-rhn~lms:,v diffuses.3 rat A "- ~~ Id ~-v~~ Considered in these terms, the automobile industry is rapidly approaching a mature state, a state in which both product and process technology are stable and well known. As a result, competitive advantage depends less on significant advances in product development than on relative costs of production and of production factors. By rights, the locus of production ought to shift from those countries where factor prices (labor, capital, materials) are high to those where they are low. This scenario has already been played out in other industries, such as textiles, motorcycles, TV receivers, and radios. Why not, then, with automobiles? In fact, from the standpoint of this "maturity" view, the only thing remarkable about the problems facing American auto manufacturers is the timing of the surge of imports. The precipitate rise in imports may have been unexpected, but the long-run tendency for them to displace domestically produced cars was entirely predictable. Imperatives of cost may still leave domestic producers with specialty-market niches, but the logic of "maturity" argues that in time the bulk of demand will inevitably be met from low-cost sources. Both these lines of interpretation envision a growing stability in product technology but differ in their assessments of the domestic producers' ability to compete. Proponents of the first line of interpretation believe that domestic cost disadvantages

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15 can be overcome by appropriate capital investments; proponents of the second believe those disadvantages to be inherent and permanent. Proponents of the third interpretation, the view we call "fundamental structural change," challenge the assumptions on which the first two rest, for they deny the fact of stability in product (or process) technology. To this third group the events of the late 1970s marked the beginning of a new era, an era in which the incentives and the rewards for technological innovation increased dramatically. In this view, radically different power plants, drive trains, body structures, and control systems loom on the horizon, promising advantage to those companies capable of technological leadership. The old stable order has been overthrown by events, and a new future of great technological diversity awaits the talented and the bold. If competition in the automobile industry between 1945 and 1978 occurred within well-defined technological limits and was dominated by marketing, styling considerations, and economies of scale, the proponents of the fundamental change view argue that competition in the 1980s and beyond will, once again, be heavily influenced by technological innovation. In this respect the industry will become much more as it was in its early years when product technology was changing rapidly and significant com- petitive advantage accrued to those who ~ . . . ,, ,, Introduced major functional Innovations. If this last view is correct, there will be a "greening" of the automobile industry, a period of striking industrial "de-maturity," in which the technology is diverse, uncertain, and changing. It is to the examination of the relative merits and implications of these three lines of interpretation that we now address ourselves. Chapter 2 of our report provides something of . a primer on tne Industry. In it we sketch out the basic facts of the market, the production process, and the companies. Following the industry primer, Chapters 3, 4, and 5 examine three historical trends that in retrospect have been of critical importance in the industry's development up to the beginning of the present crisis in early 1979. These include the covergence of technology (Chapter 3), the internationalization of products and m arkets (Chapter 4), and the growth of goverment regulation (Chapter 5~. With the historical developments as background, we shift to an analysis of the current situation, seeking to understand developments in the market, the competitiveness of domestic products, and the role of technical advance. Chapter 6 focuses on the comparative cost and quality of U.S. products and Chapter 7 on the implications for the management of people. The role of technology in competition is examined in Chapter 8, and Chapter 9 considers the nature of recent technical innovations. Finally,

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16 Chapter 10 develops alternative scenarios of the industry's futur and discusses their implications for public and private policies. N OTES 1. See Abernathy (1980) for a full discussion of these issues. 2. Katz (1980~. 3. Wells (1980) makes this argument clearly. e