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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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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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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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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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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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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
Representative terms from entire chapter:
domestic producers
