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OCR for page 150
10
The Automotive Future:
Three Scenarios and Their implications
At the beginning of this report we sketched out three interpreta-
tions of the current crisis in the U.S. auto industry. Although we
have not provided a detailed or exhaustive analysis of each, we
have focused on two aspects of the situation--technology and
comparative costs--that distinguish the three lines of interpreta-
tion from one another. The various assumptions made and the
evidence developed are summarized in Table 10.1. The evidence
points to several things: a sizeable cost and quality disadvantage
for U.S. producers, some new designs that appear to have wide-
spread appeal, and a general ferment in technology that fore-
shadows what may be radical innovation over the next several
years.
Table 10.1 underscores the ambiguity in the current setting.
As might be expected in a period of transition, we have identified
evidence that accords with some of the assumptions of all three
competing explanations. Since the purpose of this report is to
highlight possibilities, we draw no strong conclusions. Indeed, it is
important to note that the actual course of development may not
be monolithic. Maturity may characterize the industry for some
time, followed by a period of fundamental change. Furthermore,
one pattern of development may not describe all market segments.
In light of the uncertainty clouding the future and in order to
clarify the implications of alternative patterns of development,
this concluding chapter of the report presents three scenarios of
the industry's future, based on the three lines of interpretation.
We will sketch out conditions and interactions that are consistent
with the course of industry activity implied by a particular inter-
pretation of the current crisis. We will discuss the management
implications and the implications for alternative public policies
for each scenario. The scenarios depict possible chains of events
and the likely impact on those events of broad public policy
options. While the scenarios are intended to offer a realistic
assessment of the development of the industry under given
150
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assumptions, they are not based on an extensive analysis of busi-
ness strategy. And although some 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 are important areas for further work but were outside the
scope of this report. We draw no conclusions about the desir-
ability of specific government actions; rather, we indicate how
alternative actions may affect the industry within a given
scenario.
THREE SCENARIOS
The three interpretations of the current crisis--transient eco-
nomic misfortune, natural consequence of maturity, and funda-
mental structural change--have different implications for the
future. Any attempt to grasp those implications, however, must
recognize a point that is often missed: the usual form of fore-
casting the future, trend projection, is often misleading. The
future typically emerges from a collision of events that are often
unrelated. For example, the oil crisis of 1979 would have had
little permanent effect on the U.S. automotive industry if it were
not for three other events: (1) Japanese penetration of the U.S.
market and their development of excess capacity, (2) the U.S.
government's earlier attempt to shelter consumers by controlling
oil prices and mandating fuel-economy standards, and (3) the U.S.
auto manufacturers' misjudgment of the future.
If any view of the future is to offer useful insight it must be
more than a linear projection of simple trends; it must recognize
interactions among shifting technologies, political events, and
economic factors. One way to address this complicated reality is
through the development of scenarios. A scenario is a depiction of
possible chains of events that might occur. Their use provides
insight into the various ramifications of changes in associated
conditions.
A. . .
O ~
~I~he three scenarios are presented in Figures 10. 1, 10.2, and
10.3. No attempt has been made to describe the course of events
in great detail. Furthermore, we have assumed no changes in
current government policy. Our purpose is to indicate a few main
lines of development that are apt to occur under a given set of
assumptions. Thus, the scenarios illustrate the consequences of
d ifferent assumptions, taken jointly.
The basic assumptions of each line of interpretation can b e
summarized as follows:
1. Transient Misfortune:
Small or negligible
cost/quality disadvantage.
OCR for page 153
153
2. Consequences of Maturity:
3. Fundamental Restructuring:
Scenario 1: Transient Misfortune
Central problem is lack
of small-car capacity.
New dominant design has
emerged.
Product and process
technologies are stable.
Large cost disadvantage.
Location of production
based on factor prices.
Technology becomes
competitively important.
Continued increases in
real price of oil.
Introduction of radical
innovations.
The implications of the view that the industry is in the midst of a
serious, albeit transient, misfortune are spelled out in Figure 10.1.
The left column depicts some of the driving forces in the scenario:
(1) protectionist sentiment growing out of declines in auto sales;
(2) the mismatch of U.S. car capacity and market demands; and (3)
the emergency of a broader diversity in technology and product
mix. Where before V-8s had powered a largely similar fleet of
U.S.-produced cars, suddenly there is an expansion of models at
the bottom of the market (e.g., Toyota's Starlet) and "at the
sides," with repect to the propulsion options already introduced or
in process as well as with respect to other technological features.
From this starting point, Figure 10.1 shows a snowball effect,
as the implications of new capacity and a weakened domestic
industry unfold. U.S. producers develop new models and small-car
capacity, but the extra Japanese capacity leads to intense price
competition. Some of the new capacity from Japanese firm s
comes from U.S.-based assembly plants. The U.S. firms, with
their attention focused on the most popular models, fail to meet
J apanese competition in emerging niches and segments; the
mini-car is an example.
Although the depths of misfortune are transient, they clearly
have lasting effects. U.S. firms regain some market share but
overall are not financially strong enough to completely recoup
their losses, nor are they able to offset Japanese penetration into
new segments. The picture is brighter on a national basis. New
Japanese assembly plants and new capital invested by the U.S.
firms leave the country with a viable domestic industry. Because
OCR for page 154
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of market-share losses by domestic firms and the tendency for
Japanese plants to source in their home country, the U.S. share of
value-added declines, and the industry decreases in overall size.
The United States loses its preeminent world position, and the
domestic supplier industry is weakened. The net effect is a
smaller, but viable, domestic production base.
Scenario 2: Consequences of Maturity
.
The second scenario differs primarily in the assumption of a sig-
nificant U.S. cost disadvantage and a highly stable product and
process technology. In our lexicon a "mature" industry is one in
which the technology of product and process is essentially em-
bodied in factors of production that can be readily purchased in
established markets. Assuming that the auto industry is mature in
this sense has major ramifications. As Figure 10.2 suggests, the
current crisis is but a continuation of a long-term restructuring of
the location of production.
A known and stable technology and wide cost differences imply
that most cars sold in the United States will be produced in such
countries as Taiwan, Brazil, or Mexico, where labor costs are
much lower than in the United States and even lower than in Japan
($1 per hour in Taiwan versus S9 per hour in Japan and $18 per
hour In the United States).
This scenario also implies an
Increasing role for suppliers who can move their plants rapidly. As
events unfold, this search for low-cost production leads to a loss
of production capability and know-how in the United States and an
increase in third world countries. Cars produced in these
countries are introduced into U.S. markets.
This scenario does not assume that vehicle production moves
completely offshore. Because of engineering expertise, unique
market demands, and other factors associated With product
differentiation, it is likely that a good fraction (e.g., 35 percent)
of the cars sold in the United States will be produced domesti-
cally. Added to the decline in production by the original equip-
ment manufacturers (OEMs) is the loss in creative, innovative
interaction among the auto and other industries and the loss in
manufacturing know-how in high-volume vehicle manufacturing.
Scenario 2 includes three forcing events depicted at the left-
hand side of Figure 10.2: ( 1 ) the effects of the recession in
_ _ .
~ _ ~ ,
reducing demand; (2) the continued inroads of Japanese producers
based on their landed-cost (and quality) advantage; and (3 ~ a
chance in amen Preferences for efficient transportation
modes. The implications of the first two events are rather direct
standardization, worldwide sourcing, foreign penetration. The
third event means a more competitive and more varied dealer
OCR for page 156
156
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157
environment. with implications for distribution channels and entry
. , ,
strategies.
The net effect of industry evolution under the
scenario is a vastly decreased U.S. auto production
. . . . .... , , . , , ,
maturity
base and
worldwide competition based in low labor cost coun ries. One
intriguing effect of foreign entry and changes in consumer pre-
ferences is a radically different retail environment. U.S. firms
survive by sourcing and producing most of their products offshore,
while a few specialty segments are served from domestic sources.
Under conditions of maturity, plant shutdowns and layoffs would
continue, and the United States would likely become dependent on
foreign-based technology for mass production of the automobile.
Scenario 3: Fundamental Restructuring
Unlike Scenarios 1 and 2, the third scenario (see Figure 10.3
assumes substantial and continuing pressure for technological
innovation. Driven by rising fuel costs, innovation is efficiency
oriented and is a major factor in competition. The implications of
new product innovations are pervasive. Responding to a rising
market demand for both fuel savings and performance, the major
U.S. producers seek more innovative technologies from which to
develop new product designs. As investment is turned toward new
products, the degree of vertical integration declines markedl y;
specialized, robust, technologically active suppliers become key
sources of new technologies. During the period of transition and
while new products are developed, U.S. firms lose their market
shares in standard models.
Unlike earlier periods, U.S. producers are unable to adequately
develop a full-line production capability.
Change is rapid,
products are diverse, and some firms are financially weakened. As
a result, a higher degree of specialization occurs, not only by
producers but by country as well. OEMs tend to do the best when
they focus on the technology at which they are most expert. The
pace of technological innovation quickens, and specialization by
technology creates strong domestic linkages; availability of sup-
porting industries (e.g., chemicals, materials) becomes a critical
determinant of location.
The transformation of the auto industry from a mature, tech-
nologically quiet industry into a hotbed of innovation and change
creates opportunities for U.S. firms to attain competitive advan-
tages through development of radically new products. The same,
however, can be said of the Japanese and the Europeans. Whether
U.S.-based production regains lost market share by creating and
exploiting new markets depends on its ability to "out innovate" its
competitors.
OCR for page 158
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OCR for page 159
159
In this regard the U.S. firms have historically had an edge on
the Japanese, whose advantage seems to lie in refining and manu-
facturing an established technology. Many of the Europeans, how-
ever, have been more performance and technology oriented than
the U.S. firms and provide a strong innovative challenge. Thus,
Europeans make inroads in the growing specialty segments, while
Japanese maintain a strong position in standard models. U.S.
firms regain some lost ground through innovation, and, overall, the
U.S. share of value-added returns to its 1979-1980 level.
The Scenarios Contrasted
It is clear from our discussion that the future presents significant
risks for the domestic auto industry no matter what scenario one
picks. Obviously, the outcome in Scenario 3 is more optimistic,
but it supposes that U.S. firms can "out innovate" their competi-
tors and (perhaps equally difficult) survive losses of market share
and financial difficulties during the period of transition. Pros-
pects are even more bleak in Scenario 2, where the domestic
industry is reduced to specialty production; this is effectively the
"Britainization" of the U.S. auto industry. The future is not so
calamitous under Scenario 1, but even here the domestic industry
shrinks and becomes much less profitable than before.
There are two aspects of the industry's environment that we
have held constant in developing the scenarios, which may have a
bearing were they to change. The first is the overall state of eco-
nomic activity. We have assumed that the conditions of recession
_ _ ,
, . . . . ., ~ . . ~ ~ ... _
(SlUgglSh, it any, growth; anemic ulnas sales' persist. ~ Ill LO
normal or above-normal rates of growth would be unlikely to
affect our conclusions under Scenario 2 (maturity) but may influ-
ence developments in Scenarios 1 and 3. The principal effect
would be to strengthen the financial position of the domestic
firms, allowing them to cover more market segments or develop
more new products, thus strengthening their overall market share.
The second critical assumption is the absence of any policy
action by the federal government. It is somewhat unrealistic to
expect public policy to be on hold over the next several years.
Legislation has already been proposed that would impose strong
trade restrictions and reduce taxes.2 Although proponents have
made various claims for such proposals, it is important to note
that their effects are likely to differ under different patterns of
industry development by meshing the scenarios with alternative
policies, their joint implications can be made clear.
OCR for page 160
160
IMPLICATIONS FOR PUBLIC POLICY
A full-scale examination of auto industry policy measures is
beyond the scope of this study. What we can do is indicate the
broad differences in the industry's evolution if two kinds of
general policy measures are enacted. The first general category
includes "internal" measures, including deregulation, and invest-
ment incentives; the second category includes "external" policies
to reduce imports. We propose to examine the effects of a
representative or generic policy within each category. Within the
"internal" category, for example, the types of regulatory mea-
sures considered include a freeze on new regulations, postpone-
ment of compliance dates, or outright repeal of some regulations;
tax incentives would include accelerated depreciation and an
increased investment tax credit. On the "external" side, almost
all current proposals are labeled "temporary" and are represented
by quotas on imports; the basic thrust of such action would be to
afford a measure of protection during a temporary transition
period.
Before considering the effect of these broad policy options on
industry evolution, it is important to note that macroeconomic
policy may have an important bearing on the implications of the
three scenarios. Events of the last few years have demonstrated
the sensitivity of automobile sales to high, real interest rates and
sluggish economic growth. Since we assume that the conditions of
recession will persist, any developments in macroeconomic policy
that are to increase overall economic activity would affect the
predicted outcomes as noted above. Likewise, macroeconomic
policy that had the effect of deepening the recession. or which
. . .
created economic instability, could weaken the U.S. firms under
each scenario.
The implications of alternative policies are examined under the
three scenarios in Table 10.2. The scenarios are listed in the first
column, and the three policy regimes are listed across the top; we
have added "do nothing" to the "internal" and "external" categories
outlined above. The second column establishes a baseline by sum-
marizing the scenarios developed in FIgures 10.1, 10.2, and 10.3.
The third and fourth columns present likely changes in each
scenario if the hypothetical policies were to be enacted.
Perhaps the clearest conclusion to emerge from the analysis in
Table 10.2 is that what outcome one predicts for a given policy
depends on one's view of the industry's evolution. This is most
clearly spelled out in comparisons of the maturing industry
scenario and the other scenarios. Under conditions of maturity,
neither internal policies nor temporary trade restrictions alter the
long-term decline of U.S.-based production. Tax and regulatory
OCR for page 161
161
changes do strengthen the domestic financial position of firms,
and trade measures slow migration of capacity. But unless
permanent and restrictive quotas are adopted, the long-ter m
prognosis is little changed.
In the other two scenarios, internal policy options generally
strengthen the domestic firms, although the extent of such
strengthening is hard to determine without far more specific
orooosals. Moreover, there are important short-run differences
~ . . . ~ ~ ~ ~
between Scenarios 1 and 3. Under transient misfortunes, tne
transition period is characterized by increased capital spending,
but the assumed parity of new U.S. products implies that market-
share losses will not be substantial. In contrast, Scenario 3
envisions a longer transition period in which domestic firms will be
under relatively intense pressure because of their cost position.
We have assumed that the changes in internal policies are
sufficient to reduce the risk that marginal competitors and
product lines will be shut down because of financial weakness.
Under both Scenarios 1 and 3, the domestic firms are placed in a
somewhat stronger position vis-a-vis foreign competitors, although
the migration of standard components is more extensive In
Scenario 3. In effect, imports and other market pressures
maintain strong incentives for change (i.e., new capacity in
Scenario 1; new products, capital, and organization in Scenario 3),
while policy changes ease the financial pressure of the transition.
External measures are assumed to have similar effects on the
financial side but raise new risks in their impact on competition.
We have assumed that a temporary quota raises domestic market
shares and prices and thus offers financial support under both
Scenarios 1 and 2. The risk is that a reduction of imports will ease
competitive discipline and reduce the urgency of change. Take
Scenario 3, for example. Without the strong, immediate pressure
of import competition, the domestic firms (and their partners)
may make the transition in terms of new capital investment and
new products but may fail to undertake changes in organization
and management that are necessary for long-term viability. It is
our view that the temporary nature of the external measures and
the strong demands for the market mitigate the competitive
cushion offered by trade restriction. We expect Scenario 3 with
external policy measure to result in a strong viable domestic
industy, somewhat larger than would be the case under no change
in policy. N evertheless, the risk of organizational slack is real
and must be weighted in the balance when asessing the options and
their impacts.
1
~ . ~ ~ r _ ~ I_ · _ ~~ 1:_~:~__ God.. ~ ~ 1~
It Is clear from thlS discussion that prealcllons about tile
efficacy of policy must rest on a particular view of the industry's
development. Particularly in the case of trade policy, there is no
guarantee that temporary action will have its intended effect. If
OCR for page 162
162
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~ _ , ~ 8- , 5 "9 ~ d ~ ~ ~ 38 ~ ~ ~
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164
the maturity scenario prevails, only long-term measures will
preserve a large domestic industry. Yet permanent policies would
not be neutral in their effects on adaptation under Scenarios 1 and
3. Especially in the case of Scenario 3, a policy of permanent
quotas, essential to retention of domestic production under
m aturity, would likely slow the industry's adjustment, both in
organization and in technology. The result could well be a weaker
industry in terms of performance and technical leadership than
would be the case with temporary trade measures.
I MPLICATIONS FOR MA NAGEME NT:
IN THE STARS OR IN THEMSELVES?
The policy options examined in this section may have an impor-
tant bearing on the evolution of the industry, depending on what
scenario or mix of scenarios turns out to be true. We have seen
that where change and adaptation are required, public policy can
increase the industry's flexibility and freedom of action. While
public policy thus has a critical supporting role to play, a role
likely to be focused on mitigating risks and facilitating necessary
changes during the transition period, the long-term future of the
industry is by and large in the hands of its participants. This is not
to minimize the challenges they face nor the impacts of external
factors. It is only to reaffirm the central role of the productive
confederation--the firms. the unions. the !sr~nolier~__in charting the
industry's course.
-, ~ - fir r~~~~ ~'& ·O
This report identified a number of implications for manage-
ment in the auto industry, implications that hold out the prospect
of substantial changes in the way the business is managed. Some
of our conclusions are generally applicable, while some depend on
a particular scenario. Under "maturity" for example, the key to
competition is the ability to manage a worldwide production and
distribution system, with worldwide sourcing and technical
, ~ .
innovation that extends and refines existing concepts. In the case
of a "fundamental change," however, the competitive tasks are
twofold: (1) improvements in quality and productivity in existing
models and (2) the development and introduction of new concepts
in products and processes. These two scenarios m~v th'ic rim
different organizational and managerial capabilities.
TV t ~ ~ 1 ~
whatever the specific path of development may look like,
there are several irr~plications for management that appear to be
generally applicable. While the evidence in this report suggests
some room for improvement in automation and new-process tech-
nology, the bulk of the productivity-quality gap lies in established
m anufacturing practices (including design and production),
methods of organization, manufacturing systems, and the manage-
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ment of workers. These aspects of the firms are as much a capital
resource as buildings and equipment. As we noted in Chapter 7 in
our discussion of workforce management, change requires
investment, not only in procedures or structure but also in habits,
relationships, and even basic concepts of the business. It is the
investments in such activities rather than the more publicized
investment in new plants that hold the key to regaining
competitive parity with the Japanese.
The thrust of these investments in capital, people, and
organization is more than a change in the product mix--it is to
achieve superior manufacturing performance, to make manufac-
turing a major competitive factor. We have examined changes in
the management of people, the need for a more open agenda
between firms and employees, and a move to engage the work
force in the competitive activities of the enterprise. But other
equally fundamental changes also may be required. At the same
time that the domestic firms are faced with a competitive
challenge in the cost and quality of established products, the
importance, even the necessity, of significant product innovation
may grow over the next few years. If so, competitive advantage
in the mid- to late 1980s and 1990s will depend on the ability to
develop and implement new design concepts in a relatively
uncertain environment.
Competition in these terms would confront the existing
domestic producers with the need for different organizational
capabilities than those that have been developed over the past 40
years. In an environment where products were standardized and
innovations incremental, the successful firms excelled in exploit-
ing economies of scale, in incremental innovation, and in coordi-
nation and control. Entrepreneurship and brilliant but risky
projects became increasingly dysfunctional, while the structure of
organization became more hierarchical and its processes more
bureaucratic.
Contrast this state of affairs with an organization that excels
at innovation and at coping with uncertainty. It is likely to be
guided by individuals willing to take risks when precise calcula-
tions cannot be made and to utilize organizational structures that
are highly interactive and adaptive, where negative feedback is
likely to be acted upon promptly.3 This is, of course, an ideal
type, and there is as yet no reason to suppose that the successful
auto producers will function like hi-tech electronics firms. But
achieving radical innovation would seem to require an organiza-
tional setup different from that appropriate for efficient produc-
tion of an established design.
One need only look at Ford in the 1920s to see that technology-
based competition may require significant innovation in organiza-
tion and management as well as in products and processes. As an
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example of the kind of changes required, consider the role of
research. In a period of technical ferment, new ideas and new
concepts are vital to competitive success. Yet for the most part
the research organizations in the auto industry have not been tied
in to the basic competitive activities of the business, simply
because innovation that required research was not essential to
competitive success. An R&D organization that operates in its
dominate mode as an applied engineering group tends to relegate
basic or even applied research to the back seat; it is likely to be
different from the organization one would design to generate new,
competitively significant and viable concepts. Not only would the
lines of communication and the reporting relationships be differ-
ent, but changes would be likely in the types of people employed,
the process for project selection, funding, and so forth.
Other examples could be cited. The point is that the organiza-
tion, the people, the concepts that are likely to be essential to
competitive success in the auto industry in the 1980s and 1990s
are different from those that have prevailed in the postwar period
and different from those that prevail today. We have emphasized
the magnitude of the challenge but have not underscored the
strengths in the industry or the "window of opportunity" that the
current crisis has opened. The critical element in the industry's
efforts to tap resources and exploit its considerable strengths
appears to be strategic vision, the ability to see the future, to see
the business in a way that is different from the way it has been
seen in the past. Given the central importance of change and
adaptation to the industry's future, it is perhaps fitting to con-
clude this report with Alfred Sloan's commentary on Henry Ford,
long after General Motors had established its dominance in the
marketplace.
Mr. Ford's concept of the American market did not fit the
realities after 1923. tHe] failed to realize that it was not
necessary for new cars to meet the need for basic trans-
portation.... Mr. Ford, who had had so many brilliant
insights in earlier years seemed never to understand how
completely the market had changed from the one in which
he had made his name.... The old master failed to
master change.4
N OTES
1. It is important to remember that our perspective is a
national industry perspective. We do not attempt to judge the
impact on specific producers, nor are we explicitly concerned with
the future of U.S.-based companies. Our focus is on U.S.-
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based production and the U.S. share of value-added in the industry.
2. The recent "voluntary" restrictions adopted by the
government of Japan establish a short-term barrier to further
penetration; the trade issue may well be raised once they are
lifted.
3. This characterization of the dynamic enterprise is based on
work by Burton Klein. See Klein (1977) for a full statement of his
views.
4. Sloan (1972), pp. 186-187.
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Representative terms from entire chapter:
auto industry
