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4 international Competition: Trade Flows and industry Structure 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. The extent of the U.S. market and its production base had long sustained a largely self-contained industry. In the last few years, however, the relevant industry boundaries have expanded dramatically. This chapter documents the two major changes visible in this internationalization of the U.S. auto industry's market and prod- uct. The first has to do with the volume and pattern of world trade in automobiles during the last 75 years; the second, with the number of competitors and the structure of the world market. Both developments have, of course, been shaped by government policy, by shifts in consumer preferences, and by the evolution of product and process technology. These forces are particularly well illustrated by the history of the small car in the U.S. market, a history we examine in concluding the chapter. PATTERNS OF WORLD TRADE IN AUTOS In the very early years of the industry the U.S. component of world trade was dominanted by a protective U.S. tariff and, at least for U.S. producers, high transportation costs.) Until 19 13 the U.S. industry had developed into the world's largest automotive indus- try behind the protection of a 45 percent ad valorem tariff. By contrast, European countries had a relatively open tariff policy in the pre-World War I era but maintained various horsepower and other use taxes that together with high transportation costs meant that significant U.S. penetration of foreign markets, particularly f or low-priced products, could not be accomplished by exports. Thus, even at a time when the British had no tariff (1911-1912), Ford opened production facilities in the United Kingdom. Differ- . ences In consumer tastes and in technology also influenced trade 51
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53 flows. As we noted in Chapter 3, the car in the United States was more of an all-purpose workhorse; the more sophisticated Euro- pean motorist demanded a different car. There was a pronounced aversion in the United States to technical features that required driver skill, such as precision gear shifting. Compared with Europe, where horsepower taxes and high gasoline taxes dictated a performance-oriented vehicle, American manufacturing sought to emphasize driving simplicity, lower costs, and engine flexibility. Although U.S. producers remained the world's leading exporter for the next 40 years, the numbers of cars exported were small. Substantial U.S. involvement abroad occurred through direct investment. In the years following World War I, as transportation costs became a less significant barrier, government trade policy grew in significance. The British introduced a 33-1/3 percent tariff in 1915 and later added a horsepower tax, which significantly shaped the development of the British industry. Similarly, the French. acting to protect their domestic industry, set a tariff of 45 per- cent in 1922, raising it to 90 percent in 1931. West Germany used a combination of tariffs, foreign exchange restrictions, and local content requirements to provide an effective measure of protec- tion. In the face of such restrictions on trade, Ford and G M acquired or established a significant number of manufacturing facilities in the major European countries; by 1929 the facilities of the two companies numbered 68. On the eve of World War II, direct international trade in auto- mobiles was insignificant. - ~ ~ ~ European producers were insulated ram foreign competition and operated in protected national markets. The U.S. producers also were protected, not by govern- ment policy it is true, but by the competitive strength of the domestic industry. Dealer and service network played an impor- tant role in marketing, making penetration by an importer diffi- cult. Furthermore, the products in demand in the United States were far different from those being produced in Europe, where taxes on gasoline and horsepower led to production of automobiles that offered more performance from engines and fuel but at the sacrifice of popular prices, vehicle utility, and the development of m ass markets. Thus, barriers to imports were inherent in the nature of the U.S. industry and its unique market demand, although from a policy standpoint the United States was an open market. Two principal developments characterized international trade in the immediate postwar years. The first was the openness of the U.S. market to growing import penetration in response to changes In consumer demand; the second was the formation of the European Economic Community (EEC) and the resultant growth of inter-European trade. Both developments are evident in Table 4.1, which compares trade flows of 1955 and 1970. .
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55 Note, first, the tremendous increase in the volume of trade between 1955 and 1970. For the major producing countries taken together, the ratio of imports to total production rose from 1.8 to 20.2 percent. The share of imports rose in each country, but the rise was most dramatic in the United States. In 1955 imports held less than 1 percent of the U.S. market, with products from Ger- many accounting for almost two-thirds of this amount. By 1970 imports had taken 15 percent of the U.S. domestic market. German products (principally VW) continued to lead the importers but were under significant challenge from the Japanese. Japan emerged as a major factor in the world market only in the 1960s, almost entirely through its sales to the United States. In 1970 Japanese exports to Europe were trivial. Although the Europeans were not buying Japanese products in 1970, the Europeans were involved in significant trade among themselves. Among the three major EEC producers--West Ger- many, France, and Italy--there had been, as in the United States, an obvious increase in the volume of trade. But in contrast to its leading position in the U.S. market, Germany was a net importer within the EEC. So for that matter was Italy; France, however, was still a net exporter of automobiles. Indeed, the imports share of the French market in 1970 was slightly below that found in the United Kingdom, which was not a member of the EEC at that time. Patterns of trade after the first oil shock in 1973 remained about the same, even though the pace of developments had quickened. Table 4.2 presents data on trade flows in 1978. By the end of the 1970s, Japanese producers were the dominant exporters to the United States. The extent of their increased market pene- tration is striking. The total U.S. market grew by 30 percent from 1970 to 1978, but the Japanese share increased over fourfold. This time, however, the rise of Japanese imports was not limited to the United States. In West Germany and the United Kingdom, the J apanese penetration was, if anything, more rapid still. From virtually zero percent in 1970, Japanese products by 1978 came to hold 9 percent of the British market and 4.5 percent of the West German. Since imports from outside the EEC accounted for only 4.2 percent of all new cars registered in the EEC (excluding the East Bloc), it is clear that Japan is the dominant force in opening the EEC to outside penetration. These developments, moreover, do not appear to be transitory, for recent evidence suggests that the Japanese producers have continued to make significant inroads into European markets, particularly in Britain and West Germany. Their entry into Italy, however, has been barred by a restrictive quota, and such policies may well become more prevalent, especially if local demand shrinks in the face of expanding capacity.
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56 It was not only the Japanese who entered the British market. Membership in the EEC opened Britain to a virtual flood of con- tinental products. Imports held 14 percent of the British market in 1970; their share in 1978 had grown to just over 50 percent. West Germany, followed by France, lead the EEC importers to the United Kingdom, and, as a result, Germany has joined France as a net exporter within the EEC. The data on international trade underscore the importance of government policy in shaping the extent and patterns of trade. From the earliest days of the world industry, tariffs, taxes, quotas, and regulations have been used in one form or another to influence the location of production and the volume of trade. The most prominent example of government intervention in the industry has been the export promotion policies of the government of Japan. Although reduced somewhat in the last decade, the policy of the Japanese government has been to protect the domestic industry from import competition, while encouraging the growth of exports through a variety of subsidies. The most obvious polar extremes in policy terms have been the situation in the United States, where the domestic industry has been insulated from foreign competition by the barriers inherent in the U.S. market and where government policy has been oriented toward the free flow of products. The penetration of the Japanese into Europe and the United States and the apparent slower growth of demand for automobiles under conditions of worldwide recession have created pressure for governments around the world to protect their domestic auto industries. Of course, the protection and nurture of a domestic auto industry is not a new event. Apart from the major producing countries, all of whom have operated behind tariff barriers at one time or another, developing countries have made extensive use of government nolicv to encourage the growth of n' ~t~m~hi I production. Trade involving the less-developed and developing countries, though of little moment before the 1973 oil crisis, has become more significant. Patterns of government policy, much as in the early years of the auto industry, are reflected in patterns of trade. Table 4.3 provides a summary of trade policies of the major producing countries and some representative developing nations. Many of the developing countries have established barriers to imports in order to encourage and protect domestic production. Primarily through the use of local content require- ments, such countries as Mexico, Brazil, and Korea have developed domestic production bases that are beginning to compete actively in the world market. Particularly in terms of component manu- f acture, the developing countries are increasing their exports. These emerging patterns of trade depend heavily on the absence of restrictions in the major markets in the world, particularly in . . . r ~ J ~ lo_ -5 ~~ ~& ~ ~~ Ail ~ ~ Act
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57 TABLE 4.3 Policies Affecting Trade in Automobiles in Selected Countries, 1980 Special Vehicle Local Content Country Tariffs Taxes Regulation United 2.9 percent None Local content States applies to CAFE standards. West 10.9 percent (EEC) Annual road tax None Germany based on cylinder capacity. United 10.9 percent (EEC) None None Kingdom France 10.9 percent (EEC) Annual vignette tax None based on age or "fiscal" horse- power. Italy 10.9 percent (EEC); Annual use tax based None quotas on Far on engine capacity; Eastem products annual certification (Japan 1980 tax related to size. quota: 2,200 vehicles). Japan None Engine displacement None shadow area. Brazil 185-205 percent; im- None Negotiated ports currently individually embargoed. Spain 68 percent (non- Luxury tax based on 55 percent EEC/EITA) horsepower. South 80 percent; import Varies (by type of Korea license required. car) from 62 to 94 percent. SOURCE: Mark B. Fuller, "Note on the Auto Sector Policies of France, Germany, and Japan." (Harvard Business School Case Services, 1981). the United States. Thus, if open markets prevail, it is not unreasonable to expect production from lower-cost areas to increase in significance in world trade. THE STRUCTURE OF MARKETS AND COMPETITION The evolution of technology, the rapid growth of world trade, and the emergence of mass consumption in Europe and Japan in the postwar era have had a profound effect on the number, strength, and strategies of competitors in the world auto industry. Before
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58 reviewing these changes in industry structure, it will be useful to sketch out the conceptual framework that underlies our interpre- tation of them. In an industry where production hinges on a relatively stable and makeable product technology and where the manufacturing process is capital intensive and offers significant economies of scale, periods of growth in market size create opportunities for producers to offer an increasing variety of products at or below the cost of the old product mix.2 If the technology of production is well understood and procurable (e.g., embodied in capital equipment that can be purchased or in human skills that can be r eadily hired), then in addition to existing firms it would be expected that opportunities for identifying and serving new market niches will be exploited either by firms on the fringe of the indus- try or by new firms. Unless barriers to entry are substantial, growth in overall market size will not be accompanied by a pro- portionate growth in the market shares of the leading firms. The large firms will certainly grow, but some of the market increase will be absorbed by those new or fringe firms offering additional variety or serving special market segments. Thus, seen in histori- cal perspective, developments that extend economies of scale and add to the maturity or stability of technology will result in a Reconcentration of the market and an increase in the effective number of competitors. With major shifts in process technology that underpin product advance, however, the trend toward Reconcentration may experi- ence a reversal. The reason for this lies in the "lumpiness" of new technologies and in the problem of procuring and mastering the new process. When advances in process technology depart signifi- cantly from existing approaches, they usually involve large capital outlays and the development of hard-to-acquire skills on the part of workers and particularly management itself. This is true even though the new process may offer significant reductions in the variable cost of production or important new product features. Significant increases in volume are needed to warrant their intro- duction. Thus, growth in market size over time may create an incentive for the introduction of new, radically different high- volume techniques. Such introduction is unlikely to be smooth in its effect on market shares. In the first place, an innovating firm may need additional volume to justify the change. Perhaps more important, the innovation is likely to create a competitive advantage that draws customers away from the fringe or newer producer. The result is to increase concentration and to reduce the effective number of competitors, at least until further growth in the market and renewed stability and diffusion of the technology allow the emergence of smaller, more specialized producers.
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59 It is important to distinguish the connection between capital- intensive process innovation and market structure as outlined here and the relationship between firm size and technological innova- tion of a more general sort. It has often been the case, particu- larly in the very earliest phases of an industry's development, that innovation in products has been associated with the entry of small f irms. When the product is changing rapidly, when alternative product technologies vie for market dominance, production pro- cesses are typically flexible and relatively less capital intensive. In these circumstances, product innovation can be a source of competitive advantage, and the innovating firm need not be particularly large nor command a significant share of the market to survive, at least for some time. It is only when product tech- nologies stabilize and economies of scale become of critical importance that the important connection between concentration and process innovation emerges. Concentration in the United States Figure 4.1 illustrates the historical patterns of concentration in the U.S. auto industry.3 (The measure of market structure used here is the number of equivalent firms--that is, roughly speaking, the number of firms that would populate the industry if all had the same market share as the larger firms. Technically, it is the inverse of the Herfindahl index, defined as the sum of the squared market shares.) Prior to 1955, three patterns of concentration are evident. The first and most radical changes followed the introduction of the process innovations associated with the Model T (1908-1919~; the second occurred with the introduction of closed steel bodies (1924-19263; and the third resulted from the wide- spread introduction of automation in transfer lines in stamping, in engine production, and so forth (1948-1954~. Each episode marked the introduction of capital-intensive technology that significantly altered returns to scale, and each was followed by a steady increase in the number of equivalent firms. Two additional patterns of concentration have appeared since 1955. In the early 1960s the introduction of compact cars pro- duced with automated equipment stimulated a brief period of Reconcentration that lasted until the mid-1970s, when the move to downsizing produced another period of concentration. Changes in World Market Structure The ebb and flow of concentration has occurred against the back- drop of a long-term decline in concentration, which began in the
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60 s U) 11 ~ 4 is J - c, LL LL or 2 UJ He o i ~111~ ~ 1 1 1 1 1 1 1 1920 1930 1940 1950 1960 1970 1980 YEAR FIGURE 4.1 Trends in U.S. automobile market structure. (Data for 1900-1965 from Abernathy, 1978; data for 1966-1979 calculated from data in Ward's Automotive Year Book, various years.) World War I era after the first major shakeout in the industry had established Ford as the dominant firm. This long-term trend is consistent with the general evolution of technology and competi- tion in the industry and, although different in its specifics, is con- sistent with developments in the world market. The pattern of change in the number of equivalent firms worldwide since 1950 is presented in Figure 4.2.4 In 1950 the number of equivalent producers worldwide was less than five, for the market was dominated by U.S. manufacturers and their subsidiaries. The growth of the market since 1950 and the emergence of several large producers in Europe and Japan are reflected in the long pattern of Reconcentration in world markets until 1975. Since 1975, however, the world market has become more concentrated. Table 4.4, which compares world market-share data for 1965, 1975, and 1979, presents evidence broadly consistent with the previously discussed trends in international trade. The Japanese have become the principal source of increased competition in the
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61 en cr LL ~ 9 z UJ J 6 > 8 - a LO IL o In is 10 5 1 l \ \ r 'A \ 1 1 1 1950 1960 1970 1980 YEAR FIGURE 4.2 Trends in world automobile market structure. (Data for beginning to 1965: Vernon, 1977; 1965-1979: calculated from data in World Motor Vehicle Data, Motor Vehicle Manufacturers Association, 1980.) world market. From 3.8 percent in 1964, Toyota and Nissan have increased their world market share to 13.1 percent, ranking fourth and fifth, respectively. The rise of the EEC also has had a major impact, with the most significant gains accruing to the French producers. In the last four years, GM has made significant ad- vances, largely as a result of changes in the domestic market. Taken together, the evidence from the U.S. and world markets is consistent with the pattern of interaction between share growth and technology discussed above. The internationalization of the auto industry has seen a long-term trend toward increased com- petition; both the number of competitors and their relative strengths have increased. The evident concentration in the last f ew years is a response to worldwide market shifts that have required significant capital outlays for new technologies and new modes of competition.
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65 TABLE 4.5 Examples of Joint Production Arrangements in the World Automobile Market Companies Arrangements Honda-British Leyland Renault-Peugeot Volvo- Peugeot- Renault Lancia-Saab Ford-Renault Alfa Romeo-Fiat Reciprocal marketing of vehicles; assembly of Honda products in British Leyland facilities. Development and production of engines; (Francis de Mecan~que) development and production of gear boxes and axles (STA). Development and production of new-size cylinder engine. Production of new passenger car. Assembly of Ford vehicles in Australia. Assembly of reciprocal supply of components. SOURCE: Salter and Fuller (1980). changes and innovation, particularly of the capital-intensive variety, are associated with periods of concentration. THE FORTUNES OF THE SMALL CAR IN THE U.S. MARKET In the auto market of 1980 the small car dominated sales. The dominance of the small car has been a fact of life in most coun- tries since the industry's birth. But in the United States the recent rapid shift to smaller cars is nothing short of a revolution. Until the mid- to late 1970s, the small car in the United States was a specialized niche--a fairly good sized niche, but a niche nonetheless--in the overall U.S. market. It was a segment tradi- tionally filled by foreign producers--a niche in which the domestic producers had offered some products but which had been a minor part of the business. The story of the small car in the American market illustrates many of the themes developed in our discussion of product convergence, international trade, and market structure.6 It is especially useful in providing insight into th e nature of the dilemma facing domestic manufacturers in 1980 and the extent of the transformation that is under way in the industry. Small Cars and Competition The role of small cars in the U.S. market has been shaped by the mode of competition that emerged in the 1920s and by the nature of production technology in the industry. The struggle of U.S. producers to produce a satisfactory low-priced, small, utility car--
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66 one that would offer sufficient economies in material, design, or manufacturing to substain a significantly lower price than its full- sized cousin--dates back to the early 1900s.7 In an early effort, Alanson Brush offered the 500 Brush runabout in 1907, featuring replaceable wooden axles and frames to reduce cost. Hard times in the 1930s brought a flurry of "downsizing" by Graham, Reo, Hupmobile, and others. In 1939, Powell Crosley, Jr., introduced his all new small car, the Crosley. Despite these efforts, the history of the small car in the United States does indeed support l2)etroit's generalizations of the 1950s--"small car, small profits." In fact, the graveyard of U.S. small-car companies would support even stronger condemnation of small-car economies. The reasons become clearer as the unique structure of the U.S. market is considered. The fate of small cars in the U.S. market was strongly directed by the particular way that the market structure and production methods developed in the 1920s. The introduction of closed steel bodies in the 1 920s chanted the concept of the automobile and ~ clack a Wl IU1= 11=W b~1 OI criteria for automotive design-- passenger comfort, room, heating and ventilation, and smoothness and quietness of ride. As the car evolved toward the general- purpose road cruiser that dominated sales for 50 years, premium products were associated with larger size and greater weight. It was during this period that GM evolved its "full-line" product strategy and developed the organization, finance system, and pricing policies to support it. As quoted earlier, an important aspect of G M's strategy was its product-line pricing policy. In effect, market needs were to be met with adjustments in the entire product line rather than with independent design. More- over, serious effort was made to rationalize the coverage of price classes, to avoid overlap and market confusion. when combined with the market's association of luxury and high prices with larger and heavier cars, the product-line policy resulted in a close and relatively smooth relationship between the price of a car and its size. Given GM's leadership and the pressure of competition, it is not surprising that this relationship pertained to the market as a whole. Indeed, as the automobile grew in size the relationship was, if anything, strengthened. This is illustrated in Figure 4.4, which presents a set of price-weight curves for the 1957-1961 period, the era of the first import wave. The price-size relationship that grew out of market prefer- ences and product competition stands in sharp contrast to the relationship between size and cost. Within reasonable size ranges, production costs did not decline as rapidly as price with declining car size. The consequence was a growing price-cost gap in the small-size inexpensive car segment. Detroit recognized this as early as the late 1 930s. The cost-size relationship is well v- ~ =; ~ ~ ~ ~ .,, ~ ~, ~ _ . ~ ~ ~ . ~ . . v ,. . . . .
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67 5,000 4,000 - - UJ CO 3,000 2,000 ~ 1958 · 1 959 ~ 1960 ) >- Lincoln 1 - l 1. Ch rysler / ~ / Buick I / ·/ Chevrolet Corvair~ '> Valiant Fiat Renault _' _A,l,, 4~VW ~ '~ Ford 1 1 1 1 2,000 3,000 4,000 5,000 WEIGHT (lb.) FIGURE 4.4 Price-weight relationships for selected models, 1958, 1959, 1960. (From Consumer Reports, April issues, 1958, 1959, 1960.) illustrated in Ford's experience with the Model 92A in the late 1930s. By 1936 no major producer was selling to the low-price market that had been served by the Model T. Ford undertook the develop- ment of the 92A to supply this market. Eugene Farkas of Ford's engine development group engineered the project. The car was to use the small, 1 36-cubic-inch displacement version of the V-8 engine first introduced to the market in 1937 and a scaled-down version of the Ford frame and body. The project was a technical success but an economic failure. . . . Farkas engineered the model. He used the smaller V-8 engine, and the 92A, as the car was called, emerged narrower and shorter than the regular Ford, and 600 pounds lighter. The first completed model, as Farkas
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68 recalls, was a "sweet-running job." But difficulties arose. The small motor cost but $3.00 less to manufacture than the larger one. Wibel calculated the possible savings in each case at a mere $36. Since the 92A would have to compete with year-old larger used cars, this was not enough . . . so by mid April the project was abandoned.8 It appears that little of the cost of production depended on the size or weight of components; the only reduction in cost came from slightly lower material content. The relative insensitivity of cost to vehicle size is reflected in the testimony of L. L. Colbert, President of Chrysler in the late 1950s. Speaking before a Senate committee, Mr. Colbert responded to questions about small-car production: Up to this point all I can say is we at Chrysler have not given up, but we have not found a way yet to engineer, style, and build one of these smaller cars for enough difference in price to justify what we believe the American market demand for it is.9 It seems that without substantial redesign and new facilities geared specifically to small-car production, little reduction in cost could be expected from reducing the size of the vehicle. Initial Import Penetration In a market where size is associated with luxury and premium products and where pricing policy follows suit, the cost-size r elationship renders small cars relatively unattractive from a profit standpoint. These relationships are illustrated in Figure 4.5, which contains a hypothetical cost-weight curve overlaid on the price-weight curve of Figure 4.4. The price-cost-weight relationship creates large profit margins on large cars and the possibility of losses on the very smallest models. The focus of the U.S. manufacturers on large vehicles is readily explicable in this context. Following World War II, managers at VW and Renault did not fail to understand that with favorable wage rates they could enter this vulnerable Achilles' heel of the U.S. auto market. So on the basis of very low factor cost and great attention to quality, VW launched a successful assault on the massive U.S. auto market. It was in light of such incentives that the domestic producers faced the first real penetration of foreign imports in the late 1 950s. The leader of the import surge was West Germany (largely VW).
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69 5,000 - ~n o LLJ ~ 3,000 4,000 2,000 _ · 1 958 · 1959 · 1960 1 Price ~1 Per 1. Unit I 1. Chrysler /. /Buick j 1. /. Financially | _ Infeasible Region _ Typical U.S. Competitive /Big-Profit, Bigger of Auto Size in Range for Mass Market / Region _ U.S. Production I / / Cost per Unit (U.S.)/ - I ~jncol n Chevrolet'' . Ford Co air Valiant Loss ~ Falco - : _ ~ ~ I I Profit/Cost 7Y, ~ ~ /~ ~ }_r RP~OVPrV Renau,~,~y:~F fat ~ ~ ~vw 1 1 1,000 2,000 1 1 1 1 1 3,000 4,000 5,000 WEIGHT (lb.) FIG URE 4.5 Price, cost, and vehicle size for selected models, 1958, 1959, and 1960. (From Consumer Reports, April issues, 1958, 1959, 1960.) From a relatively small base of 38,000 vehicles in 1955, West German products expanded sales to 190,000 by 1960. With the additional sales volume accorded the French and British products, the share of imports reached 10 percent of the market in 1959. The imports were generally targeted at the low-price end of the market. The products were smaller, lighter, more economical in operation, and less expensive than the domestic product. The 1960 Ford Fairlane for example weighed 3775 lbs., and its lowest-price version sold for $2776. In contrast, VW had a 94.5-inch wheelbase, weighed 1650 lbs., and had a list price of $1595.~° The marked shift to small cars in the late 1950s benefited the smaller domestic producers, AhlC and Studebaker, both of whom produced small cars--the Rambler and Lark, respectively. Rambler sales in 1959 were 363,000, while Lark sales totaled 133,000. Together with the imports the smaller cars accounted for 18.4 percent of the market.
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70 The three largest producers all introduced newly designed smaller cars in the fall of 1959 (Corvair, Falcon, Valiant). Prior to this time they had participated in the small-car segment by importing products from their British (Gal, Ford), French (Chrysler], and German (GM, Ford) subsidiaries. Although the new "compact" models were much smaller than the standard sedan, they were larger, heavier, and more expensive than the imports (see Table 4.6 for a comparison). The large domestic companies sought to fill a segment of the market just above the imports in terms of price and size, a strategy similar to that employed by GM in competition against the Model T in the 1920s. The domestic compacts were quite successful. While som e sales were taken from full-sized models, the imports were cut back significantly. A large part of the cutback occurred because captive imports were reduced to almost nothing. But other foreign manufacturers. most notably Renal Am c~~ff~r-rl c:i=~=hlm , _ _ ~ ~ , ~ , ~ ~ _ . ~ _ ~ ~ . ~ . . . . . _ . r Auctions In sales. Significantly, sales of the V W Beetle, the leading imported model, continued to grow. The success of VW in this era is particularly instructive in light of later developments. Although its low price was undoubtedly a key factor, two other aspects of the car were crucial. First, the "Bug" appears to have been well constructed, particularly in comparison with the domestic products. At a time (1960) when Consumer Reports was chiding the Corvair for its "unimpressive trim quality" and remark- ing on the Valiant's "poor finish," it was extolling VW's workman- ship and construction. Second, the "Bug" was fun to drive. Again, Consumer Reports noted that the import's "handling and roadabil- ity are well ahead of the U.S. average." ~ Finally, V W had established a sales and service network that has been an important aspect of competition in the U.S. market. Imports in the 1960s and the Entry of the Japanese Before the success of the compacts was evident, Ford had begun development of a car to compete directly with the imports. Code named the Cardinal, the car was designed with a 96-inch wheel- base and, surprisingly, a front-mounted, four-cylinder engine with front-wheel drive. 2 The car was never produced in the United States but did emerge in West Germany as the Taunus 12M. At the time of scheduled introduction in 1962, imports had slipped to 5.0 percent of the market, and there was some evidence that con- sumers were "trading up" to larger, more luxurious versions of the compact models. Yet Ford's decision was unfc~rt~'nat`~ in the ~ .. . . . . ~ . extreme, tor the reduced demand for imports was to be tempo- rary. The rise of the small car reflected fundamental demographic trends (increased suburbanization, shifts in the age structure, changes in female labor force participation) and the growth of multicar families.
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71 The latent appeal of the imports was apparent in the growth of V W sales. The domestic compacts also grew, not only in sales volume but in size as well. The incentives inherent in the price- size connection as explained earlier were evident in subsequent operation. While in production the Falcon, for example, added several inches in overall length and several pounds in weight by 1968. By this time, however, imports, led by the Germans and the Japanese, had made a comeback. The second wave, which began in the mid-1960s, was much more soundly grounded than the first. Indeed, the strategy of low price, good quality, and a solid dealer network that had served VW well was refined and applied by the Japanese with obvious success. At the same time, I;)etroit was more vulnerable to foreign competition because of public disfavor brought on by politicization of the safety and emissions issues. Many U.S. citizens were eager to buy foreign as a protest. The creeping growth of the compacts left the domestic pro- ducers without products to compete with the imports. Before new products were introduced in the early 1 970s, imports took 15 percent of the market. With the introduction of the Vega (GM), the Pinto (Ford), and the Gremlin (AMC), domestic manufacturers began to compete directly with imported products. Yet even in the early 1970s the U.S. cars were heavier and had larger engines. Unlike Ford in 1936 the domestic manufacturers did not simply miniaturize the larger cars. The new domestic subcompacts were f undamentally redesigned to reduce the number of parts by 30 percent and were produced with higher levels of automation and capital intensity than was typical of industry practice. These changes reflected the need to shift the cost-size curve down in order to improve the prospects for profitable production of small cars. Small Cars and the Crisis of 1980 The history of the small car in the U.S. market prior to 197 3 underscores the extent of the transformation under way in the domestic industry and illustrates well the way in which pressure for internationalization and convergence in products has affected the U.S. market. Given the character of the market and the tech- nology that prevailed for most of the industry's history, small-car production was both unprofitable and difficult to incorporate successfully into the product strategies of the domestic manufac- turers. It is clear in retrospect that Detroit has always had the capability to produce a small car, but its dominant orientation both In production and in marketing--at least in domestic operations--has been elsewhere. Thus, to successfully produce a small car would seem to have required some basic changes--partly . .. . . . - . .
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73 .= ~ ~ C o _ ~ ~ ~ ~ o -._ ~ o.04=C~ ~a .~ ~ O ~ == ~ O ~ ~ ~ ~D E_ X :^ U' ~: .Cq O Q ~ O ~ ~ _ ~ ~ Z oo ~ ~ O _ O O O _ _ O O oo ~ _ o ~0 - - ) ~ ~4 _ a) C’ ~ ~: Ct O a :>` - e~ _ E 8 E ° E E s c ~ : E 8 S E ° E ,, j E _ X ~ ~ 8 E ~s _ · - = y 8 E E C ' ·O YE E ~ ~ 8 Y sE ~ ~ ~ =3 s~ ° ~ E E E ~ ~ ° ~ s s Y 5 o Z Z Z; o oo oo Cq ~ o 3 ~o o o - - - ~: ~4 - - CX5 ~ - o oo ~4 - . c~ o . . o v,
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74 in technology, partly in organization and strategy. Perhaps most important, it required a restructuring of the market-pricing struc- ture so that small cars could be sold at a profit. This might have been difficult in earlier years but ultimately had to be faced. This is clear in marketing, where an organization long oriented toward "trading up" in size, associating premium with size, and pricing products across a range of size classes must sell and sell profit- ably in a market where variations in size are ~harniv climinich~f] where everything is small. . ~ . . . . . ran ~^ ~ ^~ A ~ in retrospect, it is evident that the oil shocks of the 1970s have brought the U.S. market for automobiles into the international arena. Differences in tastes and relative prices that insulated the domestic producers from extensive import competition have changed dramatically. This internationalization has confronted the U.S. firms with many more competitors, and it has required major changes in operations and strategy. This is true not only because the market has changed but also because the new com- petitors approach competition very differently. The old days, where the three main producers competed on a relatively small number of dimensions (e.g., styling, dealership performance, economies of scale) in a market focused on the large road cruiser, are gone. The industry is now faced with several somewhat unfamiliar competitors with different strategies and a market demanding different products. Much has been made of the lack of U.S. capacity for producing the types of products in demand in 1980 and the large investments required to obtain it. Yet it is also useful to recognize that com- petitiveness in the future is likely to require changes in orientation and organization that may rival the billions in capital investments in importance. In some ways the challenge facing the industry is similar to the challenge faced by producers in the 1 920s, when changes in the product and the market transformed the industry. Success in that era demanded not only new products but also new forms of organization and a new strategic posture; survival in the modern era may demand no less. . .. .. NOTES 1. See Wilkins (1980) for a review of the effect of government regulation on international trade. 2. These arguments have been developed in unpublished work by David Haddock. 3. Abernathy ( 1978), pp. 29-31, notes the trends in con- centration from the early days of the industry. 4. See Vernon ( 1977) for data on equivalent firms for a number of worldwide industries.
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75 5. See Fuller (1981) for a discussion of these relationships. 6. White, L. (1971) presents an analysis of the small-car story that emphasizes the effects of market structure on new product development. 7. See Flink (1970) for information on early automobiles and attempts to develop a small car. 8. Nevins and Hill (1 962), pp. 11 7-11 9, cited in Abernathy (1978), o. 28. 9. Testimony by L. L. Colbert, cited in L. White (1971), p. 184. 1 0. Consumer Reports, April 1960. 11. Ibid. 12. The Cardinal program is mentioned in Tracy (1978b).
Representative terms from entire chapter: