Was the Economic Crisis Actually Good for the Auto Industry?
There has been much said about the problems that the U.S. auto industry has been experiencing and the causes for this crisis. Much of the blame in the media attributes the economic crisis that began in 2007 as the reason for sharp declines in sales. While the economic environment clearly had an effect on all industries, including the automotive industry, was this cause for its problems? Or did it just expose greater underlying issues that have been plaguing the North American automakers for some time already?
The easiest scapegoat for the problems in the auto industry was obviously the slowdown in the economy, originally caused by the housing bubble. Almost every side effect of the housing crisis had an adverse impact on the auto industry. As home values stopped rising and eventually shrunk, there was less household wealth to spend. This highlighted the amount of leverage that existed among individuals and corporations. The astonishing level of debt that existed and the freefall of home prices and mortgage backed securities attached to them seized the credit markets. As belts were tightened, companies and individuals often opted against purchasing new vehicles and remained with what they had. As homes faced foreclosure, auto sales plummeted, and massive layoffs began occurring, the downward spiral among both sectors continued.
While all of what is described above is correct, there are factors that are inherent to the auto industry itself that are in play. Ford, Chrysler, and General Motors, the U.S. automakers known as the “Big Three,” are the focus of this discussion. When examining decisions made by the domestic auto industry, it is highlights that there are fundamental problems in how the auto industry is run in the U. S. This can be evidenced by comparing the domestic firms to foreign automakers. There is no doubt that 2008 was a horrible year for the entire industry, but the losses incurred by the American carmakers dwarfed the losses of foreign firms such as Toyota, who lost money for the first time in recent memory.
The challenges confronting the Big Three seem so difficult to overcome that it would seem easier to start from scratch with a new model, rather than attempt to repair them. Tellingly, cost of production is apparent in every one of these problems. Most of the largest are fixed costs, such as R & D, general overhead, health care and pension obligations, and marketing. An interesting point to note is that the conversion costs of direct labor and factory overhead are usually those first targeted as among the largest expenses and the first to be cut. In reality, factory overhead and labor are further down the list than one may expect. The fact is that the visibility of cutting these inputs will yield more in terms of political goodwill than the actual economic benefit.
It is evident that the real issue is how the domestic carmakers manage these costs. The cost structure for this group began fattening in the 1970s. As this continued, Japanese carmakers were making inroads to the U.S. market. From the beginning, foreign companies kept a tight grip on costs and implemented the continuous improvement philosophy. Toyota developed the lean manufacturing style and continued to improve in quality and gain in market share. The domestic automakers eventually adopted the lean philosophy, but by then there was no competitive advantage gained from it, just an attempt to keep pace with their competitors. However, deeper problems exist in the fundamental philosophy. Auto executives did not fully comprehend that they needed to reduce costs, even using company planes to go to Washington to ask for bailout money. It appears that they just do not comprehend on any level that a change is needed.
It seems that the recent crisis is not the culprit behind the near collapse of the U.S. auto industry. It became a spotlight on companies and industries that have been mismanaged, but did not need to change since positive economic conditions kept them afloat. If not for the almost complete collapse of the economy, the auto industry would have lobbied for aid and most likely received it, as has often happened in the past. Domestic car manufacturers have existed mainly through subsidization and protectionism, rather than through the traditional free market manner of creating quality products and turning profits. If it were not for the convergence of multiple failures across the U.S. economic landscape, the underlying problems of the automakers would not have been flushed out. Maybe now the Big Three can really fix their problems this time.
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