Thursday, July 27, 2006

previous entry | main | next entry | TrackBack (0)

The healthy automotive sector in the United States

No doubt, the title to this post must sound odd. After all, according to one recent report, foreign automakers now command a majority of the U.S. auto market for the first time ever.

However, Daniel Griswold and Daniel Ikenson argue otherwise in a Cato policy brief that looks at the U.S. automotive sector. Their argument is unsurprising for anyone familiar with Cato:

The financial woes of a few companies operating in a healthy, competitive market do not justify intervention by Washington policymakers but are the market's way of providing feedback about the decisions of those firms. It is not the role of the government to rescue companies that have made relatively bad decisions. Healthy competition ensures that best practices are emulated, leads to gains in productivity and innovation, and provides American automobile consumers with greater choice, better quality, and more competitive pricing.
This argument is unsurprising coming from Cato -- but they do have the advantage of marshalling useful facts to buttress their argument:
Although complaints about unfair competition from abroad are less shrill than in the 1980s, foreign producers have not escaped criticism. The chief executive officers of General Motors and Chrysler recently complained that an allegedly undervalued yen gives vehicles imported from Japan an unfair price advantage of as much as $3,000 per vehicle. Sen. Carl Levin, a Democrat from Michigan, charged at a hearing in February that Detroit-based automakers face unfair foreign competition. "They are competing with currency manipulation by other countries, including China, Japan and Korea, which gives their vehicles and other products an unfair price advantage in our market," Levin said in a statement. And the United Auto Workers union, which represents workers at GM, Ford, Chrysler, and several parts' producers, has called for a federal "Marshall Plan" to aid those companies....

In 2004, 16.9 million light vehicles were sold in the United States, of which 2.4 million, or 14 percent, were imported from Asia, while 3.5 million, or 21 percent, were Asian nameplates produced in the United States.5 Of the nearly 1.7 million Toyotas sold in the U.S. market in 2004, nearly 3 of every 4 were produced in the United States, which was a greater share than in the previous year. Over 81 percent of the nearly 1 million Hondas sold in 2004 were produced in the United States, which was an increase from the 78 percent rate attained in 2003. Nissan's U.S.-produced vehicles accounted for 86 percent of its U.S. sales in 2004, which was a big shift from the 66 percent rate of the previous year.

In fact, each of the top 10 selling cars and top 10 selling trucks (pickups, SUVs, and minivans) in the first half of 2006 is produced at facilities in the United States.7 Toyota Camry, Honda Accord, Chevy Impala (GM), Ford Taurus, Nissan Altima, Ford Explorer, Chrysler Town & Country, and the other models that round off the most popular 20, regardless of the location of company headquarters, are produced in U.S. plants by American workers who contribute to the local, state, and national economies through their employment, expenditures, and taxes....

Domestic output of motor vehicles and parts has actually enjoyed a healthy increase since 1993 even if employment has not. In 2005, U.S. factories were manufacturing 68 percent more motor vehicles and parts in volume terms than in 1993. That compares with a 56 percent increase in U.S. manufacturing output overall during the same period. The number of workers employed domestically in the production of motor vehicles and parts was 1,098,200 in 2005, down from a peak of 1,313,600 in 2000 but still above average employment levels in the early 1990s. In light of increasing output, any decline in employment in the domestic automobile industry has been because of rising productivity and efficiency in the industry, not because of an overall decline in the industry's fortunes.

The biggest beneficiaries of a globally competitive U.S. automobile industry have been U.S. auto-buying consumers.


One small caveat to their argument -- these percentages could change as demand for hybrid vehicles go up. The Toyota Prius, for example, are manufactured in Japan.

posted by Dan on 07.27.06 at 01:47 PM


> Healthy competition ensures that best
> pactices are emulated

Of course, it also ensures that bad practices are emulated. Such as the race to the bottom, the transfer of earned wealth from one group of stakeholders (the employees) to others, the reversal of Henry Ford's "$5/day" insight, looting of pension funds, etc.


posted by: Cranky Observer on 07.27.06 at 01:47 PM [permalink]

The more important question is whether foreign-owned firms are going to be more innovative, less innovative, or as innovative (or uninnovative) as/than American-owned firms in meeting the need for (1) much greater fuel efficiency and eventually (2) a true alternative energy vehicle. These kinds of microeconomic arguments don't go far enough.

posted by: David Billington on 07.27.06 at 01:47 PM [permalink]

The Big 3 and the UAW received a wake up call in the mid 70s.

Unfortunately they pulled the blanket over their collective heads and went back to sleep for 20 years.

Now they will never catch up, and will continue to lose market share.

The federal government should not worry about the Big 3, other than keeping competition fair.

The federal government should worry about the middle class if we continue to destroy manufacturing jobs at the current pace (auto and non-auto). We can't have too many people working $9 an hour jobs.

Cranky is correct, as usual.

posted by: save_the_rustbelt on 07.27.06 at 01:47 PM [permalink]

I've read that demand for the Toyoto Pious (oops Prius) outstrips supply because Toyoto is losing money on every vehicle it sells. If true, don't expect too many more P's to be built.

posted by: JohnFH on 07.27.06 at 01:47 PM [permalink]

Please give federal dollars to american auto companies. Mexican auto plant workers could be loosing jobs!

posted by: sprice on 07.27.06 at 01:47 PM [permalink]

The domestic autmakers - both management and labor - are getting what they deserve. Management wasted billions and billions of dollars buying companies such as Jaguar,Range Rover SAAB and HUMMER - all of which then required billions of more investment to be sustained. Had those billions been invested in actual product, ie passenger cars, GM and Ford might have product line ups that bring customers into the showrooms.

For labor, it is a crime that the UAW negotiated contracts with totally unrealistic terms that could never be sustained (and management knew could not be). When I learned that GM extended health care coverage to the grandchildren of UAW employees I was appalled.

There are starting to be glimmers of life at GM, but they need to shed 2-3 brands at least so they can focus resources. I say take Buick, Hummer and SAAB out behind the woodshed and shoot em or sell em to somebody. The Chinese appear to be in the market for global brands - maybe they'll buy them.

Bill Ford is in way over his head and FoMoCo will likely have to fall further before they wake up.

The Japanese do a great job building cars in this country and I say more power to them. It shows that American workers and factory management can be globally competitive in the automotive industry .

posted by: SteveinVT on 07.27.06 at 01:47 PM [permalink]

Cranky, protectionists have long warned of the "race to the bottom", especially in terms of the environment. Do you have any evidence to support your claims?

Further, Ford's efficiency wages were OK when they were voluntary.

SteveinVT, as usual, is correct.

posted by: Jake on 07.27.06 at 01:47 PM [permalink]

Toyoto is losing money on every vehicle it sells.

Yeah, but its making it up in volume!

posted by: Mitchell Young on 07.27.06 at 01:47 PM [permalink]

Toyota does not lose money on any vehicle it makes, the Prius nor any other. If the Prius begins to sell well in the United States. Toyota will follow their usual practice and begin manufacturing it in the US. This is normal business practice for Toyota, Honda, and Nissan.

And Cranky, profits are put back into the business except for dividends and the like, and all the Japanese auto manufacturing companies are publicly traded on the Nissei and the US stock exchanges. If you want to reap some of that profit benefit, buy some stock. The employees of these companies in the US are well paid and receive competetive benefit packages, as well as discounts on the product, etc. I know this to be true because I am employed therein. Bad practices emulated? I think not. Learn before posting, that's my philosophy.

posted by: Mike on 07.27.06 at 01:47 PM [permalink]

the Prius is built in Japan specifically because it's currently sold to a small "boutique" audience.

If it ever becomes a mass market and profitable vehicle, I strongly suspect production will migrate somewhere else.

posted by: k on 07.27.06 at 01:47 PM [permalink]

> the Prius is built in Japan specifically
> because it's currently sold to a small
> "boutique" audience.

I wouldn't call the Prius a "boutique" product, but rather a long-term R&D effort. The current Prius is the 2nd generation (3rd if you count the various prototypes that have floated around since 1965, but 2nd if you count only serious efforts), meaning that Toyota is absorbing its lessons and is well into designing the 3rd generation. Meanwhile they have licensed their _1st_ generation technology to GM and Ford.

Now, hybrid might be a bad design choice and not go work out in the end. Or it might lead to pure electric, fuel cell, or something else. But in any event Toyota and Honda have been in the arena, learning the difficult lessons and gaining invaluable feedback. While GM in particular has concentrated on (1) scrapping its industry-leading pure electrics (and if I know anything about GM, sending anyone involved in that program to Siberia (2) praying that gas prices go back down to $2 so they can sell one more slug of super-heavy SUVs. Which do you think is the better long-term plan?

Personally, I doubt that Toyota is making an operating loss on the Prius either; the components are for the most part less expensive than an equivalent all-gas car.


posted by: Cranky Observer on 07.27.06 at 01:47 PM [permalink]

There's some pretty drastic cherrypicking going on the Cato paper.1993 was the worst year for the industry since the early 80s. The data in the Figure 1 suggest that output has been essentially flat since the mid-80s, and below the peak attained just before the first oil shock.

posted by: John Quiggin on 07.27.06 at 01:47 PM [permalink]

Cranky writes: "Personally, I doubt that Toyota is making an operating loss on the Prius either; the components are for the most part less expensive than an equivalent all-gas car."

And their Prius R&D is far more likely to have good long-term returns than, say, yet another hemi retread. I would guess that some work in the electric/digital portions of the hybrid could be widely licensable for non-automobile applications. Everyone would like better batteries, for instance.

posted by: Jon H on 07.27.06 at 01:47 PM [permalink]

Post a Comment:


Email Address:



Remember your info?