2007 August 01 Wednesday
US Car Makers Below 50% Marketshare

The Big Three automakers of Detroit continue to go down, down, down.

DETROIT, Aug. 1 — Detroit auto companies’ grip on the American automobile market ended in July, when dismal auto sales gave foreign nameplates the lead for the first time ever, sales reports showed Wednesday.

The traditional American brands owned by General Motors, the Ford Motor Company and the Chrysler Group held 48.1 percent of the market in July, according to the Autodata Corporation, an industry statistics company in Woodcliff Lake, N.J.

That meant foreign auto companies held 51.9 percent of the market. Their previous high was in June, when they held 49.8 percent of automobile sales.

Note that the Big Three have wracked up huge losses the last couple of years even during a period of strong economic growth. Unless the United Auto Workers (UAW) relents and gives the US car companies big relief on labor costs one or more of them will end up filing for bankruptcy.

In the current contract negotiations the UAW might go after a weakened Ford first.

This time, David Cole, chairman of the Center for Automotive Research, sees Ford as the target.

"They will very likely go to Ford first so the pattern doesn't kill the weaker company," Cole said. "The union is very aware of the financial issues, and it will be a different kind of negotiations. They can't do anything to hurt the weakest company when it's so close to the edge of the cliff. They have to do something that helps keep Ford in the game."

Ford's fragile condition, he said, "reinforces the urgency" that the UAW needs to make more concessions on issues such as health-care costs and retiree benefits. The domestic carmakers contend that those benefits are the main reasons their manufacturing costs of about $75 an hour are $30 more than those at Japanese plants in the United States.

My guess is that large chunk of the UAW's membership rationalize that they are not to blame for the decline in the US auto industry. Therefore even if the union's leaders recognize they are driving the US automakers out of business than the membership wouldn't ratify any contract that cut salaries and retirement benefits enough to allow the Big Three to reverse their fortunes before they reach bankruptcy court.

Once the automakers file for bankruptcy they'll be able to dump tens of billions of dollars of retirement benefits liabilities and maybe even stop using union labor when they emerge from bankruptcy.

The reason this tragedy has dragged on for so long is that the shareholders don't want to accept total loss. The non-union employees of the car companies and the domestic suppliers would benefit from a bankruptcy because with lower manufacturing labor costs they could probably compete and even gain marketshare. But the shareholders, forced by the US government into disastrous contracts with the UAW, keep pushing management to find some tactics and strategy that will bring success in spite of the UAW contracts.

Some say that missteps by the car companies put them in this situation. Lax attitudes about quality certainly cost them in the 1970s and 1980s and even beyond. But the US makers have improved greatly and by some measures Ford now surpasses even Toyota in quality (and more here). Costs are the bigger problem.

What is surprising about this saga is just how long the US car companies have managed to last given their competitive environment. Look at domestic manufacturers in many other industries. The US auto industry has done much better than many other domestic manufacturing industries and has lasted longer. Not only do US car makers compete with foreign makers who have lower costs but US car company labor costs are much higher than blue collar manufacturing labor costs in other American industries. So management and the engineers in Ford, GM, and Chrysler must have come up with many design and manufacturing innovations to allow them to stay in the running for this long.

Share |      By Randall Parker at 2007 August 01 09:42 PM  Economics Transportation

Bob Badour said at August 2, 2007 5:48 AM:
forced by the US government into disastrous contracts with the UAW

I guess I just don't know the history. I would have liked a link to explain that assertion. When and how did the US government intervene?

beowulf said at August 2, 2007 4:02 PM:

The US automakers are only around because of decades worth of good will (in the accounting sense, the value of a corporation's public image). People grow up in home where mom and dad drove Fords, they're likely to buy Ford. The emotional connection of people to their brand of cars shouldn't be underestimated. If humans were rational creatures, they'd all read Consumer Reports and buy a Toyota.

Of course the Toyota suits were smart to build so many plants in the US. It undercut the effort in the 80's to establish European-style domestic content requirements as well getting around the "Buy American" sentiment.

Jerry Martinson said at August 2, 2007 11:51 PM:

America's at serious risk of losing what is still a very lucrative industry - the system design of automobiles and the management of it's unique supply chain which by necessity must be substantially vertically integrated. Unfortunately, the political perception is that the lucrative part is either in the corporate ownership or in the assembly labor. But I argue that the truly desirable part of the work that we want to keep in America isn't assembly labor or the "work" of board room fat cats even though that's who's happening to be stealing the money right now.

What I'd like to know is not how many parts of a Toyota are assembled in the USA but where was is designed and who's running the supply chain. These are the kind of jobs that we really want to make sure we can get and keep in the US. With the UAW and the bankers strangling the big three, we're losing sight of where most of the real value-add occurs.

While VCs can fund niche developments in novel power train components like A123 batteries, the market superiority of the Prius over the other hybrids shows that the real value-added art is still in integrating and optimizing the whole system and integrated supply chain around the new ideas, which perhaps only a large auto-company can do.

Randall Parker said at August 3, 2007 6:03 PM:

Jerry Martinson,

I fully agree with you that we should want to hang on to all that automotive engineering work.

Dan Morgan said at August 4, 2007 5:27 PM:

Bob Badour,

... forced by the US government into disastrous contracts with the UAW
"I guess I just don't know the history. I would have liked a link to explain that assertion. When and how did the US government intervene?"

All private sector union contracts are done via government coercion of businesses. Otherwise no businesses would sign contracts with them. Unions do no participate in the free market of labor exchange. They rely on the government to lay down rules that force the businesses to sign. Labor law requires businesses to "negotiate in good faith" meaning that they had better reach a contract. If the businesses don't even want a contract, well that is not an option. They are declared then to be not acting in good faith and mediators are then needed until they do act in good faith.

Of all of the things in political life, this is one point that is rarely brought out in the media or among opinion makers.

Ned said at August 5, 2007 12:44 PM:

I live in Michigan, so I follow the auto industry closely. There is no doubt that this current round of labor negotiations is the most critical ever. In the past, the UAW would "target" on of the "Big Three" manufacturers and then use the that contract as a model for negotiations with the other two companies. Sometimes a strike was necessary, but it usually didn't last too long or hurt too much. The auto manufacturers then passed the costs along to American consumers, turning out some pretty shoddy vehicles in the process. For decades, it seemed the good times would never end. But they have. The appearance of foreign manufacturers in the market (especially Japanese-owned plants in the US) has destroyed the old business model. No longer can the US automakers count on a captive audience of US consumers to buy their mediocre, overpriced vehicles. No longer can they pay over $60 per hour in salary and benefits for semi-skilled labor and expect to pass their costs on. I attended a talk by a Ford vice president recently, and I was struck about how candid he was about his company's problems. He said that the UAW was a partner rather than an adversary. He also said that the contracts which over the years have led to the current mess bear the signatures of Ford executives as well as UAW officials, so they must share the responsibility of finding a solution. All very true. Ron Gettelfinger, the UAW president, has an extremely difficult job here. If he takes the traditional hard line and demands big increases or even calls a strike, he will probably push one or even two of the companies into bankruptcy, and then the jobs and all those goodies that the UAW has won over the years will disappear, probably forever. But if he appears too conciliatory, his membership will reject the contract and boot him out. Some union members realize that they are in dire straits, but others are oblivious and have an astounding sense of entitlement.

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