The Auto Industry of Today
There is no industry more present in the worldwide community than the automobile industry. The automobile has changed the lives, culture, and economy of the people and nations that manufacture and demand them. Ever since the late 1800s when Benz and Daimler in Germany invented the first “modern” car, the industry has grown into a billion dollar industry affecting so many aspects of our lives. There are more than 400 million passenger cars alone on the roads today. During the early part of the twentieth century, the United States was home to more than 90 percent of the world’s automotive industry, but has shrunk to about 20 percent in today’s world (Tardiff 394). This drastic change has occurred by the booming economies in such nations as Japan, Germany, Canada, France, Italy, and other nations.
The US auto industry “sales totaled $205 billion, or 3.3 percent of the total Gross Domestic Product” (Tardiff 394). By the end of 19th century, there were about 500 auto manufacturers, but that number dropped sharply to 23 by 1917, and today the Big Three dominant the market. Ford, General Motors, and Chrysler make up the Big Three, which account for 21 percent of the world’s motor vehicle production in 1997, with the Japanese industries coming in second, producing 19 percent. Germany produces 11 percent; Spain, France, Italy and South Korea each produce about 5 percent of the international market in 2000. In the US alone, the auto-industry, which includes its 500,000 car-related businesses, creates 12 million jobs (Broughty 290). The automobile is clearly an oligopoly, but each company’s control of the market has gradually diminished because of rising foreign competition.
The US has three main auto manufacturers; Japan has five major producers, as does Germany. Each of these companies produces differentiated versions of the same product, have control over their products’ prices, and rely heavily on non-price competition (Womack 154).
There are many different types of cars, like: sedans, coupes station wagons, Sport Utility Vehicles (SUVs) and pickup trucks, but by comparing models between two competing companies, you can see how great the similarities are. The auto industry can still thrive even though their products are so similar because the demand for cars is immense and continuous. People rely on cars for so many things that life without one seems impossible, especially in the US which registered 141 million cars in 1988, whereas Japan, the second highest, only registered 30 million (Broughty 96)
The creation and production of a new car starts about three to four years before it is released to the public (McBride 102). The initial planning stage begins in the company’s corporate headquarters with ideas for the car from product planners and company officials. Automotive designers draw prospective sketches of the new car, and once approved, model makers create small-scale models of the car in fiberglass or clay, then forge life size models also in clay or fiberglass. Automotive engineers then develop each part of the car, and mock-up builders create those indigenous parts of the new car. Test drivers check over the entire system, analyzing how it runs, and then gives suggestions on improving the vehicle. Automotive engineers test all the new, specialized parts of the car, and after all the parts are tested, plant engineers plan how to best mass-produce the new car. Of all the people working in the automobile industry, most will be found in this next industry, which is the assembly plant. In the United States, the majority of these assembly plants can be found in the Michigan, Great Lakes area, and on average it takes about ninety minutes on the assembly line for an entire car to be produced (Broughty 105). When planning a new car model, the company tries to create what the consumer wants. This is very difficult because as stated earlier it takes between three and four years to develop a car. When General Motors begins developing a new product, it starts by assembling a new team to coordinate the production. After this team is assembled, millions of dollars are spent on dispensing and analyzing public surveys, private firm’s own research, government research, and past car sales to determine what the consumer wants. These specifications include physical dimensions, cost, fuel efficiency, comfort, market price, appearance, and performance. GM then would go on to begin producing the car. The most time consuming step when creating a new model is supplying the specialized pieces of the new model. Some of the parts can be carried over from previous models or other cars, but many times the company has to either create the new pieces themselves or buy them from a large-scale supplier (Broughty 103). Company then looks for the supplier that will supply the parts the cheapest. After the model car has been created and approved, the plans are made for it to be made on the assembly line. The car is then ready to be sold to the public through private dealerships, which in the US, are not linked with any major automobile manufacturer. GM would then sell its cars to whichever dealership is willing to buy from them.
In many Japanese firms, like Toyota, a new system has been created and has been coined “lean production” (McBride 99). The basic manufacturing ideas are the same, but it emphasizes developing relationships between the company and those it deals with. When Toyota begins developing a new car model, it already has a team assembled, which has worked on previous models. The Toyota team then collects the same information about what the public wants just like the GM team but has a much cheaper way of going about it. Unlike the GM firm, Toyota has formed business ties with car dealerships, and in some cases even owns them. These dealerships use a new set of techniques to sell their cars, called “aggressive selling,” in which a very permanent, personal, and hopefully life-long relationship is created between the company, the dealer, and the buyer. Since the company keeps ties to its consumers, it already knows what the consumer wants, and the consumer is more willing to buy from the company. Toyota continues developing and producing its car, and it comes across the same problem, as the GM team, of not having all the specialized parts it needs. Like with the dealerships, Toyota has formed many symbiotic relationships with car part suppliers. These suppliers work hand in hand, with the Toyota team and develop any products that Toyota needs for its new model (McBride 100)
The past decade has seen many interesting fluctuations within the automobile industry. Overall, the auto industry fluctuates with the normal business cycle, for motor vehicles are an elastic demand to consumers. The more the price for cars goes up, the less people buy cars. For many years, the automobile industry has seen very large profits because the demand and necessity for cars has increased significantly. Recently, large foreign competitors and steadily increasing prices in motor vehicles have reduced these surplus profits within the industry. Consumers are now demanding lower prices and more luxuries in their cars. To deal with this consumer demand, auto manufacturers have begun by lowering employee pay rolls, replacing employees with machines and more capable workers to improve productivity, and many times merge with other companies to better compete in the market. Production growth has been about 2-3 percent for the past few years in the auto industry, and hopefully will continue by implementing new cost efficient procedures (McBride 100).
American industries, competing in the international markets, face the problem of a strong dollar compared to the weaker currencies of foreign nations. This means that American cars to foreign nations are more expensive, and foreign cars to Americans are cheaper. This supply and demand problem was solved by the Clinton administration, which opened up many foreign markets previously closed to the US automakers. One of the main markets that the Clinton administration opened up was the Japanese market. This was such a positive victory for the US industries because the Japanese were notorious for charging very little for the cars they sold in foreign countries, making up the difference with extremely high prices for the cars they sold in the closed markets of Japan (Womack 231) North American Free Trade Agreement (NAFTA) also opened up trade to many nations in Latin America, especially Mexico. Overall, between 1992 and 1995 export sales rose 22 percent and the sales to Mexico and Japan each rose 250 percent (Womack234)
The auto industry is a major source of jobs in the world. Approximately one of every seven jobs in the US domestic economy is related to the production, sale, operation, or maintenance of motor vehicles” (Tardiff 396), which makes abundantly clear the impact the car industry has on society, with GM, Chrysler, and Ford Companies making up three fourths of those jobs.
Autoworkers are also among the highest paid workers in any industry and also the most productive (Broughty 44). This great increase in worker productivity, due to advancing technology, also accounts for the huge profit gains the Big Three have received in the past few years.
Until the late 1960s, the government did not get involved in implementing regulations on the automobile industry. Most of the regulations now placed on car manufacturers have to do with making the car drive safer and be more environmentally sound. Seat belts, airbags, brakes, tires, bumpers, windshield wipers, defrosters, dashboard controls and windows were all the result of government action. Today safety has become extremely important to carmakers because of the high deaths that result from automobile accidents, the government, and most influentially, people’s growing concern for their well-being.
Today in United States best selling cars are actually pickup trucks. America’s three best-selling vehicles are pickups, which may be due to the fact that American automakers best understand their country’s love of size and cargo utility. Pick up trucks had dominated sales in U.S. auto market for past decade. According to Forbes the number one selling vehicle in U.S. is Ford F-series pickup with sales of 433,000 in first half of 2004. Chevrolet Silverado is second with 323,000 sold and Dodge sold 223,600 “Rams”. Toyota Camry is in fourth place as a best selling passenger car, closely followed by Honda Accord.
Market share for domestic automakers is constantly dropping since early 1980’s when foreign automakers, especially Japanese, started targeting U.S. auto market with cheaper and more dependable cars. This year through August, “Big Three”: General Motors, Ford Motor and Chrysler Group, which have been losing U.S. market share heavily for the past 10 years, had a combined 58.8% share, down from 60.2% at the end of last year. Market share for Asian automakers climbed to 34.6% through August, up from 32.6% at the end of 2003.
Market share is an important gauge of a company’s strength, particularly its ability to withstand industry downturns. And supporting a company’s infrastructure employees, factories and suppliers is dependent on a healthy market share and a predictable sales volume. GM’s market share was 27.2% for the January through August period, down from 27.7% a year ago. Ford’s share fell to 18.4% from 19.4%. Chrysler Group recovered a bit from last year loses, to 13.2% from 13%.
The drop in market share comes as foreign automakers have invaded on truck segments
Detroit has dominated: pickups, sport-utility vehicles and minivans. Asian and European automakers began adding truck models in the late 1980s and early ’90s. As their lineups have grown, Detroit’s market share has dropped steadily from the 70% range in 1995.
One of the reasons why foreign automakers, especially Honda and Toyota, are being so successful is because are constantly placing greater emphasis on quality vs. cost when selecting suppliers than do the domestic automakers. They continue to emphasize the importance of quality throughout their relationship with suppliers. The domestic companies always have placed greater emphasis on lower cost when selecting suppliers, while showing considerable variation in how they balance cost with quality.
Domestic giant automakers have lot more worries than losing market shares from foreign automakers. For the past few years “Big Three” giants barely made any profits even thought their revenues were close to 200 billons of dollars. Ford and Chrysler are hardly making any money and in some segments, such as compact cars they are loosing money. Basically only segment that operates successfully at this time is a division of pickup trucks and some Sport Utility Vehicles (SUV’s). According to Fortune, this table shows revenues and profits of major automobile manufacture companies.
Fortune’s Global 500 list
RankCompanyRevenues ($ millions)Profits($ millions)
5General Motors 195,324.03,822.0
6Ford Motor 164,505.0495.0
7Daimler Chrysler 156,602.2507.0
8Toyota Motor 153,111.010,288.1
25Honda Motor 72,263.74,110.8
32Nissan Motor 65,771.14,459.0
98Hyundai Motor 39,100.81,490.1
* The 2004 Global 500 list; courtesy of Fortune (from the July 26, 2004 Issue)
Broughty, James. “Careers in Transport.” Chicago: The Institute for Research, 1999
Farr, Max. “Automobile Industry.” Hoover’s Online. Online. Internet. November 2001
Fortune. “The Global 500 List.” Jul 26, 2004 Issue. Nov 27, 2004. http://www.fortune.com/fortune/global500/subs/fulllist/0,20828,,00.html
Lienart, Dan. “The Best-Selling Cars.” Forbes. 2004. Nov 28, 2004. http://www.forbes.com/lifestyle/2004/08/02/cx_dl_0802feat.html
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Womack, James P., Jones, Daniel T., and Roos, Daniel. The Machine that Changed the World. New York: MacMillan Publishing Company, 1990