Industry Profiles: Motor Vehicles

Overview

The U.S. automobile industry is among the country's most lucrative in terms of sales volume (sales of new vehicles exceeded $605 billion in 1999), but it's not nearly as profitable as many other industries. The industry is vital to the nation's economy. According to a March 2001 study by the University of Michigan and the Center for Automotive Research, light vehicle production and sales account for almost four percent of the U.S. gross domestic product (GDP). At home the U.S. Big Three—General Motors, Ford, and the Chrysler division of DaimlerChrysler—have endured a saturated market with cyclical demand tied to the health of the general economy. In addition, imported cars and trucks, mainly from Asian companies, continue to wrest market share away from the Big Three. In the latter half of the 1990s, yearly domestic production hovered around 15.0 million cars and light trucks, including sport utility vehicles (SUVs). In 1999, this number reached almost 17.0 million, followed by 17.4 million in 2000. According to some analysts, despite fluctuating levels of demand, this may indicate a higher overall industry sales threshold. Facing poor sales in a weakened economy characterized by decreasing consumer confidence and rising unemployment, the auto industry offered zero percent financing to consumers in 2001 to stimulate demand. While this was a successful tactic in the short term, such offers are not possible over extended periods because they mean significant reductions in interest income for automakers.

History of the Industry

Many people in many nations contributed the ideas, inventions, and innovations required to assemble useful motor vehicles. Roger Bacon, the thirteenth century English philosopher and scientist, prophesied its development. Leonardo de Vinci envisioned plans for its construction. Nicholas Joseph Cugnot constructed the first functioning self-propelled unit; Cugnot's vehicle, built in 1769, had three wheels and was powered with a steam engine.

During the early 1890s, many people in the United States were working separately on producing better "horseless carriages." According to some accounts, two brothers—Charles and Frank Duryea of Springfield, Massachusetts—developed the first successful American gasoline automobile. The Duryea model was based on the German inventor Karl Benz's work as reported in Scientific American.

Among the long list of early automotive pioneers, the best remembered is undoubtedly Henry Ford. Ford built his first car, called a "quadricycle," in 1896. He established the Detroit Automobile Company in 1899, but the venture failed. Ford's second company, the Henry Ford Company, founded in 1901, also failed. He finally achieved success with his third organization, the Ford Motor Company, officially founded on June 10, 1903.

Throughout the early decades of the twentieth century, Ford dominated the industry. He achieved nearly legendary status by introducing the automotive industry to the benefits of automated production and by providing an automobile at a price that most people could afford. In 1908, Ford decided to focus his company's efforts on the construction of only one model, the Model T. To help lower costs and speed production, he began moving toward assembly line production.

In 1913, a moving belt was installed in Ford's magneto department. A magneto was a part that provided the electric current required for ignition. After its installation, the moving belt enabled each worker to perform a single task rather than assemble a completed magneto. Production experienced a four-fold increase, and Ford transferred moving assembly lines to other parts of the plant. In its first complete year of assembly line production, the company built 248,000 cars—compared with 78,000 the previous year. In 1915, Ford's annual production reached 500,000 and prices fell. The 1912 Model T sold for $600, the 1914 Model T cost $490, a 1915 touring car cost $440, and the price of the 1925 model dropped to $290. By 1920, an estimated three-fifths of U.S. cars and 50 percent of all the cars in the world were Model Ts.

Although its sales diminished as consumers turned to more modern offerings, the Model T earned its place in history. When Model T production was halted in 1927, an estimated 11 of every 20 cars on American roads were Model Ts. Fifteen million units had been sold. No other single model surpassed Model T sales until the 1960s, when the record went to the Volkswagen Beetle.

Auto sales dropped in 1929—an indication of the coming depression. As the 1930s opened, auto output was down 37 percent. Production in 1931 tumbled 30 percent. The auto industry fell from first place, as measured according to the value of products sold, to fourth in the national economy, and its decline created a ripple effect throughout the nation's entire economic infrastructure. Automakers, however, were among the first to emerge from the Depression years. By 1936, for example, General Motors was close to its pre-Depression profits.

The late 1930s brought technical innovations to the automotive industry. Automatic transmissions became common, increased precision enabled manufacturers to produce better cars, and attention to styling and aerodynamics improved stability and fuel efficiency. Post-Depression era work projects also improved the nation's highway system, and the miles of paved roads more than doubled between 1933 and 1941. The Pennsylvania Turn-pike opened in 1940, and although initial estimates projected the toll road would carry 715 vehicles per day, within two weeks, 26,000 vehicles were using the new roadway each day.

American automakers found an eager market in the postwar years. One-half of the nation's 25.8 million registered cars were 10 or more years old and people were ready to purchase new cars. Between 1946 and 1950, 21.4 million new cars were sold. Production in 1949 topped the 5 million mark for the first time since the pre-Depression era. The dominance of car and truck transportation was further assured in 1958 when the National Highway Act was passed. This legislation provided funds for significant construction to improve the nation's highway system.

During the 1950s, the car's appearance assumed greater importance. Car buyers preferred big and powerful vehicles, which resulted in advertising that emphasized engine horsepower. Ornamental tail fins, inspired by aircraft fuselages, were first incorporated into a Cadillac design and came to symbolize cars of the era. Technical developments included power steering, power brakes, and improvements in automatic transmissions—all necessary to help control large cars.

In addition to increased competition from imported cars, the 1960s brought rising criticism of the U.S. auto industry. Ralph Nader's Unsafe at Any Speed: The Designed-In Dangers of the American Automobile was published in 1965 and inaugurated a crusade for safer cars. In 1966, Congress passed the National Traffic and Motor Vehicle Safety Act which mandated improvements in passenger safety, driver visibility, and braking. The act also required public announcement of recalls to correct safety defects. During the first 10 years of regulation, 52 million cars and trucks were recalled. Safety was not the only arena for critics; cars were also identified as a source of air pollution. In 1965, Congress passed the Vehicle Air Pollution and Control Act setting mandatory pollution standards. The 1970s opened with another anti-pollution effort—Congress passed the Clean Air Act, which mandated a 90 percent reduction in auto emissions within six years.

Concerns about fuel efficiency dominated the 1970s. In 1973, General Motor's cars averaged less than 12 miles per gallon and other domestic car makers' offerings were only slightly better. Two oil crises during the decade brought the nation increased gas prices, local shortages, a 55-miles-per- hour speed limit, and federally mandated fuel efficiency. The Energy Policy and Conservation Act, passed in 1975, specified that car manufacturers meet a sales-weighted "corporate average fuel economy" (CAFE) standard of 20 miles per gallon by the 1980 model year and 27.5 miles per gallon by the 1985 model year.

During the early 1980s, domestic automakers found themselves unprepared for the sudden surge in the small car market and as a result, they lost substantial ground to imports. A growing sense that the products coming out of Detroit, Michigan were inferior to those of imports further exacerbated the slide of the domestic automotive manufacturers. Chrysler Corporation wavered on the brink of bankruptcy and, under the leadership of Lee Iacocca, secured a federal loan guarantee of $1.5 billion to survive. A resurgence during the middle of the decade failed to provide long term stability. The auto industry achieved record sales of 16.3 million units in 1986, but new light vehicle sales fell in 4 out of the 5 years between 1986 and 1991. In 1990, the Big Three reported combined losses of $1.1 billion, and General Motors was in particularly bad shape. During 1991, U.S. production facilities operated at only 60 to 65 percent of their capacity.

Significant Events Affecting the Industry

The early 1990s recession triggered a period of cost-cutting and efficiency gains for the U.S. auto industry. Through the handiwork of such industry figures as Ignacio Lopez at General Motors, the industry began to place heavy pressure on parts suppliers to cut costs and pass those savings on to the automakers. In some cases, the Big Three gave their parts vendors specific reduction targets; and if these reductions weren't met, suppliers could lose their contracts. Meanwhile, automakers also began to shed some of their own employees, close unprofitable or inefficient plants, and spin off nonessential business units. These moves coincided with trends toward reducing the total number of separate parts suppliers and outsourcing more production tasks to integrated companies that could add more value to the parts and systems they supplied. Despite GM's successes at trimming some of its costs under Lopez, Chrysler and Ford proved to be much more agile at hacking inefficiencies out of their systems. GM continued to be haunted by this deficiency through the end of the decade. In the early 2000s, business-to-business marketplaces offered further opportunities for the industry to increase efficiency and lower costs. In February 2000, the Big Three announced plans to form a global online exchange for suppliers that eventually was named Covisint.

Key Competitors

The domestic U.S. auto industry was firmly in the control of the Big Three for several decades. However, in the early 2000s, Asian automakers continued to gain an increasing percentage of the U.S. market. For example, according to industry analysts, it appeared likely that Japanese automaker Toyota would replace Daimler-Chrysler's Chrysler division as one of the Big Three by 2005.

General Motors General Motors is the world's largest auto manufacturer by revenue and by production volume. GM was incorporated in 1908 by William C. Durant. Its first components were Oldsmobile and Buick. The company acquired two more manufacturers in 1909—Oakland and Cadillac—and between 1910 and 1920, Durant obtained more than 30 companies. The unit that would go on to become GM's largest division, Chevrolet, was acquired in 1918. While the megalith company that resulted came to symbolize corporate America, GM never fully surmounted a number of obstacles that increasingly weighed it down in the 1990s. In part because of its sheer size, GM was a bloated and inefficient organization compared to its competitors. In the late 1990s, management at GM publicly agreed with this diagnosis, but the company also engendered the Big Three's worst relationship with its labor union, the United Auto Workers (UAW). Tension between GM and the UAW created recurring showdowns between the company and its workers, often leading to labor strikes. Perhaps the most dramatic—and decidedly the most costly—of these was a 1998 incident involving a stamping plant in Flint, Michigan, that eventually idled virtually all of GM's production activities and cost the company upward of $2 billion in lost sales.

By the early 2000s, GM had improved in several areas including market share, quality, and profitability. Unlike Ford and Chrysler, GM turned a profit in 2001, earning $1.5 billion on annual revenues of $177 billion. The company broke an industry record for truck sales in calendar year 2001, when it also sold more than 1 million sport utility vehicles, an industry first. The company streamlined it workforce from about 608,000 workers in 1998 to 365,000 in 2001, and was making international inroads by acquiring stakes in Asian automakers like Suzuki Motor Corporation and Isuzu Motors, Ltd.

Ford The Ford Motor Company is the second largest U.S. automaker, with sales of $162.4 billion in 2001. The company was established in 1903 by Henry Ford, considered one of the pioneers of the industry, whose early models bore alphabetic designations. His first offering, the Model A, was introduced in 1903, and the company introduced the Model C the following year. Looking for a car with mass appeal that could be produced at a low cost, Ford continued making innovations. The Model N was introduced for the 1906/1907 season and boasted speeds up to 45 miles per hour and a fuel economy of 20 miles per gallon. It sold for $600. The Model N was followed by an upgraded Model R and a refined Model S. Arguably the most famous car in automotive history, Ford's Model T was introduced for the 1908/1909 season. Ford's ninth model in six years, the Model T achieved nearly legendary status and dominated the industry for 18 years. During production of the Model T, Ford was credited with introducing in 1913 the world's first moving assembly line, which greatly enhanced productivity for the 1914 model year.

After enjoying a reputation for exceptional management and quality, Ford faced a number of obstacles in the early 2000s. Following a series of accident-related deaths involving the Ford Explorer, Ford initiated a massive $300 million recall of Firestone tires in 2000, followed by a second recall in 2001 that cost the company billions of dollars. In addition to financial losses, Ford was challenged by poor relationships with its dealers and employees. In 2001, William Clay Ford, Jr. replaced Jacques Nasser as the firm's CEO. That year, Ford recorded a $5.5 billion loss on sales of $162.4 billion. In addition to its long-standing vehicle lines like Lincoln and Mercury, Ford operates the car rental company Hertz and has acquired other automakers, including Jaguar in 1990, Volvo in 1999, and Land Rover in 2000.

DaimlerChrysler AG In 1998 Chrysler Corporation agreed to merge with Germany's Daimler-Benz AG, forming DaimlerChrysler. In 2002 the Chrysler division of DaimlerChrysler still held the third slot among the Big Three U.S. automakers. Chrysler was formed from the remnants of the Maxwell Motor Car Company in 1925 by Walter P. Chrysler. As early as 1929, the company was counted as one of the Big Three. Chrysler experienced high sales during the early 1970s, but events later in the decade pushed the company to the brink of bankruptcy. To help ensure Chrysler's survival, Congress passed the Chrysler Corporation Loan Guarantee Act, which provided the company with $1.5 billion in federal loan guarantees. This money enabled Chrysler to stage a dramatic turnaround in the 1980s, led by sales of its popular minivans. By the 1990s, while it was still a distant third in the U.S. industry, Chrysler was a very lean and efficient company. It was in a period of relative financial health in the late 1990s that Chrysler shocked the industry by announcing its intention to merge with Daimler-Benz.

In 2001 DaimlerChrysler lost $590 million on revenues of $136 billion. The company faced a tough domestic market in the United States. Although it employed 372,500 workers in 2001, DaimlerChrysler was in the process of making significant workforce reductions at its Chrysler division, which employed more than 104,000 workers.

Industry Projections

One key growth trend in the industry is a marked U.S. consumer preference for light trucks, minivans, and sport utility vehicles. Indeed, in the last years of the twentieth century, analysts expected cars to rapidly lose market share to trucks. In 1997 car sales numbered 8.3 million units and light trucks accounted for 6.9 million units. By 2000 the gap between cars and light trucks had almost vanished. Light truck sales numbered 8.5 million units while car sales totaled 8.8 million units.

Another emerging trend is the popularity of specialty vehicles. One form of specialty vehicle is the hybrid, which incorporates popular features from several different vehicle classifications. For example, the Pontiac Aztec combines features from a sport utility vehicle with a minivan. Nostalgic vehicles also fall into the specialty category. Examples of this vehicle type include Chrysler's PT Cruiser and the Ford Thunderbird. Ford also planned to release the Mercury Marauder in 2003, a throwback to the early 1960s. In general, specialty vehicles command higher prices from automotive enthusiasts despite lower production volumes.

Global Presence

U.S. automakers earn billions from foreign sales, but overall they haven't been as successful exporting their products as their Asian counterparts, which continue to erode the Big Three's domestic market share. According to Standard & Poor's, the industry's trade deficit has grown significantly since the mid-1990s, exceeding $115 billion in 2000. Exports grew less than 25 percent between 1995 and 2000, while imports rose almost 60 percent during the same time period. Since 1995, deficits increased the most among Asian countries like China (288 percent), Korea (331 percent), and Japan (34 percent).

Employment in the Industry

The auto industry is a significant, although declining, employer in the United States. About 1,013,000 workers are employed by manufacturers of motor vehicles and equipment. Of these personnel, approximately 598,000 work in the production sector. The industry's production workers enjoy higher than average wages due in part to the strength of labor unions. In 2000, the average hourly wage for these workers was $17.48 per hour.

Sources for Further Study

"about covisint." 8 april 2002. available at http://www.covisint.com/about.

"autos and auto parts." standard & poor's industry surveys, december 2001.

general motors: the first 75 years of transportation products. princeton, nj: general motors corporation, 1983.

"industry data." american automobile manufacturers association web page. washington, 1998. available at http://www.aama.com.

"industry facts." alliance of automobile manufacturers, march 2001. available at http://www.autoalliance.org/ecofacts.htm.

"industry report: automobile industry." us business reporter, 6 april 2002. available at http://www.activemedia-guide.com.

langworth, richard m. the complete history of ford motor company. new york: beekman house, 1987.

"occupational employment statistics." bureau of labor statistics, u.s. department of labor, 8 april 2002. available at http://www.bls.gov/oes/2000/oesi3_371.htm.

rae, john b. the american automobile industry. boston, ma: twayne publishers, 1984.

u.s. industry and trade outlook. new york: mcgraw-hill and u.s. department of commerce, 2000.