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ECONOMIC ANALYSIS: Big Three carmakers' slide will not be easy to reverse

July 9, 2007

The last writings of the late novelist Kurt Vonnegut portrayed the Americans of today as "drunk" on fossil fuels. Of course, that's only partly true. What we're really addicted to are the machines we pour the fuel into, especially the automobile. We have more registered vehicles in this country than we have drivers. In 2005, we collectively drove more than 3 trillion miles in our vehicles-15,000 miles for each of the nation's 199 million drivers. And the numbers go up every year.

Our special relationship with the automobile also translates into a special interest in the automobile industry. It is arguably the most discussed, analyzed and criticized industry in America, especially in the industrial Midwest where it was born. And these are not happy times for those proud companies who trace their roots here.

It begins and ends in the marketplace, where consumers are increasingly opting to buy foreign-nameplate vehicles. The June sales figures were particularly depressing. GM sales were down a full 21 percent from the same month last year, with Ford and the soon-to-be independent Chrysler also slipping back, sending the Big Three's overall domestic market share down to a scant 50.2 percent. Meanwhile, Toyota, now the world's largest automaker, and most other foreign-owned brands picked up share.

Indiana has a stake in both sides of this struggle. Communities like Anderson, Bedford, Muncie, Kokomo and Indianapolis have seen firsthand the impact of the contractions of Ford, GM and Chrysler. Unlike previous swings in the industry, there is every reason to believe the changes this time are permanent. But the growth in Honda and Toyota has made winners out of other communities in the state, and holds at least some promise for local supplier firms as well.

But it is still the Big Three production levels that matter most to Indiana. And so the question on so many lips is, can the Big Three come back?

Swings of fortune in the auto industry are not without precedent. Most of us have grown up in a world where General Motors always has been the biggest car company. But in 1919, half of the automobiles in the United States were Ford Model T's, and Ford production was 10 times as large as Chevrolet, its largest rival.

Over a period of two decades, Ford stumbled badly and the situation dramatically reversed itself, and company executives woke up in 1950 with a 23-percent share of the marketplace. Despite the billions poured into new models, new marketing and new images, 20 years later their market share stood at 20 percent.

The competition of today is of a much different form, clearly. It is estimated that offshore rivals enjoy a cost advantage of as much as $1,500 or $2,000 per vehicle over Big Three producers, and have remained profitable over a period when domestic nameplates have been hemorrhaging cash. There are more viable companies in the U.S. market today than at any time since the 1920s, with the small-vehicle market in particular dominated by non-Big Three brands.

And the government is providing little help. Congressional proposals to push fleet mileage standards up dramatically-to 35 miles per gallon for both cars and trucks by 2020-will hit domestic automakers hard financially. Most exposed is Chrysler, which has more than 70 percent of its sales from trucks. Apparently, the logic of legislators is to march to energy independence over the corpse of the domestic auto industry.

Certainly, major adjustments are ahead for the industry, and states in the Midwest should be paying close attention. But if history is any guide, it will take a mighty effort by the Big Three companies just to hang onto the market shares they enjoy today, let alone regain past glory. And communities in our state should be preparing for that new reality.



Barkey is a research economist at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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