Decline of the US Auto Industry: Causes and Reasons - Essay Example

DECLINE OF US AUTO INDUSTRY: CAUSES AND REASONS TABLE OF CONTENTS INTRODUCTION US AUTO FACTS AND FIGURE DISCUSSION Foreign Transplants in the United States The Flawed Welfare System The Chinese Factor Increased Automobiles Price The Problem with Monopoly Lean Production Corporate Politics CONCLUSION RECOMMENDATIONS REFRENCE ABSTRACT This report will look at causes and reasons of the decline of US auto industry .It explores the major causes inherent in the local industries, such as invasion of foreign companies on US soil, out sourcing, Companies internal wrangling, the practices of lean production adopted by foreign companies and how US companies failed to adopt with changing time. At the end of articles, the author also offered recommendation to boost the local industry, lowering the car prices, the need of overseas plants, investment in research development and injection of funds from federal government to revive the industry INTRODUCTION In 1979, the US Big three used to sell 9 out of 10 vehicles in US, but in 2004, foreign firms have overtaken the US auto sector and now local firms sell only 50 percent vehicles in US. By 2005, 60 percent of the US market belonged to Toyota, Honda and Hyundai (Gordon, 2006).The US auto industry is in terminal decline, if this trend continues, the day is not far away when 100 percent of US auto sector will be taken by the foreign firms. There are many unanswered questions about the declining US auto industry. Analysts are wondering, why US auto industry is constantly on downward spiral from decades, but in the recent times, the decline has been proved catastrophic. There were many bad omens in US auto industry for the past two decades, which often gave a warning that further decline is coming. For example from 1995 to 2005, GM replaced its 14 percent volume per year; its average showroom age was 0.8 year old compared to industry 5.8 percent. On the contrary the Japanese replaced 20 percent of volume per year, their average showroom was 1.5 year old, which enabled them to gain 7.2 percent of the market. As a result GM (General Motors) market share declined from 42 percent in 1985 to 26 percent in 2005. The graph below shows domestic production patterns ( Clair,1996). Source: St Clair, 1996 Ford is also on decline and recently it suffered huge losses, resulting in closing down many 14 plants and cutting down 30 thousand jobs. Ford is also expected to take one billion dollar from pre-tax charges in 2006 to do cost sweeping of its plants (Gordon, 2006).. It is also expected to take charges of $250 million in 2006 for its hourly staff and write off the value of plants and equipment clearly proves that Ford is going down the road. Even though Ford mentioned that it is looking forward to work on trucks in US, in present circumstances, it is mere wishful thinking. Similarly Delphi, which was US biggest auto Parts Company, went bankrupt in 2005, which added more to the damage to already declining US auto industry (msnbc, 2006). Toyota sells 65 percent of its vehicle in America. It is expected that these cars would grow more, if Toyota is able to produce more. Toyota will also open its seventh assembly line in Texas this year, and eighth one in Ontario in 2008, while one more in Indiana in 2009. Thus, we can say by the end of decade, Toyota will be able to assemble as many vehicles as Chrysler, while Ford is closing down plants due to low sales and increasing cost. There are many who believe that Ford and other American auto companies are dis-advantaged, because Toyota is supported by Japanese Government led incentives, such as government funded health care and subsidies etc. Ironically Toyota is made in America by Americans and only headed by Japanese vision. Some analyst mention that US should thank the Japanese and Korean auto makers for giving jobs (Clair, 1996; Terry, 2006). establishing auto companies for the past 15 years. In fact problems are inherent in the US auto industry, which is unable to keep its competitive advantage. For example figures suggest that Japanese company, such is Sony is loosing from Samsung and even in video games Japanese companies are beater by US companies, who are able to produce products, which are more realistic and closer to consumer expectations. US AUTO FACTS AND FIGURE Ford, General Motors and Chrysler have been on decline due to many reasons, such as crippling pension costs, discount reliance, mismanagement etc. As a result Chrysler has been taken over by the Germans, while Ford has been losing market share consistently for the last 10 years. Even though US auto decline was already set on years ago, but 2005 proved fatal. The industry trends clearly show that the new competitors, such as Koreans and Japanese are winning. In 2005, there was decline of 30 and 28 percent in GM and Ford motors respectively. Ford witnessed 60 percent decline in the sales of its expedition model, and 57 percent decline in Explorer model (Ford Annual Report, 2004). . On the other hand, Japanese automakers, Nissan and Toyota saw a rising demand in small cars, boosting Japanese sales . The Ford and GM saw 24 and 20 percent decline in sales, while Toyota, Nissan and Hyundai rose by 10, 16 and 95 percent respectively (Guardian, 2006). DISCUSSION Foreign Transplants in the United States In the past two decades, a combination of factors, such as decline of dollar value against yen, German mark stability have made US a promised land for many foreign companies. This development no doubt provided jobs and investment in US, but these foreign transplants completely changed the way automotive industry used to work. The foreign companies created more competitive environment for American automakers, but also incurred losses for local industries, while for themselves they successfully cut cost and increased profit. Thus by 1991, about three million cars and trucks were running on US roads. These companies left their own countries due to stiff market, US not only proved a safe heaven for them, but they also grew in size, but also made huge profit in short time. Ironically, US auto industry did not take their progress seriously and continued working in the older ways, putting themselves into financial troubles, which made their survival difficult in past two three years. Had the US auto taken arrival of the foreign companies seriously, there would have been little damage done to their market share (Guardian, 2006). The Flawed Welfare System One major reasons for Ford failure was its age-old Detroit system, which had two main elements: the mass production part pioneered by Henry Ford in 1914, who replaced craft workers with assembly line. It was successful at the time and Ford was able to dominate the US auto for decades and held monopoly. The threat arrived in early 1980s, when foreign firms, such as Honda and Toyota started mass production in American soil. Compared to American way of working, which is always on grand scale, the Japanese automakers had a different outlook. For example the Ford and GM system assumed profit should equally be distributed among the entire workforce. The companies also had union leaders who negotiated pension and other benefits with management, which worked well for decades and it was assumed that this system would work eternally, which was far from being a right approach in changing times (Clair, 1996) Toyota on the other hand had a different way of working. The company did not share every penny among its workers like Ford and instead it offered premiums to workers. Ford and GM assumed that their system would work for all eternity, Toyota and other Japanese companies believed that it is unrealistic to promise benefits of future that is not certain. Thus instead of paying pension, they made payment on the basis of contribution being made during work, which did not put any burden on their financial system. On the other hand, Ford and GM had to pay benefits and compensation ,even when they were in decline and workers were also no longer contributing any thing which added to their woes (theautochannel, 2006). The Chinese Factor Another problem since 2001 has been auto parts supplier pressure, which is coming from China. Even though the local industries are able to manage the pressure from suppliers from China, but the impact of it is enormous. For example Crysler automaker has responded by lowering profits and asked supplier to reduce price by 5 percent in 2001. However the US automakers have to develop new strategies to fight back the Chinese. The reason is that foreseeable future automotive demand in US and European market is on decline, while it is on high-rise in Southeast Asia (thetrumpet, 2005) A lot of Japanese companies are setting up their companies in the developing world to meet the demand in China, India, South America and Southeast Asia. The US auto companies are even late in these markets. Ford has some plants in China and other Southeast Asia countries, and GM has also pledged to develop $130 million parts factor in Shanghai, however it is much more lower to meet the expectations of the demand. Japanese have made huge investment, such a Honda assembly plant in Thailand and Indonesia and Pakistan. American and Europeans companies have invested in Latin America, yet the growth in Asia has been ignored, where Japanese and Chinese companies are exploiting huge opportunities (atimes.com, 2006; Clair, 1996) Increased Automobiles Price The invasion of foreign firms created stiff competition in the US, which the local automaker responded by copying lean production methods, but with little success. However lead-time of the US automakers fell from 61 months to 52 months (please see the figure below) which made the local makers more competent with Japanese makers. For example Chrysler was able to cross even the Japanese companies in lead-time, but it led to increased prices. Another problem was US manufacturing model; which was a barrier in achieving competitive advantage. Source: St Clair, 1996 The National Automobile Dealers Association has mentioned that the price of a vehicle has gone up from $8,850 to $19,200 (in 1996) since 1981., while the US population cines has not increased that much. As a result car buyer are preferring to buy older card or keep their cars for longer time The Problem with Monopoly The Big three had monopoly in local market, but the problem with this sort of monopoly is that after becoming giant in the market for years, they became less flexible and agile. Even if there are dangers in the market, they are taken less seriously. Holding monopoly means becoming less complacent, unable to respond to competitiveness and remove the problems, instead move on with the problems, which keep on worsening the issues for years ahead (CNN, 2006). With the passage of time, all these problems become big train of problems, and leading companies to stagnancy that are unable to respond to the marker forces. This is what happened with companies like GM and Ford, who after decades of success became placid, unable to respond to the changing environment. They kept on following the same set of rules and regulation, which once worked well, but did not work in the changing environment. With each passing year, the companies went on decline, for example Ford for the last three years (since 2001) is losing its market share in US declining from 21 percent in 2002 to 19 percent in 2004 as shown below. While on the other side Toyota is on rise consistently as has been shown in the figure. Source: Ford Annual Report 2004 Source: Toyota Annual Report, 2005 Lean Production The Japanese brought with them their own style of production, which emphasized on lean production. The lean production uses lesser efforts and less capital to design products, yet with few faults. The result was more cars with fewer defects. On one side their production cost was also low due to lean management practices. They made more money due to making car faster and sold on higher profits. Their lean system makes even the production cost low, as a result Honda and Toyota both are charging higher price than the actual cost of the vehicle compared to American auto makers. It is believed that due to the higher margin, the Japanese companies are making as much as $2500 more per car compared to a US car (Smith, 2000). The decline in US auto industry years ago, but they little bothered. For example GM closed one of its plant as early as 1982 at Fremont California due to lower quality and lower productivity. Ironically the same plant re-opened after two years, but under joint management with Toyota and this time it proved successful due to Japanese lean management practices. Ford and GM at one time tried to emulate Japanese lean production, but both these companies have more workers than they really require. Ford and GM also have early retirement plans, which means if they send a worker home, they still have to pay. For them problem is catch 22, too many inactive workers and too many retire workers. The solution of the problem is possible by investing heavily in modern technologies to cut the cost, but the companies do not have money to invest in it. Corporate Politics The internal wrangling in GM and Ford started in early1980s. The main reason was invasion of Toyota and Honda who maintained higher quality and bigger profit, while local industry started to loose money. The real problem, critics say was GM and Ford management, who do not understand the trends of the industry. Ford and GM managers are more finance driven and have no knowledge of car, engines or mechanics, as a result they do not see problem with the situation or operations, instead they are concerned with sales only. GM and Ford managers are pure mangers, who believe that managerial skills can be applied universally and there is no need of knowing the basics of the industry or gaining knowledge of the industry. Having no knowledge means they have no knowledge of trends of auto industry, nor can they improve their shortcomings or their subordinates shortcomings ( Terry, 2006). Ford is divided into different divisions in such a way that it is hard to check the over all production process. Instead of working as teams, different division see each other as rivals and no one is in charge of over all production to check, how are things going on, or what will it cost to the company. This system worked well for decades, but in the changing environment it is not working, but Ford is sticking to its dogma regardless of change in time and situation. Toyota and Honda mangers have the know how of the vehicles and the total production process from early concepts to the prototype and the pre-prod to factory showroom, which makes them more knowledgeable and they can cop with all different of situation. They also work in teams with no rivalry, which results in higher quality in a shape of team. This internal wrangling in GM and Ford proved harmful in the long-term decreasing its performance and quality adding to ultimate decline. CONCLUSION The problem with Ford GM and other local US companies has been its size, history and total share of the market without any rival. The US automakers have dominated the US market for almost a century without a single rival, during which they little changed and whatever they made was sold. Consumer had to buy from them, as they had no alternative. However over time, this trend changed and American market became a battlefield, where US automakers were faithfully practicing their old dogmas. Japanese companies changed the scenario, they are not only highly competitive, but also have a very high standard and are able to maintain quality and consumer expectations. US automakers were used to selling whatever they made, without paying any consideration to maintain quality and defects, which could not work in changing environment. These companies also had a corporate culture, which was held as a firm belief and it did not change with time, instead it became a sacred cow. For example the pension and benefits for workers was a good incentive in the early days, but it didn’t change in the whole century, while time had changed. They kept on paying without any thing getting in return. The Japanese companies worked as teams, while American companies worked as rivals. In Japanese companies team members offer corporation, while in American division system, it led to rivalry and internal wrangling, and management did little to change this internal politics. Thus we can say it was not just one factor, but combination of factors, which led to the decline of US auto industry. RECOMMENDATIONS The income of US work has been in decline, while vehicles prices are going up. The need is to reduce the domestic vehicle price, making it more affordable for majority of the younger people. As Labour in China is cheap, local companies need to move faster and establish plants overseas for two reason: to make parts at lower costs; and sell major chunk of the vehicle in overseas market due to growing market. Instead of offering lifelong pension, domestic industry needs to seek alternative solution to reduce burden. There is more need of research and development and refining the models rather than launching new models. Federal government need to inject heavily in the local industry, otherwise US industry will find it hard to survive. Reference GM: An American icon failing. (2005). Retrieved Mar. 30, 2006, from www.thetrumpet.com. Ford sees auto loss in 06, expects $1b charge. (2006). Retrieved Mar. 30, 2006, from www.cnn.com. Pearlstein, Steven . Business: U.S. Auto Industrys Future. 12 Oct 2005. 30 Mar. 2006 Retrieved from Washington post The decline of the US auto industry. (2006). 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