The US Car Industry - Essay Example

MODULE ISSUES IN THE INTERNATIONAL ECONOMY MODULE EC3P13N NUMBER: 02007146 4000 WORD PROJECT “TO WHAT EXTENT WAS THE USCAR INDUSTRY HARMED BY IMPORTS OF FOREIGN CARS OR BY FOREIGN CAR MAKERS SETTING UP PRODUCTION IN THE US?” Introduction The development of the science and technology gave rise to the development of communication. The discovery of the cars quickened the mode of communication. With the development of the cars, the need for better roads was felt. It gave rise to the demand for the fuel. The demand for the cars also increased as it offered a quicker way of communication. This marked the growth of the car industry. Various countries began to manufacture cars seeing the potential for the industry. The development of technology and the availability of skilled labours were the main ingredients of the growth of the automobile industry. In the first half of the growth of the automobile industry, USA was one of the front runners due to the economic development of the country. The economic development in the country meant that the demand was prevalent. The engineering developed due to the growth of technology. There were no direct competitors for the US firms. However, the dominance of the US was not everlasting. With the potential of the industry on the rise, various other manufacturers from the other countries began to enter the field. The car manufacturers from Germany and Belgium began to develop with the help of modern engineering technologies. The car manufacturers from the other countries viewed the US market as one of the most inviting and potential markets of the world. They were helped by the fact that the US economy promoted free competition among the firms. This meant that the companies were free to ply their trade in the USA. The US market soon became flooded with the imported cars. Seeing the potential of the market some of the companies began to set up in operations in the US. In the modern context, the Japanese firms have made a big progress in the industry. The Japanese firms have been technologically advanced and that has prompted the companies to use the most modern technologies. They have been responsible for the introduction of the most modern cars in the market. Most of the Japanese companies have set up operations in the US and the market there has been the main focus for the Japanese companies. The Japanese cars are one of the most dominating in the US market. The US car manufacturers faced a tough competition from the car manufacturers of the other countries. Their condition has worsened due to the global economic downturn in the economy. There is lesser demand for the cars in the US market. The combination of these factors has been detrimental to the interests of the US car manufacturers. (Covarrubias, n.d.). The paper will reflect on the effect of the foreign car manufacturing on the US car manufacturers. Literature Review The US car industry The US has been the traditional powerhouse in the automobile manufacturing sector. In the first half of the 20th century, the industry took off with the introduction of various car manufacturing companies. Among the various companies, three were prominent – General Motors (GM), Ford and Chrysler. The performance of these three companies was one of the main reasons for the growth of the car industry in the US. The car manufacturers developed new products to suit the needs of the market. They were the dominant players in the market. The development achieved rapid strides in the aftermath of the 2nd World War. During this period, the companies sufficed to the needs of the customers. The other countries did not take up to the production of the cars aggressively. In this period, the Volkswagen and some other manufacturers of sports cars occupied a minor portion in the market. The demand in the market was growing with the development of the economic conditions. The standard of living in this part of the world was high and consumers demanded cars. The Big Three dominated the market and were one of the top performing companies of the world. (Cooney & Yacobucci, 25th April, 2005) Policy of the US Government The US Government from the older days has been encouraging the development of industry, trade and commerce. The development of the industry in the 20th century was due to the policies of the Government. The 2nd World War helped the US to be a leader in most of the industries of the world. Therefore, the Government encouraged the participation of the companies from the other countries of the world to be a part of the industry in the country. The Government bodies emphasized control in the basic sectors like the education and defence. The Government controlled the tax structure in the country. Separate bodies and organizations were created to control the industry and the agricultural development. The bodies were the authority in the development of the industries with the construction of viable infrastructure and tax policies. The defence sector was always kept in the hands of the Government. However, in the case of the industrial sector, this was not needed. The trade and the commerce sector developed due to the policies encouraging the growth. In the latter years, the US Trade Representative (USTR) came up which carried on the policies of the Government. The USTR revolutionized the areas of the exports and the imports in the US. The USTR opened the borders of the US for the imports of the foreign goods in the country. The movement gained momentum with the formation of the WTO and the GATT. The US allowed free trade in the country and the foreign companies flocked their products in the market of the US. (Lovett, Eckes & Brinkman,2004 ; Pp 146-148). The NAFTA agreement signed between the countries of North America has been a boon to the trade and commerce of the region. The goods and services exported to the other countries are not taxed. For example, goods from the US can enter the borders of Mexico without being levied the import duty of Mexico. This encourages competition in the industry. In the case of the US market, the goods from the other countries can enter the market without being taxed. The goods of the other countries are less costly because of the lower cost of production there. This has been a challenge for the US manufacturers. (North American Free Trade Agreement, n.d.) Benefits of the policies of the US Government The Government of the US has always encouraged the free trade practices. The main cause of the free trade practices has been the benefits associated with it. With the rise of the free trade practices, the theory of comparative advantage comes into picture. In the case of the comparative advantage, some countries have distinct advantages in the case of production of some goods and services. The countries will prosper in that trade. With the free trade agreement, the trade of the countries will increase. With different companies coming into the country, the competition will increase and the inefficient ones will be driven out of the market. The increase in the trade means that the economy of the country will grow. There will be more job opportunities for the people of the country and the standard of living of the people will develop. (Benefits of Free trade, n.d.) Effects on the US car industry The US automotive industry developed as early as the 19th century. In the first part of the 20th century, various US companies came up. Up to the end of the 2nd World War, the US car manufacturers dominated the global market. There was no direct competition from the other countries of the world. In the case of the USA, Michigan became the hub of the production of the automobiles. This was due to the presence of individuals who contributed by setting up companies. In the early part of the 20th century, various car manufacturers began to produce a wide variety of the cars. The inexpensive ones were the most sold cars of the generation. The cars became popular in the market because of the development of the economy in the country. Ford was one of the most prolific performers in the low cost car segment. As the luxury cars were the least sold in the market, the companies producing them were eventually wiped out of the market. The introduction of the assembly lines in the case of the production of the cars revolutionized the industry. The production became faster. The growth of the industry helped in the development of the ancillary industry of the motor parts. By the end of the 2nd World War, the industry was thriving. The advantages of the US car manufacturers over that of the other countries were evident. There was a supply of skilled labour force. The technology improved. And lastly, the presence of the big three-GM, Ford and Chrysler stabled the condition in the industry. The other countries were devoid of such advantages. (Rubenstein, 1992; Pp 41-42; History of automobile industry, n.d.) However, after the 2nd World War, the situation began to change. Manufacturers in the different countries began to evolve. The economy was being deregulated and there was development of communication between the countries. The US no longer had the competitive advantage. In different parts of the world like in Germany and Japan different companies began to evolve. The companies in the other parts of the world were developing with the introduction of technology. The import of the foreign cars in the US market started at a large scale in the 1957 with the introduction of the Volkswagen (VW). The VW was a European car manufacturer and it began to capture a good share of the market. The Asian countries like Japan were not successful in the beginning as they manufactured smaller cars. The US consumers used larger cars and they did not favour the purchase of the smaller cars. It was also costly for the companies to set up dealer networks in the US. In the 1970s, the oil crisis happened and this was the time that the demand for the smaller cars increased. The country went into recession which meant that the Big Three were scarcely surviving. Chrysler was on the verge of becoming bankrupt, Ford survived because of the performance of the Europe division and the GM decided to cut jobs. The Government wanted to protect the Big Three and they introduced Voluntary Export Restraint (VER) with Japan. This was for three years and this meant that there would be restriction in the imports. The US Big Three were troubled by the intrusion of the European cars and this influenced them to seek foreign partnerships. In the 1980s they wanted to forge a partnership with that of the Japanese companies that will help in the production of the smaller cars. However, it did not take off as planned. There was a restriction on the imports but the price of the cars increased. Therefore, the Japanese firms achieved more profits in the period of the VER. The increased profits were used by the Japanese firms in the development of the operations in the US. The Big Three were of the view that setting up of operations by the foreign companies will not be helpful. They were assured of their failure as that would mean the loss of the competitive advantage. However, the Japanese firms like Honda and Nissan began to set up production in the US and were soon joined by others. The sales from these manufacturers ran to 20% of the total sales in the industry. The manufacturing was effective and the companies churned out quality products. The VER effectively set up the production facilities in the US. The Japanese manufacturers were on the verge of collapse in the 1980s with the appreciating Yen. The VER meant that the prices of the cars were more. It would have decreased the demand of the products and they would have been wiped out of the market. Because of the VER, the companies of the Japanese origin began to seek the pastures of the US for the production units. The setting of the production units meant that the companies could sale maximum units. The Big Three were reeling under the pressure of competition and their sales began to fall. Chrysler was taken over by the Daimler a German based firm. (Smitka, n.d.) The Big Three have also been troubled by the increase of the costs. This has much to do with the tradition of the Big Three. Most of the workers in the Big Three have been controlled by the United Auto Workers (UAW) union. The UAW also controls the workers of the suppliers to the Big Three. There has been a contract between the Big Three and the UAW stating the payment of the pensions and the after retirement benefits to the workers. This has been a major component of the costs. The foreign manufacturers, on the other hand, have no unions and they encourage the participation of the suppliers from their home country and that from the US. This has been a marked difference in the operations of the two varieties of the companies. The trade deficit in the automobile sector in the US has been $150 billions in 2004. This was due to the deficit with Japan, NAFTA members and the other countries of Europe. The NAFTA agreements meant that the cheaper cars from the countries like Mexico and Canada entered the market. The subsequent exports of the US cars were lesser. This had an impact on the US car manufacturers. The big Three were cutting jobs at a regular basis. At the same time, the companies from Japan and Europe were developing their operations in the US. Their sales were increasing in the market. (Cooney & Yacobucci, 25th April, 2005) Conditions in the US market It has been evident that the US car manufacturers have faced a tough competition from the foreign manufacturers. The Big Three has been the major producer in the market but their demand is declining at a rapid pace. The Japanese and the German players have been the dominant players in the market. The condition of the Big Three worsened in the wake of the recession. The people had lesser money to buy the bigger cars. They chose the smaller cars companies over the Big Three. The companies were on the verge of bankruptcy. The Government utilised $ 24.9 billions for the bail out package of the companies. The demand for the cars was less and they were contemplating to stop the operations of the business. The bail out package of the Government was to make the car loans available for the consumers. The closure of operations in the company would have meant that millions of jobs would be laid off. This would have made the situation worse. Therefore, it can be understood how much pressure the US companies were facing. (Amadeo, 31st December, 2009) The literature review in this paper will be helpful in analysing the effects of the foreign car manufacturers on the US car companies. Methodology Research Design The structure and the features of the paper direct that the analysis in this paper will be done with the help of the secondary research. The secondary research is the analysis of the data which is already present. The nature of the study will be benefited with the help of the secondary data. The sales of the cars from the US manufacturers and that of the foreign companies can be retrieved from the data bases which will be helpful in the case of the study. (Secondary research, n.d.) Data Collection In this paper, the research would be done with the help of both the qualitative and the quantitative data. The qualitative data will be helpful in the analysis of the scope and the growth of the industry in the US. This has been done in the area of the literature review. The literature review gives a good idea of the US car industry and the Government policy. With the help of the review we can form the base of the study. The quantitative research is based on establishing relationship between the different variables. E-views software is used for the purpose. With the help of the relationship, an estimate can be made about the effect one variable over the other. In this paper quantitative research will be applied where the relationship between the sales of the US Big Three and that of the Japanese and the German firms will be tallied. The data will be collected with the help of the secondary research from the existing reviews based on the US car industry. (Hopkins, 2000). Analysis: The available data is analysed to find out the correlation between the sale of domestic cars and the imports from foreign countries. The yearly sale of the domestic cars is compared with that of the imports. Further ARMA test is carried out to find out any long term trends in the data series. The chow break point test is carried out for each year to find out that whether there is any break in the series. We further analyse the change in the market share of the domestic cars overtime to find out how the imports have affected them. Data The data for the paper are collected from the National Transportation Statistics of 1998. This can be tabulated as follows: Table1: Domestic Car Sales in US Year Domestic car 1970 7119 1975 7053 1980 6581 1985 8205 1990 6897 1991 6137 1992 6277 1993 6742 1994 7255 1995 7129 1996 7054 1998 6574 Table 2: Imported Car Sales in US Year import from Japan import from Germany Import from other countries Total Imports 1970 313 750 217 1280 1975 808 493 271 1572 1980 1906 305 187 2398 1985 2218 424 196 2838 1990 1719 265 419 2403 1991 1500 193 345 2038 1992 1452 201 284 1937 1993 1328 186 262 1776 1994 1239 192 303 1734 1995 981 208 317 1506 1996 887 245 418 1550 1998 789 254 545 1588 Source: National Transportation Statistics (1998) Findings and Analysis / Interpretation Qualitative analysis In the case of the qualitative analysis of the paper, the literature review has been accepted as a base. The literature review of the paper has covered the history of the US automobile industry in the pre 2nd World War period to the modern days. The Pre World War period in the US underlined the fact that the car manufacturers had a distinct advantage over the competitors. The growth of the technology and the pool of the skilled labour helped in the growth of the US automobile market. The Big Three played their part in the growth of the industry. The US companies had a distinct competitive advantage over the other companies in the various parts of the world. The demand was stable. However, the oil crisis in the 1970s changed the situation in favour of the companies from the other countries of the world. The people began to demand the smaller cars and the imports of the cars increased. This pressurized the situation of the US companies. They were in the brink of extinction. The Government proposed the VER to save the Big Three from extinction. However, this encouraged the companies of the Japanese and the German origin to set up operations in the US. This increased the competition of the US companies. The share of the foreign entities in the market began to increase and that of the Big Three decreased. The inefficiency of the Big Three in the production of the modern cars made them unpopular. The increased costs of the Big Three were another disadvantage. The Big Three reeled under the pressure of the foreign companies. They were on the verge of the bankruptcy before the Government intervened. The history of the US automobile industry underlines the fact that the companies were unable to cope up with the pressure of the competition. This had a lot to do with the inefficiency of the management of the companies. The Government tried to protect the companies with the help of VER but the move backfired. The companies were unable to introduce newer products in the market quickly and they were burdened with the increased costs. At the same time, companies like the Toyota, Honda and Nissan performed exceptionally well. They were efficient in the management of the company. The level of competition was high and that led to the collapse of the US companies to the lower rung in the industry. The US car industry as a whole has not been Quantative Analysis: To analyse the affect of the imports of the cars from different countries on the car sales of U.S.A we conduct a regression analysis with the data available. The equation we are using in this analysis is Y = βX + µ Where the terms represent the following: Y is the dependent variable that is the sale of U.S manufactured cars. X is the independent variable that is the total number of the imported cars from different countries. Β is the coefficient of X, that is determines how much Y changes due to X. µ is the error term. The results of the regression analysis are as follows:   Coefficients Standard Error t Stat Lower 95.0% Upper 95.0% Intercept 0 --- --- ---- ---- β 3.496750125 0.237954915 14.69501114 2.973014889 4.020485361 We observe that the value if the correlation coefficient R square is very high. The value of coefficient of X, is also positive though insignificant at 5% level of significance. Graph showing per unit Sale of the domestic cars in U.S.A Graph showing the imports of total number of cars per year. Economic Implications: The empirical analysis shows that there is a high correlation between the sale of the domestic cars of U.S and that of the imports of the cars from outside. The sale of the car is decreasing as the imports of the cars from outside are increasing. The coefficient of X comes out to be positive but is highly insignificant thus confirming our analysis of the negative relationship between the two data sets. The graph below shows that the there was a continuous decline in the sale of U.S domestic cars after the year 1970. In the year 1985 there is a sudden increase in the sales of the domestic cars. The data depicts that in the year 1985 there is a steep rise in the imports of the cars also. Later to which there is a negative relation between the imports and the sale of the domestic cars. It is clearly visible that the import of the cars decreases after the year 1985 and there is a steady increase in the sale of the domestic cars of U.S. Relationship between the two data series and analysis of Break point: To analyse the long-term relationship between the two data sets we need to do a test of auto regression on the data, further we find out the F-statistics for each year to find out if there is any significant break in the series. ARMA test using least square method using 12 observations: Variable Coefficient Std. Error t-Statistic Prob. IMPORT 0.290658 0.359326 0.808898 0.4374 C 6370.693 695.4239 9.160877 0.0000 R-squared 0.061413 Mean dependent var 6918.583 Adjusted R-squared -0.032446 S.D. dependent var 537.3116 S.E. of regression 545.9587 Akaike info criterion 15.59398 Sum squared resid 2980709. Schwarz criterion 15.67479 Log likelihood -91.56385 F-statistic 0.654315 Durbin-Watson stat 1.815247 Prob(F-statistic) 0.437396 The results show that there is no long term relation between the two data sets, which is the import of cars and the sale of domestic cars. The F statistic is insignificant even at 10% level of significance. Now we calculate the F-statistic for each year to analyse the presence of break points. The values of F statistic using Chow Break point test is recorded below with their respective level of significance. Year f stat level of significance 1980 0.446869 0.654671 1985 1.056809 0.391502 1990 1.721701 0.238858 1991 2.811851 0.118899 1992 0.617796 0.56299 1993 0.215235 0.810873 1994 0.324226 0.732161 1995 0.30851 0.742902 1996 0.169178 0.847302 The Highest value of F-stat is in the year 1991. However the break point is not significant. The Graph confirms the presence of break point in the year 1991. Interpretation of the Break: Many leading motor companies of U.S reported a 30 percent drop in the sales of all vehicles. “If you adjust for population growth, its the worst sales month in the post-World War II era for the industry, said Mike DiGiovanni, GMs chief sales analyst, on a conference call Koenig (November 1991). This fall was accounted for reduced access to loans. The stock markets were down weakening the economy and thus keeping the customers away from spending. Analysis of the market share of the domestic cars: The market share of the domestic cars in the year 1970 was 84%. The market share of the domestic cars did reduce to 74% in the year 1985. This year recorded a highest import (from the data available), of the cars from different countries, thus reducing the market share of the domestic cars by 10%. Market share of the domestic cars increased after the year 1991. In the year 1998 the market share increased to 80% though it was still less than the market share of domestic cars in the year 1971. Thus we can conclude that the imports of the cars had reduced the market share of the domestic cars. Results: We can report the major findings of the paper as follows: 1. The import of cars from different countries has negatively affected the sale of domestic cars in U.S. 2. There is a negative correlation between the imports and sale of domestic cars. 3. The data does not follow any trend that is; there is no long term relationship between the import of cars and the sale of domestic cars in U.S. 4. The year 1991 is marked as the break point of the data. This year shows a steep downfall in the sale of domestic cars as well as the imports. 5. In the long run the market share of the domestic cars falls, with the increase in the import of cars from the foreign countries. Conclusion: The economic development in USA had made it one of the front runners in the growth of automobile industry. The economic development meant availability of technology and demand in the country. The US Government has always been encouraging the development of industry, trade and commerce. The development of the industry in the 20th century was due to the favourable policies of the Government. In the 20th century US car manufacturers were the leaders of the global market. There was no direct competition from the other countries of the world. The Government of the US has always encouraged the free trade practices. The import of the foreign cars in the US market started at a large scale in the 1957. The US car manufacturers have faced a tough competition from the foreign manufacturers. The Japanese and the German players have been the dominant players in the market. The imports have marked a sharp decline in the sale of domestic cars in U.S. The history of the US automobile industry underlines the fact that the companies were unable to cope up with the pressure of the competition. This had a lot to do with the inefficiency of the management of the companies. The empirical analysis confirms the effects of the imports on the domestic car sales. The domestic cars lost their market share to the foreign cars. This condition was further aggravated in the year 1991 with the economic downturn. Thus, the analysis supports that the imports are having an adverse impact on the US car manufacturing companies. The US government will have to take some step to support the car firms. There has to be some policy reforms. It may be in form of financial aids, injection of new stimulation packages or imposition of more trade barriers in form of tariffs and quotas. References: 1. Covarrubias, M. (n.d.). History and growth of automobile car industry. Article snatch.com. Available at: http://www.articlesnatch.com/Article/History-And-Growth-Of-Automobile-Car-Industry/857257 (Accessed on 1st June, 2010) 2. Cooney, S and Yacobucci, B. (25th April, 2005). US automotive industry: Policy overview and recent history. CRS Report for Congress. Available at: http://ncseonline.org/NLE/CRSreports/05apr/RL32883.pdf (Accessed on 1st June, 2010) 3. Lovett. W, Eckes. A and Brinkman.R. (2004). US trade Policy: history, theory and the WTO. ME Sharp Inc. 4. North American Free Trade Agreement. (n.d.). Export.guv. Available at: http://www.export.gov/fta/NAFTA/ (Accessed on 1st June, 2010) 5. Benefits of free trade. (n.d.). Economics Help. Available at: http://www.economicshelp.org/trade/benefits_free_trade.html (Accessed on 1st June, 2010) 6. Rubenstein, J. (1992). Changing US Auto industry. Routledge. 7. Smitka, M. (n.d.). Foreign policy and the US competitive industry. Washington and Lee University. Available at: http://www.h-net.org/~business/bhcweb/publications/BEHprint/v028n2/p0277-p0286.pdf (Accessed on 1st June, 2010) 8. History of automobile industry. (n.d.). Economy Watch. Available at: http://www.economywatch.com/world-industries/automobile/ (Accessed on 1st June, 2010) 9. Amadeo,K. (31st December, 2009). The Auto Bailout. About.com. Available at: http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm (Accessed on 1st June, 2010) 10. Hopkins, W. (2000). Quantitative Research Design. Sports science. Available at: http://www.sportsci.org/jour/0001/wghdesign.html (Accessed on 1st June, 2010) 11. Secondary research. (n.d.). Available at: http://www.asiamarketresearch.com/glossary/secondary-research.htm (Accessed on 1st June, 2010) 12. Gross. M., Fieldman. M.G.R., 1998. National Transportation Statistics (1998). DIANE Publishing (USA). 13. Koenig B. (November 3, 1991). U.S. Auto Sales Fall 32% to Lowest Total in 17 Years . Bloomberg.com. Available at: http://www.bloomberg.com/apps/news?pid=20601087&sid=a5PrXcWxGKQ0 (Accessed on June 4, 2010) Read More