US AUTO INDUSTRY DECLINE: LESSONS FROM FORD AND GM
Dr. Tanvir Orakzai
July 04, 2006
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. 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.
Ford is also on decline. 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. 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 proving 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 adding more damage to the already declining US auto industry.
Toyota sells 65 percent of its vehicle in America. It is expected that these cars would grow more, if Toyota were 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 analysts mention that US should thank the Japanese and Korean auto makers for giving jobs. 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 beaten by US companies.
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. 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.
One major reason 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. 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.
Toyota on the other hand had a different way of working. The company did not share every penny among its workers like Ford did. 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.
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 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 in US and European market is on decline, while it is on high-rise in Southeast Asia.
In the past two decades, a combination of factors, such as decline of dollar value against yen, German mark stability 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 not only more competitive environment for US automakers, but also incurred losses for the local industries. By 1991 about three million cars and trucks were running on US roads. These foreign companies left their countries due to stiff market pressure, US not only proved a safe heaven, but they also made huge profit in shorter 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 US auto industry survival difficult with each passing year. Had US auto industry taken arrival of the foreign companies seriously, there would have been little damage done to their market share.
The problem with Ford GM and other local US companies is 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 were 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. 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
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.
Ford is also on decline. 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. 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 proving 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 adding more damage to the already declining US auto industry.
Toyota sells 65 percent of its vehicle in America. It is expected that these cars would grow more, if Toyota were 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 analysts mention that US should thank the Japanese and Korean auto makers for giving jobs. 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 beaten by US companies.
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. 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.
One major reason 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. 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.
Toyota on the other hand had a different way of working. The company did not share every penny among its workers like Ford did. 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.
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 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 in US and European market is on decline, while it is on high-rise in Southeast Asia.
In the past two decades, a combination of factors, such as decline of dollar value against yen, German mark stability 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 not only more competitive environment for US automakers, but also incurred losses for the local industries. By 1991 about three million cars and trucks were running on US roads. These foreign companies left their countries due to stiff market pressure, US not only proved a safe heaven, but they also made huge profit in shorter 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 US auto industry survival difficult with each passing year. Had US auto industry taken arrival of the foreign companies seriously, there would have been little damage done to their market share.
The problem with Ford GM and other local US companies is 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 were 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. 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