American Automobile Industry

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Introduction

The automobile industry is one of the expansive industries that touches at least everybody’s live, either directly or indirectly, in the world.

The US automobile industries had been dominated by what were known as the big three both in light passenger vehicle and pick ups and trucks up to around 1990s.

But of late, the market has been invaded by foreign firms which have proofed to be more efficient in their production technology hence giving the firms of united state very stiff competition. The competition from foreign firms, mostly from Asian firms, and the economic crisis of 2008 brought a lot of challenges to the industry.

Market Share

The big three united states firms were dominating the market in the late 1980s and early 1990s accounting for up to 90% of the market.

The market share started reducing in the mid 1990s reaching 75%, and continued to decline up to around 44% today. The passenger car segment was the worst hit with the Japanese trio; Toyota, Honda and Nissan, taking up the lion share of the market.

In the 1981 the number of foreign produced automobile in the US market was zero, but the number increased tremendously reaching 3 million units in the early years of the 21^st century.

Tough the big three firms were improving in 2000s to gain their market share, foreign investment still continued to increase with Hyundai opening its first United States factory in Montgomery, Alabama in 2005, and Toyota completing its sixth factory in 2006.

The automobile industry was very volatile, and demand could switch anytime due to high product differentiation that was performed by the firms. The foreign firms also produced better quality vehicles compared to those of the US companies, therefore attracting higher demand.

Whereas it was a tradition in America for health care to be highly rewarded, foreign companies enjoyed relatively lower health costs. Retirees of the foreign companies were also paid less compensation as compared to those of the big three in the US.

These factors gave the foreign companies a competitive advantage over the American firms by lowering the overall operating costs of these firms (Canis 15).

The advanced technology used by the foreign companies, especially Toyota, ensured high labor and capital productivity, which increased efficiency and therefore output thus leading to higher profits.

The years of 2000s saw the big three closing the productivity gaps by imitating the technology used by some of the foreign firms especially Toyota, but still they lost money on every car they sold while foreign firms made money on every car they sold.

This was aggravated by the fact that operational costs were higher for the big three. General motors had 2.4 retirees for every current employee by the year 2007, while the average labor cost in 2002 was $75 per hour for the big three, compared to $45 an hour of Toyota‘s America plant.

Industry progression

Until world war two, motor vehicle manufacturing was monopolized by few countries of Europe and North America including France, England, Italy and The United States of America.

By the end of 1950s however, new technology had started being incorporated in the vehicle industry mainly in Europe bringing about new models, while at the same time Japan had ventured into the industry.

In the 1960s, steel bodies and fiberglass were experimented and started being used in manufacturing of vehicles in European industry with America following the technology later.

Innovations led to advancement in engine power and production of cars with higher speeds than the previous ones, while the monopoly of America started declining as Japan increased its presence in the field.

The American market saw competition increase in 1970s as smaller foreign cars like BMW, Toyota, and Nissan started entering the market.

During the 1960s, American market was dominated by three big firms General Motors, Ford and Chrysler which collectively had a market share of about 90.3%, and other small firms contributing the rest.

Competition started increasing in the 1960s in the American market from both the big three firms and other relatively large firms, and also from foreign firms which had started gaining ground in America.

The emergence of pony cars in America was around this time along with muscle cars, and performance was of great concern as people started worrying about the speed and engine power of the cars.

Ford’s Mustang had great reception during this period, at least until 1967 when Chevrolet came up with its CamarioZ28 compelling Ford to advance its technology, and in 1969 Ford produced other brands of cars the Mustang boss 302, and the Mustang boss 429.

Japan’s first sports car, the Datsun 240Z, made it a very influential competitor with the car gaining much popularity in North America, and this boosted highly the production of Japanese cars (James 156).

There was a fall in the American industry in the 1970s due to the oil crisis that brought about sharp rises in the price of oil hence reducing the demand of the big cars that were produced by the American firms.

The fall was also as result of decline in innovation in the field of automotive and the coming into effect of the automobile emissions act, while at the same time competition by this time was stiff from the small imported cars.

Due to the competition from the small cars, General Motors resulted to acquisitions to develop new models that would compete favorably, hence acquiring Suzuki and Isuzu subcompacts in late 1970s to provide fuel efficient cars.

As competition increased, marketing strategies were necessary to gain market share and this made Toyota, Honda and Nissan to turn into naming ploy in order to sell luxury cars in the American market.

They named their new brands Lexus, Acura and Infiniti, though there was no difference between them and other cars (James 246). In the 1980s, it was discovered that attraction and retention of customers was important for long term profit making of the company.

Therefore, most firms came up with a wide variety of cars to fit every age group, hence maintaining customers from the time they buy their first cars in their teens to old age.

In the 1990s, many firms had advanced in technology and were producing competitive models to the market, while at the same time many countries especially from Asia had started manufacturing vehicles.

The American firms had also gone global, and were producing cars in different countries like China and Brazil by joining hands with the local automotive producers.

The challenge to globalization of the automotive industry has been the higher production costs, mainly labor costs which were around $65.90 per hour and $35.36 wages per hour for GM and Ford by 2005 (Cooney 14).

Toyota has increased its competitiveness to be among the three dominant automakers of the world together with General Motors and Ford, which collectively contribute to about 34% of the world wide market shares by 2004.

By the year 2007, the motor industry had an overproduction of about 20 million units globally reflecting how first the industry had grown to overtake demand, while at the same time attention was shifting from the developed nations to emerging markets where demand is still high (Canis 6).

Effects of Financial Crisis

All firms were not affected the same way after the 2008 financial crisis because of the difference in the management structure, product differentiation and difference in target market among other factors.

The American firms were worse affected by the crisis than the foreign companies because they had heavily invested on high profit luxury sports cars, as opposed to fuel efficient small cars which were produced by foreign firms like Toyota.

This made the US automakers produce cars with very low demand, which led to high inventories being held by the firms and a very low inventory turn around hence a lot of costs.

The cost of production of the America automakers was also higher than that of the foreign firms, which enabled the foreign firms to continue production using the retained profits to fund their current costs (Canis 16).

Impacts on Toyota

The years of success and high profit making for Toyota Company had placed it in a better position to cope with the reduced credit hence demand. Toyota also sort financial bail out from the bank of Japan and was given $2 billion (James 229).

The demand for the small and fuel economical cars increased during the financial crisis, which placed the producers of these vehicles in a better position of having some sales during the hard times, hence reducing the losses incurred.

On the same note, demand in emerging markets did not decline as the global financial crisis hit hard, and since Toyota produced fuel efficient relatively cheap cars which are highly demanded in these markets, it was able to fund its fixed costs through sales to the emerging markets.

Impacts on General Motors

General Motors which had been loosing its market share in the years preceding 2008, and which was producing relatively big cars with higher fuel consumption was not lucky though as they continued making losses month by month, while the costs of production remained the same. This compelled them to ask for financial assistance from the federal government, but in the end they had to enter bankruptcy.

Impacts on Ford

Though the times were hard and demand was low especially for American cars, ford declined government bail out plan. The money that ford had from turnaround fund helped in the times of the crisis and it was the first one among the big three to bounce back to profitability in the last quarter of 2009. In addition, Ford had earlier re-mortgaged all of its assets raising some capital which enabled it to continue production.

Impacts on Chrysler

Chrysler had no choice but to fall into the arms of fiat losing 20% stake on the process, while fiat took over the management too after billions of dollars in bail out had been given.

The stake that was held by fiat was expected to increase to around 51% by the end of 2011 and United Auto Workers became the majority share holder.

Factors determining performance under competitive conditions

In competitive market, like that of the United States’ automotive industry, revenue is a very important factor that influences the performance of a company.

The higher the revenue a firm earns the higher the chances of the firm to sail through tough conditions including when the sales are not able to break even.

Toyota and Ford were able to stand stronger compared to their competitors during the financial crisis since they had made a lot of revenue in the earlier years, hence their balance sheets were able to cater for their financial needs.

Measures taken during production are also important since they determine the reception of the commodity in the market. Companies in a competitive environment tend to find ways of producing a high quality but cheap product in the most efficient ways possible, which differentiates the profit margins of these firms (Cooney 34).

A firm with the most efficient way of producing a product mostly has a better chance of performing better. Furthermore, the number of units sold highly matters under these circumstances because they directly determine the revenue earned by the firm.

Each firm aims at increasing the number of units sold to increase its profits. Toyota sort to produce fuel efficient cars because, as a compliment, fuel directly determines the demand for cars and therefore fuel efficient cars would be demanded in large numbers hence increasing the sales. This will in turn increase the revenue earned and consequently the profits earned.

The share of the market held by a firm is also a matter of concern for any company operating in a competitive market. Higher market share means higher demand for a firm’s products and thus higher sales which requires higher production, hence the company grows faster.

A higher market share also means that the firm has build its brand name, therefore it does not need too much advertisement hence reducing on operating costs.

The increase in the market share of Toyota in the American market increased it sales, and enabled it to grow faster to an extent of having six factories by the end of 2006.

The price of compliments highly affects demand of a product, therefore it is important to take that in to consideration. When a product depends heavily on the compliment, it is advantageous if the firm finds a way of reducing the dependency on the compliment, especially if the price of the compliment is volatile.

Foreign automakers produced cars that were more fuel efficient than the American automakers, hence highly affecting the demand for the American cars.

Substitutes are also very vital to be assumed, since they provide an immediate threat to the volume of sales and demand. Product differentiation also plays a vital role, as it ensures that customers easily recognize the firms’ products.

Due to the high cost of making a new model of a vehicle, because a new production plant has to be built up, and the time span that is required before bringing these vehicles into the market and the uncertainty of the reception in the market, automakers rarely bring new models to the market.

Continuous improvement of technology and the understanding of customer needs are also paramount, as these determine the future demand for the firms’ goods. Japan took the fuel concern of the customers into consideration and produced cars that consumed less fuel, which enabled them to have demand even during times when fuel prices were sky rocketing.

Reputation is also paramount in a competitive market, because a firm which is known to produce commodities without defects gains customer confidence hence increased demand.

While Ford and General Motors’ continued to struggle with quality of their cars and damage control issues, Toyota’s cars were not known to exhibit any defects.

Long term planning is also an important strategy, as it helps in maintaining demand for a relatively long period of time. Toyota produced fuel efficient cars at appoint when fuel was cheap, and all an average American was looking for was luxury, but fuel prices was increasing though by minimal proportions (James 241).

Conclusion

Foreign firms entered the American motor industry and brought new changes into the industry and also provided variety in vehicles for customers.

High quality and relatively less costly vehicles to maintain that are produced by the foreign firms have continued to gain ground in America, while the big cars produced by the big three have seen their demand decline.

The financial crisis was also a major set back for the big three, but they have since then gained their foot and are making progress to gain back the market share they lost though this may take time.

Works Cited

Canis, Bill. U.S Motor Vehicle Industry: Confronting A New Dynamic in the Global Economy. Darby: Diane Publishers, 2011. Print.

Cooney, Stephen. U.S Motor Vehicle Industry: Federal Financial Assistance and Restructuring. Darby: Diane publishers, 2011. Print.

James, Wanda. Driving from Japan: Japanese Cars in America. Jefferson: McFarland publishers, 2007. Print.

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