The US Auto Industry - Which Road Does it Take Now?

Back in the 1960's and early 1970's, the domestic North American automotive industry was focused strictly on getting the product into the showrooms. During this period, the challenge was producing enough of the right product and getting it into the customers' hands. Price was not an issue and foreign competition was virtually non-existent. Circumstances certainly have changed radically since then!

In the late 1970's and early 1980's, consumers demanded quality, quality, and more quality! This change in customer expectations resulted primarily from Japanese entry into the North American market. The Japanese auto manufacturers' increase in market share also gained momentum from the first oil crisis in the US during the early 1970's. The facts are that the Japanese had the right size vehicles with better fuel economy than their US counterparts, and they were convinced that continuous improvement in quality, as advocated by Dr.W.

Edward Demings, was fundamental to growing their export base.

Dr. Demings is widely recognized as the "father of the Japanese post-war industrial revolution." He taught that adopting the right management principles would enable companies to increase quality while reducing costs. Unfortunately, it took years before the US auto manufacturers began to inculcate his teachings.

During the 1990's, worldwide demand for vehicles continued to grow as did the number of vehicle manufacturers. In addition, there was significant proliferation in the number of vehicle models available in the marketplace, with even more to come. By 2005, the industry had grown to the point where, on a worldwide basis, there were over twenty five million units of excess capacity.

Four million units of that excess capacity existed right here in the US.

In a free market environment, excess capacity only results in intensified competition for the "next sale." To keep their plants running, the US automotive manufacturers incurred incremental marketing expense through a variety of incentive programs. The net result was higher costs and lower profits due to incentive programs such as rebates and zero interest based payment plans.

In addition, many other factors put even greater pressure on the domestic automotive manufacturers' ability to stay profitable. New environmental pressures for increased safety features, more rigid emissions standards, and improved fuel economy resulted in increased vehicle costs, most of which the manufacturers have not been able to pass on to the customer.

In summary, market forces dictating the need for improved product content and technology, increased competition and changing customer wants and expectations added even more cost for the vehicle manufacturers. At the same time, decreased consumer brand loyalty coupled with an overall decline in market demand put downward pressure on pricing. Finally, increased fuel costs shifted consumer demand away from the more profitable vehicle lines -SUV's and light trucks - to smaller, more fuel efficient cars.

The net result was continuing profit deterioration for the automotive manufacturers only some of which could be passed on to their suppliers. By not being able to address these challenges on a timely basis, Chrysler and GM had to go to the government for "bailout" funds, at a significant cost to us, the taxpayers. Now the government owns sixty per cent of GM, and we, the taxpayers who provided the funds, didn't even get to vote on it!

The government also fired and replaced the head of GM and dealerships that were about to be closed are being rescued by members of the House of Representatives.

What's the next challenge facing the industry? My prediction is that the government will determine what vehicles we need, and which ones can be built by GM. Who knows, maybe there will be new regulations for the entire industry that will dictate what we'll be driving in the future!

Is this still a free market economy or has the concept of free enterprise seen its heyday?

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