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July 9, 2007

Can the Big Three Come Back?

The last writings of the late novelist Kurt Vonnegut portrayed the Americans of today as “drunk” on fossil fuels.  Of course, that’s only partly true.  What we’re really addicted to are the machines we pour the fuel into, especially the automobile.  We’ve got more registered vehicles in this country than we have drivers.  In 2005 we collectively drove more than three trillion miles in our vehicles – about 15,000 miles for each of the nation’s 199 million drivers.  And the numbers go up every year.

Our special relationship with the automobile also translates into a special interest in the automobile industry.  It is arguably the most discussed, analyzed, and criticized industry in America, especially in the industrial Midwest where it was born.  And these are not happy times for those proud companies who trace their roots here.

It begins and ends in the marketplace, where consumers are increasingly opting to buy foreign-nameplate vehicles.  The June sales figures were particularly depressing.  GM sales were down a full 21 percent from the same month last year, with Ford and the soon-to-be independent Chrysler also slipping back, sending the Big Three’s overall domestic market share down to a scant 50.2 percent.  Meanwhile Toyota, now the world’s largest automaker, and most other foreign-owned brands picked up share.

Indiana has a stake in both sides of this struggle.  Communities like Anderson, Bedford, Muncie, Kokomo and Indianapolis have seen first hand the impact of the contractions of Ford, GM and Chrysler.  Unlike previous swings in the industry, there is every reason to believe the changes this time are permanent.  But the growth in Honda and Toyota has made winners out of other communities in the state, and holds at least some promise for local supplier firms as well.

But it is still the Big Three production levels that matter most to Indiana.  And so the question on so many lips is, can the Big Three come back?

Swings of fortune in the auto industry are not without precedent.  Most of us have grown up in a world where General Motors has always been the biggest car company, but in 1919 one half of the automobiles in the United States were Ford Model T’s, and Ford production was 10 times as large as Chevrolet, its largest rival. 

Over a period of two decades Ford stumbled badly and the situation dramatically reversed itself, and company executives woke up in 1950 with a 23 percent share of the marketplace.  Despite the billions poured into new models, new marketing, and new images, twenty years later their market share stood at 20 percent.

The competition of today is of a much different form, clearly.  It is estimated that offshore rivals enjoy a cost advantage of as much as $1500 or $2000 per vehicle over Big Three producers, and have remained profitable over a period when domestic nameplates have been hemorrhaging cash.  There are more viable companies in the U.S. market today than at any time since the 1920’s, with the small vehicle market in particular dominated by non-Big-Three brands.

And the government is providing little help.  Congressional proposals to push fleet mileage standards up dramatically – to 35 miles per gallon for both cars and trucks by 2020 – will hit domestic automakers hard financially.  Most exposed is Chrysler, which currently has more than 70 percent of its sales from trucks.  Apparently the logic of legislators is to march to energy independence over the corpse of the domestic auto industry.

Certainly there are major adjustments ahead for the industry, and states in the Midwest should be paying close attention.  But if history is any guide, it will take a mighty effort by Big Three companies just to hang onto the market shares they enjoy today, let alone regain past glory.  And communities in our state should be preparing for that new reality.

Link to this commentary: https://commentaries.cberdata.org/159/can-the-big-three-come-back

Tags: auto industry


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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