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November 16, 2001

Changes Afoot in the Auto Industry

The motor vehicle industry, so vital to countless communities around Indiana, is steering into a fierce cross wind these days. Yes, profits are down and so is job security. But that could be said about any number of industries right now. What sets the problems in autos apart is that they predate the downturn in the economy.

To say that the car industry is heading for a train wreck is a bit of an overstatement, but not much. Overall, conditions for manufacturers could be a lot worse. Even though sales in the last model year were down, 2001 was still the third best year for sales on record. Gasoline prices, while still volatile, have not proved to the major disruptive force that some had feared. And the industry has been largely spared the painful strikes that have plagued it in the past.

But there are a number of unsustainable trends that could rip this veneer of normalcy away very soon, especially for the Big 3 automakers. One is that companies are running out of cash. Inventories have been depleted by the unprecedented generosity of the zero percent financing programs initiated after September 11, but so have company coffers.

Instead of serving as a shot of adrenaline to jump start sales and get the industry rolling, the hugely successful incentive program now looks more like a sell-off in advance of a long, cold winter. That's because cash-strapped GM, Ford, and Daimler-Chrysler are not ramping up production to replace depleted inventories of new cars, even though October sales were up by more than 26 percent. That's not a good omen in a business that often requires a good selection of products to close a sale.

And the Big 3 no longer split the U.S. car market amongst themselves anymore. Asian carmakers, many with sizable production capacity located here, now collectively account for more than 1 out of every 4 cars and light trucks sold. In some states, the ratio is nearly half. Moreover, the new facilities of the transplant companies like Honda, Toyota and Nissan have, in most instances, a sizable cost advantage over the older infrastructure of the Big 3.

There are, in fact, eighteen different car companies that sell more than 2,000 cars per month in the United States. The strong dollar has helped create this situation, but the economics of the industry still require volume. And with Oldsmobile, Plymouth, and Camaro already pronounced dead, don't be surprised if the casualty list of the shakeout still ahead contains more familiar names.

But the gun isn't simply aimed at company executives' heads. It's aimed at the leadership of the United Auto Workers union as well. Their surprisingly strong defeat in the attempt to organize non-union employees at the Nissan complex in Smyrna, Tennessee, reveals the sharply divided nature of the auto workforce. Younger workers at transplant factories enjoy union wages without union dues, while older UAW members pay to support a bureaucracy with a storied past, but an uncertain future.

But a certain amount of chaos and controversy is par for the course in an industry that has given us Henry Ford, Lee Iacocca and John DeLorean. As the car-making environment moves further away from the traditions of the past, a lot of Indiana communities may, ready or not, soon face the consequences.

Link to this commentary: https://commentaries.cberdata.org/449/changes-afoot-in-the-auto-industry

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 has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. 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. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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