Global Competition and U.S. Automakers

Written by: Keith BoldenClass: BA 385

Instructor: Dr. Jeanne EndersTerm: Fall 2007

Global Competition and U.S. Automakers

Ever since the start of the 20th century, automobiles have enhanced the way

Americans traveled across the United States. Automobiles became a quicker source of

transportation than train, boat, or horse-drawn carriages as it promised Americans a more

productive lifestyle. Three American automakers, General Motors, Ford, and Chrysler

were the only major competitors in the automobile industry for most of the 20th century.

However, increasing competition from foreign automakers, such as Toyota and Honda,

have made the profits of “The Big 3” domestic automakers decrease, and UBS Warburg

states that it is not unlikely in the “coming years that either Ford or GM will go into

Chapter 11, or Chrysler is ejected from DaimlerChrysler.” The American automakers are

in a troubled state, and they need to find a way to become more competitive with foreign

automakers if they wish to stay in business.

One issue that American automakers face that foreign automakers do not is the high

cost of health care and pension programs for its workers and retirees. Diana Kurylko

quotes the Center for Automotive Research that “U.S. automakers spend $8,655 per

vehicle on labor costs, including suppliers’ labor costs, compared with $6,052 for the

Japanese transplants.” The extra $2,500 cost per vehicle puts the American automakers at

a competitive disadvantage because foreign automakers are able to produce more cars at

a cheaper cost. According to Eric Noe from ABC News, “$1,500 is paid out in health

benefits to workers and retired workers” and when pension plans are taken into account,

the “number climbs above $2,000 per car.” These statistics are not expected to get better

as “the Big 3 are losing the ability to pay their legacy obligations” according to Rubin

from UBS Warburg.

According to Deutsche Bank Securities, they estimated “GM’s pension and medical

costs at $25.39 per labor hour last year [2002]. Toyota’s cost: $9.76 an hour.” This

number was estimated to increase in 2003 to $34.46 an hour for GM and $10.51 an hour

for Toyota. With GM’s costs increasing at such a sharp rate compared to Toyota’s,

problems will only get worse for GM as more employees enter retirement age. In 2003,

Kurylko stated that GM had “339,000 retirees, nearly three for every one of its 125,000

active employees.” When compared to Toyota North America’s operations, they had only

“65 retirees, compared with 20,500 total employees.” There is a considerable ratio

difference between these two automakers and matters only get worse when considering

the average age of workers between them. Kurylko concludes the “average age of its

[GM’s] workers is an industry-high 48.7, compared with 38 for Toyota.”

Another issue that American automakers face due to foreign competition is declining

market share. In 2004, General Motors “sold 4.66 million cars in the United States”

which resulted in a “27.6 percent market share” but in the following year, sales dropped

to “4.4 million and only 26 percent of the market” according to Global Insight, an

economic forecasting firm. Ford experienced a similar trend by going from “3.28 million

cars sold in 2004 to 3.09 [million]” in 2005 resulting in a market share drop “to 18.3

percent from 19.4 percent.” The only American automaker expected to see improvement

in sales is DaimlerChrysler according to Noe “from 2.2 million [in 2005] to 2.26 million

in 2006. Noe explains that DaimlerChrysler has been more alert to what consumers want

by “gauging the market and rolling out new products that consumers have bought.”

In contrast to American automakers declining market share, foreign automakers such

as Toyota and Honda have enjoyed successful increases in market share with Toyota

“expected to jump from 12.2 to 13.5 percent in 2005” and Honda from “8.3 to 8.6

percent” Noe states. Jesse Toprak, an executive director of industry analysis with the

automotive Web site Edmunds.com, expresses concern with the rising success of foreign

automakers. He concludes that “if the speed the Japanese automakers are gaining repeats

itself for the next decade, Japanese cars will outsell American cars in 10 years.” What

makes the situation even more complicated is that China is now trying to become a

competitive force in the automotive industry by “bidding to buy a car engine plant in

Brazil” according to Keith Bradsher of the New York Times.

Bradsher explains that because the engine plant is “one of the world’s most

sophisticated engine plants”, Lifan Group, a Chinese carmaker, finds it to be more

feasible to disassemble the plant in Brazil and rebuild it in China. Yin Mingshan, the

primary owner of Lifan Group, plans to rebuild the engine plant next to his current

operations where he intends “on exporting to Europe in 2008 and the American market in

2009.” Mr. Yin realizes that it will take several years in order for his company to be able

to compete with more developed countries, but he says “Chairman Mao taught us: if you

can win then fight the war, if you cannot win, then run away.” Yin emphasizes that he

wants “to train [his] army in these smaller markets, and when we are ready, we will move

on to bigger markets.” Because Chinese workers work 16 hours a day and 7 days a week

compared to American workers 8 hours a day and 5 days a week, Yin has full confidence

that they will be able to compete with the United States.

In a 2007 report by Neal Boudette of The Wall Street Journal, he explains that the

American automakers have made efforts to improve their cars, “but then find it hard to

get buyers to notice.” CNW Market Research is a group that talks with “would-be car

buyers” and plays tricks on them by removing “any identifying logos” from the import or

domestic car. Then they confuse the would-be car buyers into thinking the import car is a

domestic car and that the domestic car is an import car. The end result, according to Art

Spinella of CNW Market Research, is the same. Spinella says, “If they think it’s an

American car, the perception of the vehicle falls dramatically.” Boudette explains that the

public perception of the Big 3 has been that, for many years, they have concentrated on

trucks and paid little to no attention to their sedans and compacts. Recently, the Big 3

have taken notice of this perception and “markedly improved the quality and look of their

sedans and compacts” says Boudette.

To help emphasize the changes in their cars, “Detroit auto makers have been

increasingly willing to experiment with aggressive marketing tactics”, and Ford has been

one of the most recent examples with their “Swap Your Ride” program. In this program,

Ford uses its advertising agency, JWT, to pretend to be from a “fake market-research

firm, track down owners of cars made by Toyota Motor Corp., Honda Motor Co. and

other competitors”, and ask them to take new Ford models for what seems to consumers

like an “impartial weeklong test” Boudette concludes. After consumers were finished

with their weeklong experience, JWT staffers, still posing as the fake market-research

firm, would arrange a camera crew to interview the consumers about their test drive

experience.

One of the positive comments came from Derek Campos, a 24 year old student who

was currently driving “a 2002 Nissan Sentra.” When asked about his test drive experience

in the Ford Focus, Campos stated that he liked “the Focus’s flashy look, and appreciated

the Synch entertainment system that allowed him to use his cell phone and Apple iPod

while driving.” Campos also noted that he was in the market for a new car soon, and

when he did start looking, he would “definitely look at the Focus.” Boudette explains on

a side note that “Synch uses Microsoft Corp. technology, and is making its debut in the

Focus.” This positive comment regarding the quality of domestic cars is one step in the

right direction for Ford and other domestic automakers, but they still make plenty of

work ahead as Boudette notes “inferior cars that Detroit churned out in the past are still

hurting the industry’s image.”

According to J.D. Power & Associates 2006 survey of people planning to purchase a

vehicle, 47 percent of truck buyers considered domestic brands only, while 26 percent

only considered imports, and 27 percent considered both brands. As for car buyers, 23

percent considered domestic brands only, 54 percent only considered imports, and 22

percent considered both brands. Boudette further explains the impact of these numbers on

the Big 3 saying their “combined share of U.S. light vehicle sales so far this year [2007]

is 51.3%, down from 54.2% at the same point in 2006, and down from 60% just four

years ago.” These numbers demonstrate that consumers desire to purchase domestic

vehicles is continuing to decrease, and the domestic automakers need to continue

programs such as Ford’s Swap Your Ride in order to get consumers actively interested in

buying domestic.

Going into J.D. Power & Associates study further, brand loyalty is no longer

important as owners of domestic vehicles demonstrate a lower repurchase rate than

owners of import vehicles with the exception of European vehicle owners. This year,

69.2% of consumers who traded in a domestic vehicle bought domestic again, while

28.7% decided to buy Asian, and 1.9% decided to choose European. If consumers were

trading in an Asian vehicle, 78% continued to purchase Asian, while 18.6% purchased

domestic, and 3.8% purchased European. Owners of European vehicles who traded in

seemed to equally purchase European (41.2%) and Asian (40.2%), with the remaining

18.6% belonging to domestic purchases. These numbers continue to explain that, if a

consumer has already purchased an import and is trading in for another vehicle, the odds

are very unlikely that they will end up purchasing a domestic vehicle.

In conclusion, American automakers are on a slippery slope, and they have failed at

staying competitive with foreign competition. If American automakers want to stay in

business, they will need to start closing down unnecessary plants like GM demonstrated

when they cut “9 percent of its workforce” as Noe mentions. In addition, they will need

to find ways to make their light cars more appealing to the global population by offering

more innovative options in their cars, such as Ford Focus’s Synch entertainment system,

to stay on the competitive edge. Toyota’s president Katsuaki Watanabe says that Toyota

plans to sell “around 9.8 million vehicles worldwide in 2008” and given the steady

increase in market share in the past few years, this is a realistic possibility. According to

Kurylko, Toyota’s market value is $15 billion more than the Big 3 combined, at $91.8

billion. Only time will tell if the Big 3 are still operating in the coming years.

Works Cited

Boudette, Neal E. “Detroit Auto Makers Try Some New Tricks.” The Wall Street Journal

14 September 2007: B1.

Bradsher, Keith. “China Seeking Auto Industry, Piece by Piece.” New York Times

17 February 2006. Accessed: 7 November 2007.

<http://www.nytimes.com/2006/02/17/business/17auto.html>.

Clark, T.D. “U.S. Automakers: Left Behind.” Weblog entry. 20 September 2006.

Thomas Publishing Company. Accessed: 7 November 2007.

<http://news.thomasnet.com/IMT/archives/2006/09/us_automakers_left_behind_

foreign_automaker_competition.html>.

Kurylko, Diana T. “Wall Street paints a grim picture of Big 3 prospects.” Automotive

News 77 (2003): 1-43. EBSCOhost. Portland State University Library, Portland, OR.

Accessed: 7 November 2007. <http://www.ebscohost.com/>.

“More Competition for U.S. Automakers?” Weblog entry. 17 February 2006. Economist’s

View. Accessed: 7 November 2007. <http://economistsview.typepad.com/

economistsview/2006/02/more_competitio.html>.

Noe, Eric. “Toyota, Honda Gaining on U.S. Automakers.” ABC News 22 November 2005.

Accessed: 7 November 2007. <http://www.abcnews.go.com/Business/Autos/story?

id=1334996>.

“Toyota eyes world sales of 9.8m vehicles.” FairfaxDigital 20 September 2006.

Accessed: 7 November 2007. <http://www.theage.com.au/news/Business/

Toyota-eyes-world-sales-of-98m-vehicles/2006/09/20/1158431779279.html>.

Website Evaluations

Economist’s View

1). Who is the author of the site?The author of the website is Mark Thoma, who is in the Department of Economics at the University of Oregon.

2). Who sponsors the site?The sponsor of the website is TypePad, a blogging service for professional small business websites.

3). When was the site last updated?The website is updated daily, and it was established March 6, 2005.

Thomasnet.com

1). Who is the author of the site?The author of the website is ThomasNet Industrial Newsroom, which is a source that provides up to the minute product information in the industrial marketplace.

2). Who sponsors the site? The sponsor of the website is Thomas Publishing Company LLC, who also created ThomasNet Industrial Newsroom.

3). When was the site last updated?The website is updated daily.

The New York Times

1). Who is the author of the site?The author of the website is The New York Times Company, which also is known for Newspaper publications such as: The New York Times, The International Herald Tribune, The Boston Globe, and others.

2). Who sponsors the site?The sponsor of the website is also The New York Times Company.

3). When was the site last updated?The website is updated daily and up to the minute.

ABC News

1). Who is the author of the site?The author of the site is ABCNews Internet Ventures.

2). Who sponsors the site?The sponsor of the website is Walt Disney Internet Group.

3). When was the site last updated?The website was established by the Walt Disney Internet Group in 2003 and updated on November 30, 2006.

The Age Company

1). Who is the author of the site?The author of the site is the Australian Associated Press.

2). Who sponsors the site?The sponsor of the website is Fairfax Digital, an online database of Australia’s major newspapers.

3). When was the site last updated?The website is updated daily and sometimes several times a day to keep up to the minute on breaking news.