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Thread: Extinction Of The Car Giants

  1. #1
    What lies below I found pretty shocking. I'm no economist or mba-er, i had no idea just how bad off (it appears) the big 3 are...
    myfiles


    Extinction of the car giants

    Jun 12th 2003
    From The Economist print edition

    Why America's car industry is an endangered species

    Get article background

    MOTOWN is celebrating. One hundred years ago Henry Ford set up in business, and America's love affair with the automobile began. Ford is staging a party that would not have disgraced Jay Gatsby. And why not? The American car market has been roaring, with annual vehicle sales over 16m. It could be close to 20m in a decade's time, with another 26m young Americans clamouring for their first set of wheels.

    Yet the ride is not going to be smooth: it will be more like cruising in a Ford Thunderbird while ignoring a nasty rumble from its mighty V8 engine. For all the signs are that things are going badly awry in Detroit. Unless something changes, the industry could go broke—with Ford, the most troubled of the big three carmakers, leading the way (see article). The 100th birthday party could swiftly be followed by a wake.

    This quintessential American industry has, admittedly, been written off before, only to bounce back. Chrysler entered the 1980s thanks to a federal bail-out; Ford narrowly escaped bankruptcy around the same time. Washington also came to the industry's aid with restrictions on Japanese imports. Even so, Chrysler nearly came to grief again in the early 1990s, before it was sold to Daimler-Benz. In 1991, the combined losses of the big three topped $7 billion. General Motors (GM) was said to be within an hour of going bust in 1992, with its bosses staring at the fax machine as they waited for a credit-rating downgrade that would have pushed the company over the edge. The downgrade never came, and GM recovered.

    Over the 1990s, modernisation and imitation of Japanese techniques helped to raise Detroit's game. But the saviour of the industry was America's growing appetite for sport utility vehicles (SUVs), minivans and pick-up trucks. For years these chunky vehicles have enjoyed such success that Detroit has made most of its profits from them. Today they account for every other passenger vehicle sold in America. Competing Japanese products, where they existed, faced import tariffs. But now Toyota, Nissan and Honda have developed their own competitors in this market—and they are making them where it matters, in America's southern states, far from the citadel of union power that is Detroit. Also in the 1990s, the industry benefited from a booming stockmarket that lightened the car makers' growing pension burden as they shed workers in an effort to become more efficient. There is no sign of any such deus ex machina now.

    The industry's leaders, as ever, cast the blame at a weak economy. GM's boss, Rick Wagoner, reacted to September 11th by launching discounts and interest-free financing to “keep America rolling”. Almost two years later the discounts are still there, and he cannot see them stopping without a “significant” improvement in the economy. He pins hopes for the future on America's growing population and China's rising wealth, which is at last igniting demand. But neither American babies nor Chinese yuppies may come in time to rescue Detroit. Nor will a resurgent American economy.

    America's car industry is in a trap. It has one-fifth more capacity than it needs. Japan's big three (Toyota, Nissan and Honda) now make a full range of models in America, and manage to sell them without deep discounts. The reaction of any normal industry to such overcapacity would be to shrink, paying attention to profits not sales. But Detroit is not normal. Its labour contracts with the unions restrict its ability to close factories quickly. Jack Smith, a former chairman of GM, used to complain that he would have to wait until his workers retired to get numbers down and make factories more efficient.

    Worse, retirement now brings its own peril, as every retiree adds to the car companies' growing pension burden. GM already has a pension-fund shortfall of $19 billion, as big as its market capitalisation. Add the health-care liabilities of both employees and pensioners, plus the presence of the United Auto Workers (UAW) union, and Detroit is at a huge competitive disadvantage to its Japanese competitors, with their younger, non-unionised workforces. GM, which has two-and-a-half pensioners for every employee, reckons pensions and health-care benefits add $1,000 to the cost of each car it makes. Cuts in the workforce make the burden still greater. In Detroit's circumstances, in short, downsizing cannot deliver results.

    In the past two years, the federal government has come to the rescue of farming, steel and airlines through subsidies and import barriers. It may be just a matter of time before a big carmaker considers using America's Chapter 11 bankruptcy law to shed its pension liabilities, as several steel companies and airlines have already done. When that happens the federal insurance agency picks up much of the tab. It is, however, cash-strapped already. Moreover, the examples of steel and airlines, with their repeated bankruptcies, suggest that federal bail-outs cannot solve an industry's fundamental problems.

    The figures are bleak. Instead of the $2 billion operating profit it once forecast, Chrysler has given warning of a $1.2 billion operating loss in the second quarter. Ford and GM are expected soon to issue similar bleak warnings. Once the Ford birthday bash is over, Detroit will start negotiating a new three-year contract with the UAW. This will be tough, as it will include the carmakers' plans to close some factories—and they already admit that planned closures may not be enough.



    Delayed impact
    Can Detroit escape the grim reaper a third time? The odds look poor. In the past seven years Detroit's share of the American market has slid from 73% to barely 63%. If SUVs, pick-ups and the like are excluded, the big three's share of the passenger-car market is already under half. The backlash against gas-guzzling vehicles can only be bad for Detroit. And the Japanese and German car companies have begun to produce models that compete head-on with such American icons as Ford's F-150 truck. If the Japanese repeat their success with smaller cars, the big three's last profitable redoubt will be overrun. The extinction of America's car giants is no longer just a bad dream: it is coming closer to reality.

  2. The Drawing Room   -   #2
    clocker's Avatar Shovel Ready
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    I, for one, would oppose a government bailout of the Big Three.
    They made their beds, let them rest uneasy.
    Despite the fact that America invented the car industry ( note: industry- not " the car") they have ignored the far more successful business model evolved in Japan.
    Time to pay the piper.
    Big unions (of all industries) have evolved from being the buffer between the "little guy" and his evil capitalist masters, into being the "big stick" that bludgeons capitalism into submission.
    Time for them to pay the piper, also.

    It may help to know that in my 38 years of car ownership I have never even owned an American car.
    Always thought they were crap.
    Sorry, j2.
    "I am the one who knocks."- Heisenberg

  3. The Drawing Room   -   #3
    Originally posted by clocker@18 June 2003 - 14:26
    It may help to know that in my 38 years of car ownership I have never even owned an American car.
    Always thought they were crap.
    me too. but i must admit, they have improved since the 80s. but still no comparison, the japanese and to an increasing extent the germans are running circles around the big 3. Remember when volkswagen rabbits were kind of dorky? VW is now one of the sexiest brands on the road for aspiring yuppies. I can think of few american brands that appeal to anyone not belonging to a working class demographic. and even fewer if you factor in things like taste, sophistication, and resale value....

  4. The Drawing Room   -   #4
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    Originally posted by myfiles3000@18 June 2003 - 09:27

    me too. but i must admit, they have improved since the 80s. but still no comparison, the japanese and to an increasing extent the germans are running circles around the big 3.
    I'll admit to an improvement, but with two qualifications.
    1) By means of mergers they now have access to a lot of foreign technology.
    2) They were forced to improve by the increasingly evident gap between Detroit offerings and that of competitors.

    I still marvel at the amazing con job re:SUVs.
    15 years ago your average suburban housewife wouldn't have been caught dead in a truck. Through massive advertising and overt brainwashing these same women have been convinced that a pimped-out truck is not only safer, but highly desirable.
    Detroit was thus able to coast along for another decade without making any significant technological improvements, other than to cupholders and in-car entertainment systems.
    While Madison Ave. did it's thing the rest of the world concentrated on advancing the art of automobile making.
    The deception has been revealed and now Detroit must face the consequences.
    I hope they can do it without trying to raid my tax dollars.
    "I am the one who knocks."- Heisenberg

  5. The Drawing Room   -   #5
    j2k4's Avatar en(un)lightened
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    You guys are onto a great subject and I'm off!

    FMRAKM!

    Don't let it die before I return.
    “Think about how stupid the average person is, and then realize that half of 'em are stupider than that.” -George Carlin

  6. The Drawing Room   -   #6
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    Does America have a car industry outside of America. Forgive my obvious ignorance on this, but the only really American cars one sees is actually in America. I know that there are American cars outside of the USA, or at least cars made by American companies based elsewhere. However those cars are quite obviously made for the market they were intended for.

    The fact of the matter is that there are so many good, reasonably priced cars about today that the choice is awesome. A friend of mine is the head mechanic at a large garage. His opinion is that it is nigh on impossible to buy a "bad" car today. The technology is such that they are easy and cheap to make.

    Obviously if you want to buy a good car that is another story, however the point is that you can buy a perfectly reasonable car, for a perfectly reasonable price. More people appear to be taking that option, opting for low cost, low maintenance, low insurance, high mpg cars. The Japanese can make these beautifully. So the question is, what is the need for the classic huge gas guzzler, traditionally from the Detroit area I believe.

    Just so you don't take me the wrong way I drive a 1400cc Nissan Sunny, to and from work. However at the weekend I drive a 3900cc V8i 7 Seater Automatic Land Rover Discovery. It does 18 mpg on a long run and about 15 mpg in town. If only I could howl like Tim Taylor right now I would be happy.

  7. The Drawing Room   -   #7
    Originally posted by clocker+18 June 2003 - 17:34--></span><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>QUOTE (clocker @ 18 June 2003 - 17:34)</td></tr><tr><td id='QUOTE'> <!--QuoteBegin-myfiles3000@18 June 2003 - 09:27

    me too. but i must admit, they have improved since the 80s. but still no comparison, the japanese and to an increasing extent the germans are running circles around the big 3.
    I&#39;ll admit to an improvement, but with two qualifications.
    1) By means of mergers they now have access to a lot of foreign technology.
    2) They were forced to improve by the increasingly evident gap between Detroit offerings and that of competitors.

    I still marvel at the amazing con job re:SUVs.
    15 years ago your average suburban housewife wouldn&#39;t have been caught dead in a truck. Through massive advertising and overt brainwashing these same women have been convinced that a pimped-out truck is not only safer, but highly desirable.
    Detroit was thus able to coast along for another decade without making any significant technological improvements, other than to cupholders and in-car entertainment systems.
    While Madison Ave. did it&#39;s thing the rest of the world concentrated on advancing the art of automobile making.
    The deception has been revealed and now Detroit must face the consequences.
    I hope they can do it without trying to raid my tax dollars. [/b][/quote]
    i think we&#39;re speaking the same language, clocker, you&#39;re qualifications are exactly right. my brother bought a 2000 escort wagon, and i have to admit its pretty well built car. but then again, its a mazda...

    I admit, i grew in a family that drove japanese cars exclusively, but I have always preferred the ergonomics/feel of japanese cars -- little things, like the feel of the turner signal (instead of those bizarre, chintzy ones on GMs).

    My favourite example of the stupidity of the american makers was the Cadillac cimarron -- a cavelier with power leather seats and dual exhaust. the geniuses actually thought they could prevent market erosion from 3-series BMWs, audis, and entry Mercs&#33;

    its true, though, that SUVs are definitely safer for the people inside the SUV than your average mid-size breeder-mobile. and preserving the safety of your little brats is a HUGE motivating factor -- people will pay a lot of money to demonstrably lower the chances of auto injury. its the poor trendy singles and homosexuals driving around in minis that pay the price.

    I just think its amazing that an industry as venerable, and enormous by sales volume, could be so sickly. And, while i&#39;m reasonably sympathetic to labour, the polarization of union and management in the us auto industry is warning for all of what can happen. short-sighted, penny-wise kind approach.

  8. The Drawing Room   -   #8
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    I&#39;ve got a Datsun Cherry&#33;

    Very economical or as the vicar might say ecumenical&#33;
    <span style='font-size:14pt;line-height:100%'><span style='color:red'>Mr Hand&#39;s Busy Right Now&#33; So Talk To Mr FOOKIN FINGER&#33;&#33;&#33;&#33;</span></span>

  9. The Drawing Room   -   #9
    clocker's Avatar Shovel Ready
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    I think that for the most part you are correct, JPaul.

    I&#39;ve been to the UK several times and the classic American hog just wouldn&#39;t be too practical.
    Robbie Coltrane did a PBS special several years ago where he toured the US in a 50&#39;s(?) era Cadillac. At the end of the tour he had become so enamored of the vehicle that he bought it and imported it back to England.
    The scenes of him billowing down your narrow tree shaded lanes in this huge, chromed American behemoth were hilarious.
    "I am the one who knocks."- Heisenberg

  10. The Drawing Room   -   #10
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    Originally posted by myfiles3000@18 June 2003 - 19:20
    its the poor trendy singles and homosexuals driving around in minis that pay the price.

    Can you say that on a PC.

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