Death of the American Automobile Industry

Friday, May 06, 2005
Slowly but surely the American auto-industry will die a slow and painful death.

My family never buys American cars. Other than some false sense of patriotism we never understood why someone would want to buy one. Koreans do it cheaper, the Japanese do it with higher quality, and the Europeans do it with more flair and performance. I've driven plenty of American cars because it is what you normally get when you rent a car and I have never really enjoyed my experience.

But all signs point to problems with the American auto industry. A recent WSJ article pointed out a sharp decline of truck and SUV sales in Texas. Yes, Texas. GM and Ford both make the majority of their profits from SUVs and Trucks and god knows if Texans, who are notoriously stubborn about their trucks, are giving up their gas-guzzlers you know that segment is going to take a turn for the worse.

Add on top of that the huge problem facing American manufacturers in terms of benefits. Both GM and Ford have huge outstanding pension and benefit costs that puts them at a significant disadvantage in the marketplace. Part of every dollar earned must be diverted not to making products better but to pay for work done in the past. It's like buying on credit, at some point its going to come bite you in the ass.

And just another blow to the industry. S&P just downgraded both GM and Ford bonds to Junk status. Yes JUNK status. Not only does this point out that most of the industry believes GM and Ford will default on their obligations but it makes it extremely difficult for them to raise money through the debt markets because they will have to pay a higher premium.

People cry out that America needs its auto industry. I say that is hogwash. I am bullish on the American economy and I know that America is resilient. Once America was the king of the Textile industry until cheap Asian labor took that market away. I didn't see the American economy collapse when that happened and I'm sure it won't happen this time either. America will find a way to bounce back.

7 comments:

Ryan said...

Clearly you've never been to the midwest. Drive around Omaha or St Louis sometime. Tell me how many foreign cars you see. Most of the midwest is dominated by a "buy American" culture that frowns on imported cars, beers, and movies. I lived in Canton, Ohio for two years and I remember estimating that over 90% of the vehicles were American made. I don't doubt that the huge domestic market share of GM and Ford will decrease. But, they won't "die". They can't. There will always be a sector of the market which only considers American cars. Even in big coastal cities American cars can't disappear. It looks bad if government agencies, police departments, etc buy foreign cars. Thus most cop cars and county vehicles will be Crown Victorias and Ford trucks.

And even if worst came to worst and one of the big auto makers was forced into bankrupcy the government would bail it out. It happened before. And the auto industry is contributing to politicians as much today as ever. Markets will ebb and flow, but the US auto industry will never cease.

T said...

No, I've quite clearly gone to the middle of the US, that was my point about Texas. Sales of SUV's and Trucks in Texas are down about 20% when compared to this time last year.

If Texans are willing to turn in their trucks, and they have been GM and Ford's most loyal customers, then I believe most of the rest of the country will follow suit.

Many Americans are willing to "Buy American" so long as its close. But when push comes to shove I believe Americans go with their pocketbook.

All one has to do is look at Wal-Mart. Remember the good old days when Wal-Mart advertised "Made in America"? Notice they don't do that anymore? Why? Because Americans weren't willing to pay a premium for American made clothing over the much cheaper Asian-made counterparts.

I'm not really saying American auto-manufacturers will go into oblivion, but the days when they have the major market share I believe are done. Its not about buying american anymore. Its economics. American Auto-Manufactuers face daunting economic challenges. Can they pull out, maybe. I'm just not all that optiisitc.

Ryan said...

Sales of SUV's and Trucks in Texas are down about 20% when compared to this time last year.

The article has no statistics on which manufacturers are picking up the slack. In fact, there isn't even a hint that foreign cars filled in the 20% drop. Unless you could find statistics demontrating that the business migrated over to Asian or European automakers this statistic is largely irrelevant to how GM and Ford will perform overall, nationwide.

If Texans are willing to turn in their trucks, and they have been GM and Ford's most loyal customers, then I believe most of the rest of the country will follow suit.


Actually, the statistics in the article indicated that the national drop in SUV sales was much less than in Texas alone. This would seem to indicated that the rest of the nation is less likely to follow Texas's example. The article also mentioned that Texas has an unusually high proportion of large vehicles registered. Perhaps the 20% is partially due to Texas car buyers normalizing to the rest of the country's buying habbits.

Many Americans are willing to "Buy American" so long as its close. But when push comes to shove I believe Americans go with their pocketbook.

I don't think precedent backs up your statement. During the fuel crisis of the 1970s push did come to shove and US automakers survived. Yes, there were rough times and VW stole a nice chunk of the market. But, not only did they survive they never lost majority market share.

Remember the good old days when Wal-Mart advertised "Made in America"? Notice they don't do that anymore? Why? Because Americans weren't willing to pay a premium for American made clothing over the much cheaper Asian-made counterparts.

As I remember the "Made in America" campaign is a relatively recent thing (within the last 5 years, I believe, at least I remember seeing the line in advertising as recently as last year). Ironically, the campaign coincided with a huge shift toward imported goods. In the last 4 or 5 years 85% of Walmart products came from overseas. But, Walmart is doing quite well thanks to their campaign. I think the successfulness of their campaign reinforces that many midwesterners like to buy American (or at least they believe they are buying American).

I'm not really saying American auto-manufacturers will go into oblivion

Well, then perhaps I misinterpreted "Slowly but surely the American auto-industry will die a slow and painful death."

Kat said...

why is it that when i read this sentence "Koreans do it cheaper, the Japanese do it with higher quality, and the Europeans do it with more flair and performance." i pictured a bumpersticker?

Anonymous said...

What will be very funny is after the US auto industry is RIP, what you will say when you and your families jobs also go down the gutter. You have to be a complete fool not to at least hope the US auto industry don't come out ok. I admit to not loving American cars either, but you are just downright sick how you treat your fellow Americans. Be ashamed with yourself, if you have the ability to be self-critical. But, alas, most self-righteous and ignorant people as yourself -- rarely do.

Anonymous said...

Hah, you are a fucking Java monkey with the last name that sounds like Dick. This is even more funny after I read your diatribe. Your whole industry is coming next. I hope you find something else to do rather than typing out logic statements... HAHAH Mark my words pal -- Karma is indeed a big phat bitch.

Anonymous said...

Given that this blog was written in 2005, it shows remarkable foresight in light of the Chrysler and GM bankrupcies happening today. One day, it will be taught in business school, using the example of GM, Chrysler and Ford, how management ruined an entire once-prosperous American industry.

That said, I will not miss the junk GM and Chrysler have been putting on the road.