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The Road Ahead for Automakers

Prepared by: Lee Hudson Teslik
March 2, 2007

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It's been a rough decade for America's automakers. Profits are flagging, global market share is down, and rival companies abroad have dramatically improved the efficiency of their operations. Given the general sense of unease, it wasn't a huge surprise for analysts when in mid-February DaimlerChrysler announced plans to restructure Chrysler (Bloomberg), lay off thirteen thousand employees, and possibly divest the whole group. But even if the restructuring announcement wasn't entirely surprising, it stoked preexisting fears that Detroit's Big Three automakers—Chrysler, General Motors (GM), and Ford—could be unceremoniously dumped in an increasingly competitive global marketplace.

America’s automakers have been riddled first and foremost by high costs. As a new Backgrounder explains, pressures from the United Auto Workers union force American firms to pay factory workers an average of sixty-five dollars per hour. That is twenty dollars per hour more than Toyota pays its nonunion workers in U.S. factories, and Chrysler says that difference alone raises the price tag of each of its automobiles by one thousand dollars. These numbers, coupled with a sluggish response to consumer desires for smaller, more fuel-efficient vehicles, have been hard to overcome. The Big Three lost 10 percent (National Journal) of market share between 1998 and 2003.

Meanwhile, Asian competition has surged. Toyota will surpass GM as the world’s largest auto producer later this year, and its stock market value already exceeds that of Chrysler, GM, and Ford combined. A recent New York Times Magazine cover story credits Toyota’s meteoric ascendance (Subscription required) to a unique culture of self-examination that has allowed the company to greatly increase factory efficiency without sacrificing product quality.

Toyota’s successes notwithstanding, it is Japan's emerging Asian competition that remains the ultimate X-factor in the industry’s future. China’s domestic market for automobiles is rapidly expanding, and some Chinese companies, often in partnership with multinational competitors, are dipping their toes (Automotive Business Review) in the export market. The state-owned Chinese company DongFeng recently partnered with Honda to export cars both to Europe and America, and a joint venture struck between DaimlerChysler and Chery, another Chinese automaker, aims to take on the American market. India’s carmakers are also intent on breaking into the American market. The country’s government has forecast that Indian auto sales will jump from $34 billion this year to $145 billion (IHT) by 2016.

Precisely what all this means for U.S. manufacturers remains to be seen. Chrysler’s attempted restructuring could be a litmus test. There has been speculation that GM might swoop in and purchase Chrysler (BusinessWeek), perhaps in exchange for some of its own stock. But experts question how much sense this would make for GM: “Two drowning men don’t make a swimmer,” says Garel Rhys, a professor of economics at Cardiff University in Wales. “If GM is going to take on Chrysler’s problems, that could be enough to tip GM over the edge.”

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