What is the Future of the American Automobile Industry?

by on July 25th, 2014
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Only a few years ago, it was questionable whether the U.S. automotive industry would survive the economic downturn and the subsequent backlash from government bailouts. An industry that was selling an average of 16 – 17 million vehicles annually, by 2009 had lost more than 35% of its market. It was hard to imagine the Big Three withstanding the devastating blow to not only their revenues, but to their reputations.

However, as a new year begins, the car industry seems poised for a comeback very few would have predicted. Only time will tell if the automakers can sustain their new-found success. For the time being, however, the lessons learned have prompted much-needed changes that may lead to many years of future growth in the automotive industry and the economy as a whole.

Changes to Corporate Restructuring

When the big three auto executives flew to Washington D.C. in 2008 to ask for financial help, they used their private corporate jets. As further proof of how out of the touch the automakers had become, they came with no definitive plan to change their failed business model. Like Henry Ford, who reportedly said, “A customer can have a car painted any color he wants so long as it’s black,” management was intent on doing things their way – regardless of the needs or wants of the American consumer. Undoubtedly, business as usual had to change for the U.S. auto industry to regain their standing in the global automotive market.

One of the major changes the automakers made was to discontinue some of their product lines, thereby streamlining their corporate structures. GM cut Pontiac, Saturn and Hummer, and Ford discontinued the Mercury product line. They further simplified their businesses by eliminating some of their dealerships. More importantly, management made product quality a high priority. In a 2010 report by JD Powers and Associates, American cars reported fewer problems in the first 90 days than their overseas counterparts. By restructuring their product lines, streamlining their organizations and emphasizing high quality, the automakers have laid the foundation for continued sales growth, estimated to be close to 14 million in 2012.
New Agreements with the Auto Unions

In 2008, estimates were that a comparably-designed car manufactured by Toyota and Honda would cost $2,000 less than one manufactured in the U.S. A portion of the additional cost of the U.S.-manufactured vehicle could be attributed to less favorable labor contracts. Although labor unions fulfill an important role, disproportional contracts while initially benefiting the employee, may eventually contribute to business loss and employee cutbacks.

Recently, all three automakers have signed new agreements with the United Auto Workers. These new agreements reduce wages for new employees, but they also add new profit-sharing incentives. Incentive payouts make everyone an essential part of the organization by rewarding them for their contributions to the company’s success. These new agreements enable the automakers to reduce the unit cost of each vehicle, making them more competitive, despite the lower sales volume. More revenue results in increased profit sharing – a win-win scenario for both the employee and the automaker.

Economic Changes

With the decline of the housing market in 2008 and 2009, the economy took a nosedive. Home equity was lost, making refinancing difficult to obtain. Having less funds at their disposal, consumers were unable to pay off their existing debt, or to make large purchases, such as buying new cars. To make matters worse, the credit scores of some consumers were negatively impacted, which made it a challenge to secure financing for automobile loans.

Now that credit is becoming more available, interest rates are low and consumer confidence is increasing, the stage is set for a buying boom, as consumers replace their older vehicles.

Auto Industry Future

As the stigma of the auto bailouts fade, all signs point to the auto industry gaining traction as it recovers from the recent recession. With the positive actions taken by management, more balanced labor agreements and available consumer credit, the resurgence of the U.S. automotive industry has all the makings of a great success story. This dramatic comeback is sure to find its way to a Hollywood movie script. Perhaps the movie trailer has already been written, as illustrated in the television ad for the new Chrysler 300. As this luxury model drives through Detroit, the ad portrays a feeling of optimism and hope for the future. It leaves the viewer with the feeling that the U.S. car industry has rebounded, and is ready to compete with the best the world has to offer.

Sources:
Auto Industry Recovery Accelerates
U.S. Auto Industry – Another Strong Year


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