AUTOMOTIVE

2008-11-16T07:05:00.000-08:00

The automotive industry is the industry involved in the design, development, manufacture, marketing, and sale of motor vehicles. In 2007, more than 73 million motor vehicles, including cars and commercial vehicles were produced worldwide.^[1]

In 2007, a total of 71.9 million new automobiles were sold worldwide: 22.9 million in Europe, 21.4 million in Asia-Pacific, 19.4 million in USA and Canada, 4.4 million in Latin America, 2.4 million in the Middle East and 1.4 million in Africa. ^[2] The markets in North America and Japan were stagnant, while those in South America and Asia grew strongly. Of the major markets, Russia, Brazil and China saw the most rapid growth.

About 250 million vehicles are in the United States. Around the world, there were about 806 million cars and light trucks on the road in 2007; the burn over 260 billion gallons of gasoline and diesel fuel yearly. The numbers are increasing rapidly, especially in China and India.^[3]

In 2008, with rapidly rising oil prices, industries such as the automotive industry, are experiencing a combination of pricing pressures from raw material costs and changes in consumer buying habits. The industry is also facing increasing external competition from the public transport sector, as consumers re-evaluate their private vehicle usage.^[4]

Crisis in U.S. Auto industry

Main article: Automobile industry in the United States

The "Big Three" (General Motors, Ford and Chrysler) have done poorly in recent years. They have lost most of the market to imports and "transplants" (cars made in U.S. factories owned by foreign makes). The first signs came when Volkswagen and Honda started importing cheap, well-made cars in the 1960s. Detroit convinced Congress to impose quotas, and the foreign companies responded by opening their own plants in the U.S.

The "transplants" were built in the South and are non-union. Facing steady financial losses, The Big Three have closed many factories and drastically cut employment, especially in Michigan. The most expensive part of closing a plant is the union contract which require them to "buy out" union workers, at a typical cost of $100,000 to $150,000 each. Health care and pension costs add $1500 to the cost of each vehicle made by the Big Three, and their wage levels are much higher than the transplants. Average annual wages for production workers at the Big Three were $67,480 in 2007, and $81,940 for skilled workers. GM spun off many of its employees in certain divisions into independent companies, including American Axle in 1995 and Delphi in 1999. Ford spun off Visteon in 2000. The spin-offs and other parts makers have shared Detroit's downturns, as have the U.S. owned plants in Canada. All together the parts makers employ 416,000 people in the U.S. and Canada.

In 2008 a series of damaging blows drove the Big Three to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.), which prevents lower prices. The Big Three had in recent years stressed expensive, fuel-guzzling SUVs and large pickups. They were much more profitable than smaller, fuel-efficient cars. When gasoline prices shot past $4 in 2008, Americans stopped buying the big vehicles, and the Big Three saw their sales plummet. The Financial Crisis played a role as no one was willing to loan GM the money to buy Chrysler. Consumer credit has tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car, so sales fell further. Stock prices fell as shareholders worried about bankruptcy; GM's shares fell below 1946 levels. Intense debate is underway about a massive bailout, that would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency. GM employs 123,000 people in the U.S. and Canada, is trying to mobilize its 6,000 local dealers, who emply another 325,000.

Big Three bankruptcy scenario

Bankruptcy of the Big Three would be very expensive to the American economy as a whole and the government, and shows just how important the auto industry is to the entire U.S. economy. Economists use 2007-8 data to build econometric estimates of what a shutdown would cost in summer 2008. Their goal is to set benchmarks that will help policy makers understand the impact of bankruptcies, and their estimates are indeed widely discussed among policy makers in late 2008.Wall Street Journal video Nov. 14, 2008 Closing the Big Three would mean loss of 240,000 very high paying jobs at the Big Three,^[6] a loss of 980,000 high-paying jobs at the suppliers and local dealers, plus the loss of 1.7 million additional jobs throughout the economy--a loss of 3 million jobs. Estimates are that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years. The federal, state and local governments would lose tax revenue and spend on welfare programs a total of $156 billion over three years.

Daimler-Benz is the industry's oldest firm, building automobiles since the late 1880s; its current structure dates from 1926. In 1998 it bought the American Chrysler, then sold out in 2007 at a heavy loss as it never integrated the new car in its line.

In the popular market, Opel and Volkswagen are most famous. Opel was a bicycle company that started making cars in 1898; General Motors bought it out in 1929, but the Nazi government took control and GM wrote off its entire investment. In 1948 GM returned and restored the Opel brand.

Volkswagen is dominant in the popular market; it purchased Audi in 1964. VW's most famous car was the small, beetle-shaped economical "people's car" with a rear-mounted, air-cooled engine. It was designed in the 1930s by Ferdinand Porsche upon orders from Adolf Hitler, who was himself a car enthusiast. However production models appeared only after the war; until then only rich Germans had automobiles. By 1950 Volkswagen was the largest German automobile producer.^[8]

Germany is famous for its upscale sedans. They are designed for high-speed cruising over the autobahns. They feature well-designed suspension systems that provide both a soft ride and good handling characteristics on winding country roads. Engines are designed for sustained high-speed operation, though in general they are weak on acceleration.

Daimler-Benz produces the upscale Mercedes-Benz, long a famous name in racing. BMW (founded 1916) and Porsche are major factors in the luxury market.^[9] Porsche formed his own company, which today produces expensive, high-quality sports cars.^[10]. In 2008 the Porsche company sought control of the much larger Volkswagen company; Porsche cornered the market for Volkswagen stock and made profits of tens of billions of Euros, while apparently gaining control of the bigger company.

Britain

Britain today produces about 1.6 million cars and 240,000 trucks a year, 75% of which are exported. Since 2005 the main firms are all foreign owned.

The auto industry developed late in Britain and for the first half of the 20th century the small output of British-owned companies focused on luxury and upscale models notably Rolls-Royce and later Bentley as well as Jaguar and Rover. The stress was on high quality hand-made craftsmanship, regardless of high cost.

Beginning 1925 William Morris, later Viscount Nuffield, began to mass produce small cars of modest power under the "M.G." nameplate. Morris modeled his methods after Henry Ford, and sought high volume production of inexpensive cars geared to the urban middle class. In 1953 M.G. merged with Austin to form the British Motor Corporation, the largest producer, which also produced the Austin, Austin-Healey, Morris, Riley, Wolseley. It added Jaguar in 1966. BMC specialized in small, economy sedans and sports cars, with 4 cylinder engines. It merged in 1968 with rival Leyland. Another rival was the Rootes group, with the brands Sunbeam, Talbot, Hillman, Singer, and Humber. ^[11]

Ford opened a plant as early as 1911 and soon had 40% of the British market. General Motors entered in 1925 by buying up two small companies and making the Vauhall its brand name. In 1931 Ford opened the largest auto plant in Europe near London. Ford eventually acquired Aston Martin, Jaguar and Land Rover. By 2008 it was selling off those divisions.^[12] Rootes was taken over by Chrysler in the late 1960s and its brands phased out by the 1970s. The Chrysler operations were taken over by Peugeot in 1978. Nissan opened a plant in 1986.

After 1945 and the end of the Second World War, American and British firms dominated the European market. In 1950, of 523,000 cars produced in Britain, 398,000 were exported. By the late 1950s, however, the Germans were back, followed soon by the French and Italian producers, and Britain lost most of its continental market. By 1970 Japanese firms identified the British market as the first major European market to attack because of the relative weakness of the domestic car industry.^[13]

When the domestic auto industry was largely nationalized in 1975, British Leyland was the holding company that controlled 40% of production. It was renamed Rover; it went bankrupt in 2005, ending the era of mass production by British makers. The Chinese purchased the MG brand, while Jaguar went first to Ford and now to TATA Motors.

The gentry who bought cars before 1939 found driving was easy on rural Britain’s smooth road surfaces in its generally mild weather. The rural roads are famously narrow and winding, so cars were small with stiff springs for good handling characteristics on them. High taxes on gasoline and crowded streets encouraged smaller, fuel-efficient cars in the cities.

Fly Wheel

AUTOMOTIVE

Crisis in U.S. Auto industry

Big Three bankruptcy scenario

Britain