Blog author: jballor
Thursday, January 26, 2006
By

If you’re like most Americans, the answer is probably “No.” Faced with loss of market share and declining revenues, Ford announced a restructuring plan that would cut nearly a quarter of its workforce and close 14 plants over the next six years. The moves are intended to bring the auto giant back to profitability by 2008.

What has caused the competitiveness of Ford to plummet? It’s part of the larger trend among American automakers. Ford’s “Way Forward” plan was preceded by GM’s flirtation with a “cloud of bankruptcy” and was followed by DaimlerChrysler’s announcement of layoffs (many of which would be in Germany).

NBC Nightly News featured a story on the U.S. auto industry’s woes on Tuesday night (Netcast available here). Patriotism is being replaced by pragmatism, says NBC’s Anne Thompson.

MSNBC’s Roland Jones writes, “Like its U.S. rival GM, Ford has struggled in recent years with a loss in U.S. market share to Asian rivals, a decline in sales of its large SUVs because of higher gasoline prices and a crippling healthcare bill and pension costs for its U.S. workforce and retirees.”
If we look at each of these three points, we can see clear reasons why Americans have stopped buying American cars. While all of them are interrelated, the loss of market share can be largely seen as an artifact of consumers not feeling they are getting appropriate value for what they spend on American cars. With reliability, safety, and generous warranty offerings from Asian carmakers at an all-time high, and prices approaching all-time lows, Asian companies have the complete package to offer. American car companies tend to offer less-reliable cars at higher prices. Early last year, Toyota even briefly considered the idea of voluntarily raising it’s own prices to give American competitors some breathing room before it wisely decided to recognize that “prices are something for the market to determine.”

Vigorous SUV sales had been the backbone of American profitability in recent years, but spikes in gasoline prices have caused many to turn in the keys of their Explorer for something that has lower mileage costs. Clearly it was an error to for Ford and others to “put all their eggs in one basket,” as the saying goes.

And finally we come to what is perhaps the greatest contributing factor to the lack of American competitiveness: huge labor costs associated with UAW contracts. Paul of Hattiesburg, Miss., responding to the MSNBC story, sums up the problem, “As much as I would prefer to ‘buy American,’ I am not going to subsidize the huge pensions and inflated salaries that the United Auto Workers union (UAW) has extorted from Detroit by buying a sub-standard automobile. The UAW and their kind are going to be the undoing of the American car manufacturing industry as we currently know it. What rises from the ashes may be an automobile manufacturer that will stand up to the UAW and build cars that actually give people their money’s worth.”

Well, Paul, those manufacturers already exist, and have opened new plants in the US. The Asian automakers have opened 29 new plants in the US, which are staffed largely by younger non-union and therefore cheaper workforces than their American counterparts. Much or all of the Honda or Toyota model bought today might have been made in the US.

The Asian “Big Three,” Toyota, Honda, and Nissan, have their own competition from other growing automakers like the South Korean Hyundai, which opened a $1 billion plant in Montgomery, Alabama last year. As Kia Motors considers where to build a new plant, could Montgomery be the new “Motor City” of the South? All together, foreign companies garnered nearly 40% of the US auto market last year.

Next year looks to be a pivotal year for the American “Big Three,” since all of them “are readying for tough union negotiations in 2007 when their contract with the UAW is set to expire.”

As for the “Way Forward” plan, merely cutting staff and closing plants won’t be enough for Ford. They’ll need to negotiate a sane labor contract, improve their product quality, and make prices more competitive. American loyalty goes only so far.

“What you’re finding in the automotive business is the products you design today affect your profitability three to four years down the road,” Brett Hoselton, an automotive analyst with KeyBanc Capital Markets, said. “What we are seeing today is some pretty good changes at General Motors, but nothing like that at Ford, and I think Ford is really going to be in dire straits in five to 10 years from now.”

Not many people will pay more for a car that is less reliable, no matter where it’s made. Voluntarily spending more to put my family in a car that is more likely to break down and leave us stranded would hardly be responsible.


  • Steven Depolo

    The US auto industry simply needs the vision and energy to design attractive and useful cars. The auto unions need to partner with the companies to help make this possible. It may be too late, since the flexible and constantly improving manufacturing process perfected by the Japanese would take a decade to master. Maybe Toyota and GM will merge.