The US Auto Industry: Trainwreck in Progress?

20150313_120331By The Gunship Blogger

The 1980’s movie Robocop showed Detroit as a criminal wasteland abandoned by failed businesses, left to the callous care of corrupt corporations and crooked politicians.  While the soothsaying accuracy of the science fiction film may be uncanny, the real question is: What happened to the American automotive industry?  What used to be a worldwide juggernaut has been relegated to the station of a failed handout accepting dinosaur.  A failure to adapt and a failure to monitor market forces lead to its downfall.  What should have been left for market forces to correct, was interfered with by a government bailout (Fama, 2009).  While seemingly good in the short term, the bailout and government intervention risks dooming the company to permanent failure and relegation to the history books as another state owned Lada manufacturer (e.g. Chevy volt).



Introduction to the Auto Industry

Industry Definition

The US automotive industry naturally consists of all vehicle manufactures, parts manufacturers and the specialized suppliers in the chain designed to support automobile manufacture (Select USA, 2015).  This includes foreign based manufactures with facilities located in the United States, such as Honda and Toyota.  In this broad definition with significant overlap, it is difficult to determine who might be considered a competitor.  Ford Motor Company only competes with Autozone with OEM parts for car repairs (Select USA, 2015).  They do not compete for vehicle manufacture.  Therefore, for this essay, the definition of the industry will be truncated to include only those companies that manufacture vehicles.  This leads to another dilemma concerning foreign based and domestically based car manufacturers.  While a look at all 13 auto manufactures might yield a business structure which leans more towards perfect competition than oligopoly, looking specifically at the Big Three auto manufactures as the essay prompt mentions seems more in keeping with this analysis (Select USA, 2015) (Lifson, 2008).  Therefore, the US auto industry in this essay will primarily reference the Big Three auto manufacturers.

Industry profile

The US automotive industry generates a mammoth 3.5% of the US Gross Domestic Product annually (Select USA, 2015).  With 13 different manufacturers in the country, of those, three US based, the benefits to the country’s economic power and employment are not to be trifled with (Select USA, 2015).  The entire industry employs almost 790,000 workers, accounting for 4% of America’s manufacturing output (Select USA, 2015).  The supporting infrastructure of autopart suppliers adds another 3.62 million jobs to the total, resulting in the largest job market than any other manufacturing segment (Select USA, 2015).

Output from the US auto industry included 2.6 million vehicles exported resulting in $63 billion in revenue from 200 different countries.  Parts exports value up to $75 billion (Select USA, 2015).  With an annual production rate of 8 million vehicles per year, the domestic market accounts for 4.7 million vehicle sales (Select USA, 2015).  This indicates there is a ripe market and sustained demand for automobiles by both domestic and foreign manufacturers.

Industry Structure

The overall US automotive industry is structured as an oligopoly when considering just the US based manufactures (Lifson, 2008).  This is readily apparent by the subtle cooperation between the Big Three firms.  While they do not overtly attempt price control, they maintain a fairly even price with their competitors.  Firms like Tata motors in India can produce a car for practically pennies on the dollar when compared to one of the Big Three, and would quickly out price all of the companies if permitted to compete evenly with the US automotive industry (Rai, 2013).  The Big Three were able to produce substandard equipment for an equivalently high price.  GM had tons of recalls for poorly designed parts that a comparable Honda vehicle would never have (General Motors, 2015).  The oligopoly might have been profitable in the short run, but it removed the competitive spirit (Lifson, 2008).  Without that immunity, they were quickly plagued by failure as the US auto industry began to include foreign competitors who could work more economically with a superior product (Lifson, 2008).  Currently, factoring in the foreign businesses, the US auto industry is still an oligopoly, but has moved much closer to a perfect competition model in the recent years (Lifson, 2008).  As consumers have more choices, business will keep shifting towards perfect competition.

Future outlook

The future looks bleak for GMC and Chrysler as they failed to evolve and read the market.  Ford, on the other hand liquidated unprofitable holdings and worked diligently to remain solvent during the crisis (Peggy & Joel, 2014).  Ford managed to survive without any intervention from the government at all, which boosted public confidence in the company as well (Peggy & Joel, 2014).

The former oligopoly structure of American based auto manufactures is quickly becoming a relic.  The foreign based firms simply outcompete the domestic competitors with significantly lower labor costs, streamlined processes and modern production techniques.  While the Big Three used to control the market, they lost enough market share and tarnished the brands significantly enough to allow foreign based firms to consume a larger share of the market (Lifson, 2008).  Displaced and still functioning as though they were still controlling the market, all of the Big Three, except for Ford, refused to adjust to changing times.

Thus the future will have an American automotive industry which is more nimble and responsive to consumer demands.  Additionally, the structure will begin to resemble perfect competition again as the international automotive manufacturers compete for low price and quality of goods.


Porter’s Five Forces Strategy As it Applies to the Auto Industry

Introduction to Porter’s Five Forces

Porter’s five forces is a framework which may be applied to an industry to assess its potential profitability or risks (Dobbs, 2014).  The framework looks at three horizontal competition forces and two vertical competition forces (Samuelson & Marks, 2012).  The horizontal forces are threat of rivals, threat of new entrants to the market and threat of substitutes (Samuelson & Marks, 2012).  These forces rely more on outsider competitors than natural market forces.  The vertical forces consist of bargaining power of suppliers and that of buyers (Samuelson & Marks, 2012).  These are more in line with traditional market forces as supply and demand dictate which of the two parties has the more powerful bargaining position.  All of these forces together provide a composite picture of the market as a whole.  When applied to the car industry, it can be used to assist the Big Three automotive giants with determining where they are at risk and how they might be able to mitigate that risk.

Bargaining Power of Buyers

Today’s technology and economy have significantly empowered the buyer with reference to the suppliers or manufacturers.  In the 1909, while there were 272 car firms, the buyer’s power was significantly lower than it is today (Klepper, 2001).  There are several reasons for this, namely information, access to capital and oligarchical business structures (Klepper, 2001) (Lifson, 2008).

In the history of the car industry, the modern era is the most enlightened period of time for consumers, arguably.  The internet signaled a power shift, enabling consumers to conduct in depth research, comparison shop and view reviews with very little barriers.  This makes it more difficult for suppliers to apply misleading information to their sales pitches.  The informed consumer is discriminating in taste and well educated on the car buying ‘game’.  Previously, a customer might spend days moving from dealership to dealership comparing quotes.  Today, a consumer can force dealerships to fight over their business virtually through information technology.

In the 1920’s vehicle purchases were large and deliberate investments.  Debt was not a commodity as it is today.  Therefore the loan process was designed to profit off of the interest a borrower paid versus trading the debt to aggregators or bundling investments for sale to financial institutions.  Additionally, the government was much less involved in activist financing; cash for clunkers, ‘green’ initiatives and the like did not exists to subsidize sub-par performance and astronomical prices to bring tarnished products into American homes.  Today, buying a vehicle is much less of an initial financial investment.  With in house financing (like GM), a customer can walk away with a new car with near zero down payment (General Motors Canada, 2015).  This has significantly lowered the barrier to entry for customers, artificially increasing demand.  However, this is a two edged sword.  With customers having effectively a blank check book, price is less of a discriminating factor than it might have been in the past (Lewis, 2015).  Therefore, buyers maintain more power of the manufacturers because they look for other factors.

In 1909 there were 272 car manufactures in Detroit (Klepper, 2001).  The trend over the years has resulted in the survival of three of these firms by way of mergers, buy outs and takeovers.  Prior to the Big Three, the business was competitive.  Effectively the driving force behind a successful business was the duration of its R&D process (Klepper, 2001).  A faster R&D process resulted in a new product (Klepper, 2001).  Like the OODA Loop concept, running a faster cycle resulted in more sales.  The modern age resulted in three main competitors who operate more as an oligopoly than competitors.  While this might seem to be a win for the car manufacturers, the foreign competitors innovate faster than the slow bureaucratic oligopoly (Klepper, 2001).  Therefore, when the auto bailouts hit, the Big Three suffered massive financial losses while firms like Toyota and Honda actually saw profits (Peggy & Joel, 2014).  So, in this light, the buyer still maintains power in the car market, unless he wishes to only buy an American car.

Bargaining power of Suppliers

Over the past century, the power of suppliers has significantly shifted over to the buyers due to new entrants, technology and arguably in house/simplified financing.  New entrants such as foreign owned, but domestically based firms such as Toyota and Honda have operated in environments where real-estate and labor costs were prohibitively high (Lifson, 2008).  Therefore they developed methodologies (automation) to decrease costs, increase productivity and improve quality.  Therefore the added addition of foreign based suppliers adds competition to the system; decreasing the aggregate power of the suppliers.

Technology drives information dissemination.  The connected customer is discerning with his tastes and more readily able to research across brands.  Therefore, a product pitch may be less effective to an informed consumer who has focused questions rather than lacking a sense of direction.

As observed in the housing crisis, readily available and low barrier to entry loans certainly drives up demand.  However, it also makes price less of a discriminating factor.  Therefore, where the Big Three might have lobbied to maintain import tariffs on foreign cars, in order to increase the per unit cost of the competitors goods, such measures seem to be less effective if there is no effective difference in equity staked at the beginning of the loan process (Nelson, 2013).  Therefore, it is reasonable for customers to shift their focus (if price is less of a discriminator) over to quality, style, reliability and abstract concepts such as “green” credentials.  This means the Big Three can’t just rely on cheaper, by comparison, price.

Competitive Rivalry in the Industry

The Big Three in the US operate as an oligopoly; setting prices and services similar to each other in order to provide a larger market share (Lifson, 2008).  As in an Oligopoly, each firm maintains flagship products which rely on the brand to create customer demand and loyalty.  For instance, the F-150 is the most profitable product for Ford Motor Corporation (Bunkley, 2015).  While the General Motors Corporation manufactures trucks as well, the F-150 brand is much more universally associated with truck.  Just like the Suburban is associated with SUV.  Therefore, each company maintains its market share, but can cooperate with each other as well.

Had the American people been restricted to buying only American made cars, the Big Three would likely be thriving and still working well in their inefficient ways.  However, the inclusion of domestically made foreign cars (avoiding import tariffs), allows competitors with experience operating in financially and labor constrained environments (Toyota in Japan) to directly compete with the oligopoly which had grown accustomed to being the only vehicle supplier in effect (Lifson, 2008).  Therefore, the domestic vehicle suppliers (the Big Three) experienced a perfect competition model with their oligopoly, which drover customer demand away from their inferior and more expensive products.

Threat of New Entrants

In 1909, new entrants were a significant issue (Klepper, 2001).  This primarily spawned from spin off companies which could conduct their R&D cycles faster than their parent company.   These small spin offs generally consisted of engineers or managers who had experience with the larger companies such as FMC, but had different ideas (Klepper, 2001).  The majority of the spin off companies remained near their parent companies in Detroit, aiding in building and growing the Motor City into the capital of car production (Klepper, 2001).  However, as time progressed, the larger companies began absorbing the smaller competitors.  Each acquisition and merger grew the company larger, making future acquisitions easier.  The companies absorbed maintained their brand and their individual processes, but fell under the larger company for management and financing.  The positively correlated increasing economies of scale at the time made expansion seem like the only profitable solution.  So effectively, the 270+ companies in 1909 merged into the Big Three we know today or collapsed completely (Klepper, 2001).  Today, there is little threat from new entrants.  Even Tesla Motors does not have the volume to make their niche cars impede on the Big Three’s market. However, outside competitors already established in the automobile market do pose a substantial threat.  While technically not new, they are recent entrants to the US market (Toyota and Honda).  In that regard, they do represent a new entrant threat.

Threat of Substitutes

Substitutes to the automotive industry include alternative transportation such as air travel, public transportation and human powered transportation (bikes, walking, etc).  However, depending on the company, some modifications to automotive technology may pose a threat as a substitution.  While GM pioneered the electric car in the 1980’s it lost its lead and misread the market with regard to public endorsement of electric vehicles (Maynard, 2012).  Companies like Tesla and Fisker filled that market space, providing the public a substitute product to what the Big Three produce.  However, in the strictest sense of substitution, there is little threat of substitute methods of transportation supplanting the automotive market.



In conclusion, the US auto industry is at a turning point.  Due to decades of operations as an oligopoly, the Big Three have a tough decision to make.  Either adapt to the changing times or be out innovated.  Ironically, the very things that make the Big Three successful early on in the industry might contribute to the overall failure of the industry.  When the small companies spun off in the 1920’s and were later absorbed, the delineation between a successful and unsuccessful organization was the ability to innovate faster than the competitor (Klepper, 2001).  Economies of scale allowed the larger car manufactures to out innovate competitors in many cases.  Flash forward to today, the Big Three no longer out innovate competitors.  Instead, ‘owning’ the dominant share of the market provided no reason for the businesses to innovate (Lifson, 2008).  There was no competition and buyer power was lower than supplier power.  This obviously lead to complacency and allowed the industry to be lapped by foreign competitors more in tune with the demands of the American people (Lifson, 2008).  The American dream is the rags to riches story, not a corporate welfare story.



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Rai, S. (2013, December 05). Its ‘World’s Cheapest Car’ Tag Made The Nano Undesirable In India. Retrieved from Forbes:

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