The American Automakers, General Motors, Ford and Chrysler

The American Automakers, General Motors, Ford and Chrysler had been losing profit compare to foreign car companies.  “An enormous gap still separates the performance of Detroit automakers from their foreign competitors,”[1] according to Alex Taylor, Fortune senior editor.

“2006 was the first year since 1991 that Detroit’s Big Three were all in red.  Ford’s situation seems drier than ever: Chrysler, which was profitable until mid 2006, is now preparing a restructuring plan to roll out February 2007; and Toyota has claimed the number-two spot in the U.S. auto market, just behind GM.”[2]

The causes of U.S. Automakers’ profit loss are various.  The most trivial is the US-Japan trade policy that is affecting the dollar exchange rate to the yen.  “The U.S. government continues to passively accept subsidized imported vehicles from Japanese automakers that are not competing fairly because their government effectively subsidizes its auto industry through the use of an artificially low yen. This policy has led to the skyrocketing levels of auto exports to the U.S. that harm the economy and cost American jobs by giving Japanese automakers an unfair and unearned advantage over American automakers.  The artificially low yen has helped fuel our trade deficit with Japan, which hurts the U.S. economy and gives Japanese automakers an unfair advantage over American automakers. Nearly two-thirds of that deficit, or $56 billion out of a total $88 billion, is exclusively a result of Japanese auto products.”[3]

Certain facts about the policy were cited that affect the profit. One, with a yen valued at 118 to the dollar, Japanese automakers take a $4,000 cost advantage per vehicle more than they would when traded at its true value. The overall subsidy Japanese automakers gain for the 2.2 million vehicles they import is a total of $8.8 billion in 2006.  Two, the total yen subsidy provided to Japanese automakers in 2006 was $13.4 billion – $8.8 billion for car & truck exports to the U.S. and $ 4.6 billion for imported parts used in American-made Japanese cars. Three, 52% of all automobiles manufactured in Japan were designated for export in 2006, exceeding 50% for the first time in 19 years. In fact, even as demand within Japan for new autos is declining, Japanese companies are adding production capacity to Japan-based facilities, reactivating assembly lines, adding workers and postponing planned factory closures as they move to export ever greater numbers of vehicles.[4]

Another reason that could keep the U.S. automotives from increasing its sales was to the slipping consumer satisfaction; the quality of the cars assembled. “American automakers are riding the yellow line for customer satisfaction, the American Consumer Satisfaction Index finds.  Of the six automakers at or below the industry average for customer satisfaction, five are domestic and the gap in customer satisfaction between domestic and foreign producers is once again growing, with Japan regaining the lead followed by the Europeans. This will not make it easier for the Big Three to curb further erosion of market share by overseas competition.” [5]

Another reason being looked at is the cost of labor.  American labor used to assemble a car is definitely higher in cost compare to Japanese labor.  When labor is taken into consideration, parts of it are the health care coverage, retirement pay, overtime pay, holiday pay and the costs of union negotiations.

For instance, General Motors spends $1,635 per vehicle on health care for active and retired workers in the U.S.  Toyota, on the other hand, pays nothing for retired workers because it has very few and only $215 for active ones.  Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle while Japanese cars cost none.  Also, UAW members are still paid for not working when plants are shut costs another $350 per vehicle.[6]

Lastly, the lifestyle of buying a car also affects the sales of U.S. automobiles.   Since the cost of making cars is higher compared to foreign cars, the price tag of vehicles assembled by U.S. automakers are also high.  And just like housing sales, auto sales are taking a hit as credit becomes harder to obtain due to the recent sub prime loan crisis. Experts suggest that it has become harder for people with a tainted or limited borrowing credit history to get a loan when shopping for a new or used car. [7]

It is not only the trade policy that’s affecting the profit loss of American cars, but also its perceived value, together with the quality and its cost to manufacture.  Thus, new strategies are being challenged to address this issue.

REFERENCES

WEBSITES

Taylor, Alex III. (2007). Behind Ford’s scary 12.7 billion dollar loss. Retrieved October 18, 2007, from CNNMoney.com. website: http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/index.htm 

The Auto Industry: On the Road to Disaster or Recovery. Retrieved October 18, 2007, from Knowledge@Wharton. website:http://knowledge.wharton.upenn.edu/article.cfm?articleid=1656

Japan’s Yen Subsidy Hurts US Automakers. (2007) Retrieved October 18, 2007.

website: http://www.autoyensubsidy.org/

US Automakers Slipping in Consumer.Retrieved October 18, 2007, from Consumeraffairs.com. website: www.consumeraffairs.com/news04/acsi.html

Taylor, Alex III. (2007). Behind Ford’s scary 12.7 billion dollar loss. Retrieved October 18, 2007, from CNNMoney.com.

website: http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/index.htm

Malhotra, Heide B. (2007)Can the U.S. Automakers Pass Their Test. Retrieved October 18, 2007, from The Epoch Times. website: http://en.epochtimes.com/news/7-10-7/60483.html

[1] Taylor, Alex III. (2007). Behind Ford’s scary 12.7 billion dollar loss. Retrieved October 18, 2007, from CNNMoney.com.

website: http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/index.htm

[2] The Auto Industry: On the Road to Disaster or Recovery. Retrieved October 18, 2007, from Knowledge@Wharton.

website: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1656

[3] Japan’s Yen Subsidy Hurts US Automakers. (2007) Retrieved October 18, 2007. website: http://www.autoyensubsidy.org/

[4] Japan’s Yen Subsidy Hurts US Automakers. (2007) Retrieved October 18, 2007. website: http://www.autoyensubsidy.org/

[5] US Automakers Slipping in Consumer.Retrieved October 18, 2007, from Consumeraffairs.com.

website: www.consumeraffairs.com/news04/acsi.html

[6] Taylor, Alex III. (2007). Behind Ford’s scary 12.7 billion dollar loss. Retrieved October 18, 2007, from CNNMoney.com.

website: http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/index.htm

[7] Malhotra, Heide B. (2007)Can the U.S. Automakers Pass Their Test. Retrieved October 18, 2007, from The Epoch Times.

website: http://en.epochtimes.com/news/7-10-7/60483.html