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The United States automotive industry has been undergoing tremendous changes in recent years. Speakers at a recent Chicago Fed conference explored these changes and considered the road to the future for the auto industry.

In order to better understand the changes taking place in the production of automobiles and to gain some insight into what the future holds for the industry in the U.S., the Federal Reserve Bank of Chicago held a conference on Monday, June 11, Transitions: The State of the Automotive Industry.1 More than 100 economists and analysts from business, academia, and government attended the conference and industry experts were invited to share their perspectives on this topic.

The United States automotive industry has been undergoing tremendous changes in recent years. Some of these changes include significant reductions in employment, factory closings, bankruptcies among the supplier base, downgrades on corporate bond issuances, and consolidations. One needs to merely pick up any daily newspaper to also see the market share losses by the group formerly known as the Big Three (now more appropriately called the Detroit Three-Daimler Chrysler, Ford Motor Company, and General Motors).

While the Detroit Three have been dealing with mostly bad news, foreign nameplate producers are enjoying a very different environment. Rather than closing plants, there are several automotive production facilities being planned by these “new domestics” over the coming years.

If we look back to 1980, when there was very little production by foreign nameplate firms in the U.S., the Detroit Three made up nearly 73% of all the light vehicles sold, while foreign-nameplated production in the U.S. was less than 2%, and imports representedjust over a quarter of the market . Beginning in the 1980s, an ever-increasing number of foreign-nameplated vehicles began to be produced in the U.S. at factories that were referred to as transplants. Through the early to mid-1990s, the popularity of the sport utility vehicle (SUV) supported the Detroit Three’s market share. In 1996, the Detroit Three’s market share stood at 72.5%, virtually the same as 16 years earlier. However, imports’ share had declined by 14 percentage points to just over 11%, and new domestics market share had risen to more than 16% of the market. The gains of the new domestics came at the expense of imports.

Over the next ten years, however, the Detroit Three would not be as fortunate. Challenged by the growing number of foreign SUVs, rising energy prices, and a flat overall sales market, the Detroit Three’s market share began to suffer. By 2006, their market share plunged nearly twenty percentage points to 53%. New domestics sales had risen to nearly a quarter of the market, and imports sales rose to over 22%. So unlike the previous 16-year period, the loss over the past ten years of 20 percentage points of market share by the Detroit Three is the direct result of gains by both new domestics and imports.

However, the market share of vehicles being produced in the U.S. in 2006 was still over 77%, several percentage points higher than in 1980, but by a greater number of firms than in the past. So, what has happened over the past ten years is less a concern about the loss of vehicle production in the United States, but more about the transition from the domestic industry being comprised of the Detroit Three to an industry that has more producers. Consequently, the Detroit Three are playing a less dominant role in the industry.

While it is true that the new domestics vehicles had been made with less domestic content than Detroit Three vehicles, this pattern has been changing. Over the last ten years, new domestics have been increasing the amount of domestic content, while the Detroit Three have been lowering their domestic content, as they outsource more components. For example, 70% of the 2007 Ford Mustang’s parts were made in the United States and Canada, while over 85% of the 2007 Toyota Sienna’s parts were sourced in the United States and Canada.

Expanding on the role of foreign manufacturers and markets in the auto industry, Loren Brandt, professor, University of Toronto, presented his findings on China’s auto production. Brandt emphasized the importance of the Chinese market because of its recent economic growth. For all the countries producing more than a million vehicles per year, China’s production growth outstripped all the others in the market: from 2000 to 2005, coming in at 181.3%. During the same time period, the results for other countries in that group were quite mixed: U.S., -5.9%; Germany, 4.2%; France, 5.8%; Spain, -9.2%; South Korea, 29.4%; Italy, -40.3%; and the UK, -0.4%. The growth in the automotive industry, in fact, has been so large in China that it has begun to cut back on its production of trucks, which are used for business, and to focus more on passenger vehicles for its consumer market.

Alan Mulally had them from the start. The president and CEO of Ford Motor Company, speaking to a packed house at the Center for Automotive Research’s Management Briefing Seminars, couldn’t have had a more receptive audience even if the venue was in Dearborn, not Traverse City. There he was on stage, recalling when he was working on the Boeing 777 , and how he spent a few days with Lew Veraldi, the man who was behind the original Team Taurus, when Ford truly broke the mold for what American cars could be …

Unlike other CEOs or execs that make presentations in front of suppliers, customers, employees, journalists, researchers, academics, and other interested parties, Mulally was working without PowerPoint. That’s right. No bullet points. No videos showing cars with hard-driving music. Just a man in a blue blazer and a tie, who walked away from the podium and the Teleprompters, who asked for the house lights to be brought up so that he could see the members of the audience as well as they could see him. He was working without a script. He didn’t even have a handful of index cards. He just talked about what they are doing at Ford to sustainably turn the company around. One of the points that he made in more than one way was, essentially, that it is important to deal with reality. While it might seem that that is what everyone does all the time, had people at Ford–as well as many more companies in this industry, OEMs and suppliers alike–been doing that, the company probably wouldn’t have had to go out to the financial community in search of $23.5-billion for funding its restructuring plan (which he charmingly described as “the biggest home improvement loan”). That’s because it might not have needed a restructuring plan. Those dealing with reality would have recognized that the vehicle manufacturer–ditto other OEMs and suppliers–has, in Mulally’s words, “tremendous overcapacity.” They would have recognized the profound over-reliance on trucks and SUVs.

Mulally said that every one of the planes that he’d had the opportunity to work on had one thing in common: “A point of view about the future.” He explained that it wasn’t that it was a case where the 747 would be a big multi-row plane and the 757 would be a long single-row plane, that one would carry X passengers and the other Y passengers, but that the point of view about what they would do would be things like transforming transoceanic travel or providing greater range and efficiency. They were meant to do something. And he suggested that that is what companies need to have when developing products. Which explains, in part, why Boeing is able to compete with its foreign competitors in a way that the domestic vehicle manufacturers haven’t, or at least haven’t done as well.

While Mulally spelled out in large strokes what they are doing at Ford (dealing with overcapacity and restructuring in order to get to the state where they can effectively deal with “real demand”; accelerating the development of new products and services; creating value; and working together within the organization, as well as with suppliers and dealers), what is more telling about Mulally’s approach to organizational effectiveness came when he talked in a more generic sense about what needs to be done–1. Understand business demands; 2. Develop a plan; 3. Include everyone; 4. Review continually–which sounds suspiciously like the Deming cycle of Plan-Do-Check-Act. Whether it is or not doesn’t matter as much as the fact that it is a methodology that can serve all of us well.

Mulally spoke of the need to sustain manufacturing in America, which is a somewhat refreshing thing to hear in the context of all-to-many-people talking about a “low-cost country” strategy, which is essentially not-too-cryptic code for “sending the work to China.” He talked about how when he spoke to Congress on the subject of Corporate Average Fuel Efficiency standards and pointed out that what was being proposed was not an arithmetic average increase but a harmonic average increase, the response was puzzlement: Was Mr. Mulally talking about math? He said that while they acknowledge that energy independence and security, as well as environmental stewardship are of concern, he also stated that he was afraid that some people in Washington could, through what he described as a “market-distorting policy” (a.k.a. CAFE), “destroy a phenomenal industry in the United States.”

If Mulally’s past is prologue, then perhaps he will be successful in leading the needed transformation at Ford. Given his freshness and candor, his belief and passion, I, like many in the room in Traverse City, as well as throughout the country, certainly hope that he will be.