Car Insurance

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.