Wednesday, May 2, 2018

Why can't American auto manufacturers make a profit on cars?


I note that Ford has announced it'll stop production of all its cars except the Mustang, concentrating instead on a range of SUV's and pickup trucks.  This follows Chrysler's move in the same direction two years ago.

The question is, why can foreign manufacturers such as Toyota, Honda, Hyundai, etc. make a profit on their automobiles, while the Big Three can't?  I suspect that problem goes all the way back to the 1980's, when foreign imports savaged sales of US autos.  I don't know that the quality of US cars (as opposed to trucks and SUV's) ever caught up with the competition after that.  (Of course, I wasn't here for part of that period, but since I came to the US in the late 1990's, I've consistently experienced foreign-designed autos as being better made and equipped, and more comfortable, than most of their local equivalents.)

Ford argues, as did Chrysler a couple of years ago, that car buyers' tastes have changed.  That may be so . . . but why?  Are car buyers' tastes actually changing, or are US auto manufacturers deliberately trying to change those tastes?  Their advertising, marketing and promotions appear to suggest that.  Is that an attempt to undercut "foreign" competition (by now mostly made in the USA)?  Are the US manufacturers admitting, in so many words, that they can't produce cars as well, or make them as attractive, as foreign models, and therefore they're going to solve their problem by driving down the demand for cars, trying to make them less desirable overall?  I can't help but think that's part of it.

There's also regulation, of course.  Until very recently, the CAFE standards mandated a fuel economy "average" across a manufacturer's range that was growing more and more unrealistic.  It could only be achieved by producing a proportion of extraordinarily economical cars, to offset gas-guzzling SUV's and pickups - cars that were so focused on fuel economy that they skimped on other amenities, and were therefore less popular with the buying public.  Foreign manufacturers, making fewer SUV's and almost no big pickups, were not subject to the same disadvantage, and could therefore make their cars less economical, but more desirable to consumers.  (I suspect that a large element of the overproduction problem plaguing US car manufacturers is precisely this need to make large numbers of highly fuel-economical cars that were, frankly, not wanted by the buying public.)

Another very important element is that new vehicle prices are becoming unaffordable for ordinary Americans.  I wrote about that last month.  When a new car costs as much, or more than, the average annual income of a working-class family . . . something's got to give, and it'll be the sale of that vehicle, more often than not.  The Big Three will doubtless claim that their input costs are rising, therefore their prices are too:  but one of the claims made by both Chrysler and Ford is that they're turning away from cars, and towards SUV's and pickups, specifically because the latter are more profitable.  In other words, they can price them higher, because consumers find them more desirable.  In a free market, of course, one charges what the market will bear . . . but what if the Big Three become accustomed to living on those higher profit margins, and the market collapses due to other economic factors?  Will they be able to survive if they have no low-margin, low-profit offerings that people can still afford to buy?  IMHO, that's questionable.

All in all, when I look at the US auto industry (and the Big Three in particular), I see companies trying to force the market into what they want, rather than trying to respond to what the market really wants.  Until recently, the US government was trying to do the same thing.  In either or both case(s), I'm not sure that's sustainable.

Peter

19 comments:

kurt9 said...

I always thought that government mandated CAFE standards were unnecessary. Government regulation is considered necessary only when there is a "failure" of the marketplace. When gas prices went up in the 1970's, many people bought foreign (Japanese) cars partly because they were more fuel efficient. The same was true for the VW Rabbit diesel, which got 40 MPH in 1979! Clearly the market does seek out fuel efficient vehicles when gas prises are high for a period of time. There is no "failure" of the marketplace. Thus, the CAFE regulations are entirely unnecessary.

RandyB said...

The market is flooded with inventory, especially in the low-margin segments. Not adding more inventory year-over-year into that market is a smart business move.

High margins at low volume can sustain a company far longer than low margins at low volume, or even a mix of high and low margins. If and when the low-margin segments consume the oversupply, a reentering the low-margin segments is always possible.

Brian said...

Like you say the car companies didn't care about the product. FORD came out with the slogan "Quality is Job 1. That saying alone spoke volumes about their product at the time, also they were late to the better fuel economy.

Will said...

There was no profit in autos for the big three. Virtually all profits were generated by trucks and SUV's. For instance, the most profitable line Ford ever had was the Expedition. This replaced the full size, 2dr Bronco with 4drs, and produced several Billion $'s/year of profit. The F-150 is the most popular truck, and perhaps vehicle, in the US. Truck manufacturing has ALWAYS been the highest profit factories for US makers since day one. For instance, GM shut down their motorhome line in '78, which sold well, to switch that production line back to pure trucks, for more profit. They just took too long to assemble.

Remember, the union health costs for retired workers added about $1500/car, and that number was generated about 10 years ago, so probably much higher now. The Japanese makers don't have that cost on US made vehicles. Except for the odd luxury or high performance car, cars have devolved into a low profit area for the high volume producers, since the Japanese entered the market. The big three could afford unions back when they had the market to themselves. In other words, in an artificial market. This hasn't been true for a long, long time, of course. The unions killed production in the US, of every product they got involved in. Not just due to the obvious cost they added, but also due to the effects of the union controlling employee quality and productivity. Essentially, unions act just like socialism, a system with a built-in death drive.

Dad29 said...

Umnnhhh.....remember that "da Union" negotiated for benefits which then were applied to salaried employees, too. So not ALL the cost problems are "da Union."

In fact, consumers are staying away from sedans in droves, and purchasing the 'crossovers' in unbelievable numbers. This is despite the fact (you can look this up) that GM mid- and small-sedans get better fuel economy than their Japanese counterparts. Further, Toyota's cars are beginning to show "cost reductions". Compare the interior of a new Toyota Corolla to the interior of a 2000 (or so) Corolla. You'll note the diff immediately.

IMHO the only thing Detroit is over-doing is the electronic doodads and foofafferie. Many customers over the age of 50 do not want all that magic--and the younger kids may want it, but can't afford it.

Cost of car is higher, yes--but it's very common for a car to run into the high 100,000-mile mark before it really needs to go away. So the $4,000.00 sedan of 1958 is the $34,600.00 sedan of 2018 (DoL cost-of-living index tool). But that 1958 car was dead, dead, dead, at 100,000 miles (or less.) Do the math: the 2018 costs only HALF as much.....

Well Seasoned Fool said...

What is a US manufacturer? Most "foreign" makers have US plants while US manufacturers have plants in Mexico, etc.

Old NFO said...

Yep, this WILL be the death knell for the "US" automakers, which are now GM and Ford. Chrysler is no longer a US automaker.

HMS Defiant said...

Still driving a 17 year old 2001 VW Jetta. As with my father's 30 year old Honda, it looks good for a lifetime and I am not planning on buying any new cars. I honestly don't know how the big 3 stay in business but I'm sure conspiracy, bribery and greased palms are there doing the mojo.

Divemedic said...

When the UAW has forklift drivers making $100,000 a year, of course there is no profit.
http://street-pharmacy.blogspot.com/2008/12/politics-of-self-destruction.html

MrGarabaldi said...

Hey Peter;

I worked at Ford at the assembly plant here in Georgia and the profit for a 2006 Taurus was after all the bill were paid were $1400. The CAFE standards hurt the American automakers harder than the "imports" they didn't have the trucks and SUV's like Ford, Chrysler and GM. The U.S Automakers had to push the unprofitable cars on the public because of the CAFE standards. If pure market standards were the key, they would have made fewer cars and not decontented them. Blaming the unions isn't the whole story, The imports especially Toyota would bring temporary workers and work them for 89 days then lay them off then bring them back, they would do this 3 or 4 times before the worker was "permanent". if the worker was hurt before that time...oh well sucked to be him. I am not saying that to say that I am a hard core union supporter, I am not. The unions had their own issues. If Ford is getting rid of their cars, it means that the market is driving their actions..People don't want cars, they want trucks and SUV's and the American companies are not pushing their taste on anyone.

deborah harvey said...

from here, it is the cost combined with unemployment or only parttime employment. who can afford a car?
mine is 20 years old and runs well. husband's car is 16 years old and may be on its last legs.
we cannot afford another car.
money goes to groceries, medicine and medical costs.

Tal Hartsfeld said...

Actually it's kind of obvious:
They've simply have made too many cars overall over the many decades of the existence of the automotive industry.
Every year every maker introduces the public to yet another crop of either new models, or "updated" versions of current ones----advertising them in an aggressive practically coercive "in-your-face" manner.

One has to figure that someone of limited financial means just might decide that the car they currently own "runs just fine", and just might not deem it practical or viable to just run out and unnecessarily snatch up yet ANOTHER late-model vehicle.
That such an individual may have other priorities in their life they consider to be of greater importance.

Unknown said...

I'll just note that Ford and Fiat-Chrysler have little trouble making car models that sell well outside of the US.

I was briefly excited when FCA started selling the Dart in 2012, as a mass-market compact sedan on the Alfa Romeo Giulietta platform seemed pretty impossible to screw-up.

Then I got one as a rental for a trip that included mostly fast twisty roads with little traffic. Not exciting at all.

sysadmn said...

I'll just leave this here.

Three full-size pickups were still the best-selling vehicles in the United States last year. But the fourth-place spot was claimed for the first time by an SUV, not a sedan.

In 2017 the Toyota RAV4 sport ute outsold the Toyota Camry sedan, reigning car-sales champ for the last 15 years.

The compact, five-door RAV4 crossover sold 407,594 units last year — a gain of 15.7 percent — eclipsing Camry by 20,513 in sales. The midsize sedan saw an annual sales decline of 0.4 percent. Camry wasn’t even runner-up as another SUV, the Nissan Rogue, gained 22.3 percent to 403,465 units sold.

...

Honda also saw its once perennial best-seller, the Accord sedan, eclipsed by its CR-V ute for the second year in a row. Chevy and Ford small crossovers healthily outsold their passenger cars stablemates, though the RAV4, Rogue, and CR-V have been able to translate their sales leadership in midsize sedans to compact SUVs.

The decline of sedan sales has brought a reassessment of the market from Detroit automakers. Japanese manufacturers are still bullish on cars, however, with both Toyota and Honda introducing an all-new Camry and Accord, respectively, for 2018.


Ford's action is not that radical. Sedans morphed into car-like SUVs, which buyers prefer. Whether that is a fad or predicated on cheap gas remains to be seen.

Dad29 said...

Thanks, Sysadmn....your source is dead-on.

The crossovers provide FAR more passenger/cargo flexibility than the sedans. Older people love them because they can 'slide in' and 'slide out.' Young families love them because they can get the kids, the car-seats, and the baseball crap in.

Fuel economy is not really a factor.

Will said...

The fact is that a typical sedan type people mover is too narrowly focused a vehicle these days. Too many requirements to move other stuff, besides or in addition to people, which seems to have started in the 70's.
Stationwagons faded away, replaced by vans/minivans, which was broadened to SUV's and pickups, which grew to 4dr size in many cases.

The thing is that there used to be a dividing line for the use of any sort of utility vehicle, and those who drove cars. A "not-car" was associated with a tradesman, or business.
Station wagons were the vehicle with space for luggage that was sent to the train station to pick up traveling families. They were called "sedan deliveries" if they didn't have rear windows, and were oriented toward salesmen and store delivery use. Those faded away with the marketing of small vans that eventually were called minivans.

As people got more involved in outdoor activities, and the spread of the suburbs with the resulting DIY home maintenance/remodeling, the appeal of owning your own hauling vehicle increased over the following decades.

Ragin' Dave said...

Folk want to carry stuff.

I remember my parents buying a Ford Crown Victoria station wagon. He was military. We traveled a lot. The only reason he got rid of it was because we moved up North, and he needed a vehicle with four-wheel drive. The car itself was still functioning perfectly. He got a truck, mom got an Isuzu Trooper.

The modern sedan is designed to follow government regulation, NOT the market. I drive a Ford Focus. Great car. Great gas milage. Can't carry squat. It's my runner, eating up the miles for my work, and I enjoy driving it, but my wife has a Subaru Outback that can carry 3 times the cargo AND tow one ton of gear. If we were a one-vehicle family, it would have to be the Subaru because we couldn't function without the ability to carry a lot of items. And we're empty nesters. Families with kids need a hell of a lot of room. Room that doesn't exist, because in order to pack in all the FedGov mandated safety equipment AND meet the FedGov mandated fuel economy, things like the back seat have damn near disappeared.

And then there's the American use of the vehicle as a status symbol. My little Focus doesn't scream "money". The Ford Expedition does.

There are plenty of reasons for the death of the sedan. The unions are just one. Government meddling is another. Market forces are a third. There's probably more I haven't thought of yet. All in all, Ford is doing what they have to do in order to stay in business.

Thomas W said...

In terms of CAFE standards, minivans and SUVs are considered trucks, which have to meet a lower standard than cars. Thus Ford is dropping most cars, but not SUVs.

From what I've read, this dual standard killed the traditional station wagon (a car) in favor of the minivan (a light truck). And minivans have gradually become closer to station wagons with lower ceilings and "fold flat" third row seats (like my 1967 station wagon).

Today a compact SUV is essentially a car (sits a little higher, but so did cars in the past). My compact SUV gets just under 30MPG (better than many cars), has as much or more legroom than a full size car, and more cargo space than if it had a trunk. Since it doesn't have to meet as high a mileage standard as cars, the manufacturer can sell that many more large SUVs with lower mileage.

Magson said...

I work in the support industry to the automotive dealer sector, and we have meetings and talks about industry trends relatively often.

One stat that surprised me was that for most mid-sized and smaller sedans and coupes that a sale typically resulted in a net loss of about $150-200 per vehicle to the dealers and that they mostly make their money in parts and service, not in sales.

It became a joke in the office for a while that you could threaten a dealership by saying "Hey, give me $100 or I'll buy a car!"

Granted, this is the dealerships, not the manufacturers, but I can't imagine that this doesn't "trickle up" as it were.