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.