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November 17, 2008

Endgame in the U.S. Automobile Industry

Kathryn Harrigan
Henry R. Kravis Professor of Business Leadership
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The term “endgame” refers to the second half of a product’s life cycle, during which firms producing products face slow growth, no growth or negative growth in consumer demand. Are U.S.-based automakers prepared for theirs?

General Motors, Ford and DaimlerChrysler Daimler AG are facing declining demand primarily because their products are less popular than those manufactured by competitors on U.S. soil such as Acura, Isuzu, Mercedes-Benz, Mitsubishi, Nissan, Toyota and Volkswagen. But this decline in demand is not the result of U.S. consumers buying significantly fewer cars; American autos are less popular because these automakers have failed to innovate to match consumer demand.

Yet even before this reality was recognized, General Motors had 22 idle factories that no incoming competitor wanted to acquire. Those plants weren’t attractive to new buyers because they were antiquated and because GM’s laid-off laborers had high wage expectations. In the 1960s, the era of domestic market share dominance and the time when “a good time was had by all,” the employees (including the managers) of U.S. automotive firms enjoyed lavish compensation packages, especially with respect to retiree benefits. But those good times had a steep price for American industry, opening the door to offshore competition in Detroit’s own backyard.

Look at the steel industry, for example, where similar “legacy” costs have in the past bankrupted more than 35 U.S. steelmaking firms. When the government-backed Pension Benefit Guaranty Corporation (PBGC) created a way for investors to revive mothballed steel mills, U.S. steelmaking assets became hot properties. They were acquired by offshore competitors, such as Arcelor-Mittal NV from India and WCI Steel, which is owned by the Russian Federation, who bought their way into the U.S. market for steel with vastly reduced operating costs.

This phenomenon — offshore competitors becoming “domestic” — has already occurred in the automotive industry, where offshore competitors jumped the tariff wall long ago to become “local” and built their greenfield plants in regions where there were no legacy costs (or manufacturing practices) to hobble their cost structures.

Today, the automobile industry’s endgame problem is determining how to scale back the manufacturing capacity of those firms whose products are no longer economical to produce. However, in spite of this endgame for some firms, many others that are producing cars in the U.S. are doing just fine.

Photo credit: Pennilicious

Comments

by Anonymous | November 19, 2008 at 1:12 AM

Chrysler is no longer DaimlerChrysler. Cerberus Capital Management bought Chrysler from Daimler in an LBO in May 2007.

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