DaimlerChrysler's sobering announcement
last week that it will fire 26,000 workers caps months of bad
news from U.S. auto makers. Driven by what were touted as computer-age
productivity improvements, auto manufacturing was supposed to
be a "new economy" triumph. The car industry's stunning reversal
of fortune, however, suggests how much of their recent boom
depended on fortuitously cheap energy, money and regulatory
loopholes, rather than breakthrough innovations.
According to new-economy pundits, the U.S. created the world's
most nimble, advanced Information Age economy in the 1990s.
The U.S. auto industry was one of the biggest beneficiaries.
After years of stagnation, U.S. manufacturing productivity suddenly
accelerated, something widely attributed to magical new technologies
like the Internet. Motor-vehicle sales boomed. U.S. car companies
earned an unprecedented $ 85 billion during the decade.
But far from reflecting new computer-led design or manufacturing
skills, the U.S. firms' successes almost totally depended on
making and selling lower-tech light trucks--SUVs, minivans and
pickups--rather than more demanding passenger cars. For a variety
of reasons, truck manufacturing shielded chronically weak U.S.
manufacturers from the technological, regulatory and competitive
challenges they could not otherwise meet. As soon as these fortuitous
circumstances changed, the illusory nature of the car industry's
renaissance became clear.
Throughout the 1990s, U.S. companies largely gave up trying
to compete with Asian and European manufacturers in producing
more refined, less polluting and fuel-efficient passenger cars.
Such conventional vehicles are subject to stringent and ever
evolving safety, performance and environmental standards. Flexible
and creative design and manufacturing skills are necessary to
produce them. U.S. auto makers simply did not possess these
Accordingly, from 1990-99, total annual domestic car sales
fell by more than 600,000 units, almost entirely because of
curtailed U.S. production of passenger cars. By 2000, foreign
car manufacturers had gained nearly 50% of the U.S. passenger-car
market, compared with 35% at the start of the decade.
U.S. manufacturers instead focused on marketing light trucks.
This strategy offered several immediate advantages.
Most light trucks were exempt from pesky federal and state
pollution and fuel-economy standards. They could be built with
less sophisticated emissions, propulsion and other key technologies
than found in typical passenger cars, and thus were less expensive
to make. High fuel prices and narrower roadways in Europe and
Asia, moreover, discouraged overseas producers from even thinking
of turning large, gas-guzzling trucks into passenger vehicles
and competing with U.S. companies.
Nevertheless, U.S. consumers were willing to pay about the
same price for a light truck as for a better engineered passenger
car. Given these economics, a single U.S. SUV assembly plant
could generate as much profit as 20 conventional-car factories
U.S. firms wasted no time shifting toward light-truck production.
By 2000, about 70% of DaimlerChrysler's production, 60% of Ford's
and half of GM's was composed of SUVs, minivans and pickups.
Annual U.S. vehicle sales rose by 3 million units, or 22% during
the 1990s. All that growth was due to light-truck sales, which
accounted for nearly 50% of U.S. new vehicles in 1999, up from
30% 10 years earlier.
In the new economy, business profitability is supposed to be
gained through the use of novel, high-tech capabilities that
allow for continuous product development and manufacturing,
a previously unattainable goal. But U.S. auto industry growth
in the last decade took an almost exactly opposite turn. By
late last year, the favorable market conditions that enabled
short-term U.S. manufacturing successes were rapidly eroding.
The most important condition was cheap, plentiful fuel. Light
trucks are far less efficient than passenger cars. Volatile
gas prices would have curtailed their sales. After the Gulf
War, however, Americans could freely import as much oil as they
wanted from grateful Middle East emirates. Like the 1950s, it
just didn't seem to matter if vehicles became steadily bigger
and heavier, or if average U.S. fuel economy dropped to its
lowest level in 20 years.
Also crucial was the continued relaxation of light-truck pollution
and safety regulations. Originally intended to lower costs for
farmers and small businesses, Congress never dreamed that these
provisions would be used to evade more broadly applicable consumer-vehicle
standards. But by avidly lobbying to retain light-truck exemptions,
U.S. truck producers avoided having to deal with strict passenger-car
tailpipe emission controls, crumple zones or rollover stability.
They could continue to sell vehicles that were less safe and
that spewed forth two to four times the pollution emanating
from a conventional car.
Finally, cheap money, short-term leasing and rapid product
turnover reduced consumers' quality concerns.
All these happy circumstances began to evaporate in the last
half of 2000. Increases in gas prices rekindled long-dormant
fuel-economy concerns. Higher interest rates made buyers more
keenly aware of long-term vehicle quality. Light-truck regulatory
loopholes started to close. And foreign producers, resigned
to the fact that U.S. consumers actually wanted to drive badly
built trucks instead of more sensible passenger cars, flooded
the market with highly competitive products.
U.S. manufacturers immediately began to suffer. Their car and
truck sales fell by nearly 2% in 2000, even though total domestic-market
sales reached a record level. GM's market share dropped to a
new low, just 28% of the total U.S. market, compared with 35%
10 years earlier, and it scuttled an entire car division, the
venerable Oldsmobile. DaimlerChrysler rang up losses of more
than $ 1 billion. Ford, by far the healthiest U.S. producer,
suffered embarrassing product and tire recalls and was forced
to take a mammoth $1.5 billion charge against earnings.
Meanwhile, "old economy" European car makers like VW/Audi were
achieving the world's most rapid sales and profit growth rates
with a bevy of new, widely acclaimed vehicles. Honda's U.S.
sales rose by 6%. Toyota's Lexus became America's best-selling
luxury car. Once troubled Nissan accomplished a nearly miraculous
turnaround under the auspices of a French chief executive from
Renault. Foreign sales in the U.S. surged by 12% and exceeded
30% of the total domestic vehicle market for the first time
Automobiles are the heart of U.S. manufacturing and, by some
measures, account for as much as 14% of the entire economy.
If the Information Age had truly transformed U.S. industry,
its effects should have been everywhere apparent in car production.
Yet, the sobering reality is that U.S. auto makers emerged from
the go-go 1990s less capable than ever compared with their supposedly
"old economy" competition..
But what about the fabulous productivity numbers? Much of this
improvement seems to have been the result of cutbacks in technology,
safety and quality investments. Blessed with a market that did
not much value engineering enhancements, U.S. firms could reduce
their costs and, at least for a time, boost apparent productivity.
When consumers started to become more discerning, however, the
industry's latent competitive problems worsened.
Rather than cling to an unsubstantiated sense of economic dominance,
the U.S. would be better served by more realistically assessing
its industrial strengths and weaknesses. Only a handful of skeptics
correctly predicted that higher interest rates would severely
throttle the nation's supposedly unstoppable economy. Information
Age hype blinded energy experts from the obvious fact that burgeoning
computer use would push electricity demand well above previous
Similarly, even the most encouraging productivity data shouldn't
have induced many observers to imagine that U.S. auto makers
could long thrive on a bloated diet of gas-guzzling, low-quality
vehicles. It now seems inevitable that U.S. car makers, and
the communities that depend on them, face an uncertain future.
We can only hope that our other new-economy fantasies are less