Today Ford announced an $8.7 billion loss for the quarter. One might wonder how Ford, GM, and Chrysler have fallen so far so fast. None of the press coverage mentions what is likely the root cause of the precipitous decline: the 25 percent tariff that the U.S. imposes on “light trucks” (search for “light truck tariff” in Google News and you will see how sparse the coverage is). Imported cars are taxed at 2.5 percent. Imported SUVs, minivans, and pickup trucks are taxed at 25 percent. Domestic auto manufacturers are forced to compete on the world market when they make cars. They lose money on nearly every car that they make. Domestic manufacturers have a built-in 25 percent profit if they can make a pickup truck at the same price as someone in Japan, Eastern Europe, or China. Ford and GM make money on pickup trucks, though only at the expense of American consumers who pay 25 percent more for their gas guzzlers than they should.
American consumers have finally decided that they don’t need to pay a 25-percent premium for vehicles that are not efficient means of personal transportation and hence the collapse in profits and share price. Without the tariff walls it is not clear that the U.S. operations of Ford and GM, considering their union contracts and pension/health care liabilities, have any value at all.
According to a client of mine, who is a financial analyst, GM is now worth less than Mattel (maker of Hot Wheels) in terms of market capitalisation.
GM and Ford are basically truck manufacturers. They’ve been that way since WWII. They’ve fallen on hard times because they haven’t designed and manufactured a fuel efficient car that anybody wants.
Of course, no one expected gas prices to rise so dramatically. Right now you can’t give away a used or new SUV. Until they introduce models to compete with the Corollas & Civics and the Hybrids, they’re in a free fall.
Toyota and Nissan already get around the Chicken Tax by building their trucks in the U.S., and various other automakers found workarounds (Subaru was able to import their Brat by putting a couple of throwaway vinyl seats in the bed, which they were later shocked to find people actually made use of).
SUVs and minivans have been classified as passenger vehicles for import purposes (but not for CAFE purposes) since the late ’80s. Still, their lack of full-sized truck platforms did tend to give the American automakers an advantage in the large and supersized departments.
The effect is there, but it’s less significant and more complicated than a simple 25% profit bonus.
One of the disastrous knee-jerk reactions in the Great Depression was to raise trade barriers (tariffs) in order to “protect” local production & jobs. Sure-fire vote getter.
Unfortunately a very popular & seemingly logical move does tend to have bad long term consequences.
When companies are protected from competing they inevitably become addicted to all sorts of inefficiencies & fixed costs. When the barriers come down–as they always do for one reason or another–there’s big trouble.
The 25% is interesting but something that NOBODY ever mentions about the downfall of the US auto industry is the effect that unions have had. the US companies can’t spend money on R&D or anything else if they’re paying a wrench-turner or button-pusher $60K a year with full benefits and retirement. Just doesn’t work in the long run. Then they have to charge more for a far less inferior vehicle that’s outdated and doesn’t match buyer’s needs, and there you go.
Best thing that can happen is for them to completely go under, restructure and get smarter from the ground up, sans UAW.
Interesting points all.
Has anyone been in some of the new American cars lately? My boss has a 2 year old Jeep that I was shocked how shabbily it was assembled and designed. The dash was some sort of coarse plastic that looked like it was slapped together in about a minute.
I am also still amazed how little room my co-worker’s Ford Explorer has inside. I keep asking myself, “How can a car that is so big on the outside be so small – room wise – on the inside?”
I finally got rid of my 14 year old Honda Accord (not too fancy but good enough) with 281,000 miles and bought a 2000 Acura RL with 94,000 miles on it. Runs like new. Now gas mileage wise is another story …… I doubt I will be looking for another car until about 2012-13. and I am already leaning toward the 2007-2008vInfiniti M35X that Phil reviewed.
I am not knocking all American cars, they make some nice ones (Mustang, Corvette etc..) I just think that once you go foreign – on some models – you don’t or won’t be so quick to go back to American. Especially if the foreign car performs so well and lasts for 10 years.
Oh yeah, how come Ford’s SUVs, which vary from Explorer ->Expedition ->Excursion all have the same drab instrument cluster/dashboard and steering wheel across all models that come with their run of the mill regular pickup trucks?
The cause for the decline of American car makers? How about shabby design and shabby quality? A while ago, I read somewhere that Chrysler had 85 different cruise control designs, depending on the vehicle at hand. Toyota — exactly one. The same cruise control mechanism was installed in all vehicles. For an example of hideous design, look no further than the Chrysler 300 with its slit-like windows. Sure some models have recently topped the JD Power surveys of initial quality. But what matters is not initial quality, but quality over the entire 5-10 year ownership cycle. A quick consultation of Consumer Reports will show that virtually all American makes fail in this measure.
I’ve owned three Toyotas altogether. While their quality is not as great as legend has it, they’re pretty decent. They get me from point A to point B relatively inexpensively, and barring occasional maintenance I don’t need to take them to the shop. When I was looking for my vehicles, American brands never even entered my consciousness. Sure, I’d save about a grand for the same features if I went with Detroit’s finest. But that advantage quickly disappears when one is faced with repeated mechanic visits and repair bills.
The one funny thing is that American brands actually have some equity outside of the USA. My father in India likes his locally made subcompact Ford Ikon. He still finds it a better value when compared with assorted Suzukis, Mitsubishis, Opels, Hondas and even the Corolla. India is a very competitive market for compacts and subcompacts, and it would appear that at least Ford is holding its own.
Maybe, time to get some expat managers to shake things up here?
Quoting Jagadeeh:
> The one funny thing is that American brands actually have some equity outside of the USA
I think that the only thing Ford Europe shares with it’s sclerotic American cousin is the name. The European Focus is a generation ahead of the American version and a consistent top seller. We rented a Mondeo TDCi while in France a few years ago and had a blast tearing through the Pyrenees in it. Ford US sold a dumbed-down version of the Mondeo called the Contour in the US for a few years. Nobody bought them, and they mercifully killed that model.
Regarding the canard about American manufacturing and unions being responsible for the malaise: back in the 80s and 90s, I worked for U.S. Steel (benefactor of VTR or whatever the acronym is that placed trade restrictions on Japanese/foreign steel imports to help keep domestic industry competitive). I got to work with metallurgists who spent time in Japan and I always asked them how the Japanese were able to be more competitive, more efficient, more profitable at the process of manufacturing finished steel product. They were always eager to answer, and their response was as such:
Unlike American locales, their facilities were engineered from inception to be process flow efficient whereas in U.S., new technology was inelegantly grafted on top of older facilities. I am reluctant to spend a lot of words here on this but will give an example of the facility I worked at: A Japanese mill was designed from the start around continuous slab casting instead of just plopping in a caster and expecting it to make money without considering crane facility or other factors. In fact, that new caster nor the bloom caster (for making pipe) could not be fully maximized because the crane facility could not support it and often, steel product was made at a net loss for supplying a joint Korean/U.S. Steel venture whereas much more lucrative bloom casting would be foregone. Business arrangements about which plants to shutdown or where to buy coke from were made not on the basis of profit and efficiency, but rather dependent upon “old boy” network of associations. In another words, management, not labor, as the late W. Edwards Deming was prophetic in this regard.
Labor was never a significant cost factor, and only is relevant today because of technology, corporate entities can run so much leaner that compared to past times and those long existing companies are burdened with the retirement pensions of all those workers that present day firms have dropped as a benefit for their significantly smaller work force compositions.