Academic journal article Chicago Fed Letter

Challenges to the U.S. Auto Industry

Academic journal article Chicago Fed Letter

Challenges to the U.S. Auto Industry

Article excerpt

What will the auto industry look like in the future? Will domestic producers continue to lose market share? How will the industry's geography change? A recent conference brought together industry experts and economists to discuss the challenges facing this industry concentrated in the Midwest.

On November 3, 2003, over 80 industry insiders, academics, analysts, and policy-makers gathered in Detroit at the second in a series of conferences sponsored by the Federal Reserve Bank of Chicago on the current landscape of manufacturing in the Midwest. This conference addressed the challenges facing today's U.S. auto industry and what these challenges imply for the Midwest.1

In his welcoming remarks, Chicago Fed President and CEO Michael H. Moskow illustrated the importance of the auto sector. The sector employs more than 1.3 million workers nationwide, and gross motor vehicle output alone represents more than 3% of the U.S. economy. At first glance, the industry did rather well during the most recent recession. Light vehicle sales continued to advance instead of following their usual pattern of slowing down sharply. However, the sales data mask a number of challenges. Moskow referred to the fact that the Big Three automakers have been using sizable sales incentives to spark vehicle sales, which in turn has significantly reduced their profit margins. Yet, faced with high fixed costs for labor, plant, and equipment, it was less expensive to produce vehicles and sell them with heavy incentives than it was to shut down plants. Contributing to the high fixed-cost structure of domestic automakers have been soaring health care costs, which also increase the automakers' so-called legacy costs, or benefits paid to retirees.

Furthermore, the traditional Big Three have experienced sizable losses of market share to foreign nameplates. Moskow pointed out that this trend was partly driven by exchange rate movements, which have contributed to a rise in import sales since the mid-1990s (up from 12% of U.S. light vehicle sales in 1996 to 20% in 2003). In addition, foreign automakers successfully introduced new products to compete with the Big Three in the surging light truck market. In the process, foreign automakers added significant production capacity inside the U.S. This represents two challenges. First, the spatial pattern of newly added production capacity has altered the geography of the auto region, extending it further south. Furthermore, it has raised the level of excess capacity in the industry. In response, the new contracts agreed upon between the United Auto Workers and the domestic car companies included agreements on near-term plant closures, affecting approximately 12,000 jobs that are primarily located in the Midwest.

In light of all these changes, it is useful to take stock of how these challenges might affect U.S. manufacturing at large and the auto industry in particular. What will the industry's structure look like in the future? Will domestic producers continue to lose market share? How will the industry's geography change? Will the Midwest continue to be the hub of the industry? And how do these issues relate to the broader question of whether the recent downturn in manufacturing is cyclical or structural?

Location trends and issues

Thomas Klier, Chicago Fed senior economist, discussed location trends for the U.S. auto industry. Using a series of maps, he illustrated how the auto industry is currently tightly clustered along the so-called auto corridor. The corridor extends from Detroit west to Chicago and south to Tennessee, with fingers reaching into Canada and Mexico. Detroit remains the hub of this industry. For example, a 400-mile radius drawn around the Motor City includes virtually the entire Canadian auto sector and about 60% of all U.S. light vehicle assembly plants, as well as the vast majority of supplier plants.

However, a number of trends challenge the Midwest's position as the nation's auto hub. …

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