Big Three May Be Shrinking but U.S. Auto Business Isn’t
Plant closings. Job cuts. Shrinking market share.
Judging from the steady drumbeat of bad news in recent months, it would seem that auto manufacturing in the U.S. was headed for extinction.
But lost amid all the carnage is the fact that the North American auto business is still growing, and is expected to grow still more.
It’s just that the expansion is not happening for any automakers headquartered around Detroit.
Even as General Motors Corp. and Ford Motor Co. prepare to close more plants and cut an additional 60,000 jobs in the next five years to try to shrink their way to profitability, Toyota Motor Corp. is opening a huge pickup assembly plant in Texas. Japan’s leading carmaker also is building a plant in Canada and is eyeing Michigan, home of beleaguered Ford and GM, as a site for a factory.
American automakers may be contracting, but industry watchers expect substantial growth in overall auto production and sales in the U.S., Canada and Mexico over the next decade.
“There are 64 million people in the U.S. who will be getting drivers’ licenses in the next 10 years,” said George Peterson, president of AutoPacific market research in Tustin.
The national appetite for new cars and trucks will grow to about 18.5 million vehicles per year in the next decade, up from 16.8 million this year, he predicts. Mexico and Canada could easily add an additional 3 million in annual vehicle sales.
Most of these extra sales are likely to be won by the likes of Toyota, Honda Motor Co., Nissan Motor Co. and South Korea’s Hyundai Motor Corp.
The U.S. carmakers are getting hammered by intense competition from Asian and European rivals and by skyrocketing healthcare and pension costs.
Even if they are successful in remaking themselves, the U.S. carmakers’ best odds for further growth are in Asia and Europe. In North America, they “are going to come out of this as smaller companies, with smaller market share, fewer employees and fewer manufacturing plants,” said George Pipas, Ford’s in-house U.S. market analyst.
GM’s share of the U.S. auto market has fallen to a record low 26%. A decade from now GM will have shrunk “into the teens,” said Dan Gorrell, vice president of Strategic Vision, an auto research firm in San Diego. Ford (currently with a 17.4% U.S. market share) and Chrysler (13.6%) will have similarly reduced shares, he said.
Peterson and several other analysts say Toyota (now with 13.3%) could be the top brand here within a decade, but with less than a 20% market share.
It’s not only sales patterns that are changing. Factory employment and the production of passenger vehicles are shifting to foreign companies on this continent. It’s part of the new automotive landscape that has taken hold in the last quarter century.
“Instead of the Big Three in Detroit being the symbol of the world’s automobile industry, we’ll be looking at a global Big Six or maybe a Big Seven, and eventually they’ll all be around the same size” in North America, said Jim Press, president of Toyota Motor Sales U.S.A. and a member of Toyota’s global management board.
On his scorecard, the top six automakers would be: Toyota, General Motors, Ford, Honda, DaimlerChrysler and Nissan. Hyundai is the likely seventh player.
Asian brands together account for almost 40% of all passenger vehicle sales in the United States. To accommodate this demand, there’s also been a surge in foreign-owned plants.
Honda was the first Asian carmaker to build a manufacturing plant in the U.S. -- in Marysville, Ohio, in 1982 -- which now makes almost 70% of its North American sales volume.
So far foreign automakers have built 27 car, truck, engine and part plants in North America. That compares with 132 North American factories owned by American carmakers. There also are three assembly plants that are joint ventures between U.S. and foreign brands.
And foreign-owned plants continue to sprout. South Korea’s Kia Motors, the only major Asian automaker that doesn’t have a factory here, is scouting for a manufacturing location, just as Honda, Toyota and Mazda Motors also are looking for extra North American production capacity.
Changing tastes have a direct effect on the factory floor. Consider the New United Motors Manufacturing Inc. assembly plant in California. The Fremont plant was opened in 1984 as a joint venture between GM and Toyota and in the early years it split its vehicle production between the two companies.
But this year 82% of the 380,000 vehicles built in Fremont are Toyota Tacoma pickups and Corolla sedans, vehicles in far greater demand than the Pontiac Vibe sport wagon, the sole GM model made there.
“We’ll see more and more of these cooperative deals” aimed at increasing foreign brands’ North American production by utilizing the Big 3’s underperforming plants, said David Cole, director of the nonprofit Center for Automotive Research in Ann Arbor, Mich. “It’s a way for companies to maximize their dollars.”
Indeed, on Monday, Chrysler Group, the U.S. arm of Germany’s DaimlerChrysler, said it would invest as much as $1 billion modernizing its St. Louis, Mo., plant to help get it ready to start building minivans there under a pending contract for Volkswagen to utilize extra capacity. VW doesn’t offer a minivan in the U.S., so it will hire Chrysler to build them.
It’s a significant shift from 1980 when Ford, GM, and then-Chrysler Corp. collectively employed about 780,000 salaried and hourly workers in North America and built 9.7 million cars and trucks at factories located primarily in the American Midwest. Volkswagen was the only foreign automaker building cars in North America, with a modest plant in Pennsylvania.
Meanwhile, Toyota and all other foreign brands were true importers, making cars and trucks overseas and shipping them to showrooms.
Today, 14 automakers build passenger vehicles in North America.
Moreover, ever since Nissan opened a massive car and truck assembly plant in Smyrna, Tenn., a few months after Honda’s Ohio plant, auto production and employment has drifted into the southern states, Canada and Mexico.
Once Nissan showed that cars could be made in non-union plants outside of the traditional manufacturing states, others followed. “Manufacturing will continue to drift out of the Midwest,” said James Sourges, vice president of consulting firm Capgemini’s auto group in Detroit.
Total auto production here has risen 65% to 16.2 million vehicles since 1980, even as employment has shrunk 34% to about 515,000. Foreign-owned companies account for 26% of all direct employment by automakers in North America.
The foreign brands’ presence doesn’t stop with factories. Each has a U.S. headquarters -- Toyota employs more than 6,000 in Torrance. The major players have design studios in California, hot weather test centers in Arizona, and engineering centers near Detroit.
Even as Ford and GM continue shedding underutilized production capacity and trimming staff, several Asian automakers are snapping up Motor City engineers and technicians to staff their growing technical centers there.
Detroit “will remain the center of automotive engineering in North America,” said Eric Noble, president of CarLab, an automotive market research firm in Orange. “The Japanese and Koreans will be increasing their presence, their operations there because of the talent pool that is, increasingly, underemployed.”
Toyota, Nissan, Honda and Hyundai have a major research presence in greater Detroit, with more than 2,000 employees and close to $500 million invested in their technical centers. Toyota expects to add an additional 500 workers as it doubles its Ann Arbor center by 2008.
It is that kind of growth, based on the foreign brands’ ability to produce quality vehicles more cost-effectively than their American rivals, that continues to reshape the auto industry.
To get their costs under control, Ford, GM and Chrysler Group will have to engineer new labor contracts, analysts said. The United Auto Workers union has agreed to some recent healthcare changes to cut costs, but the union has said any major changes will have to wait until the next labor contract in 2007.
But many analysts, including Cole, say the UAW will become a much smaller and more cooperative partner in the revamping of the American auto industry.
“There is now, finally, a real sense of urgency to get at the fundamental cost issues,” he said.
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Not your father’s auto industry
American automakers still have far more factories in North America than do foreign brands, but the pattern since 1980 shows that import brands are on the move--and moving south.
Industry at a glance, 2005
*--* North American Plants employees GM 62 173,000 Ford 39 122,000 Chrysler 33 85,700 Toyota 12** 36,800 Honda 7 26,200 Nissan 3 26,750 Other 6 44,500 Totals 162 514,950
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** Includes joint venture with GM.
Sources: Individual automakers, ESRI
