America was once the leader and pioneer in the auto industry, a title that the country had for decades and a title that was so dear to America's heart that it was unfathomable to think that title might ever be lost. It's commonly misconstrued that America invented the automobile, when in reality that honor goes to German Karl Benz in 1885 (Rozema, 2010). "Americans did, however, industrialize the love of the automobile. America loves big, fast cars, and for many decades American car companies shared the biggest slice of the auto industry pie" (Rozema, 2010). America made having a car and the business of making cars firmly entrenched in American culture. This was a fact which kept the economy stimulated and which provided a consistent level of financial stability for the nation and the civilians within it. However the decade of the eighties marked the time when that began to serious slip away as Japan and Germany offered extremely competitively priced cars that had a high level of quality (Rozema, 2010). This marked a seriously influential reason for the beginning of the end: the decline of the big three.
The collapse of the big three car companies (Ford, General Motors, and Chrysler) was indeed a complex process of which many causes were responsible. In 2005, an interview with NPR put it perfectly, "Though the trio has dominated the American market for decades, its grip is slipping fast due to the perfect storm of business decisions -- poor ones -- raising health-care costs and strong foreign competition. The Big Three's decline has already been felt by 130,000 workers that have been laid off since 2000. It's only beginning to really impact the larger economy" (Gordon, 2005). While this excerpt offers several reasons for why the big three were losing so much business, one of the more compelling reasons offered was the real manifestation of formidable foreign competition.
As the narrator writes in the book Once Upon a Car, "Executives came and went at the Ford headquarters, but none of them was able to help Bill [Ford] stave off the flood of Toyotas, Hondas, and other foreign cars that were relentlessly beating Ford in the market" (Vlasic, 2011). When it came to the fierceness of foreign competition, executives at Ford, GMC, and Chrysler, had to have felt like they were paddling out water in a sinking ship. In 1997 the big three dominated the American auto market; in fact, Ford was number one in California as recently as 2005 (Schoenberger, 2007). However, once the tables turned they turned very rapidly. "An article from The Detroit Free Press (2005) stated that the combined market share of GM, Ford, and Daimler Chrysler was at an all time low of 60% in 2004. Currently, Toyota, Honda, and Nissan are the top three foreign competitors with market shares of 13.1%, 10.8%, and 6.6% respectively (Standard and Poors 2004)" (Gatesman, 2005).
When a consumer market makes such a rapid and immediate shift in preference and behavior it's often for a complex and multi-faceted amount of reasons, reasons which reflect the changing times. When any consumer market changes their preferences and choice of an automobile, it's the reflection of changes in society, lifestyle changes, controllable changes and incontrollable ones.
One of the reasons why foreign cars were able to ease the market away from the big three was because they really were better quality. American cars still had a reputation for questionable levels of quality and that was something they just weren't able to shake; this was unfortunate as cars from overseas were being introduced to the market that had levels of quality that cars made by the big three just couldn't compete with. A Business Week article written in 2001 demonstrates that the problems facing the big three started with the engineers: "Factories make the cars the way they are supposed to be made, but that is the problem. The materials and the design of the car are poor quality. U.S. manufacturers also end up spending more in warranty costs than foreign manufacturers" (Gatesman, 2005). All of these facts point to a lower level of quality of American cars. If a car is going to be known for being a lower quality than its competitors, it should have a significantly lower price tag to match. Otherwise, there's the danger of American car companies appearing as though they're charging the same price for lower quality, comparable to a snake oil salesman.
However, as one scholar points out, it's useful to determine how Lancaster's Theory of Consumption can be applied to the car industry and the collapse of the big three.
The graph is very basic and it demonstrates the mix of traits between reliability and safety of car A versus car B. Simply put, consumers who purchase Car A, place safety as more important than reliability; consumers of car B. place reliability as superior to safety (Gatesman, 2005). The use of the theory is to help the determination of which characteristics are fundamentally important to the general purchaser of cars in America, shedding light fundamentally on how one of the reasons of the collapse of the big three was able to occur at all through the loss of market share (Gatesman, 2005). Examining the work that economist Gatesman conducted for this theory is indeed revelatory as it assumes that "a consumer obtains more utility with the higher quality car he/she buys. Since consumers are utility maximizers, they will buy the best quality car. Quality is represented by specific characteristics such as: safety, warranty, gas mileage, and reliability. Therefore, these variables will reveal what makes a 'quality' car and what consumers value most" (2005). It's important to acknowledge as Gatesman points out, that some consumers will just be purchasing the car based on its price alone and so the comparison needs to reflect the price. "Market share is the dependant variable and defined by the following equation:
Market Share = (# of x cars sold / total # of cars sold in the segment) x 100
(where, x is the type of car, Camry, Impala, Sebring, etc.)" (Gatesman, 2005).
Gatesman used this formula to construct his hypothesis which was that mainly, Lancaster's theory had to be absolute for nearly all cars: people need to prize the individual traits of the cars they purchase, and these traits were basically encapsulated by foreign cars (and completely lacking in domestic cars) at the time of the auto industry collapse (2005).
Gatesman used the empirical model revolving on the following dependent and independent variables: These variables selected for his equation are worth closer examination.
The sticker price for the model -- even if consumers don't end up paying this price
Data used -- the most standardized value ever.
Country where cars are produced
At the time of Gatesman's work, some foreign car companies had factories on U.S. soil, hiring U.S. workers.
Based on National
Highway Traffic Safety Administration (NHTSA) data
Cars are crashed full frontal at 35 mph. The lowest score in each category is used for the cars: cars are only as strong as their weakest link.
Assumption: if consumers have to pick between two similar cars they're naturally going to pick the one with the better warranty.
Warranties are important as they lower repair costs.
Warranties are treated as a dummy variable.
Rating taken from autos.msn.com
This rating can be seen as the "repair cost"
During the collapse of the big three, gas prices were at an all-time high.
Is still a factor in some car-buyer's decisions
Market Share Lagged
Dictates the popularity of a given car.
Ultimately, all of these factors helped him to come up with the following formula.
"% Market share = ?1 - ?2
price + ?3 safety +
4 reliability lagged + ?5 gas mileage + ?6
warranty + ?7
Market Share lagged + ?8
The goal of this formula is to better illuminate what features consumers preferred the most when it came to automobiles during the early 2000s. In illuminating these preferences, it should shed light on the demise of the big three automakers, as one would assume that the characteristics preferred were ones which American cars simply did not possess. Most consumers don't purchase cars impulsively. The purchase of a car first starts with a decision made in the mind of the consumer that a new car is needed, then the consumer weighs the advantages and disadvantages of various models (Khan, 2007). The behavior and thought processes which go into a consumer choosing one brand over the other is a complex and multi-faceted process and the consumer's ultimate decision depends on their perceived consumer value of a given vehicle.
Consumer value= Costs of the vehicle -- Total Benefits
In this formula the costs of the vehicle would include things like the price of the car, gas, maintenance, possible injury in…