Market Failure an Analysis of

Market Failure An Analysis of the Auto Industry as a Market Failure Of all market failures over the last ten years, the greatest one continues to be the melt-down of the American auto industry. Having completely lost touch with the concept of cost efficiency in their supply chains, while at the same time getting out of step with customer demand led to many of them teetering on the edge of bankruptcy. Only after the U.S.

Government chose to initiate a massive bail-out did this segment of American manufacturing survive (Hortaccsu, Matvos, Shin, Syverson, Venkataraman, 2011). If this industry had averted market failure by concentrating first on the changing needs of consumers while at the same time using technology to automate and simplify every complex process, they could have averted a total market meltdown (Hortaccsu, Matvos, Shin, Syverson, Venkataraman, 2011). Now Americans are encouraged to buy their products even when it is widely known many models lack the reliability, performance and comfort of off-shore models (Hansen, 2009).

An Analysis of the Auto Industry as a Market Failure The American auto industry has for over a century symbolized American production prowess and the concepts of mass production and managing supply chains to continually aggressive cost levels. It has also shown what happens when an entire industry becomes too complacent with the repurchase cycles of its products, letting go of its focus on what customer requirements are and how to react to them (Hortaccsu, Matvos, Shin, Syverson, Venkataraman, 2011).

Amidst all of these strategic problems is the one large, looming financial challenge that could force the entire industry to collapse, and that is the costs of continually complying to organized labor's unrealistic demands (Lucas, Furdek, 2010). While unions served a useful purpose in previous generations, the UAW continually pushed American auto manufacturers for raises and cost-of-living increases when sales of autos were down, quality was dropping fast, and everyone was voting with their dollars Japanese, German and Korean autos that met or exceeded their expectations (Lucas, Furdek, 2010).

The UAW paradoxically became more like a protection racket or a crime syndicate than a partner in production, extracting more and more money from businesses already hurting due to their lack of focus on customer needs. Asking for a raise when a company has a net loss for over a year is ridiculous and would be laughed at in any non-union business anywhere in the world. At its worst point, the U.S.

auto industry was moving in the direction of socialism, only with the businesses designed to survive based on profitability were paying the way. The result was a near-collapse of this industry with the U.S. government stepping in to save it.

Even the most impassioned pleas by auto makers to Americans to buy their cars didn't make a difference; people were already concentrating more on quality and performance and began to see the shake-down labor was putting on auto makers helping the auto industry to disintegrate and shrink (Lucas, Furdek, 2010) (Hansen, 2009). With all of these factors contributing to the American auto industry nearly collapsing, the U.S.

government had to take into account how critical this is as an industry for the economically ravaged states of Michigan, Ohio, Illinois, Wisconsin and many of the southern states including Alabama, Kentucky and Mississippi. The U.S. government actually had no choice but to bail out this failed industry as at one point it was projected that nearly 250,000 to 350,000 jobs would be directly or indirectly lost as a result of the failure of the American auto industry.

Further, foreign auto makers including Renault, Daimler Benz, who eventually did buy a significant portion of Chrysler, and Hyundai all began bidding on the assets of American auto manufacturers. Congress was pressure to save this industry and the jobs associated with it. The fact that many in congress owed their jobs to the constituents whose jobs would go away if the industry did brought a tremendous clarity and urgency to the U.S. House of Representatives and U.S. Senate debates.

If the government did not bail out these industries, congressmen and senators would certainly be voted out of office at the next election and vilified as not being strong enough to keep the most American of industries, automobile manufacturing, within the U.S. (Hansen, 2009). With not only hundreds of thousands of jobs on the line but their own as well, congressmen and senators went to work to craft the biggest.