Research Paper: Collapse of the Big Three

Pages: 13 (3475 words)  ·  Bibliography Sources: 10  ·  Level: Master's  ·  Topic: Transportation  ·  Buy This Paper

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[. . .] The total benefits would be the fun of driving, the aesthetic value of the car, ease of transportation, the fun of owning the car, the help it might provide one's work or family and other values (Khan, 2007). The formula for calculating the percentage of the market share that cars made by the big three vs. cars made by foreign automakers highlights where the consumers head was at during this decline of the American auto industry.

This formula created the following values for the following automobiles:

"Mean Values for Each Model:

Car Market Share Price Safety Reliability Gas Mileage

Chevy Impala 4.49 18400.70 4.23 3.60-19.80

Chrysler Sebring 1.00 18340.56 4.17 4.75-20.67

Ford Taurus 8.09 18406.00 4.40 4.70-19.22

Honda Accord 8.81 16922.10 4.00 4.44-24.30

Nissan Altima 3.29 15931.00 3.69 5.00-22.75

Toyota Camry 8.70 17651.80 4.00 4.40-22.45"

(Gatesman, 2005).

Of the table above one can see that both price and market share were taken from Ward's Automotive; the figures for safety, reliability and gas mileage were taken from autos at msn.com (Gatesman, 2005). When examining all of these characteristics in the format of a table, such as the one above, the preferences of consumers becomes crystal clear and it's not at all difficult to understand why foreign cars started to surge ahead in popularity. Essentially foreign cars were offering the consumer more -- better gas mileage and better prices, greater reliability. The value to the consumer was exponentially higher, and no one could ignore it.

The importance of a perceived high value in an automobile is something which cannot be underestimated, particularly during the early 2000s when the big three started to decline. As one of the factors which contributed to this decline had to do with the rising cost of fuel. "The last place where the American car makers make pretty easy money is full-size pickup trucks. They don't have a lot of competition in that area and also the very large SUVs that are built on those platforms. With fuel prices this high, sales of those vehicles are getting soft and that's the place where they make their money. So that hurts them quite a bit" (Gordon, 2005). The high cost of fuel definitely made the consumer think twice and really feel the drain of driving an SUV. SUVs no longer seemed like roomy vehicles that could handle any road condition and that gave the driver an elevated seat. They started to feel like large, lavish, expensive, wasteful vehicles that were a drain to the consumer's pockets. And just as they were popular in the 1990s, the pendulum shifted to the other side, and they lost favor: they seemed impractical for the changing times.

However, it wasn't just the sheer impracticality of the SUV in the early 2000s that heard the big three automakers, as some consumers were still buying these types of cars regardless. It's that the SUV section of the market was no longer easy money for American carmakers: they started to receive a tremendous amount of competition in this arena. "In the '90s, the Big Three all made a huge amount of money on SUVs as the market moved in that direction and they were there first. But capitalism works. Everyone got into that SUV business. Today, even Porsche's building SUVs and the easy money there is gone" (Gordon, 2005). The very revelatory remark in this statement is in fact that capitalism works. In the spirit of competition and offering the consumer a wide range of choices, other car manufacturers started to make SUVs, ripping this type of vehicle from something that was exclusively American, to creating Japanese and German varieties of it. American car manufacturers simply weren't ready or able to compete in what had become an incredibly high-competition playing field. Some have accused the big three has having "no strategy" to compete in the changing marketplace and meet the needs of the new consumer. The big three had built their fortunes on making massive heavy cars, and they weren't used to adapting their product and they weren't used to creating anything but these types of cars. As one economist noted, when oil prices went up, none of these automakers had an alternative product ready (Hyland, 2008).

As early as the 1970s, the government had developed the Energy Policy and Conservation Act of 1975 which dictated that all automobile companies reach a corporate average of fuel efficiency of 18 miles per gallon by 1978 and 27.5 by 1985 (Dunbar & May, 1995). This dictation was as the result of a desire for energy conservation and a greener automobile policy, but in retrospect, one can't help but wonder if the nation was anticipating a potential spike in gas prices in the years to come. However, the Detroit Three did little to heed this warning, still focusing on bigger cars, which at the time, their customers demanded (Dunbar & May, 1995). This was destructive to their entire business as the data indicated that subcompacts were in fact the fastest growing section of the market (Dunbar & May, 1995).

If one were to examine the table and formula proposed by Gatesman in terms of variables, much is in fact expected with little surprises as regression is the foremost issue in how foreign car makers were able to claim such a large portion of the market share (2005). Below are the results in terms of coefficients; through this table Gatesman highlights two of the variables that do not have an expected sign: price and safety (2005).

"R- Squared

.772

Variable

Coefficient

Significant

T-Statistics

Constant

-16.844

.003

-3.118

Warranty

1.009

.201

1.299

Price

.001

.032

2.226

Gas

.358

.026

2.306

Market Share Lagged .610

.000

6.273

Reliability Lagged 4

1.134

.243

1.185

Reliability Lagged 5

1.35

.159

1.434

Safety 3

-.882 .138 -1.512

Safety 4

.806

.065

1.896

Safety 5

.007

.991

.011

Produced in U.S.

1.392

.250

1.167" (Gatesman, 2005).

As Gatesman demonstrates, one of the unexpected aspects of these results was that price should not have had a negative sign (2005). While price does have a slight coefficient, it's still a positive sign; a potential reason for this surprised result is that the price has gone up through the years because of inflation, but the market share still grows as a result of popularity (Gatesman, 2005). However, it's important to bear in mind that as the price goes up, so does the market share, but these are not two elements which are dependent on one another (Gatesman, 2005).

Ignoring Social Trends, Supply and Demand

One could argue that the fall of the Detroit Three which the world witnessed from 2003 to 2008 was actually predetermined by the events of the late 1970s to the early 1980s. The carmakers of Detroit neither learned from these lessons, nor did they heed the clear signs of the imminent changes to come. The following table demonstrates the trends in a clear and unmistakable manner:

American Car Sales

Year

9,300,000

1978

8,162,000

1979

5,049,184

1982

If one compares this to the production of Japanese cars at the same time, one sees how American automakers failed to ignore a steady threat and infiltration of their market by a competitor that was better reacting and meeting consumer needs.

Production of Japanese Cars

Year

3,500,000

1979

6,200,000

1979

7,000,000

1980

The Japanese made up 80% of all the cars imported in the United States in 1980: "The 1980 production made the Japanese the world's number one producers of automobiles, a position the Americans had held since 1904" (Dunbar & May, 1995, p.632). Based on this data, one could argue that the fall of the Detroit Three had started decades before the bailouts occurred in 2008, but that the decline of these companies was as a result of consistently ignoring market trends, the directions of supply and demands and the sheer tendency to ignore the needs and behaviors of consumers.

The Absence of Strategy

Aside from not having another product ready once gas prices went up, once consumer tastes changed away from large SUVs, and once consumers got savvier about the environment, a sheer absence of a long-term sales strategy was one of the overwhelming economic factors which were responsible for the big three to dig their own graves. After the tragedy of September 11th, the Detroit three began a long and misguided use of rebates and discounts in order to get sales going again. This was an extremely poor long-term strategy, as it had the following impacts: it boosted sales while stealing from future sales; it damaged resale values by devaluing the brands (Hyland, 2008). More importantly, it negatively impacted Supply and Demand, by training customers to wait to purchase a vehicle until they'd get a rebate worth $5,000 to $6,000. While this created some short terms sales, it did little to increase the demand for these vehicles (Hyland, 2008). On the other hand, one could argue that this poor strategy was a manifestation of classic… [END OF PREVIEW]

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