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2 2Q/2009, Economic Perspectives

Thomas H. Klier

Thomas H. Klier is a senior economist in the Economic Research Department at the Federal Reserve Bank of Chicago. He thanks William Testa, Rick Mattoon, and Anna Paulson, as well as seminar participants at Temple University, for helpful comments. Vanessa Haleco-Meyer provided excellent research assistance.

Introduction and summary

3Federal Reserve Bank of Chicago

Literature review

FIGURE 1

The Detroit Three’s U.S. market share, 1955–2008

Notes: The Detroit Three are Chrysler LLC, Ford Motor Company, and General Motors Corporation. Over the 1955–79 period, the market share is measured for passenger cars only. From 1980 onward, it is measured for light vehicles (both passenger cars and light trucks, such as minivans, sport utility vehicles, and pickup trucks). The shaded areas indicate official periods of recession as identified by the National Bureau of Economic Research; the dashed vertical line indicates the most recent business cycle peak. Sources: Author’s calculations based on data from Ward’s Automotive Yearbook, various issues; Ward’s AutoInfoBank; and White (1971).

100

1956 ’60 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 2000 ’04 ’08

percent

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From mid-1950s to 1980: Imports and oil prices challenge Detroit

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FIGURE 2

Foreign brand import share of U.S. passenger car sales, 1955–80

Source: Author’s calculations based on data from Ward’s Automotive Yearbook, various issues.

percent

1955 ’56 ’57 ’58 ’59 ’60 ’61 ’62 ’63 ’64 ’65 ’66 ’67 ’68 ’69 ’70 ’71 ’72 ’73 ’74 ’75 ’76 ’77 ’78 ’79 ’80

6 2Q/2009, Economic Perspectives

Unsafe at Any Speed: The Designed-In Dangers of the American Automobile

FIGURE 3

U.S. retail gasoline prices, 1970–2008

Notes: Real dollar values are in 2000 dollars. The shaded areas indicate official periods of recession as identified by the National Bureau of Economic Research; the dashed vertical line indicates the most recent business cycle peak. Sources: Author’s calculations based on data from the U.S. Department of Energy, Energy Information Administration; and White (1971).

dollars per gallon

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1970 ’72 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 2000 ’02 ’04 ’06 ’08

Real

Nominal

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FIGURE 4

U.S. consumer response in auto size purchased to oil shocks

A. 1979–80 index

Small passenger cars

120

160

200

Jan. Mar. May July Sept. Nov. Mar. May July Sept. Nov.Jan. 1979 1980

B. 2007–08 index

120

160

200

Jan. Mar. May July Sept. Nov. Mar. May July Sept. Nov.Jan. 2007 2008

Notes: Market shares of automobiles and nominal price of gasoline were indexed to 100 in January 1979 for panel A and in January 2007 for panel B. Prior to 1980, large cars were referred to as full-size cars. Because of the rising popularity of light trucks, I included large light trucks with large cars in panel B. Light trucks include vehicles such as minivans, sport utility vehicles, and pickup trucks. Sources: Author’s calculations based on data from Ward’s Automotive Yearbook, 1980 and 1981; Ward’s AutoInfoBank; and U.S. Department of Energy, Energy Information Administration.

Leaded gasoline

Full-size passenger cars

Small passenger cars

Unleaded gasoline

Large passenger cars and large light trucks

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From 1980 to 1996: Detroit stages a comeback

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FIGURE 5

U.S. light vehicle sales, 1960–2008

Notes: Light vehicles are passenger cars and light trucks, such as minivans, sport utility vehicles, and pickup trucks. The shaded areas indicate official periods of recession as identified by the National Bureau of Economic Research; the dashed vertical line indicates the most recent business cycle peak. Sources: Author’s calculations based on data from the U.S. Bureau of Economic Analysis from Haver Analytics; and White (1971).

millions of units

1960 ’72 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 2000 ’02 ’04 ’06 ’08’62 ’64 ’66 ’68 ’70

FIGURE 6

The Detroit Three’s net income, 1980–2007

Notes: The Detroit Three are Chrysler LLC, Ford Motor Company, and General Motors Corporation (GM). The data series on Chrysler net income ends in 1997. In 1998, Chrysler merged with Daimler; it was sold to Cerberus Capital Management LP , a private equity company, in 2007. The shaded areas indicate official periods of recession as identified by the National Bureau of Economic Research; the dashed vertical line indicates the most recent business cycle peak. Source: Author’s calculations based on data from Compustat, accessed through Wharton Research Data Services.

billions of dollars

1980 ’83 ’86 ’89 ’92 ’95 ’98 2001 ’04 ’07 –40

–30

–20

–10

GM Ford Chrysler

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Systems (EDS) in 1984, as well as Hughes Aircraft in

1985. Chrysler bought Gulfstream in 1985 and AMC

in 1987. All three automakers acquired major stakes

in car rental companies during the late 1980s. Ford

bought Jaguar in 1990, and GM acquired a majority

of Saab in the same year. However, most of these

transactions were unwound within a decade, and with

the exception of the AMC acquisition, 25

the car com-

panies then acquired have since either been sold or

are currently for sale. In any case, the acquisitions

took up valuable time and attention of the companies’

management back then. And so the recovery of the

three Detroit carmakers took twists and turns along

the way. It also involved changes in top management

and leadership. GM is a case in point.

During the early 1980s, GM’s leadership decided

the best way to beat the foreign-based competition

was to automate the production of automobiles when-

ever possible with the help of sophisticated technology.

As a result, the company invested heavily in new capital

equipment. It turned out to be a costly experiment, since

it raised GM’s cost structure to the point that its North

American auto business was barely breaking even

during the late 1980s—a time of very strong industry

sales (Ingrassia and White, 1994, p. 20). In terms of

product design, “GM by 1985 was dead last in the

industry” (Ingrassia and White, 1994, p. 93). GM

also made an effort to learn from the leader in lean

production at the time: In 1984 an entity called

NUMMI (New United Motor Manufacturing Inc.),

representing a joint venture between GM and Toyota,

began producing vehicles at a previously idle GM

plant in Fremont, California. In the following year,

GM established a new division called Saturn. It was

to demonstrate that the company could successfully

compete in the market for smaller cars by implementing

off the assembly line at its new plant in Spring Hill,

Tennessee, in 1990. Yet, according to Ingrassia and

White’s (1994, p. 12) assessment of GM, “by January

1992, ‘the General’ stood closer than the world knew

to the brink of collapse. Its management had lost touch

with its customers and with reality.” In 1993, GM’s bond

rating dropped to BBB+, barely qualifying as invest-

ment grade; 26

it was a far cry from the AAA rating the

Chrysler’s bonds had recovered to investment grade

FIGURE 7

The Detroit Three’s bond ratings, 1980–2008

Notes: The Detroit Three are Chrysler LLC, Ford Motor Company, and General Motors Corporation (GM). In 1998, Chrysler merged with Daimler; it was sold to Cerberus Capital Management LP , a private equity company, in 2007. A rating of BBB or above represents an investment grade bond; a bond is considered investment grade if it is judged by a rating agency as likely enough to meet payment obligations that banks are allowed to invest in it. Source: Author’s calculations based on Standard and Poor’s Domestic Long-term Issuer Credit Rating data from Bloomberg.

rating

AAA

BBB

CCC

1980 ’02’98 2000 ’04 ’06 ’08’88 ’90 ’92 ’94 ’96’82 ’84 ’86

GM Ford Chrysler Daimler

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TABLE 1

in the United States

Volkswagen 1978 Honda 1982 Nissan 1983 Toyota 1984 Mitsubishi 1987 Subaru 1989 BMW 1994 Mercedes 1997 Hyundai 2005 Kia 2009

Note: BMW means Bayerische Motoren Werke (Bavarian Motor Works). Source: Automobile companies’ websites.

Time BusinessWeek Forbes

12 2Q/2009, Economic Perspectives

FIGURE 8

Light truck share of U.S. auto sales, 1980–2008

Notes: The Detroit Three are Chrysler LLC, Ford Motor Company, and General Motors Corporation. Light trucks include vehicles such as minivans, sport utility vehicles, and pickup trucks. Source: Author’s calculations based on data from Ward’s AutoInfoBank.

percent

1980 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 2000 ’02 ’04 ’06 ’08 0

Foreign automakers

Detroit Three

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From 1996 to 2008: Detroit on the defensive—again

14 2Q/2009, Economic Perspectives

Conclusion

Ward’s Automotive Yearbook

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16 2Q/2009, Economic Perspectives

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Klier, Thomas H.,

Economic Perspectives

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__________,

Economic Perspectives

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__________,

17Federal Reserve Bank of Chicago

__________,

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