For the United States, the 1920s marked the climax of the "second industrial revolution" (Nash & Jeffrey 786). The introduction of mass-produced automobiles was a major factor in this post-World War economic boom. The automobile changed the lives of Americans in a variety of ways. It created suburbs and allowed families to live many miles from work. It stimulated and transformed many other industries, including petroleum, steel, and rubber. The automobile also created a demand for many complementary goods and services, such as government spending on streets and highways, gas stations, mechanics, diners, motels, and the financial institutions that became necessary to finance these machines. Gradually, the automobile became not just transportation but a sign of status.
While many men have contributed to the development and production of the automobile over the years, the name Henry Ford is virtually synonymous with the automobile itself. Credited with inventing the assembly line, in 1903 Ford began the Ford Motor Company, laying the foundation of what was to become the largest industry in the United States. In 1908, William Durant formed General Motors after buying and combining the firms of Buick, Cadillac, Oakland, Oldsmobile, and seven other companies. Finally, Chrysler entered the picture in 1925 when Walter Chrysler took over Maxwell Motor Car Company and renamed it after himself.
Before the late 1970s, loyalty to a particular make of car was very strong. If the family down the street owned a Plymouth, odds were their next car would be a Plymouth , and the car after that, and so forth. Loyalty was especially strong for Ford and GM, whose rivalry began in the '20s and '30s. "You were a GM or Ford family with the same fervor that you were Catholic or Methodist, Republican or Democrat, Cub fan or White Sox fan" (Goldsborough S-38). Loyalty among Big 3 car owners stayed strong through the '60s and '70s.
The energy crisis of the 1970s, however, significantly halted the intense brand loyalty of American car owners. Consumers turned their attention toward fuel efficiency, but the Big 3 continued producing gas guzzlers. This increased the popularity of Japanese automobiles, which had better fuel economy and were perceived as being generally superior in quality. With all this at a lower price tag, Japanese manufacturers increasingly gained market share.
In the 1980s, as worldwide supply "permanently exceeded demand", what used to be a producer-driven market became a customer-driven buyers market. Not only that, the buyers, particularly the younger ones, were more demanding than ever and more critical of American-made cars. Today, the least brand-loyal buyers are those of Generation X (born between 1965 and 1973), who, according to a 1993 J.D. Power study of new car purchases, "wear their cynicism like a badge of honor." That study found that younger people are also more likely to recommend a vehicle or dealer than are older people. In an attempt to rekindle brand loyalty, particularly among younger buyers, American car makers increasingly have stressed quality and relationship marketing (Goldsborough S-39).
The United States automobile industry fits into an oligopoly market model. An oligopoly exists when a few large firms, producing a homogeneous or differentiated product, dominate a market (McConnell & Brue 240). The U.S. automobile market consists of General Motors, Ford and Chrysler. In 1995, the Big Three together sold 64% of all new cars sold in the U.S. (Standard & Poor's A62), giving them a domination of the market. Also, another characteristic of an oligopoly is the problem of entry barriers. One barrier of the automobile industry is the physical numbers needed. It is estimated that the minimum efficient number of automobiles needed is about 300,000 per year. But when producing automobiles, one must be aware of the different styles and features demanded by the consumer. Experts think a truly viable firm must produce at least two different models, thus requiring a new firm with reasonable prospects of success to produce about 600,000 autos per year. In addition, the estimated cost of an integrated plant might be as much as $1.5 billion (McConnell & Brue 255).
Other entry barriers of an oligopoly are the need for large advertising expenditures and extensive dealer networks to provide replacement parts and repair services. Also, a new firm in this industry would have to pull consumers away from the brands they already know and trust. In the automobile industry, the price leader is General Motors. In the past several years automobile prices have increased uniformly, but often at a rate larger than inflation. For the Big Three, price leadership has been very profitable. In the last 30 years, the Big Three have earned an average profit significantly greater than all of U.S. manufacturing corporations taken as a whole.
The Big Three have gone through a difficult period of restructuring and are now meeting the import challenge. There are several reasons for this revival. First, American producers have upgraded the quality of their products. While the import and domestic quality gap in cars remains, it has become smaller and continues to decrease. Second, the Big Three have increased productivity and reduced costs by copying the Japanese production methods and concepts. These methods and concepts include the use of fewer parts suppliers, smaller inventories, a more flexible work force, and a greater attention to quality. Currently, imports cost about $2000 more than comparable American cars, increasing demand for these domestic autos.
The competition of the Big Three domestic automakers are that of each other, along with imports from Europe, Japan, and other Asian countries. General Motors, which is the largest of all U.S. companies, is the leader of sales in this industry. Therefore, GM is the price leader. In the next few years, price leadership may be a thing of the past, giving way to a more competitive pricing system. This new system will put the ball in the hands of the company with the right price. Right now, GM, Ford, and Chrysler are all cutting production costs in order to lower the sticker prices on next year's showroom floor. Ford is the maker of the number one selling car in America, the Taurus, which has recently been redesigned. Chrysler has recently introduced an entire new line of cars, including Neon, Breeze, and Cirrus. Competition is on the rise in this industry. Each of the Big Three have made vast improvements in the looks and quality of the automobiles. While the domestic autos have comparable pricing, they compete with one another by using different rebate and cash back programs with different models.
Although there will always be foreign competition in the U.S. automobile market, the Big Three's models are now just as good as the imports, but with a lower price tag. The Big Three have produced increasingly more reliable cars that have kept higher resale values than in the past. With their newfound competitiveness with import automobiles, this import competition will no longer be as significant as the competition between Ford, General Motors, and Chrysler. Competition in the past has focused on things such as advertising, quality, and safety features. However, automakers today are beginning to reach a point of equality when it comes to things such as safety and quality. This suggests that the future of competition in this industry lies in differences in service and pricing.
An increasing number of automakers are appealing to a younger generation of car buyers by advertising with online computer services. The overall idea is to "appeal to people who'd rather interact with a computer than getting caught in a showroom by a salesperson" (Freeman S-30). In January 1995, GM's Chevrolet division went online with prodigy. Cadillac, in a similar effort, is trying to market its vehicles to a younger generation of owners by posting ads on Prodigy and CompuServe. Ford Motor Co. and Chrysler Corp. have also used online advertising to promote youth-oriented vehicles such as Mustang, Ranger, and Neon. Chrysler has also been experimenting with a number of interactive media, including Interactive Network, which tests consumer recall of TV ads. Also, in March 1995, the company began shipping a CD-ROM catalog to its dealers, to be handed out to showroom visitors instead of, or in addition to , a traditional paper catalog. According to Mike Rosenau, Chrysler Marketing programs PR manager, "The young people who have grown up with computers, Generation Xers, don't want to be told something. They want the opportunity to learn it themselves" (Freeman S-30).
Of course, young people are not the only people who drive, and therefore are not the only target market of the automobile industry. Automakers in recent years have expanded their marketing to hit all the individual segments rather than trying to encompass an entire market with a single strategy. They now focus on different, distinct strategies to reach young, old, black, white, male, female, wealthy, and lower income groups, as well as regional groups.
An example of regional marketing is the Jeep Grand Cherokee. The Grand Cherokee, which has been a marketing success for Chrysler, is shown climbing snow-covered mountains in national advertising. These ads help to create an overwhelming demand for more four-wheel-drive factory production. However, many regions don't have mountains and rarely get snow, so why would they want a four-wheel-drive vehicle? While this national advertising image brings people into the showroom, southern dealers promote the two-wheel-drive version. Nationally, two-wheel-drive models account for only about 10% of Grand Cherokee sales. But in markets such as Mississippi, the ratio of sales is about reversed (Chapell S-14).
Women are becoming an increasingly significant percentage of new car buyers. In the 1980s, when domestic automakers were losing sales to imports, they began looking for new markets. What they found were the impressive demographic statistics that women make up half the U.S. work force and more than 6.5 million women own their own businesses. Manufacturers have responded by setting up marketing-to-women committees and have hired more female engineers and executives to help them understand women customers (Triplett 2). However, automobile dealers still seem to have a condescending attitude toward women , as well as blacks, both of whom are often quoted significantly higher prices than white males. As a result, dealerships are hiring more women and blacks, and more sophisticated salespeople. According to Melanie Brennan, Master Service Manager of Kendall Toyota in Miami, "Whether you are male or female, your first thought [of a white male salesperson] is that he is out to screw you." To overcome this perception, dealerships are striving to regain customer trust.
Price elasticity of demand refers to the responsiveness, or sensitivity, of consumers to a change in the price of a product. As a whole, motor vehicles are relatively elastic, with an elasticity coefficient of 1.14 (McConnell & Brue 125). However, by dividing the market into segments, differences in elasticity become apparent. For example, people with lower incomes who are merely looking for dependable transportation may have a more elastic demand than that of the rest of the industry. This person will compare the cheapest cars of each manufacturer in search for the best value, and if the price is too high, may decide to buy a used car or use public transportation. Another example of the elasticity of a target market is that of consumers in mountainous and/or snowy regions. These people are in high demand for four-wheel-drive trucks or sports utility vehicles, thus creating a relatively inelastic demand for this type of vehicle. However, if the price of a Ford Explorer rises, the demand for a Chevrolet Blazer will increase. Being an oligopoly, each manufacturer will develop similar pricing for comparable cars. This will leave the consumer to make comparisons based upon non-price competition, perhaps things such as reputation, customer service, and advertising.
Examples such as these suggest that when analyzing the elasticity of demand for automobiles, manufacturers find it is more relevant to consider the product cross-elasticities of target markets. Product cross elasticities are expressed in terms of diversion fractions (Bordley 456). Of the share lost to one product because of a price change, diversion fractions are the fractions of that lost share going to each of the other products. Consisting of more than 200 products, automotive elasticities are estimated by specifying the diversion fractions using cross-sectional first choice/second choice data, while factoring in more aggregate elasticity estimates (Bordley 456).
Domestic car makers are continuing to gain ground on their import rivals by pressing advantages such as lower pricing. The Big Three have done this in part by successful advertising. In 1994, manufacturer advertising for the automobile industry was $5 billion, up from $4.1 billion in 1993. The Big 3 share of this in 1994 was about $3 billion. However, this paints only part of the picture. The $5 billion figure is merely the amount spent on national advertising by the manufacturer. For 1994, an additional $1 billion was spent by advertising associations for regional advertising, along with $2.3 billion in dealer advertising. In a country whose total advertising expenditures is estimated to be $150 billion a year (McConnell & Brue 233), the automobile industry accounts for about 5% of this.
Advertising is no exception to the rule of change in the automobile industry. Nameplate advertising used to be done on separate national and regional levels, but there has been a recent push for consolidation into one system of national and regional cooperation. While control over the advertising message is the main issue, regional differences make clear the importance of regional ads (Serafin S-12). Regional advertising is done by advertising associations, whose funds are obtained through a "redirection" of money from dealers. On average, $100 to $200 is added to a car or truck's wholesale price to fund advertising associations. GM's Pontiac Motor Division, for example, adds an extra 1% to the price of a new car for ad associations. Pontiac sold 544,000 cars in 1994, thus generating about $90,000 for association advertising.
Over the past few years, General Motors Corporation has attempted to revamp its regional advertising. GM Chairman John Smale has been pushing for "one voice" advertising in which regional efforts support and complement national messages. To accomplish this, Chevrolet provided extra funds to twelve dealer ad groups that agreed to hire the one national agency. Other divisions of General Motors, such as Pontiac, Buick, GMC Truck, and Oldsmobile took a different approach to "one voice" advertising. These divisions provided dealer ad groups with a menu of agencies approved by committees of factory and dealer representatives (Bohn 4). Dealer ad groups must then hire one of these approved agencies.
While domestic automakers are now trying to exert greater influence over dealer advertising, foreign automakers have almost complete control. For example, Toyota Motor Sales USA Inc. and Mazda Motor of America Inc. do not permit dealer groups to have their own advertising agencies. Also, as of 1994, American Honda Car Division stopped supporting dealer ad associations altogether, replacing what they did with a regional marketing program run by Honda's agency.
Although Japanese car makers are the Big Three's main competition, a new threat must now be taken into consideration. The growing economy of South Korea is fueling the country's automakers' expansion. "They plan to invest $35 billion to build new factories at home and abroad, giving them the world's fourth largest car industry by 2000" (Kraar 153). Following in the footsteps of the Japanese, the South Korean automakers plan to flood the American market with exports, while discriminatory taxes limit the number of American cars in their country. This has the possibility of not only disrupting the automobile economy, but also that of the world economy. However, to succeed in the international market, the Koreans will have to first overcome their reputation for making low-quality cars. If they can accomplish this, while keeping prices low, the American Big 3 may have to battle with a new Big 3--Hyundai, Kia, and Daewoo.
At home, the Big Three are battling with environmental concerns. In 1990, the California Air Resources Board (CARB) announced a mandate that 2% of the vehicles sold in that state must meet a zero emissions vehicle (ZEV) standard by 1998 (Standard & Poor's A63). Although tailpipe emissions of hydrocarbons are down 96% from the 1960s ("In a Move" 24), the only way to currently meet the ZEV standard is through the production of electric vehicles. However, automakers have insisted that the electric vehicles' limited range between recharges and high price will result in vehicles that consumers will not want to buy. Additionally, they decreased support for the mandate by claiming electric vehicles will increase other forms of pollution. "Recharging the vehicles' batteries consumes electric power largely produced by burning fossil fuels, thus increasing the emissions of toxic lead into the atmosphere" (Standard & Poor's A63). The Big Three, along with the U.S. government and U.S. battery makers, have begun working to solve these problems by developing advanced technology batteries, but so far have not come up with a practical, affordable solution.
Because of the flaws in the CARB requirements, the seven car makers affected by the mandate (GM, Ford, Chrysler, Toyota, Nissan, Honda, and Mazda) began negotiating with CARB in 1995 to modify the mandate. In exchange for the lifting of the mandate, the automakers have offered to begin producing limited quantities of electric vehicles, mainly for use in fleets, by 1997.
The automobile industry is one that has gone through drastic changes over the years and will continue to do so in the future. What was once a domestic industry has become part of the new global economy. Unfortunately, it took the domestic car makers almost a decade and a loss of 20% of the U.S. market to realize this transition was taking place. Now that the Big Three have made the necessary changes to compete in this international industry, it is vital that they be prepared for any challenges the future may bring.
With the threat of an influx of Korean automobiles, the Big 3 should begin pushing for trade barriers such as those imposed by Japan and Korea. Instead of falling behind and having to play catch-up as they did with Japan, the U.S. should begin the upcoming trade surge with Korea by standing its ground and insisting on fair trading policies.
Another aspect that is raising many concerns is the affordability of automobiles. While in 1973, a new car cost about 1/3 of a year's income, a new car today costs about 56% of annual income (Moskal 13). This suggests the possibility of an affordability crisis. What is now considered almost a necessity may one day become a luxury. New technologies and safety equipment are worth the higher price tag, but for their future success, automakers should concentrate on developing less expensive manufacturing and design techniques to reduce the rising costs of automobiles.
The influx of Japanese automobiles in the late 1970s and 1980s was essentially an uppercut to the Big Three domestic automakers. However, GM, Ford, and Chrysler seem to have gotten back on their feet over the past few years and are now ready to battle it out with their foreign competition. After suffering massive losses in 1991, each of the Big Three car makers have improved both the quality of their vehicles and the quality of their production and managerial techniques. Although they have not gained back their share of the market lost to the Japanese in the '70s and '80s, recent developments point to an in increase in Big Three exports to Japan. On April 12, 1996, a White House report highlighted the fact that in the six months after an auto trade agreement was negotiated with Japan last year, sales of U.S.-made GM, Ford, and Chrysler vehicles to Japan have risen 33% percent over the same period a year earlier (Blustein). While this fact alone may be rather insignificant, it signals the opening of world markets and the increasing presence of domestic automobiles in these markets. The United States is slowly regaining its position in the automobile industry as a force to be reckoned with.
In the beginning, there were hundreds of automobile makers. In 1908, more than 250 companies were manufacturing automobiles in the United States (Nash & Jeffrey 787). As car sales increased, the number of car makers decreased. In 1929, only 44 remained, and currently there are only three U.S. firms. These firms, known as "The Big Three", are General Motors Corporation, Ford Motor Company, and Chrysler Corporation. 