Just about everyone, from President Barack Obama to ex-President George W. Bush to GOP presidential candidate Mitt Romney, agrees that government intervention to revive the struggling Detroit-based auto industry was necessary. A new study from the Chicago branch of the Federal Reserve notes that the restructuring undergone by Detroit carmakers allowed them to more easily earn a profit — but has also given them a much more competitive environment.
The study, produced by Chicago Fed economist Thomas H. Klier and Miami of Ohio University geographer James Rubenstein, is agnostic on exactly how much of a role government intervention had in the resurgence of the Detroit automakers. But they note that in the aftermath of the restructuring, the entire auto industry in North America is now much more competitive.
Detroit-based automakers have drastically cut their production capacity. The Chicago Fed study notes that between January 2008 and December 2010, the Big Three closed 13 assembly plants in North America and announced the shuttering of three more. This amounts to shedding the ability to produce 2.6 million vehicles, with the majority of the loss, the equivalent of 2.36 million units, coming in the United States.
Since 1978, 10 foreign-based firms have set up shop in North America assembling vehicles, joining Volkswagen and the Big Three. The number of plants has remained roughly the same as it was in 1980, however.
What this means, the authors conclude, is that the North American auto market is coming to resemble the European market, with eight sizeable players.
In the mid 20th century, the Detroit Three dominated the U.S. auto market.
Another result of the restructuring is that Big Three auto assembly plants tend to be concentrated in Midwestern states north of Kentucky, while many more foreign-based automakers’ plants are located in the South.
This concentration also means that while 16 states had a Big Three auto assembly plant in 2007, only 10 did in 2011.
Because of this reduced capacity, Big Three firms are able to reap profits on much lower sales volumes.
Their profitability has also been helped by labor agreements that have made labor costs much more competitive with foreign-based auto producers, the authors note.
The good news is that the restructuring of the auto industry allowed by government intervention enabled General Motors and Chrysler to survive — sparing Detroit and Michigan an even more wrenching episode if the firms had simply had to be broken up and sold. Such an outcome would also have devastated auto supply companies.
But it is clear that the Big Three won’t be able to serve as the revenue engine for Detroit and Michigan that they did for much of the 20th century.
They are in a much more competitive environment and with their smaller economic footprint won’t enjoy the political clout they once did.
And they still must compete with determined and skillful rivals who now have a stronger foothold in the U.S. market.
As the study notes, General Motors and Chrysler have been allowed, with taxpayer help, to continue the fight in the auto market. But the fight continues.
