US Auto Industry

Antitrust Economics and the Non-Competitive State of the US Auto Industry
[Analysis] The problems that exist in subsidizing the auto industry
Alfredo Ascanio (askain)
Published 2008-12-22 17:37 (KST)
Edited by Rich Bowden

A basic summary of a chapter on the automobile industry in America taken from the study entitled "The Closed Enterprise System" by Mark J. Green (Ralph Nader's Study Group Report), finds the following.

While there once were as many as 88 auto manufacturers in America, today General Motors (GM), Ford, and Chrysler make 83 percent of all cars sold in the country and account for 97 percent of all domestic models sales. GM alone produces 54 percent of all American cars.

During the year 1972, a study by economist Leonard Weiss of the University of Wisconsin estimated that the lack of competition in the US auto industry costs consumers $1.6 billion a year.

If the consumer movement wished to focus on the issue with the most impact on the purchasing public, it should choose the failure of antitrust enforcement.

Paying a $1,000 auto-repair bill when only $500 worth of work was done is painful enough. So is repairing $1,250 worth of damage because a bumper is so fragile that it is damaged in a four-mile-an-hour collision. But paying hundreds of dollars more when you first purchase the car -- since the industry is dominated by the non-competing "Big Three" -- is the ultimate bilk, no less distressing because the cost is invisible.

When supposed competitors get together to fix the price of their products, or when an industry becomes controlled by so few big firms that price competition ceases, the consumer pays more.

So can a competitive marketplace give consumers their money's worth? Or will collusion between dominant industries continue to infect industry, reducing the purchasing power of the consumers' dollar while increasing corporate inefficiency and maximizing profits?

An Industry Sketch

It is difficult to overstate the role of the automobile industry in the American economy. The Automobile Manufacturers Association boasts that one business out of six is automobile related, in Fortune's 1970 list of the 500 top industrial companies, General Motors was listed first, Ford third, and Chrysler seventh.

The industry consumes one-fifth of the nation's steel production, two-fifths of its lead, one-half of its reclaimed rubber, and three-quarters of its upholstery leather. GM alone has 800,000 employees worldwide and earns over $20 billion each year in gross sales, more revenue than any country's budget except that of the United States, Russia, and Great Britain, with the possible exception of the aluminum industry.

As a result, says a Yale Law Journal, "The industry is said to exhibit the indicia of unsatisfactory market performance: inflated selling costs, product imitation, higher than competitive prices, collusive suppression of technological innovation, and persistently high rates of return."

History and Structure

In 1904, 35 companies produced automobiles. The leaders were the Olds Motor Works, Cadillac, and Ford. William C. Durant founded General Motors in 1908, with an aim to control all the principal motor vehicle manufacturers in the tradition of the great trusts.

By 1909 GM did control more than 20 automobile and accessory companies (including Olds and Cadillac) and narrowly missed out on the bid for Ford.

Between 1914 and the mid-1920s Ford was the industry's leader, with approximately 50 percent of the market, due largely to the success of its Model T. The car was cheap and efficient, with totally interchangeable parts between 1909 and 1926.

By 1927, however, GM's sales had risen to 43 percent of the market, due in large part to its acquisitions of Chevrolet and the Fisher Body Company. The peak number of firms in the industry was 88 in 1921. Beginning in 1923, the number of automobile producers began to rapidly decline.

GM claims it is big because it is efficient, but industrial economists who have studied the industry disagree. Professor Joe Bain concluded that an automobile manufacturer would be efficient enough to compete if it produced only 300,000 to 600,000 cars per years, and based on a 10 million-car market, there is room for 12 to 33 manufacturers.

Almost all new cars are sold through independently owned, franchised dealerships. But by a system called "forcing," the dealer must sell a quota of cars or be threatened with loss of franchise.

Planned obsolescence, which GM President is quoted as calling "synonymous with progress", prevails in the industry, causing rapid auto trade-in and a lucrative replacement parts market. The warranty system ensures this hegemony: usually only franchised dealers can perform warranty service, and use only parts authorized by the manufacturer. GM's high return in replacement parts is a primary reason for its overall high profits (21 percent return). The profits on the industry, says White, are "clearly excessive."

What Bain calls "product imitation," a defect common to tight oligopolies, prevails in the auto industry. Unwilling to risk, each firm offers models similar to its rivals to reduce risks.

Is this the problem that exists today in efforts to subsidize the auto industry?

Alfredo Ascanio is a professor of economics at Simon Bolivar University in Caracas, Venezuela.