Automotive industry: After World War II - Business in United States of America

Automotive industry

Automotive industry: The Beginning of the Industry

Automotive industry: Automobiles Become Mainstream

Although the U.S. government prohibited production of passenger automobiles during World War II, the industry earned large profits by producing 8.6 million military vehicles, 3.8 million tanks, 2.5 million trucks, and 660,000 jeeps. When production of passenger automobiles was resumed in 1945, there was a tremendous pent-up demand. In 1945, about 25 million vehicles were registered in the country, with more than half older than ten years. In the next five years, some 21 million vehicles were produced, thereby replacing most of the prewar fleet. The UAW effectively took advantage of its bargaining position by negotiating with a single company at a time. With limited competition from foreign imports, U.S. companies avoided costly strikes by agreeing to generous benefits—health care insurance, retirement pensions, and cost-of-living wage adjustments. Few people at the time recognized the extent to which fringe benefits would create onerous “legacy costs” when the number of workers would later plummet.

By the 1960’s, a growing consumer movement was calling for governmental controls to force manufacturers to produce automobiles that were safer, consumed less energy, and emitted less pollution. Ralph Nader’s influential book Unsafe at Any Speed: The Designed-In Dangers of the American Automobile (1965) helped promote this movement. In 1965, Congress first mandated emissions standards in the Vehicle Air Pollution and Control Act, which would be modified frequently in subsequent years. The National Traffic and Motor Vehicle Safety Act of 1966 mandated a number of improvements for passenger safety. In 1975, moreover, Congress passed the Energy Policy and Conservation Act, which attempted to double the fuel efficiency of new cars by 1985 by mandating the Corporate Average Fuel Economy standards (CAFE) for passenger cars.

Until the 1970’s, American manufacturers increasingly built vehicles that were larger and more powerful. During the 1960’s, a small number of Americans were purchasing small and relatively inexpensive Volkswagens, and during the 1970’s, manufacturers became alarmed about the growing popularity of Japanese imports. Detroit was unprepared for the explosion of oil prices in 1973 and 1979, which increased demand for small, energy efficient cars. Factories closed, and some 300,000 workers were laid off. After the downturn almost forced Chrysler Corporation into bankruptcy, Congress in 1979 reluctantly passed legislation guaranteeing Chrysler with a loan of $1.5 billion. By trimming costs, closing old plants, and adding a number of popular models, Chrysler managed to make profits and begin paying off the loan by the mid-1980’s.

New Motor Vehicle Sales and Leases, 1970-2005, in Thousands

Sources: Data from the Statistical Abstract of the United States, 2000 and the Statistical Abstract of the United States, 2008 (Washington, D.C.: Department of Commerce, Economics and Statistics Administration, Bureau of the Census, Data User Services Division, 2000, 2008)

With growing automation and the continuing challenge of foreign competition, the number of U.S. autoworkers continued to decline. In 1978, 2.4 million Americans were employed in the industry; four years later, the number dropped to 1.8 million; by 2002, the number had dropped to 1.16 million; and by 2007, there were only 860,000. The share of the market held by the Big Three companies declined from 70 percent in 1998 to 49.4 percent in 2007. With their huge losses, financial analysts warned that one or more of the companies could be forced into bankruptcy. The crisis of the Big Three was due to a combination of factors, including a general decline in demand, legacy costs not faced by competitors, the public’s view that foreign automobiles were of better quality, and rising gasoline prices that caused consumers to prefer smaller vehicles. Toyota had become the largest producer of automobiles in the world. The number of Japanese imports, however, had actually declined since the 1990’s, for by 2007 almost two out of every three Japanese nameplates sold in the United States was domestically made. Another trend was the movement of factories to the South, where labor costs were lower. Whereas the South was home to only 7 percent of automobile workers in 1972, it was home to 17 percent thirty years later.

In 2008, with rising gasoline prices that made sport-utility vehicles (SUVs) and trucks less popular and a credit crisis in the fall, the Big Three (and the Japanese automakers as well, although to a lesser extent) saw their sales and profits drop. In October, the Big Three automakers appealed to the federal government for financial aid, as Chrysler and General Motors faced possible bankruptcies. On December 19, President George W. Bush announced that $13.4 billion in emergency loans would be made available to keep Chrysler and General Motors afloat, with an additional $4 billion to be available in February. However, the automakers were given the loans on condition that they make major concessions and organizational changes by March 31, 2009, to demonstrate that they could return to profitability. Ford, which was in a better financial state, was not expected to make use of the federal loans. On February 18, 2009, General Motors and Chrysler asked for an additional $14 billion in aid, while presenting restructuring plans designed to return their companies to profitability.