The US Automotive Industry - Research Paper Example

Your The U.S. Automotive Industry Introduction Home of 13 automobile manufacturers, United States of America is one of the major automotive markets in world. They produced an average of eight million passenger vehicles annually during 2008 to 2012. Moreover, U.S. assembly plants are contributing to the production of every leading European, Japanese, and Korean automaker since Honda started its first plant in U.S. during 1982.In addition, U.S. manufacturing facilities serve not only Honda and U.S. big three-General Motors, Chrysler, and Ford, but also Toyota, Hyundai-Kia, BMW, Mazda, Mitsubishi, Nissan, Mercedes-Benz, and Subaru. May 2011 brought Volkswagen’s manufacturing plant to America. In addition to manufacturing plants, several manufacturers have opened transmission and engine plants that are working in research and development, design, and testing in the United States. The whole automotive industry and dealership amounts to nearly 3.5 percent Gross Domestic Products (GDP) of the United States. By the end of 2012, auto manufacturers and related industries directly employed 786,000 people (SelectUSA). In addition to manufacturers, there is an extensive network of auto parts suppliers who produced $225.2 billion (4 percent of U.S. manufacturing) in shipments during 2012. According to the study conducted by Motor & Equipment Manufacturers Association and Information Handling Services, overall automobile industry’s direct employment generation was 3.62 million while indirect influence was the creation of jobs and economic wellbeing in comparison to any other sector (SelectUSA). This research paper examines U.S. automobile industry, its history and development, and finds that it the backbone of manufacturing industry, therefore, plays a vital role in strengthening American economy. History of the U.S. Automotive Industry During 1900 and 1930, Detroit experienced record growth in comparison to any other city in the United States. The reason behind this unparalleled growth was concentration of auto industry around Detroit, which became the largest industry in the U.S. by 1929(Davis ix). The number of auto firms grew in a gradual manner from 1895 to 1907, reaching at its peak at 82 in 1907. For the next three years, the number of entrants remained high, but after that it dropped sharply. With an average number of 15 firms every year from 1911 to 1922, it fell to only 15 firms from 1923 to 1966. After a few early years, the auto industry’s exit rate was more than 10 percent; moreover, by the year 1910, the number of exit was more than the number of entries. Excluding the two year period from 1919 to 1921, the number of auto firms fell gradually from 1909 to 1941 ranging from the highest point of 272 in 1909 to only 9 in 1941(Klepper 2). As a result of this massive decline, the auto industry evolved into a tight oligopoly ruled by three major firms, Ford, General Motors, and Chrysler. General Motors was established as a merger of several small firms, and most prominent parts were, Old Motors Works, Cadillac, and Buick which dates back to 1901, 1902, and 1903 respectively(Klepper 3). Ford Motor Company emerged in 1903 while Chrysler Corporation entered the scene in 1924 as result of the efforts of Walter Chrysler, ex-president of Buick. It was formed in order to recognize two of the major firms that merged as a result of hard time in auto industry, Maxwell Motor Corporation (1904) and Chalmers Motor Co. (1906).Ford and General Motors were the leading auto firms in 1911 with 38 percent share of the total industry output. Their collective share rose to more than 60 percent by 1920s.After 1930, Ford, General Motors, and Chrysler collectively accounted for about 80 percent of the whole industry’s output (FTC 20). Detroit and U.S. automotive industry All three of these firms were Detroit, Michigan based. Detroit had been the geographic centre of industry for several years; however, industry wasn’t focused around it. Industry got 69 entries during first six years (1895-1900). Packard Motor Car Co. got into the business in 1900 and moved to Detroit in three years (1903). There wasn’t any manufacturer in Detroit except Old Motor Works came in 1901. In later years, the number of firms in Detroit increased reaching a peak of 41 in 1931.The number decreased with the decline in number of total firms in the industry. The percentage of entry in Detroit rose to 15 percent by 1905, declined in subsequent years, and then increased to 24 percent again in 1916.In the next eight years, it declined and then climbed up again to more than 50 percent by 1935. It is interesting that concentration of firms around Detroit area was much greater than the number in Detroit (Klepper 3-4). According to the list compiled by Automobile Quarterly, starting from 1901, Detroit area make were listed among the top number which gradually increased .In 45 years, Detroit area based firms dominated the whole auto industry in the United States (Bailey qtd. in Klepper 4). Three phases of development The development of automobile industry in United States can be divided into three periods, as Alderfer and Michl state, “…the first, extending to 1908, was an experimental period. The second, ending approximately 1921 was period of rapid growth. The third period, from 1921 to the present, is characterized by a diminishing rate of growth.” (qtd. in Lyles 212) Automobile production during 1899 and 1919 was triggered by development of internal combustion engine by the German-American team of Otto and Selden. During the experimentation period, the number of automobile business increased from 57 to 178 within five years that is approximately 212.3 percent (1899-1904). It is noticeable that overall value of manufactured automobiles increased during this period; however, higher growth was hindered due to several factors. These factors include, construction related lack of standardization, railroad dominance as major transportation link between city centers, patent disputes, lack of investment and, appropriate highways. Despite problems, production of Model T cars increased. Total horsepower rose by 219.5 percent and total number employees increased by 437.7 percent. Similar increase was observed in iron and steel industry. Throughout the experimentation period, most of the automobile production was conducted by Ford Motor Company. They held a monopoly on the production of Model T cars by centralizing the sources to manufacture them. As these obstacles diminished, automobile manufacturing rate increased 729.7 percent. By 1908, automobile gained widespread acceptance as main mode of transportation. Moreover, U.S. court decision to exempt Ford Motor Company from fee on patents led to several times increase in its production. As a result, production volume reached to 1.8 million in 1920 from 40,000 cars in 1907. In order to meet the production demand, total horsepower was increased 100 percent during 1909 and 1914.In this way, autoworkers manufactured automobiles worth more than $3 billion by 1914, on the other hand, aggregated wage was far less than that. Among majority of the workers, it led to the trend of working more than fifty-four hours per week (Lyles 213-214). Contribution to the Economy Automobile is one of the most significant industries in the United States that has contributed 3-3.5 percent to overall GDP. Automobile industry generates over 1.7 million jobs as direct employment in manufacturing, designing, engineering, assembling, supply and, sell and service sectors. They collectively earn more than $500 billion on annual basis; moreover, they contribute $70 billion in tax revenues. In addition, it serves as a massive consumer of other products and services from various industries, such as, construction, raw material, legal, machinery, computers, semi conductors, advertising, financial, and healthcare. On annual basis, the industry spends $16 to $ 18 billion on research and development, 99 percent of the activity is funded by the auto industry itself. As a result of auto industry’s consumption of products and services from other manufacturing sectors, it serves as a main driver of 11.5 percent manufacturing share of GDP (Arbor 3-11). U.S. Auto Industry Export United States export vehicles throughout the world. During 2012, auto export to over 200 countries reached to nearly 2.6 million vehicles worth $63 billion, moreover, automotive parts exports for the same year was approximately $75 billion. No doubt, United States of America is the leader in auto industry with its open investment policy, huge consumer base, highly skilled workforce, government incentives, and appropriate infrastructure (SelectUSA). Changing Composition of Industry Over the past two decades, the composition of the auto industry in United States has changes as domestic automotive companies like Ford, General Motors, and Chrysler have lost their market share to international firm like Toyota, Hyundai, and Honda in a gradual manner. It’s a dynamic industry, in last two decades it evolved and transformed itself by new direct investments of $25 billion from Europe and Asia. Most part of this investment was made into non-traditional areas of automotive industry; therefore, it helped in stretching the impact of industry. This revolution served suppliers throughout America, in particular southern part and network of manufacturers in Great Lake states (Arbor 12). Conclusion Irrespective of the challenges in last few years, auto industry is ready to face the challenges posed by 21st century and leading on innovation, research and development front (SelectUSA).Automotive industry is very significant to the U.S. economy, no other industry is as closely associated with the U.S. manufacturing sector, generates that much retail business, and generates as much employment. If manufacturing is the backbone of American, the automotive industry is certainly the heart of it. A deeper look into the entire production and supply chain provide evidence that a robust automotive industry can support and strengthen many other industries. The growth and development of manufacturing sector in general and automotive industry in particular has always been crucial for U.S. economy. By the end of 2008, U.S. automotive output amounted to 2.2 percent of GDP while overall manufacturing amounted to 11.5 percent. Industry’s significant contribution to economic output is attributed to several factors which include the international trade opportunities that led to the highly specialized products export. Most of these products are value-added goods that highly skilled labor and advance equipment. Since the process of making these products is complex, it leads to the job-creating multiplier effect in the manufacturing industry in United States (Arbor 13-15). According to Howell, it is very exciting time for the automotive industry in America. Customers’ demands are not only increasing but also becoming complex. There is fierce competition to innovate, maintain prices and even keep them low. There is structural change in the industry as well. Globalization influenced the industry and led to alliances on greater level. Industry, academics, and government partnerships have regrouped the world’s auto manufacturers in six major groups. The whole process of restructuring is still going on. Once it is done, only a few corporations will survive in independently. Works Cited Alderfer, E.Benner, and Herman Edward Michl. Economics of American Industry. New York: McGraw-Hill Book Company, Inc, 1950. Arbor, Ann. “Contribution of the automobile industry to the economics of all fifty states and the United States.”cargroup.org, Center for Automotive Research (CAR), April 2010.Web.13 Nov 2014. Davis, Donald F. Conspicuous Production: Automobiles and Elites in Detroit, 1899-1933. Philadelphia: Temple University Press, 1988.Print. Federal Trade Commission. “Report on the Motor Vehicle Industry, 1939.” ftc.gov.Web.14 Nov.2014. Howell., J.Larry. Innovation in the automobile industry: A new era.pubs.acs.org, Nov.2000.Web.13 Nov 2014. Lyles,D.,Lionel. Historical Development of Capitalism in the United States and its Effects on the American Family: From Colonial Times to 1920, Volume One. Lincoln: iUniverse, Inc, 2003.Print. OECD 2011, “Recent Developments in the Automobile Industry”, OECD Economics Department Policy Notes, No. 7. SelectUSA, “The Automotive Industry in the United States.”commerce.gov.selectusa, n.d.Web.15 Nov.2014. Read More