U.S. Automotive Industry: Recent History and Issues
Order Code RL32883
CRS Report for Congress
Received through the CRS Web
U.S. Automotive Industry:
Recent History and Issues
April 25, 2005
Stephen Cooney
Industry Specialist
Resources, Science, and Industry Division
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
U.S. Automotive Industry: Recent History and Issues
Summary
More than one million Americans are employed in manufacturing motor
vehicles, equipment and parts. But the industry has changed dramatically since the
U.S. “Big Three” motor vehicle corporations (General Motors, Ford and Chrysler)
produced the overwhelming majority of cars and light trucks sold in the United
States, and directly employed more than that many people themselves. By 2003,
most passenger cars sold in the U.S. market were either imported or manufactured
by foreign-based producers at new North American plants (so-called “transplant”
facilities). The Big Three now dominate only in light trucks, and are being
challenged there by the foreign brands. The Big Three have shed about 600,000 U.S.
jobs since 1980, while about one-quarter of Americans employed in automotive
manufacturing (nearly 300,000) work for foreign-owned companies — and that
excludes Chrysler, which was acquired by Daimler Benz of Germany in 1998.
These changes have had major effects on the structure and location of the U.S.
motor vehicle industry. Michigan has been the state most directly and adversely
affected, losing about 100,000 auto industry jobs since the late 1970s. Most other
Midwest auto belt states have either held steady or posted gains in total industry
employment, even if they have lost Big Three jobs. Some southern states, notably
Kentucky and Tennessee, have been the largest net gainers of jobs in the industry.
The transplant vehicle manufacturers virtually all began and have remained non-
union; the United Auto Workers (UAW) union has lost more than half its members
since 1979 — from 1.5 million to less than 700,000. Big Three representatives state
that they are now burdened with health care and pension costs of as much as $1,500
per vehicle in competing with foreign-based companies and have sought tax relief
from Congress to alleviate this disadvantage.
The global industry also has changed. In North America, there has been
regional consolidation, enabled by trade policy changes leading to the North
American Free Trade Agreement of 1994. Congress approved a federal bailout of
Chrysler in 1979 and forced the Reagan Administration to negotiate quotas on
imports from Japan in the 1980s. Nevertheless, the overall U.S. deficit in automotive
trade widened from $9 billion in 1979 to more than $100 billion annually since 2000.
Acting under World Trade Organization rules, the United States has pressed Japan,
Korea and China, among others, to reduce their automotive trade and investment
barriers.
Fuel economy and environmental issues in the automotive industry have also
been subjects of major concern in Congress, and these issues have had important
effects on the motor vehicle market. Currently, the manufacturers are suing
California to prevent its regulation of emissions of carbon dioxide and other
greenhouse gases, which they claim is preempted by federal statute. This report will
be updated as warranted by developments.
Contents
Introduction and Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Developments in the U.S. Domestic Automotive Industry . . . . . . . . . . . . . . 2
The Automotive Industry in the International Context . . . . . . . . . . . . . . . . . 4
Impact of Fuel Economy and Emissions Standards . . . . . . . . . . . . . . . . . . . . 6
Automotive Industry Outlook and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Policy Issues for the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pension and Health Care Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Currency Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Labor Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fuel Economy and Emission Standards . . . . . . . . . . . . . . . . . . . . . . . . 10
Pickup Trucks in U.S.-Thailand Free Trade Agreement (FTA) . . . . . 11
Broader Issues of Automotive Trade Policy . . . . . . . . . . . . . . . . . . . . 11
North American Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Size and Growth of the U.S. Automotive Industry . . . . . . . . . . . . . . . . . . . 11
Consolidation of the North American Industry . . . . . . . . . . . . . . . . . . . . . . 18
Rise of International Investment in North America . . . . . . . . . . . . . . . . . . . 23
Big Three Lead in Light Trucks — Transplants Grow Rapidly . . . . . . . . . 27
Shifts in Employment Among Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Changes Among States in Automotive Employment . . . . . . . . . . . . . . . . . 32
Divergence in Labor Relations Organization . . . . . . . . . . . . . . . . . . . . . . . . 37
Pension and Health Care Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
U.S. Automotive Trade: Data and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . 46
Growth of Foreign-Based Competition in the U.S. Market . . . . . . . . . . . . . 46
The Changing U.S. Automotive Trade Balance . . . . . . . . . . . . . . . . . . . . . . 51
NAFTA Automotive Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Trade with Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Development of Trade Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Chrysler “Bailout” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
The 1980 Safeguard Case on Foreign Imports . . . . . . . . . . . . . . . . . . . 55
Voluntary Export Restraints on Japan . . . . . . . . . . . . . . . . . . . . . . . . . 56
U.S.-Japan Autos and Auto Parts Issue in the 1990s . . . . . . . . . . . . . . 57
American Automobile Labeling Act (AALA) . . . . . . . . . . . . . . . . . . . 58
U.S. Initiatives Against Automotive Trade Barriers . . . . . . . . . . . . . . 59
Thailand Free Trade Agreement and U.S. Pickup Truck Tariff . . . . . 61
Exchange Rates and Automotive Trade Issues . . . . . . . . . . . . . . . . . . 62
Globalization of the Automotive Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Globalization and the U.S. Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Global Performance of Automotive Manufacturing Companies . . . . . . . . . 67
Performance by Producing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
The Global Automotive Supplier Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Fuel Economy and Emissions Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Fuel Economy Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Structure of CAFE System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Alternative Fuel Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Safety Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Effects of CAFE on the Auto Industry . . . . . . . . . . . . . . . . . . . . . . . . . 90
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Emissions Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Effects of Emissions Standards on the Auto Industry . . . . . . . . . . . . . 95
Fuel Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
List of Figures
Figure 1. U.S. Automotive Industry Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 2. Real Output of Automotive and Total Manufacturing . . . . . . . . . . . . 14
Figure 3. U.S. Employment in Automotive Manufacturing . . . . . . . . . . . . . . . . 15
Figure 4. U.S. Total and Automotive Manufacturing Employment . . . . . . . . . . 16
Figure 5. Location of North American Motor Vehicle Production . . . . . . . . . . . 22
Figure 6. Production in North America by Type of Company . . . . . . . . . . . . . . . 24
Figure 7. U.S. Car and Light Truck Production by Manufacturer . . . . . . . . . . . . 28
Figure 8. Total Car and Truck Production by Company Type . . . . . . . . . . . . . . . 29
Figure 9. U.S. Motor Vehicle Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 10. U.S. Trade Balance in Automotive Products . . . . . . . . . . . . . . . . . . . 52
Figure 11. Sales of Foreign Affiliates of U.S. Automotive Manufacturers . . . . . 65
Figure 12. Sales of U.S. Affiliates of Foreign Automotive Manufacturers . . . . . 67
Figure 13. Major Motor Vehicle Production Countries and Regions . . . . . . . . . 75
Figure 14. U.S. Consumption of Total Energy by End-Use Sector . . . . . . . . . . . 84
Figure 15. Annual Passenger Vehicle Fuel Use, 1970-2000 . . . . . . . . . . . . . . . . 85
Figure 16. Estimated Consumption of Vehicle Fuels, 2003 . . . . . . . . . . . . . . . . 89
Figure 17. U.S. Transportation Emissions, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 94
Figure 18. Pollutant Emissions from Highway Vehicles, 1970-2002 . . . . . . . . . 94
List of Tables
Table 1. Employment by Automotive Manufacturing Categories . . . . . . . . . . . . 17
Table 2. Leading States in Automotive Employment . . . . . . . . . . . . . . . . . . . . . 33
Table 3. U.S. Motor Vehicle Sales by Manufacturer . . . . . . . . . . . . . . . . . . . . . 49
Table 4. Selected Leading Global Motor Vehicle Producers . . . . . . . . . . . . . . . 70
Table 5. Automotive Industry Supplier Location . . . . . . . . . . . . . . . . . . . . . . . . . 79
Table 6. Leading Automotive Parts Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Appendix Table 1. North American Vehicle Production, by Country . . . . . . . . 97
Appendix Table 2. North American Motor Vehicle Production by Company . . 98
Appendix Table 3. U.S. Motor Vehicle Production by Company Type . . . . . . 100
Appendix Table 4. U.S. Motor Vehicle Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Appendix Table 5. Details of U.S. Automotive Trade . . . . . . . . . . . . . . . . . . . 102
Assistance in providing data, graphs and tables by John Williamson, Information Resources
Specialist.
U.S. Automotive Industry: Recent History
and Issues
Introduction and Key Findings
In the immediate post-World War II era, the auto industry was seen as both a
pillar and a beneficiary of American growth and economic achievement. General
Motors Chairman Charles Wilson proclaimed in the 1950s, “What’s good for the
country is good for General Motors, and vice-versa.” More than half the automobiles
sold in the United States were then produced by General Motors (GM). Its
organizational genius, Alfred Sloan, had succeeded in creating a company that built
cars “for every purse and purpose,” as opposed to the original concepts of Ford, the
first icon of automotive mass production, whose sole major product for 20 years, the
Model T, was “any color you wanted, as long as it was black.”1 The other “Big
Three” producers of the postwar era, Ford and Chrysler, together with the still-
surviving lesser domestic manufacturers (American Motors, Studebaker-Packard and
Kaiser), built a range of vehicles that met every consumer need. Among foreign
producers, only Volkswagen and a few luxury and sports cars had even small niches
in the U.S. marketplace.
From this once-dominant position in the domestic market, the Big Three today
produce less than 60% of all automobiles and light trucks sold in the United States.
Their market share has been steadily declining. The Big Three developed a
consumer-oriented light truck product, the “sports utility vehicle” (SUV), which
market they still dominate, but Japanese and German-based manufacturers have been
making major inroads in this class as well. Moreover, to some critics the Big Three
have been on the wrong side of every environmental, safety and social issue, from
opposition to the Clean Air Act, corporate average fuel economy (“CAFE”)
standards, and mandatory seat belt requirements in the 1960s and 1970s, to slowness
in developing alternative fuel vehicles today.2
The Big Three are still the largest domestic producers, but one of them,
Chrysler, is a subsidiary of DaimlerChrysler, a German-controlled and managed
company. The smaller U.S. producers have all disappeared, and imports, especially
from Asia, have surged. The smaller manufacturers have been replaced in the
1 Although, “in its first five years of production the Model T could be had in red, green, gray
or dark blue as well as basic black.” Ford pared its vehicle color choices down to black to
reduce costs and production time. Douglas Brinkley, Wheels for the World (New York:
Penguin Books, 2003), pp. 129, 181-82.
2 Graeme P. Maxton and John Wormald, Time for a Model Change (Cambridge, U.K.: CUP,
2004), pp. 60-61.
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domestic market by “transplanted” units of Japanese, German and Korean
companies, which now build in North America significant and increasing shares of
their vehicles that are sold in the United States. Most of the major companies now
compete globally, through cross-ownership and investment in manufacturing plants
more than through trade in finished vehicles. They also compete through what a
2004 Commerce Department report described as “global supply chains:”
Whereas U.S. automobile manufacturers once provided a ready market for many
domestic suppliers of parts and components, the manufacturers now operate on
a global basis. Thus, automotive parts suppliers must now find niches in the
global supply chains of U.S. auto companies or their foreign competitors to
succeed in today’s market ... The possibility of relying on increased auto sales
that automatically translate into increased orders and components for U.S.
suppliers simply no longer exists.3
Developments in the U.S. Domestic Automotive Industry
The U.S. automotive manufacturing sector is large and dynamic,
but its structure is changing. Whatever changes are occurring globally or
within the domestic market, production and sales in the United States remain at
historically high levels. The overall picture of North American production is,
however, accompanied by tension within the industry created by the entrance of new
international competitors as domestic manufacturers. Growth has been due in part
to internationally based companies (“transplants,” especially from Japan) investing
in the North American market initially as a substitute for importing, while the Big
Three struggled with downsizing issues. With growing automotive manufacturing
capacity elsewhere, especially in Asia, there are concerns that the motor industry may
be creating a problem of global overcapacity. The result could be accelerating
rationalization and industry closures, which could have especially negative
consequences for the Big Three and their U.S. employees.
Such changes do not necessarily portend a declining automotive industry in the
United States. Gross output in the U.S. automotive manufacturing sector in 2004,
including motor vehicle parts, trailers, bodies and heavy trucks, was $424 billion
(current dollars). That was the largest output of any durable goods manufactured
product grouping measured by the Commerce Department Bureau of Economic
Analysis (BEA).4 Although annual U.S. motor vehicle output has moved up and
down since 2000, the automotive industry still grew faster than domestic
manufacturing overall in 1990-2003. Real output has increased 55% since 1990,
compared to 35% for manufacturing as a whole. But the balance of production
between traditional, Big Three manufacturers and foreign-owned transplants has been
shifting in favor of the latter, and that shift has recently been accelerating.
3 U.S. Department of Commerce. Manufacturing in America (January 2004), pp. 29-30.
4 For a discussion of why gross output, rather than value added, is used to measure the total
size of the automotive manufacturing sector, see below in this report, p. 12.
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The automotive sector employs more people than in 1990, while
employment in overall domestic manufacturing significantly declined.
The Big Three-dominated automotive manufacturing sector struggled in the 1980s,
and shed hundreds of thousands of jobs. But between 1990 and the end of that
decade, while employment growth in the rest of manufacturing was just about flat,
automotive manufacturing employment increased almost 25%, or about 250,000 jobs.
Despite an employment decline in the industry in 2001-2004, there were still 55,000
more people employed in automotive manufacturing than in 1990, while
manufacturing in general lost more than three million jobs over the whole period.
This report examines how the strategies of both the Big Three and the transplants
have contributed to maintaining or increasing employment.
There appears increasingly to be two U.S. automotive industries
based on organization of the labor force: the traditionally unionized Big
Three and the foreign-owned “transplants,” which are mostly non-
union. The Big Three assembly plants are all organized by the United Auto
Workers (UAW) union.5 The Big Three have reduced direct employment by about
600,000 jobs since 1979. Many of these jobs have been shifted to specialized parts
suppliers, who employ far more people than the vehicle manufacturers. The two
largest are the parts manufacturing spinoffs from formerly integrated Big Three
companies (Delphi from GM, Visteon from Ford). Both companies are still
organized by the UAW. The UAW has also obtained “benevolent neutrality”
agreements, whereby the Big Three promise not to encourage suppliers to oppose
unionization, and agreements under which the Big Three promise to give fair
consideration to sourcing manufacturing activities in-house rather than from outside
suppliers. As the Big Three have lost market share in recent years, the UAW has
experienced a serious membership decline — from 1.5 million in the late 1970s, to
less than 700,000 today.
There are few union shops among the transplant assembly operations. The
transplants have encouraged direct investment from their traditional home country
suppliers into the United States, as well as development of local supplier networks.
Based on U.S. official foreign investment data, we estimate that foreign-owned
automotive companies by 2002 employed about one quarter of the 1.1 million
workers in automotive manufacturing in the United States, not counting the
employees of the Chrysler Group of DaimlerChrysler.
The bifurcation of the industry has led to serious competitive cost
issues for the Big Three manufacturers. The Big Three maintain that paying
pension and health care costs for retirees, as negotiated under union contracts over
past decades, may cost $1,500 or more per vehicle produced today. The Big Three
have supported both health care and tax policy changes in Congress that would have
alleviated this burden, but such changes have not been passed into law.
Moreover, the Big Three have contracts with the UAW that require them to pay
employees and provide benefits, even when production lines are not operating. In the
5 The full name is the United Automobile, Aerospace and Agricultural Implement Workers
of America, but its shorter abbreviation and title are commonly used.
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period after the September 11, 2001, terrorist attacks in New York and Washington,
they kept their factories producing vehicles and used big consumer incentives to keep
selling those vehicles. But GM and Ford have begun to lose market share in the
United States nevertheless. This strategy was initially profitable and helped the
country pull out of the recession of 2001, but now Ford and GM have begun to lose
money in their North American automotive operations. The three largest Japanese-
owned companies in the United States, Toyota, Honda and Nissan, are all currently
profitable and have held or increased market share in recent years.
“Card checks” are a key strategy for the UAW in trying to regain
members. The UAW is seeking to maintain its active membership level by
insuring that the Big Three do not outsource parts supply jobs to non-union
operations. They are aggressively using a “card check” approach to try to expedite
organizing activities at independent parts-making companies. Under a card check
system, employers may recognize a union as representing employees at a facility for
collective bargaining purposes, once a majority of the employees have signed a card
authorizing the union to represent them, as opposed to formal elections supervised
by the National Labor Relations Board (NLRB).
The UAW so far has failed to organize any transplant assembly operations that
are independent of links to the Big Three. The use of card checks is also under legal
challenge before the NLRB. The UAW and the AFL-CIO have supported legislation
in Congress that would clarify the legality of the use of card checks in establishing
union representation.
The changes in the structure of the U.S. automotive industry and
the decline in the market share of the Big Three has most adversely
affected Michigan and the Northeast. The core of the U.S. industry, including
its major supplier base, is shifting from the traditional Midwest “auto belt” to the
Sunbelt, and to other locations in the South and West. Michigan has lost a minimum
of 100,000 jobs since the peak of automotive manufacturing employment in the late
1970s. Losses in other midwestern states appears to have been offset by the shift of
production jobs from the Big Three to outside suppliers and by increased inward
foreign direct investment. Ohio, Illinois and Missouri may have marginally gained
or lost automotive jobs, and Indiana appears to be a significant net gainer. Major
northeastern industrial states, particularly Pennsylvania, New York and New Jersey,
have lost automotive jobs as the Big Three have rationalized suppliers and assembly
plants. Kentucky and Tennessee have been the biggest job gainers, while South
Carolina, Alabama, North Carolina and Texas have all gained automotive
employment. Shift of jobs away from the Midwest may have been reduced by the
widespread adoption of “just-in-time” manufacturing, modern trucking supply
strategies and the development of interstate highways, which typically enable parts
manufacturers to supply assembly plants up to 400 miles away.
The Automotive Industry in the International Context
The domestic automotive industry is completely integrated within
North America. Trade barriers affecting vehicles and parts production within
North America have been eliminated by successive trade agreements, culminating in
the North American Free Trade Agreement (NAFTA). After producing about 12
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million vehicles annually in the late 1970s, the U.S. domestic industry went through
cyclical periods of decline and recovery, and next reached that level again in 2000.
It has subsequently declined somewhat from that total. Canada during this period has
increased production from less than two million units per year to an average of nearly
three million; Mexico has increased from less than half a million to about two million
annually. Each of the Big Three, and now most of the transplants, have vehicle
assembly plants in each of the three countries.
The U.S. automotive trade deficit in 2004 was nearly $150 billion.
The deficit has grown from less than $10 billion in 1979 to $150 billion, despite high
levels of inward investment by foreign-brand manufacturers, and a decline in imports
relative to vehicles built at transplant assembly facilities. U.S. policies in the 1980s,
aimed at requiring foreign-owned companies to produce here more of the vehicles
that they sell in the United States, and other policies aimed at heightening consumer
awareness about imported vehicles and parts, such as the American Automobile
Labeling Act, appear to have had little effect on the growth of this sectoral trade
deficit.
About $40 billion of the automotive trade deficit is with the NAFTA partners;
the United States has a large deficit in vehicles with these two countries, though as
of 2004 it had a small surplus in automotive parts. The United States had a deficit
of more than $30 billion with the European Union, where exports of U.S.-made
vehicles and parts of more than $10 billion were more than offset by imports in both
categories. The largest component of the deficit was bilateral trade with Japan, from
which U.S. imports were more than $48 billion, and U.S. exports were about $2
billion. The United States also imported nearly $12 billion in vehicles and parts from
Korea, with less than $1 billion in exports. China’s role in the automotive trade
deficit in 2004 was relatively insignificant, though imports of parts from that country
are rising.
Automotive trade issues have had a high priority in U.S. trade
policy since the early 1980s. In the wake of the Chrysler bailout and the
unsuccessful effort of Ford and the UAW to request that the U.S. International Trade
Commission (ITC) establish import safeguards protection, the focus of this policy
was on rising levels of imports. Responding to congressional pressures and the
request of the Reagan Administration, the Japanese government formally agreed to
voluntary export restraints (VER) and Japanese companies began to undertake
investments here. The policy shifted in the 1990s to focus more on opening the
Japanese market to imports of motor vehicles and parts from the United States and
other countries. This effort culminated in a U.S.-Japanese bilateral agreement in
1996.
With the establishment of the World Trade Organization (WTO) in 1995, U.S.
policy shifted again to focus more on multilateral pressure against trade-related
investment measures and other barriers aimed at creating protected automotive
markets for domestically established manufacturers in many of the industrializing
countries. The United States has brought or participated in trade cases against such
countries as Brazil, India, Indonesia, Korea and the Philippines. Criticism from the
United States and other WTO members of China’s official policy on the automotive
industry led to establishment of a new automotive development policy in 2004 in that
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country, though it is not clear if implementation of that policy will be free from all
violations of WTO rules. The United States has also proposed that elimination of
nontariff barriers to trade in motor vehicles and parts be added to the agenda of the
WTO Doha Round of negotiations on revised trade rules.
Meanwhile, inauguration of free trade talks between the United States and
Thailand has led to concerns in Congress that one result could be duty-free entry into
the U.S. market of pickup trucks made in that country, the world’s second-largest
producer. Since 1963, the United States has maintained a high tariff on imported
pickups. Many in Congress are concerned that Japanese and Korean manufacturers
could evade this duty by importing trucks made at their Thai facilities.
Globalization means major changes for the U.S. automotive
industry and its suppliers. The largest motor vehicle markets for the foreseeable
future are the advanced industrial countries, where vehicle sales have been slow (or
even negative) during the past fifteen years. The fastest growth has been in certain
large developing countries, or countries in transition from planned to capitalist
market economies (namely, China, India and Russia). Some analysts believe that
there is already excess capacity in the global market, and that capacity will increase
out of proportion to new demand from developing markets. The major motor vehicle
manufacturers, especially including Ford and GM, increasingly source their vehicles
from manufacturing facilities in the regions where they are sold, in part due to
differing customer demands and tastes. As the vehicle manufacturers globalize and
rationalize their supply base, the impact on the U.S. auto parts manufacturing base,
which employs several times as many people as the vehicle manufacturers
themselves, could be the closure of many companies and facilities. With the Ford
and GM market share in North America having declined, a large number of major
U.S. automotive suppliers are in financial difficulties. Moreover, many of the
historically independent suppliers who sold directly to the Big Three, or indirectly
through “Tier 1” suppliers, may lack the scale to be competitive in the global market.
Impact of Fuel Economy and Emissions Standards
Environmental issues, including vehicle emissions, fossil fuel consumption, and
resource use, have played an increasing role in shaping the U.S. auto industry.
Environmental decisions play a key part in automotive design, research and
development of new vehicles, and marketing to consumers.
Fuel economy standards have been effective in reducing energy
consumption, but have had a significant effect on U.S. auto
manufacturing. Corporate average fuel economy (CAFE) standards are estimated
to have reduced fuel consumption by as much as one-third from what it otherwise
would have been. Undoubtedly, the standards have significantly affected vehicle
design, as well as manufacturing and marketing decisions. However, because of
separate standards for passenger cars and light trucks, as well as distinction between
imported and domestic vehicles, the current standards likely have had differential
effects on various manufacturers. Further, any future changes to the CAFE system
would likely leave some manufacturers better positioned than others.
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While individual manufacturers may have been advantaged or disadvantaged by
the current CAFE system, the total effects of CAFE on U.S. auto industry
employment and output seem to be limited, according to an analysis by the National
Research Council. However, CAFE standards have affected the ownership of U.S.
manufacturing plants, if not the total level of employment.
Emissions standards have directly affected the automotive industry
over the past four decades and this effect may increase. Highway vehicle
emissions have dropped dramatically over the past few decades. For example,
allowable nitrogen oxide emissions from passenger cars have been cut by roughly
70% from 1980 levels. They will be cut further with the introduction of the Tier 2
light-duty vehicle standards set by EPA.
Like CAFE standards, the emissions standards may give a competitive
advantage to some manufacturers over others. On average, smaller vehicles with
smaller engines tend to emit less than larger vehicles with larger engines. Therefore,
those manufacturers that produce larger vehicles may have more difficulty and may
likely need to invest more to comply with the standards. Furthermore, as the Tier 2
standards eliminate separate treatment for passenger cars and light trucks, the effects
on large vehicle producers may increase. Therefore, auto makers that focus on small
cars may have a competitive advantage over manufacturers that produce a larger
proportion of light trucks.
California’s Greenhouse Gas Rule may be the most significant
current issue regarding automotive fuel economy and emissions
standards. California adopted regulations in 2004 to require a reduction of
greenhouse gas emissions of 30% by 2016 in passenger vehicles. There are no
current federal standards for greenhouse gas emissions, and critics of the regulation
maintain that greenhouse gases (including carbon dioxide) are not pollutants under
the federal Clean Air Act. Thus, they argue that the greenhouse gas standard is a de
facto fuel economy standard, and they maintain that reducing emissions of carbon
dioxide — the key greenhouse gas — requires reductions in fuel consumption.
Opponents of the rule argue that authority to set fuel economy standards rests solely
with the federal government.
The California rule has been challenged in court. The Big Three and many
international auto manufacturers oppose the California rule. California officials
maintain that they have the authority under the Clean Air Act to regulate vehicle
greenhouse gas emissions. The outcome of this case could have major effects on the
U.S. auto industry as California is a major vehicle market, and some other states are
likely to adopt the California standards if upheld.
Automotive Industry Outlook and Policy Issues
The prospects for the automotive industry in the United States are mixed. Sales
have been maintained at a high level since 2000, although only by liberal use of
manufacturers’ incentives — and neither sales nor total production has grown since
then. Heavy use of incentives, especially by GM and Ford, have promoted sales
CRS-8
since 2001, but at the price of reducing current profits and future demand. If
companies continue promoting sales through financial incentives, then higher interest
rates, which are widely expected in financial markets, will raise the cost of incentives
and further reduce earnings. Big Three earnings have also been adversely affected
by “legacy costs,” such as rising contributions to pension funds and retiree health
care. Thus, the prospects for this industry as 2005 began were not as robust as in
many other sectors.6
However, GM and Ford were profitable overall in 2004, despite declines in
domestic market share, losses on U.S. automotive operations, legacy costs, and
problems in Europe.7 Chrysler has overcome annual losses of as much as $3 billion
in recent years, has introduced successful new products in North America, and
increased both sales and market share in 2004.
All three leading Japanese transplant producers (Honda, Toyota and Nissan) are
operating profitably in the U.S. market, and Toyota and Nissan scored double-digit
percentage sales increases in 2004. Hyundai, the remaining independent Korean
manufacturer, is opening a major new manufacturing plant in Alabama in 2005,
while the Ford-Mazda plant in Michigan will produce the new Mustang, whose sales
forecasts are strong. At the end of 2004, even the Japanese companies were using
incentives on popular models, as consumers had come to expect them. However,
their incentives were much lower per vehicle, than those offered by GM and Ford.8
Among foreign-brand motor vehicle manufacturers, only Volkswagen, which does
not assemble cars in the United States, and Mitsubishi have experienced major
declines in sales in 2004. These two companies’ problems are linked to global
competition and management issues, not confined to the U.S. market.
Recent Legislation
In terms of legislative action, the final version of the major corporate tax bill
(P.L. 108-357, the American Jobs Creation Act of 2004), which passed at the end of
the 108th Congress, saw deletion of some provisions that were favorable to the
automotive industry, or at least to parts of it. The legislation as passed:
! Deleted tax credits that had been proposed of up to $4,000 for
purchase of gasoline-electric hybrid vehicles, and up to $8,000 for
purchase of fuel cell-powered vehicles;
6 Business Week, “Borrowing from the Future,” analysis of automotive sector in special
“Outlook” section (Jan. 10, 2005), p. 100.
7 GM stock values and creditworthiness were reduced in March 2005, however, when CEO
G. Richard Wagoner announced the company would lose money in the first quarter,
followed by reduced earnings the rest of the year; Greg Schneider, “General Motors CEO
Takes over American Unit,” Washington Post (Apr. 5, 2005), p. E2.
8 According to Autodata information reproduced in ibid., GM incentives per automobile in
March 2005 averaged more than $4,000 per vehicle, Ford and Chrysler averaged more than
$3,000, while Nissan averaged $2,000, and Toyota and Honda about $1,000. See also
Detroit Free Press, “Auto Industry Report: Japanese Use Incentives” (Jan. 7, 2005).
CRS-9
! Eliminated a proposed two-year deferral of taxes, supported by the
National Automobile Dealers Association, on payments by GM to
Oldsmobile dealers, who lost their franchises when the company
discontinued that brand — the deferral would have allowed dealers
to reinvest the payments and would reportedly have been worth an
average of $67,000 per dealer;
! Reduced the amount that business persons can deduct from their
taxable income in one year for purchases of large SUVs — the
amount was lowered to $25,000, although the full, original
deduction of up to $100,000 remains in effect for large pickups and
vans used in businesses.9
Policy Issues for the 109th Congress
While the automotive industry in the United States may not be in a crisis, the
109th Congress may address a number of policy issues that deal with the subject of
equitable competition, both internationally and in the domestic market.
Pension and Health Care Issues. A report issued on behalf of the Big
Three stated that their ageing work forces, increasing numbers of retirees and
generous health care benefits impose an average cost of at least $1,200 per vehicle
in 2004, compared to little or no “legacy” costs of this type for transplant producers.
The Big Three, along with the UAW, supported amending tax legislation in the 108th
Congress to give manufacturers tax credits for health care payments for older workers
and retirees, but no such amendment or separate legislation was introduced. This
subject could again become a legislative issue in the 109th Congress.
Currency Exchange Rates. The Automotive Trade Policy Council,
representing the Big Three, has complained that exchange market intervention by
Japanese monetary authorities has frequently prevented market forces from
appreciating the yen and thus make it easier for the Big Three to compete against
imports from Japan. At the end of 2001, the value of the dollar was about 132 yen.
It fell to nearly 100 by the end of the first quarter in 2004, the last period of publicly
acknowledged intervention by Japan. The dollar by April 2005 was a little above that
level.
More broadly, many U.S. manufacturers, including automotive suppliers, have
pressed for a revaluation of China’s currency, the yuan, which has been fixed at 8.28
per dollar for a decade. As China’s bilateral trade surplus has risen with the United
States rapidly during this period, they have pressed to secure a currency realignment
that would be more reflective of China’s competitiveness. At least ten legislative
measures were introduced in the 108th Congress that addressed this issue. One
industry coalition filed a petition urging the Bush Administration to take action under
Section 301 of U.S. trade law, and another threatened to do so. The Bush
Administration did not accept such petitions in 2004, as its representatives stated that
it was not appropriate to address exchange rate issues with trade policy instruments.
9 Automotive News: Harry Stoffer, “Tax Bill Losses Outnumber Wins” (Oct. 11, 2004); and,
(editorial) “Congress Closed 3 Auto Loopholes — Good Riddance” (Oct. 18, 2004).
CRS-10
Instead the Administration pressed China in consultations to adopt a more flexible
exchange policy.10
In the 109th Congress, a provision to address the China currency revaluation
issue was introduced as Section 321 of S. 14, a broad bill introduced by Senator
Debbie Stabenow and 13 co-sponsors, addressing job creation, fair trade,
competitiveness and other issues. It would mandate that a 27.5% tariff be applied to
imports from China, unless the President could certify within six months that China,
following negotiations required in the legislation, had either made efforts to revalue
its currency upward or was no longer accumulating foreign reserves to prevent
appreciation of its currency against the dollar. S. 295, introduced by Senator Charles
Schumer and 13 co-sponsors, imposed the same level of duty on imports from China,
unless the President certified that China is no longer manipulating its exchange rate
and had adopted market-based trading policies. A version of this legislation was
added as an amendment to S. 600, the Foreign Affairs Authorization Act, on April
6, 2005, when the motion to table failed on a vote of 33-67. Subsequently, it was
reported that the amendment would be stripped from that legislation, with a promise
by the Senate leadership to Senator Schumer that he would receive a floor vote on S.
295 by July 27, 2005.11 On the House side, Representatives Tim Ryan and Duncan
Hunter with 35 cosponsors introduced on April 6, 2005, H.R. 1498, which would
approach this issue in a different way. H.R. 1498 would clarify existing U.S. trade
law to allow remedies to be sought against imports from China that are shown to
benefit from Chinese government exchange rate manipulation.
Labor Representation. Decisions on whether to allow union representation
to be determined by the card check process, as described in the previous section, at
plants owned by automotive parts suppliers are pending before the NLRB.
Legislation introduced in the 108th Congress would have validated the card check
process by law. It may be anticipated that similar legislation would be introduced
again, especially if the NLRB took a negative position regarding card checks.
Fuel Economy and Emission Standards. Requiring higher fuel economy
standards, and establishing a different process for setting such standards for SUVs
and other light trucks, were issues debated in the context of energy legislation in the
108th Congress. With the world price of oil in early 2005 at times exceeding $55 per
barrel, and with no comprehensive energy bill having been passed, these issues may
10 The Sec. 301 petition of the China Currency Coalition was covered especially in
American Metal Market, “Tired of ‘Tacit’ Nod, US Group Confronts China on Currency”
(Sept. 10, 2004), p. 1, and “China Currency Plea Falls on Deaf Ears” (Sept. 13, 2004 print
ed.), p. 2. On Administration policy, see DER, “Treasury’s Speltz Says China Should Make
Exchange Rate Flexible” (Sept. 14, 2004), p. A-9. For the CRS analysis, see CRS Report
RL32165: China’s Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy.
The China currency issue in the 108th Congress, including legislative proposals, were
summarized in Gary C. Hufbauer and Yee Wong, “China Bashing 2004,” International
Economic Policy Brief PB04-5, Institute for International Economics (Sept. 2004), pp. 4-9
and App. 1-2.
11 Congressional Record, April 6, 2005, pp. S3248-53; Greg Hitt, “Senate Slams China
Currency Policy,” Wall St. Journal (Apr. 7, 2005), p. A2; R.K. Morris, “Editor’s Letter:
China Alarm,” Global Positions Notebook (Apr. 11, 2005).
CRS-11
be addressed again in the 109th Congress. In addition, California has proposed
emission standards for carbon dioxide and other greenhouse gases. The vehicle
manufacturers have brought suit in federal court, claiming that the U.S. Clean Air
Act allows California only to regulate specifically identified pollutants, not other
emissions, and that the proposed standard is a de facto fuel economy standard, on
which state action is specifically preempted by federal law.
Pickup Trucks in U.S.-Thailand Free Trade Agreement (FTA). In the
FTA it is negotiating with the United States, Thailand is seeking to remove the
general U.S. 25% import duty on pickup trucks that it would export here. Most Thai-
made pickups are built by local affiliates of Japanese and Korean companies. U.S.
Big Three manufacturers oppose duty-free entry of pickup trucks from Thailand,
outside the context of a broader trade agreement that addresses what they believe are
continuing trade restrictions on automotive imports in Japan and Korea. Resolutions
were introduced in the 108th Congress that any FTA with Thailand should not include
duty-free access for Thai-made pickup trucks to the U.S. market. A letter co-signed
by 40 senators in March 2005 in support of this position indicates that this will
continue as an issue in the 109th Congress.
Broader Issues of Automotive Trade Policy. The U.S. government has
been active in WTO cases aimed at removing foreign government trade restrictions
and policies that have distorted trade in motor vehicles and parts. These included
cases in which countries such as Brazil, India, Indonesia and the Philippines had
discriminatory policies to require domestic content in locally made vehicles,
subsidize exports, or restrict imports as part of national automotive development
strategies. The Administration is continuing to review implementation of a new and
less prescriptive automobile policy in China. It is working with Korea in an effort
to change features of that country’s tax policies that discriminate against imported
vehicles. It is continuing to monitor policies in Japan that affect the establishment
and activities of foreign-owned vehicle and parts manufacturers. Tying all these
approaches together, the Administration in early 2005 proposed including a wide-
ranging approach to elimination of automotive trade restrictions as part of the
ongoing Doha Round negotiations on revising WTO rules.
North American Industry Profile
Size and Growth of the U.S. Automotive Industry
Figure 1 illustrates the growth of the U.S. motor vehicle manufacturing industry
since the late 1970s, in terms of gross output as reported by the Bureau of Economic
Analysis (BEA) of the Department of Commerce. In current dollars, the industry has
expanded from just over $100 billion per year in the late 1970s to nearly $500 billion
in 1999, which is still the all-time peak. Gross output declined in 2000-01, rose to
$436 billion in 2002, but then fell again slightly to $424 billion in 2004. The motor
vehicle industry is defined in this figure to include automotive parts manufacturing.
It also includes heavy trucks, truck trailers, mobile homes, travel trailers and
campers, not just automobiles, light trucks and parts, which are the focus of this
CRS-12
report. But 92% of 2003 total industry output as shown in Figure 1 was accounted
for by the principal subjects of the present report.
Figure 1. U.S. Automotive Industry Output
Gross Output in Billions of Current Dollars
500
400
300
200
100
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: Department of Commerce. Bureau of Economic Analysis. “1947-1997 Historic SIC Data” and “1998-2003 NAICS
Data Gross Output by Industry.”
Note: SIC 371 (Motor Vehicles and Equipment), 1977-88; NAICS 3361 (Motor Vehicles); NAICS 3362 (Motor Vehicle
Bodies and Trailers); and NAICS 3363 (Motor Vehicle Parts), 1987-2003.
Gross output is used in this report as the most accurate measure of the scale of
the industry. Gross output includes the value of intermediate inputs as well as that
of the final assembly process, whereas gross domestic product originating in the
motor vehicle industry, a common measure, reflects only the value added by final
assembly. Intermediate input production, whether done by nameplate assemblers or
by suppliers, is an integral part of this industry, as these inputs are specifically
designed for automotive applications. Gross output excludes imported or exported
intermediate inputs.12 The gross output of automotive manufacturing represented
10.8% of the total gross output of U.S. manufacturing in 2003.
Through 1997, the industry is defined for statistical purposes as Standard
Industrial Classification (SIC) category 371, “motor vehicles and equipment.”
Beginning in 1998, the Commerce Department switched to the North American
Industry Classification System (NAICS), and it has subsequently recalculated
industry output on the NAICS basis back to 1987. In this report, the domestic
automotive industry since 1987 is defined as including the categories of motor
vehicles (NAICS 3361), separately produced motor vehicle bodies (NAICS 3362),
and motor vehicle parts (NAICS 3363); these are commonly combined in BEA data
12 Definition of terms as applied by the U.S. Department of Commerce, Bureau of Economic
Analysis (BEA); information from discussions with Robert McCahill, BEA Office of
Industry Analysis, July 23, 2004.
CRS-13
as “motor vehicles, bodies and trailers, and parts.” Under the NAICS system, using
these definitions, industry output is somewhat higher than on the basis of SIC 371,
because NAICS 3363 incorporates products that were previous included under non-
automotive categories (for example, automotive air conditioning equipment).
However, the SIC and NAICS automotive data track closely enough that they are
presented here as a single output series. The one-time switch from SIC to NAICS-
based industry definition partially explains most of the jump in output in 1987 to
$241 billion from $198 billion the previous year.
Figure 2 illustrates the growth of U.S. automotive industry output on a real
basis since 1977, and compares it to overall U.S. real growth in manufacturing
output.13 The figure illustrates that U.S. automotive manufacturing did not grow as
strongly as U.S. manufacturing overall between 1979 and 1990, but did outperform
manufacturing in general from 1990 to 2000. The principal reason for this higher
relative rate of automotive growth, detailed examination later in the report will show,
is increased output from new plants owned by foreign-based manufacturers, the so-
called “transplants.”
Inflation-adjusted output in the automotive sector increased about 75% between
the late 1970s and 1999, some of which may be accounted for by the definitional
change from SIC to NAICS. The figure shows the sensitivity of the industry to the
business cycle, with declines in the real value of output during recessionary periods
in the early 1980s, the early 1990s, and 2000-01 (starting even before the recession
in the latter year). Growth resumed in 2002, but real output again fell slightly in
2003, leaving the industry 13% behind where it was in 1999. Overall, from 1977 to
2003, the inflation-corrected real dollar value of the sector increased by less than 2%
per year. But as the number of major motor vehicle assemblers operating in the
United States increased significantly, this implies possibly smaller profit margins and
downsized workforces for some manufacturers.
Before 1990, the growth in real domestic automotive output was weaker than
the rate of overall real manufacturing output growth; the industry barely recovered
from the recession of the early 1980s, before the next recession was upon it. Since
1990, automotive industry output has outperformed the rest of the manufacturing
sector of the economy.
The inflation-adjusted index for all manufacturing increased
by 31.5% between 1977 and 1990. For the automotive sector, the net change was
essentially zero from 1977 to1990. It is true that automotive output peaked one year
earlier than total manufacturing, but even at the 1989 peak, the level was less than
10% higher than in 1977. Both automotive and general manufacturing sectors did
much better in the 1990s, but the auto sector significantly outperformed general
manufacturing. In 1999 it peaked at 75% above the 1990 level, compared to a level
for all industry of about 40% above the 1990 base. After four years of slower
growth, the automotive output index for 2003 (the latest available data year) was still
much higher than that for all manufacturing (55% above the 1990 base, compared to
35%).
13 In Figure 2, the definitions of both automotive and general manufacturing real output
switch from SIC to NAICS in 1987. For purposes of comparison, both series are indexed
to 1990, when the NAICS definition applies.
CRS-14
Figure 2. Real Output of Automotive and Total Manufacturing
Index: 1990=100.0
200
150
100
50
All Manufacturing
Motor Vehicles, Bodies, and Parts
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Sources: All manufacturing output data, U.S. Department of Labor. Bureau of Labor Statistics.
“Major Sector Productivity and Costs Index” (http://www.bls.gov, SIC basis as viewed Sept. 17,
2003; NAICS basis, as viewed March 1, 2005.). Automotive data as for Figure 1.
Employment in the automotive sector may not have grown on a net basis over
the past 25 years, but neither has it fallen substantially, unlike some other industrial
sectors. A direct comparison is difficult, because there are two different data series
for automotive employment, and they only overlap for the period 1990-2002. Figure
3 shows that on the basis of SIC 371 (for which 2002 was the last year for annual
data), total employment in the automotive sector peaked at more than 1 million in
1978, and then reached that level again 20 years later, before falling lower during the
recent “down” cycle. The employment levels reported by BLS on the current NAICS
basis are significantly higher than the equivalent SIC 371 data, because of the
inclusion of specialized parts manufacturing. The NAICS-based employment figure,
which has been calculated by BLS back to 1990, is shown as a separate line in
Figure 3. On this basis, total employment in all automotive-related industries was
more than 1.3 million in 1999-2000, and is still more than one million, despite falling
since then.
CRS-15
Figure 3. U.S. Employment in Automotive Manufacturing
Millions
1.4
1.2
1
1.0
0.8
0.6
0.4
All Employees, based on SIC 371
0.2
All Employees, based on NAICS 3361, 3362, 3363
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Sources: Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings.” http://data.bls.gov (as viewed on March 3, 2005)
As in the case of real output, automotive manufacturing has maintained its
employment level better than manufacturing overall since 1990. Figure 4 compares
the patterns of automotive employment with that for manufacturing generally. The
chart uses index values to normalize the percentage change in the respective
categories. The SIC 371 data are shown for the period 1977-2002, when that series
was terminated, and the NAICS-basis automotive data available from 1990.
However, as the figure shows, the rates of change, whether measured on an SIC or
NAICS basis for automotive manufacturing employment, are virtually identical, so
the growth rate of employment in the 1990s is not a statistical artifact.
The index of total manufacturing employment and automotive manufacturing
employment both peaked around 1978-79. Since then, manufacturing employment
has trended slowly and steadily down, with some cyclical variations. The all-time
record level of manufacturing employment was 19.4 million jobs in 1979, and the
U.S. economy has never come close to creating so many manufacturing jobs since
then. After the most recent economic recession, overall manufacturing employment
fell almost 20% below the latest peaks in1990 and 1998.14
After worse performance than general manufacturing before 1990, automotive
manufacturing in the United States has demonstrated superior performance since then
14 A detailed discussion of the long-term downward trend in manufacturing employment is
presented in CRS Report RL32179, Manufacturing Output, Productivity and Employment:
Implications for U.S. Policy, pp. 4-10. The contrasting experience of the automotive industry
is discussed in that report on pp. 28-29.
CRS-16
in creating manufacturing jobs during the strong-growth 1990s, and in maintaining
jobs since 2000. For automotive manufacturing employment, the cyclical swings of
the late 1970s and early 1980s were stronger than for general manufacturing
employment, and the relative decline in jobs between 1979 and 1990 was twice as
large: 18% against 9%. But between 1990 and the end of that decade, while
manufacturing employment was just about flat, automotive manufacturing
employment increased almost 25%, or about 250,000 jobs (NAICS basis). Even by
2004, after four years of slow growth, there were still 55,000 more people employed
in automotive manufacturing than in 1990, while manufacturing in general lost more
than three million jobs over the period. This report will later examine in detail how
the strategies of both the Big Three and the transplants have contributed to
maintaining or increasing employment in the sector.
Figure 4. U.S. Total and Automotive Manufacturing Employment
Index: 1990=100.0
140
120
100
80
60
40
All Manufacturing Employment
Employment SIC 371
20
Employment NAICS 3361, 3362, 3363
0
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings” (http://data.bls.gov as viewed on March 3, 2005).
As a consequence of these trends, employment in automotive manufacturing has
increased as a share of all manufacturing jobs. As of 1990, when NAICS-based data
become available, automotive manufacturing employment of more than 1 million
represented 6% of all U.S. manufacturing employment. At its peak in 2000,
employment in automotive manufacturing represented 7.6% of all manufacturing
employment. Levels of both total and automotive manufacturing employment have
subsequently fallen, but because auto-related employment fell more slowly in
absolute terms, in 2004 it actually represented a slightly higher rate of all
manufacturing employment than in 2000 — 7.7%. The key employment question in
the industry is whether it is due for more rationalizing and downsizing, as has been
the pattern in other manufacturing sectors.
Table 1 shows how employment has shifted among the three NAICS
automotive sector categories. Motor vehicle manufacturing accounted for only
20,000 new positions between 1990 and 2000, and by 2004 had fewer employees
CRS-17
than in 1990. This change reflects a downsizing of the Big Three, especially through
spinoffs, which were not fully offset by expansion of assembly operations by the
transplant competition. Motor vehicle parts added almost 200,000 jobs between
1990 and 2000 (from 653,000 to 839,000 employees), and as of 2004 still employed
35,000 more people than at the beginning of the period. The smallest category,
motor vehicle bodies and trailers, had the largest percentage rate of growth between
1990 and 2000, increased employment by more than 40%. By 2004, the number had
retreated to 164,000, still 35,000 (27%) higher than in 1990.
Table 1. Employment by Automotive Manufacturing Categories
(Thousands)
1990
2000
2004
NAICS 3361 (Motor Vehicles)
271.4
291.4
256.1
NAICS 3362 (Bodies, Trailers, etc.)
129.8
182.7
164.5
NAICS 3363 (Motor Vehicle Parts)
653
839.5
688.5
Total
1054.2
1313.6
1109.1
Source: U.S. Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings” [http://data.bls.gov], as viewed Mar. 4, 2005.
Formerly, the Big Three domestic manufacturers were highly integrated, with
the assemblers of cars and trucks manufacturing many of their own parts, as well as
the vehicles and engines.15 In recent years, assemblers have increasingly outsourced
more of their parts, subassemblies and systems; “modularization” of outsourced
systems and components has become a new key concept in the motor vehicle
manufacturing business. For example, both GM and Ford have spun off their parts
manufacturing operations. GM spun off its main parts operation as Delphi in 1999,
while Ford did the same, creating Visteon in 2000. Notwithstanding its long tradition
of vertically integrated manufacturing, the U.S. automotive industry also has an
equally long tradition of specialist suppliers. As the major Japanese and European
assemblers have established manufacturing operations in North America since the
1980s, the domestic industry has seen both the establishment of foreign-owned parts
and systems suppliers that have accompanied them, and domestic U.S. firms’ efforts
to compete for the supply business.16
15 Most famously, Henry Ford not only poured his own steel at the Ford steel mill in the
River Rouge manufacturing complex, but the mill used iron ore from Ford-owned mines,
transported to the “Rouge” on Ford-owned ships. James P. Womack, Daniel T. Jones and
Daniel Roos, The Machine That Changed the World (New York: Rawson Associates, 1990),
p. 39. Rouge Steel still operates on the same site today, where it continues to supply Ford,
although, after more than a decade as a spun-off company, it was acquired in 2003 by the
Russian company, Severstal.
16 An analysis of its impact on South Carolina, commissioned by BMW, included a review
of the suppliers that moved or expanded operations in the state: The Economic Impact of
BMW on South Carolina (University of South Carolina, Moore School of Business, 2002),
pp. 11-19, esp. Figure 8. The 1998 Report on the Significance of Toyota Motor
CRS-18
Consolidation of the North American Industry
This report has initially focused on the size and growth of the motor vehicle
production sector in the United States. The context has been the consolidation of
motor vehicle manufacturing in North America into a single, albeit somewhat
bifurcated, industry. This development has proceeded in three important phases:
! The U.S.-Canadian Automotive Products Trade Agreement of 1965
effectively created a single industry in the two countries, owned by
the U.S. Big Three (plus American Motors). By the agreement and
an associated “letter of understanding” between the Canadian
government and representatives of the U.S. automotive
manufacturing companies (to which the U.S. government
“acquiesced,” but was not a party), the manufacturers agreed to
increase Canadian-origin content in vehicles and parts, as a
percentage of the gross value of their Canadian sales each year. In
exchange, the manufacturers did not pay U.S. or Canadian tariffs on
automotive products in bilateral trade. Both Canadian and U.S.
analysts believe that the agreement was not sectoral free trade, as it
is often described, but rather a form of managed trade, in which
duties were eliminated on a two-way basis, as long as certain
Canadian sourcing conditions, closely monitored by the Canadian
government, were met.17
! In 1988, the auto agreement was subsumed into the broader U.S.-
Canadian Free Trade Agreement (FTA). The principal U.S.
automotive negotiating goal within the FTA appears to have been to
“freeze” the Canadian duty remission program to the existing (Big
Three) registrants, rather than having Canada extend it to Japanese
and Korean investing companies. However, the FTA contained
general provisions that effectively phased out the remaining
Canadian incentives, restrictions, and performance requirements on
automotive operations.18
! On January 1, 1994, the North American Free Trade Agreement
(NAFTA) entered into effect. Under NAFTA, Mexico agreed to
gradually liberalize and then eliminate the restrictive provisions of
Manufacturing, Kentucky, Inc. by Prof. Charles F. Haywood found that 120 of 175
automotive suppliers had moved to Kentucky since the location of Toyota’s plant there.
17 This conclusion is drawn from separate analyses of the agreement by the U.S.
International Trade Commission and a Canadian source, quoted in CRS Report 88-122E,
Automotive Products Trade with Canada and the U.S.-Canada Free Trade Area Agreement
(available from the author of the present report), pp. 6-7.
18 Ibid., pp. 14-19. Although, according to Gary Hufbauer and Jeffrey J. Schott, certain
Canadian auto industry safeguard provisions from the 1965 deal were even later “untouched
by NAFTA ... a tribute to the negotiating skills, if not the economic wisdom, of the
Canadian team.” See their NAFTA: An Assessment, rev. ed. (Washington: Institute for
International Economics, 1993), p. 38n.
CRS-19
the Mexican Auto Decree, a policy that had been developed in
accordance with the theory of import substitution. This policy had
restricted the distribution of automobiles and trucks in Mexico to
locally established manufacturers (the Big Three, VW and Nissan),
and subjected them to extensive performance requirements. The
most notable of these rules was a “trade balancing” requirement that
a manufacturer had to export twice the value of vehicles that it
imported. Trade balancing and local sourcing rules were gradually
eliminated over a ten-year period, though restrictions remain on
imports of used cars and trucks. NAFTA requires automotive goods
to meet special rules of origin. For passenger cars, light trucks, and
their engines and transmissions, the rule is 62.5% North American
content, compared to 50% under the original U.S.-Canada
automotive agreement.19
These agreements, over a period of thirty years, have curtailed Canadian and
Mexican attempts to promote and protect automotive assembly and supplier
industries through restrictive and interventionist government policies. Of course,
both the central governments of Mexico and Canada, as well as provincial, state and
local governments, continue to seek to attract or keep auto plants through incentive
programs, as do U.S. states and localities.20
In Canada, automotive exports now account for 23% of total national exports.
But concern has been expressed in Canada that the automotive trade surplus has been
declining since 1999. A Canadian Automotive Partnership Council (CAPC) has been
formed, with representatives of all groups with an interest in the industry (including
the Big Three, Honda, Toyota, parts manufacturers, dealers, the Canadian Auto
Workers union, the academic community, and federal and provincial governments).
CAPC has produced a study and policy recommendations, with the explicit target of
reversing declines in the trade balance in both vehicles and parts.21
In Mexico, automotive products have been among the major products of the
maquiladora program. Prior to NAFTA, manufacturers could minimize both
exposure to Mexican trade and tariff laws, while minimizing exposure to U.S. tariffs
at maquiladora plants that exported at least 50% of their production. According to
19 Governments of Canada, the United Mexican States and The United States of America.
Description of the Proposed North American Free Trade Agreement (Aug. 12, 1992), pp.7-
10; Hufbauer and Schott, pp. 37-40.
20 See, for example, “Canada Pledges Millions for Ford Plant,” Automotive News (June 21,
2004), p. 6, on Canadian federal and provincial support worth $Canadian 200 million to
meet Ford “demands” for help in a major revamp of its Oakville, Ont. assembly operations.
GM has received $350 million from the same sources in support of $2 billion worth of new
investment in three Ontario projects; “GM Steers $2 Billion into Ontario,” Detroit Free
Press (Mar. 3, 2005).
21 CAPC. A Call for Action: A Canadian Auto Strategy (Oct. 2004). Full report available at
[http://capcinfo.ca]. The report is discussed in: Bureau of National Affairs. Daily Report for
Executives (DER), “Group Urges Canadian Government to End Barriers to Auto Trade with
U.S.” (Oct. 29, 2004), p. A-15.
CRS-20
the U.S. General Accounting Office (GAO), 112,000 Mexicans worked in such
establishments that produced items of “transportation equipment” in 1991. That was
about a quarter of the total of all maquiladora workers, and equal with electronic and
electrical products as the two largest employing sectors.22 With the establishment of
NAFTA, the export minimum for maquiladora facilities has been eliminated, and any
product now manufactured in Mexico (under NAFTA origin rules) enters the United
States duty-free.
There is still a low-cost production, comparative advantage logic to locating the
manufacture of certain products or components for the U.S. market in Mexico, and
as some analysts note, some maquiladora operations have moved into more
sophisticated manufacturing and R&D activities.23 The significance of Mexican
manufacturing establishments for automotive parts in North America automotive
assembly industry is indicated by the fact that the value of parts imported into the
United States from Mexico rose from less than 12% of all parts imports to almost
30% between 1993 and 2002. Mexico displaced Canada as the leading source during
this period. Imports of complete vehicles from Mexico also increased more than
fivefold, to more than $20 billion in value by 2002. This was greater than the value
of imports from Germany, though still much less than Canada or Japan.24
The maquiladora industries in total lost 278,000 jobs between late 2000 and
early 2002, but they remain an important aspect of North American motor vehicle
production. Some analysts have asserted that Mexico as a low-cost location for sub-
assemblies, parts and components for manufactures has been overtaken by
competition from China. But a sectoral breakdown of apparent trade share gains and
losses for maquiladoras indicates that, trade gains in automotive parts and systems
by Chinese producers appear to complement, rather than subtract from, market shares
held by Mexican maquiladora exporters.25 A late 2004 article also noted that, as
Mexico moves away from the import-substitution model, the low-cost high-volume
models sold in Mexico are actually imported from lower-cost production areas, and
that Mexican auto factories are actually beginning to specialize in higher-cost
vehicles for the global market (such as the VW “new” Beetle, and the Chrysler PT
Cruiser).26
22 Program described in CRS Report 93-1050E, Mexico’s Maquiladora Industry, by M.
Angeles Villarreal; GAO data reported on p. 6.
23 Federal Reserve Bank of Dallas, El Paso Branch. “Maquila Industry: Past, Present and
Future,” Business Frontier (Issue 2, Aug. 26, 2004).
24 See CRS Report RL32179, pp. 51-52 and Table 5. U.S. automotive trade data will be
covered in detail later in this report.
25 Federal Reserve Bank of Dallas, El Paso Branch. “Maquila Downturn: Structural Change
or Cyclical Factors?” Business Frontier (Issue 2, Aug. 26, 2004), Table 2, reporting results
of research by Ernesto Acevedo Fernández of the Mexican Ministry of Finance and Public
Credit.
26 Joel Millman, “Mexico Blazes Trade Success; Auto Industry Matures to Supply Global
Markets,” Wall St. Journal (Nov. 29, 2004), p. A12.
CRS-21
Press reports also note a 2004 comeback in hiring at Mexican maquiladora
operations, which may indicate that the economic problems of maquiladoras have
been the result of the U.S. recession and some confusion over Mexican tax law
changes, more than competition from China.27 With respect to the North American
motor industry and its growing reliance on “just-in-time” inventory systems, it could
be difficult to replace Mexican sources for original equipment (OEM) suppliers with
product shipped long distances from China. Moreover, in an effort to reassure
maquiladora operators and to retain or expand their investment within global supply
chain systems, Mexico has launched a Sectoral Promotion Program (“PROSEC”),
which gives producers in 20 maquiladora sectors an opportunity to import non-
NAFTA components at reduced Mexican tariff rates (0% to 5%).28 Recent data
indicate that both output and employment at maquiladora plants expanded strongly
in 2004.29 A Mexican official has also stated that the Mexico-Japan Free Trade
Agreement, signed in September 2004, and which entered into effect on April 1,
2005, could substantially increase Mexico’s role as a supplier to the U.S. market for
Japanese automobile and auto parts manufacturers.30
Figure 5 shows the impact of these changes on the U.S. and North American
motor vehicle assembly industry.31 As of the late 1970s, the U.S. automotive
industry, then almost exclusively the Big Three, built an average of about 12 million
vehicles (cars and light trucks) per year. This was more than 85% of total vehicle
production in North America. Canada at that time built less than two million
vehicles per year, and Mexico fewer than 500,000. During the recessionary period
1980-82, the U.S. auto industry averaged fewer than 8.0 million units per year. From
that low point, U.S. production output expanded, with one other big recessionary dip
in the early 1990s, to 13.0 million vehicles by 1999. Once again there was a decline
in demand as a recession overtook the U.S. economy, but this time, the decline in
units built in the United States was relatively modest: in 2002-03, U.S. output was
more than 12 million vehicles, or about the same as the totals of the late 1970s. As
of 2003, 74% of the vehicles produced in North America were still assembled in the
United States.32
27 “Made in the Maquilas — Again,” Business Week (Aug. 16, 2004), p.45.
28 “Maquila Industry: Past, Present and Future.”
29 “It’s Hot South of the Border,” Business Week (Mar. 7, 2005), p.32.
30 Bureau of National Affairs. Daily Executive Report (DER), “Mexico says FTA with Japan
Will Boost Japanese Exports in U.S. after April 1” (Mar. 15, 2005), p. A-10.
31 See Appendix Table 1 for the detailed numbers.
32 The automotive industry tends to measure output in terms of “units,” rather than value,
even though vehicle unit values, and the profits per unit sold, vary significantly between
lower-cost and higher-cost cars and light trucks.
CRS-22
Figure 5. Location of North American Motor Vehicle Production
Millions of units
14
12
United States
10
8
6
4
Canada
2
Mexico
0
1977
1979
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Ward’s Automotive Yearbook, 2004.
Both Canada and Mexico have seen fairly steady increases in their total output
and shares of North American production. Canada produced about 12% of the
industry’s North American total in the late 1970s, after the U.S.-Canada automotive
trade agreement was in place. Output there declined with the recession of the early
1980s. By 1988-89, as the FTA entered into effect, Canada’s output hit 2.0 million,
and close to a 15% market share. By 1999, when NAFTA had been in effect for six
years, Canada’s total output exceeded 3.0 million units and a 17.6% share of a record
North American production of 17.7 million units. In the post-2000 industry
downturn, Canada has continued to produce about 2.5 million units annually.
From the late 1970s through the end of the century, Mexico’s automotive unit
production advanced even more steadily, to one million units by 1991, and just under
two million in 2000-01 — despite a major decline in the mid-1990s because of a
serious domestic financial crisis. Mexico’s percentage share of total North American
production, which was around 2% in the late 1970s, reached double-digit levels in
2000-02, before declining to just less than 10% in 2003. Mexico’s own internal
demand in 2004 reached a record high of 1.1 million vehicles, as the economy again
grew strongly.33
Total North American vehicle production has thus steadily risen for the past 20
years, while sectoral and regional trade deals have created the basis for a fully
regionalized industry. In the early 1980s, output took a devastating fall, from 14.5
million units per year in 1977-79, to an average of just 9.5 million units during the
next three years, a fall of 35%. Since then, production has never been less than 11
33 “Hot South of the Border,” Business Week.
CRS-23
million units, and has been in the 15-18 million unit range annually since 1994. The
share of vehicles assembled in the United States has fallen, though not dramatically,
while the absolute number of vehicles assembled in the United States has remained
about the same, allowing for changes in economic trends and overall demand.
Rise of International Investment in North America
The overall picture of growth in North American production masks the tension
within the industry created by the entrance of new international competitors as
domestic manufacturers. Growth has been due in part to internationally based
companies (especially from Japan) investing in the North American market initially
as a substitute for importing, while the Big Three struggled with downsizing issues,
as will be reviewed in a later section. Together with growing automotive
manufacturing capacity elsewhere, especially in Asia, there are concerns that the
motor industry may be creating a problem of overcapacity. The result could be more
serious rationalization and industry closures, especially in North America, as well as
in Japan and Europe, the other two traditional major producing regions.34
Figure 7 illustrates the increasing role of international (foreign-based) producers
in the U.S. motor vehicle market (cars and light trucks, the latter including pickup
trucks, minivans and SUVs). The figure uses 1979, 1990 and 2000 as growth years,
at or near peaks of domestic U.S. economic growth and automotive production. The
year 2003 is also shown, to provide the latest complete annual data. Detailed data for
manufacturers within North America are provided in Appendix Table 2.
The total number of vehicles produced in North America by the traditional Big
Three manufacturers has not changed very much overall since the late 1970s, as can
be seen in Figure 7, when one looks at the growth peaks. The Big Three produced
more than 12 million vehicles in North America in 1979. Production dropped
dramatically in the recessionary period 1980-82. Despite a recovery in the later
1980s, by 1990 total production was still two million vehicles less than in 1979. By
2000, production in North America by the Big Three companies35 was more than 13
million vehicles, less than one million more than in 1979. With the onset of
recession and slower economic growth after 2000, total Big Three production
declined by 1.8 million units, to about 11.5 million, in 2003.36
34 See special section, “Perpetual Motion: A Survey of the Car Industry,” The Economist
(Sept. 4, 2004).
35 While Chrysler had effectively been acquired by Daimler Benz in 1998, these data count
the subsequent Chrysler Group operations separately from Mercedes Benz production in the
United States, which had already begun in 1995. Other Big Three links with foreign-based
investors to establish North American production facilities are also counted as “transplants,”
as noted in Appendix Table 2. This is how such operations are treated in industry sources.
36 Sales were disappointing overall through the first eight months of 2004, especially for GM
and Ford, which reported plans to cut production for the balance of the year. Chrysler sales
increased, especially for some new products, and results were mixed, though generally
somewhat higher for imports and foreign-brand vehicles; Associated Press, “Ford, GM Sales
Drop; Both Cut Production” (Sept. 1, 2004); Reuters, “Ford Cuts Production after Sales
Fall” (Sept. 1, 2004); John K. Teahen, Jr. “Dog Days of August Are a Dog for Ford, Too,”
CRS-24
Figure 6. Production in North America by Type of Company
A closer look at Appendix Table 2 reveals significant variations within North
America and among the Big Three. GM produced more than seven million vehicles
in 1979; by the 1990s, its annual production level was around 5-6 million units per
year. In 2000, GM produced 5.6 million vehicles, and by 2003, despite a slow
economy, that level had fallen only minimally, to 5.3 million. However, this level,
it can be argued, was artificially maintained by high levels of discounted fleet sales
and expensive customer incentives of up to $6,000 per vehicle.37 Ford production at
the end of the 1970s was just over half the GM level; in 1990 it had reached nearly
70% of GM’s total, and in 2000, Ford produced more than 80% of the number of
vehicles produced in North America by GM. But with the economic recession and
an aging Ford lineup of models, the ratio declined somewhat to 71% in 2003.
Similarly, Chrysler also gained on GM in North American production totals. It
produced less than a quarter of the number of vehicles manufactured by GM in 1979,
but by 2000-03, its North American output was about half the GM level. As will be
shown later, some of this change is because of greater relative success of Ford and
Chrysler in producing light trucks, including minivans and SUVs.
Automotive News (Sept. 13, 2004).
37 When GM reported disappointing earnings for the third quarter of 2004, it was noted in
one source that, “In North America, GM reported a $22 million loss,” despite a September
sales surge, in part because “it led the industry with an average incentive of $4,340 a
vehicle;”Associated Press, “Pricing, Europe Weigh on GM Results” (Oct. 14, 2004). On GM
incentives, see “General Motors Incentives to ‘Stay High,’ Executive Says,” Bloomberg.com
(Aug. 14, 2004); David Welch, “GM: Enough with the Come-Ons,” Business Week (July 26,
2004), p. 44.
CRS-25
Another shift in vehicle output within the Big Three is the increasing role of
Canada and Mexico in final vehicle assembly. Appendix Table 2 illustrates that the
U.S. production level of 9.8 million vehicles in 2000 was about one million below
the level of 1979, and was another one million less in 2003. Meanwhile, Canada had
substantially higher production levels in 2000-03 than in 1979 or 1990, and Mexico’s
Big Three production in 2000-03 was double the level of 1990 (before NAFTA).
This relative decline of the U.S. role in Big Three North America production appears
solely due to a decline at GM, particularly at its U.S. plants. In 1990, 2000 and 2003,
GM produced at least two million fewer vehicles in the United States than in 1979.
Both Ford and Chrysler produced more vehicles annually in the United States in
2000-03 than in 1979 or 1990, although Ford vehicle output by its U.S. factories in
2003 was barely higher than in 1979.
Foreign transplants have increased their share of North American motor vehicle
production from virtually nothing to more than a quarter of the total in 25 years, as
shown in Figure 7 and, in more detail, in Appendix Table 2. Volkswagen was the
only foreign-based producer in 1979, when it produced 175,000 units at its plant in
New Stanton, Pennsylvania. That plant proved to be unsuccessful, and has since
been closed, with subsequent VW production in North America located in Mexico.
By 1990, most Japanese manufacturers had vehicle production facilities in North
America. Some transplants were built in direct collaboration with the Big Three, but
most of the production came from plants independently designed, built and operated
by the Japanese-based producers. The initial decisions of Japanese manufacturers to
locate in North America was in part a function of U.S.-Japan trade relations, as will
be described in a subsequent section of this report. But whatever the cause, by 1990,
more than two million vehicles were assembled each year by the transplants in North
America, and more than two-thirds were built in the United States.
This total doubled to more than four million annually by the end of the decade.
Moreover, while Big Three output dropped by 1.6 million units between 2000 and
2003, transplant output continued to increase, despite the economic slowdown: from
4.1 million to 4.7 million units assembled in North America, with all the net gain
coming at U.S. plants. The Japanese producers were joined by BMW and Mercedes
Benz, which opened their first North American production facilities in South
Carolina and Alabama respectively in 1994 and 1997. The German
manufacturers’confidence in the ability to assemble world-class vehicles in the
United States may be indicated by exclusive production of certain models in these
plants for distribution to both U.S. and worldwide markets.
A close examination of the transplants’ data in Appendix Table 2 also shows
that the more profitable or higher-volume transplants have been those that were
started up by the foreign-based companies themselves, rather than those that were
developed in conjunction with the Big Three. Honda’s plants in Ohio, Ontario, and,
most recently, Alabama, were all initiated by the company on its own.38 Nissan’s
38 See the special section in Automotive News (Sept. 6, 2004) commemorating the 20th
anniversary of Honda’s manufacturing beginnings in Ohio, which started with a motorcycle
plant. The first article, “Changing the Rules,” by Lindsay Chappell, emphasizes the different
approaches from traditional U.S. automotive manufactures employed by Honda.
CRS-26
plants were also built and operated on their own, as was the large Toyota plant at
Georgetown, Kentucky, the largest of the transplant operations in North America, in
terms of annual vehicle output. The one major exception is “NUMMI” (for New
United Motor Manufacturing Inc.). This was a closed GM plant in Fremont,
California, which Toyota reopened and has successfully managed as a joint venture
with GM (and with UAW-represented workers).39 By contrast, the plant built by
Mitsubishi in the “Diamond-Star” alliance with Chrysler in Normal, Illinois; the
Ford-Mazda “AutoAlliance” plant in Flat Rock, Michigan; and the GM-Suzuki
CAMI operation in Cambridge, Ontario, have all been more limited or less successful
in terms of output growth. The Subaru-Isuzu plant in Lafayette, Indiana, was a joint
venture between Subaru (owned by Fuji Heavy Industries of Japan) and Isuzu (partly
owned by GM); but the Isuzu truck operation at that facility has now been shut
down.40 About three-quarters of the net increase in transplant production of 2.4
million vehicles in North America since 1990 has come from the independently built
and operated facilities of Honda, Nissan and Toyota (excluding NUMMI) alone, to
which should be added the 250,000 vehicles produced by BMW and Mercedes Benz
at new plants (Mercedes Benz started production before the acquisition of Chrysler
by Daimler Benz, the common parent).
Transplant activity thus represents a permanent new competitive force in North
American vehicle manufacturing, one which, in general, has no ties to the Big Three.
By contrast, Big Three-linked “transplants” primarily represent an effort by the Big
Three to defend market share in some segments through vehicles produced by
controlled or allied foreign producers. But this effort has had limited success and
impact on the North American vehicle market to date. GM has also tried to create
a homegrown “transplant” operation, the Saturn company, based on new models of
relationships with customers, dealers and labor, which would allow it to compete
more effectively with economy models from foreign-based producers. While the
initial approach and the resulting product were well received, “the unit has posted
only one profitable year since 1990 ...” and “Saturn [sales have] never moved past
the 300,000 mark. Its best year was a decade ago.” GM is reinvesting in the
operation, and reorganizing it as a corporate division.41
Not only have the transplants increased their total output since 2000, but new
operations are ramping up or are in development. Nissan has started producing a
range of new products in Mississippi. Hyundai, having earlier closed a plant in
Quebec, is building a new facility in Alabama, and Toyota is building a new large
pickup truck plant in Texas. International investors have thus become a large,
established, independent, and growing part of the U.S. and North American
automotive manufacturing picture.
39 Womack et al., The Machine That Changed The World, pp. 82-84.
40 For an excellent overview of transplant activities and recent developments in North
America, see the special section on “New American Manufacturers” in Automotive News,
(June 14, 2004), pp. 23-30DD, esp. the summaries by Lindsay Chappell in “The
Transplants’ Changing Faces,” p. 26.
41 Dave Guilford, “Once Different Saturn Looks More like GM,” Automotive News (June
14, 2004), p. 30V; Jerry Flint, “Saturn: The Forgotten Promise,” Forbes.com (Aug. 17,
2004); “GM to Invest in Plant to Help Saturn Brand,” Detroit Free Press (Aug. 27, 2004).
CRS-27
Big Three Lead in Light Trucks — Transplants Grow Rapidly
As noted in a previous CRS report,42 the major difference between the
development of the Big Three’s domestic product output and that of the transplants
in terms of their production output is the increasing shift of the former from cars to
light trucks. This shift is summarized in Figure 7, with more statistical detail
provided in Appendix Table 3, the latter adapted and updated from the earlier CRS
report.
As of 1990, despite its substantial downsizing in the 1980s, GM still produced
more than 2.6 million cars in the United States, compared to 1.47 million trucks —
cars represented 64% of its U.S. motor vehicle output. Somewhat surprisingly,
perhaps, given its acquisition of Jeep and its minivans, Chrysler in that year produced
about 40% more cars in the United States than trucks (730,000 against 530,000).
Only Ford, whose pickup trucks had been outselling Chevrolet since 1968, and which
in 1990 began producing the highly successful Explorer SUV on a truck chassis,
produced more light trucks than cars at its U.S. assembly plants in that year.43 And
overall, despite the popularity of some models produced at U.S. transplant facilities
by the 1990s (Honda Accord in Ohio, Toyota Camry in Kentucky), more than 78%
of all cars produced in the United States were still made by the Big Three, as well as
more than 95% of all light trucks.
By 2003, the Big Three product mix had changed dramatically in favor of a
greater focus on truck output from U.S. plants. Most notable was a reversal of the
ratio at GM, whose U.S. output was 64% trucks in 2003, exactly the opposite of the
1990 ratio. The ratio of trucks to cars from Ford and Chrysler was even higher.
Ford’s Explorer continued to register strong sales despite a safety controversy over
rollovers and Firestone tires; trucks represented 74% of Ford’s U.S. output in 2003.
Chrysler dedicated almost 80% of its U.S. production in 2003 to the light truck
segment. In particular, as both Big Three and Japanese-based companies struggled
to launch models competitive in the minivan segment that Chrysler invented,
“Chrysler dominated the market for minivans from 1984 until the late 1990s,
capturing half the total sales.”44 Overall, according to a study prepared for the
Alliance of Automobile Manufacturers, light trucks, including SUVs, now account
for around 60% of total U.S. motor vehicle production of cars and light trucks
(including the output of both the Big Three and foreign-based manufacturers).45
42 CRS Report RL32179. See the section on “Automobiles and Light Trucks,” by M.
Angeles Villarreal, pp. 24-30 and Fig. 6.
43 Brinkley, Wheels for the World, p. 593.
44 Charles K. Hyde, Riding the Roller Coaster: A History of the Chrysler Corporation
(Detroit: Wayne State University Press, 2003), pp. 265-269.
45 Alliance of Automobile Manufacturers, Economic Contribution of the Automotive
Industry to the U.S. Economy — An Update (Fall 2003), p. 3, cited in CRS Report RL32179,
p. 25.
CRS-28
Figure 7. U.S. Car and Light Truck Production by Manufacturer
By contrast to the Big Three, foreign-based producers have developed a strong
position in the U.S. car market, and now account for 43% of all passenger car
production at their U.S. transplant facilities; see Figure 8, which compares Big Three
and transplant total car and light truck sales. (As will be shown below, foreign-based
companies actually sell a majority of the cars sold in the U.S. market, when imports
are also counted.) Combined transplant car production in 2003, as indicated in
Figure 7, was greater than that of GM, Ford or Chrysler individually, whereas in
1990 it was only ahead of Chrysler, the smallest of the Big Three in car output.
Michelene Maynard, in her book, The End of Detroit, documents how Ford
successfully developed the Taurus in the mid-1980s, and how it became the leading
seller among all car models in 1992-95. But then as the Toyota Camry and Honda
Accord were redesigned in the late 1990s, the Ford product declined in sales, and is
set to be discontinued.46 On the other hand, it should be added that the Big Three
have not given up on the passenger car segment. For example, GM has launched new
luxury Cadillac models from a modernized plant in Lansing, Michigan; Ford is
launching several new models for the 2005 model year, including a completely
redesigned Mustang; and, Chrysler has had recent initial successes in launching two
new rear-wheel-drive vehicles, the redesigned Chrysler 300 and the Dodge Magnum
“sports wagon.”
46 Micheline Maynard, The End of Detroit: How the Big Three Lost Their Grip on the
American Car Market (New York: Doubleday, 2003), pp. 43-54. Significantly, Brinkley in
Wheels for the World devotes a full chapter to the successful development and launch of the
Taurus, but fails to note the model’s subsequent unsuccessful redesign and decline in sales;
see pp. 696-714, 727.
CRS-29
Figure 8. Total Car and Truck Production by Company Type
However, foreign-based motor vehicle manufacturers have not been content
only to gain increasing shares of the car segment. They have also rolled out new
products from their domestic U.S. production facilities to challenge the Big Three in
the light truck segment. By 2003, transplant production of light trucks had reached
14% of total U.S. light truck output (see Figure 8), and every indication is that they
intend to compete vigorously in that segment. Mercedes Benz specifically designed
its Alabama plant to inaugurate production of its first SUV, the new “M-class.”
BMW introduced its “sports activity” vehicles into production at its South Carolina
plant. Honda now builds its Odyssey minivan at a new Alabama plant, and is adding
production of its Pilot SUV there. Toyota builds a wide range of light truck vehicles
in its U.S. plants, and is planning to build its first full-size pickup truck at a new plant
in San Antonio, Texas. Nissan has introduced its own full-size pickup, the Titan,
along with other light truck products at a new plant in Mississippi.47
Shifts in Employment Among Companies
A generation ago, the U.S. automotive manufacturing industry was dominated
by the domestic Big Three, integrated, unionized nameplate assembly companies,
located, with their suppliers, predominantly in a Midwest “Auto Belt,” with branch
assembly plants around the country. Today, that structure has been significantly
modified.
The number of U.S. automotive manufacturing employment workers directly
employed by the Big Three has declined substantially since the early 1980s,
47 Some of these plans are reviewed by Chappell, “Transplants’ Changing Faces.”
CRS-30
especially at GM and Ford. As of 1979, the Big Three together employed almost one
million persons in the United States: 618,000 at GM; 240,000 at Ford; and 109,000
at Chrysler. GM also employed 39,000 persons in Canada and Ford employed
18,000 there; they may be considered as integrated with domestic U.S. production.
In addition, 28,000 persons were employed by American Motors in the United States
and Canada, so the total employed by U.S.-based nameplate manufacturers was more
than one million in the two countries.48
The 1980s witnessed a dramatic downsizing of Big Three employment,
especially domestically. The rise of imports and the recession of the early 1980s
resulted in much lower Big Three production and large-scale layoffs. Employment
levels did not recover to pre-recession levels after prosperity returned to the domestic
industry. By 1990, GM had shed more than half its total number of U.S. employees,
with a total of 279,000 listed in its annual report of that year. Ford and Chrysler
each reduced domestic employment by about a quarter; to 181,000 for Ford, and
79,000 for Chrysler.
As shown above, the production focus of the Big Three shifted to the light truck
market in the 1990s, and particularly to the SUV and minivan segments. But this did
not prevent a further substantial decline in direct employment levels, despite a decade
of strong market growth. As also noted earlier, GM and Ford both downsized
especially by spinning off major parts operations in the late 1990s. The location
breakouts reported in corporate annual reports are not consistent over time, but for
2000, GM reported total North American automotive employment of 212,000,
compared to 365,000 on a similar basis ten years earlier. For 2003 the total
employment level reported for North America for GM automotive operations was
down to 190,000. Ford’s total reported decline in 1990-2000 in U.S. employment
was smaller, to 163,000, but this still included some employees being shifted to the
newly spun off Visteon Corporation in the latter year. By 2003, Ford reported total
North American automotive employment as only 122,000.49
Chrysler’s story is more complicated, both because of its acquisition of
American Motors (AMC) in the 1980s, and its merger with Daimler Benz in 1998 to
form DaimlerChrysler (DCX). But it seems probable that it has also downsized,
though by a lesser number. Annual reports indicate that the combined Chrysler and
AMC totals in 1979 were 162,000 employees worldwide (mainly U.S. and
Canadian). The Chrysler worldwide total was 110,000 in 1990 (the latter would
mainly represent both Chrysler’s automotive operations and those it acquired with
AMC in the United States and Canada). The Chrysler Group of DaimlerChrysler
(DCX) reported a total of 93,000 employees for 2003, primarily in the United States,
and total DCX employment for the United States was 102,000.50
48 These figures are taken from 1979 annual reports of the Big Three, plus American Motors.
Chrysler indicated that it employed an additional 25,000 persons outside the United States,
but did not specifically break out data for Canada.
49 Ford annual reports, 1990, 2000 and 2003; GM annual report, 1990 and U.S. Securities
and Exchange Commission annual 10-K report, 2000 and 2003.
50 Chrysler Corp. annual report, 1990; DCX annual reports, 2000 and 2003; American
Motors annual report/10-K filing, 1986.
CRS-31
From about one million Big Three employees in the United States and Canada
in 1979, the level has thus declined to about 400,000 by 2003, or a net fall of almost
600,000 jobs. Not all of the jobs were simply eliminated. Some of them were
transferred to spun off or independent supplier companies.
How many of these jobs have been replaced by new transplant investments?
The Japanese Automobile Manufacturers Association (JAMA) reported that their
members employed more than 56,000 U.S. workers at 20 “manufacturing plants” in
2003. JAMA further states that, “Japanese automakers now supply 64% of their total
U.S. sales from their North American plants, compared with less than 12% in
1986.”51
A more comprehensive figure for the United States is provided by BEA.
According to its foreign investment data, the total number of persons employed by
foreign-affiliated manufacturers of motor vehicles, bodies and parts (NAICS 3361-
62-63) was 328,000 in 2002, as reported in that year’s benchmark survey of inward
foreign investment. This compares with 188,000 in the 1997 benchmark, and 58,000
(on the basis of SIC 371) in 1992. However, most of the net gain in 1997-2002 is
presumably due to the DCX merger, and the Chrysler Group is not counted in the
industry as a transplant. Chrysler Group’s employment total was 95,000 in 2002,
including some employees in Canada and Mexico, meaning that only about 50,000
of the net 1997-2002 increase of 140,000 employees of foreign-affiliated automotive
companies was due to employment expansion by other manufacturers. Another
feature of this data is the “primary line of business rule,” which means that foreign-
owned companies with multiple U.S. operations need report all their corporate data
under only one line of business. Thus, foreign automotive companies with both
importing and manufacturing operations in the United States may report their
investment data, not as manufacturing, but as “wholesale trade — motor vehicles and
motor vehicle parts and supplies.” In 1992, this item added 71,000 employees to the
total for U.S. affiliates of foreign companies in the motor vehicle industry, or more
than the 58,000 reported as working in motor vehicle manufacturing. In 1997, the
motor vehicle wholesale activities business number went up to 88,000, but in 2002
it declined to 54,000 (implying that the primary line of business for some foreign
companies may have shifted from importing to manufacturing). This number could
be added to the total for motor vehicles and parts manufacturing.
The net result would be that perhaps about 287,000 persons worked for foreign-
affiliated automotive companies (excluding Chrysler) operating in the United States
in 2002.52 This number may be compared to the approximately 1.1 million persons
51 JAMA. Growing Investment and Employment in America (2004), pp. 2 and 7.
52 U.S. Department of Commerce. Bureau of Economic Analysis (BEA). “Operations of
Foreign Affiliates in 2002: Preliminary Results from the Benchmark Survey,” Survey of
Current Business (Aug. 2004), Tab. 19.2; “Foreign Direct Investment in the U.S.: Financial
and Operating Data for U.S. Affiliates of Foreign Multinational Companies — Final 1997
Estimates and Revised 1992 Estimates,” at [http://www.bea.gov]. Data on employment by
Japanese-based auto companies, Chrysler and DCX are from proprietary private sources,
and may not be compatible with BEA survey-reported data. The Association of
International Automobile Manufacturers in March 2005 released The Contribution of the
CRS-32
working in the United States in the automotive manufacturing industry in 2003
(NAICS 3361-62-63), as reported in Table 1 of the present report. This would mean
that roughly a quarter of those who work in some aspect of automotive
manufacturing now work for foreign-affiliated companies (again excluding Chrysler).
Changes Among States in Automotive Employment
Table 2 illustrates how the changes in automotive manufacturing employment,
including the arrival of transplants, have affected the distribution of auto industry
jobs among the leading states in automotive employment. It compares the changes
in levels of employment ascribed to automotive manufacturing industry categories,
as measured in the BLS county-level Quarterly Census of Employment and Wages,
a report based on company filings of unemployment compensation premiums.
The table compares state automotive industry employment levels in 1979, near
the peak U.S. automotive manufacturing employment peak year, with the levels of
2003, after two years of economic recovery from the 2001 recession. SIC 371 and
NAICS 3361-3362-3363 data are used for 1979 and 2003 respectively. As noted
earlier, with respect to Figure 3, this may result in an undercounting of employees
working in automotive manufacturing in the earlier year, especially in auto parts
businesses. The undercount could be as high as 25%, and may mean that state losses
in this industry are actually understated, while state gains are not as high as indicated.
Also, data may not be published when there are only one or two operations, with
the risk of disclosing proprietary corporate data. This constraint affected mostly
NAICS 3361 data, motor vehicle assembly, in 2003. In Table 2, the non-disclosure
issue affected data from three states, Tennessee, South Carolina and Wisconsin.
Other states affected by the data disclosure restriction do not appear to have enough
automotive employment to move into the upper tier of auto industry employment
shown in the table, regardless of the missing numbers.
International Auto Sector to the U.S. Economy: An Update, prepared by the Center for
Automotive Research. The estimates for direct employment by the “international” sector
(imports and transplants) based on annual BEA foreign investment data for 1999-2001 are
similar to those reported here, allowing for some differences in definitions (pp. 14-16).
CRS-33
Table 2. Leading States in Automotive Employment
Total employees,
2003
Total employees, 2003
1979
1979
State
Rank
Naics 3361-62-63
Rank
Sic 371
Michigan
1
269,902
1
394,048
Ohio
2
136,399
2
119,947
Indiana
3
125,367
3
67,225
Kentucky
4
53,096
14
14,262
Illinois
5
41,120
9
28,551
California
6
40,546
4
49,532
Tennessee
7*
38,040
13
14,747
Missouri
8
36,896
6
38,760
Texas
9
28,901
11
16,298
New York
10
28,623
5
41,814
North Carolina
11
26,907
15
10,879
Georgia
12
21,781
10
18,778
Alabama
13
21,136
19
8,061
South Carolina
14*
20,717
34
1,471
Pennsylvania
15
20,702
8
32,489
Wisconsin
16*
19,319
7
33,425
Source: U.S. Department of Labor. Bureau of Labor Statistics. “Quarterly Census of Employment
and Wages,” viewed on [http://www.bls.gov] (Oct. 21-22, 2004).
* 2003 total excludes non-disclosable data.
The most striking change is the apparent loss of auto industry-related jobs in
Michigan. It is still by far the leading state in terms of auto industry employment, but
experienced a decline of at least 125,000 employees between 1979 and 2003 in
automotive-related industries. Michigan not only ranked first among all states in
automotive employment in 1979, but accounted for 43% of all employment counted
under SIC 371. Though still the leader under the corresponding NAICS categories
in 2003, Michigan’s share was down to 23%. Also, late 2004 estimates provided by
Ward’s, an auto industry data source, indicate that in 2004 Michigan will be passed
for the first time by Ontario as the largest auto-producing regional jurisdiction in
North America. Ontario was estimated to produce 2.7 million vehicles in 2004,
compared to 2.6 million from Michigan. Ontario would show a gain of about
CRS-34
600,000 from 1994, compared to a decline of 800,000 in Michigan over the same
period.53
Other midwestern “auto belt” states were not as severely affected. The number
two state from 1979, Ohio, gained about 17,000 jobs, from 119,000 to 136,000,
though the gain could be a statistical artifact, caused by the switch from SIC to
NAICS-based data. On the other hand, Marysville, Ohio, is the site of the Honda
assembly plant, which in 1979 was the first transplant manufacturing operation
established in North America by a Japanese automotive company. By 2003, Honda
employed more than 14,000 workers there and at other assembly, engine and
transmission plants in Ohio. Indiana, which ranked third in auto-related employment
in both 1979 and 2003, apparently gained the most auto-related jobs between the two
years. It nearly doubled its total, from 67,000 to 125,000. Indiana also has seen the
establishment in recent years of two major assembly plants by Japanese-owned
companies, a Toyota truck plant in Princeton and the Subaru plant in Lafayette.54
Thomas Klier of the Federal Reserve Bank of Chicago has analyzed job loss in
the automotive industry on a shorter term basis, since the year 2000, in these three
states. His data, based on the same source used in Table 2, plus industry data, also
show that the most severely affected state is Michigan. He found that Michigan in
2000-03 lost 15% of its automotive assembly jobs, and more than 20% of its
automotive parts employment (60,000 jobs in three years). Combined employment
declines since 2000 in Ohio and Indiana in automotive assembly operations were
somewhat less than in Michigan: 11.4% in assembly operations and 15% in parts, or
a combined total of 35,000 jobs. These three states accounted for most of the net
decline in employment nationally in assembly operations, as the net loss in the other
47 states was only 3.3% during the period. In parts, the net decline in employment
in the rest of the country was more proportionate, 10.7%. However, when Klier
reviewed this same data from a different source, plant-level data, the conclusion was
that the major employment losses in the automotive supply industry were largely
among “captive” suppliers owned and operated by the Big Three. Klier linked the
loss of automotive industry employment in these three states primarily to the loss of
market share by the Big Three.55
Among other midwestern “auto belt states,” Illinois also showed a net increase
in Table 2, from 29,000 to 41,000. However, this net increase in both states again
could be explained by the shift from an SIC basis to NAICS. The only midwestern
state besides Michigan to post a major decline in auto industry jobs was Wisconsin,
which fell from seventh in 1979, with more than 33,000 jobs, to sixteenth in 2003.
Its total of less than 20,000 employees in the industry by the latter date does exclude
NAICS 3361 assembly operations, but the major presence in this category, the AMC
plant in Kenosha, was closed by Chrysler soon after its acquisition of the smaller
53 Brian Dunn, “Ontario to Top Michigan in ‘04 Auto Production,” American Metal Market
(Dec. 3, 2004), p. 5.
54 Honda’s Ohio plant was originally a motorcycle manufacturing operation. JAMA, p. 3
chart summarizes 2003 data for statements about transplant activities in this section.
55 Thomas Klier, “Caution Ahead — Challenges to the Midwest’s Role in the Auto
Industry,” Chicago Fed Letter, no. 211 (Feb. 2005).
CRS-35
competitor. Missouri also registered a small decline in Table 2, and fell two places,
from sixth to eighth, in state rankings.
The biggest relative gainers in automotive industry employment were several
southern states, beneficiaries of increasing production in the South, particularly by
transplants, but also to some degree, by the Big Three. Kentucky, already the home
of a Ford truck plant in Louisville and the Chevrolet Corvette manufacturing plant
in Bowling Green, moved dramatically up the table of automotive manufacturing
states with the establishment of the Toyota plant in Georgetown, which produces
vehicles on the Camry, Avalon and Solara platform, as well as engines. With a head
count of more than 7,000 employees, it is the largest single transplant operation in
the United States. By 2003, Kentucky had moved up from thirteenth to fourth in
automotive employment, counting more than 50,000 employees. Tennessee would
probably rank next, if the employees at assembly plants established by Nissan in
Smyrna and GM Saturn in Spring Hill in the 1980s, which together employ more
than 7,000 persons, were added to the total of 38,000 shown in Table 2.
There are a group of southern states on the fringe of the top ten, which showed
employment gains. Texas is ninth, and will get a boost from the new Toyota truck
plant in San Antonio. Georgia fell slightly in rank, from tenth to twelfth, although
it showed a net small job gain to more than 21,000 employees. It has long-
established Ford and GM plants in the Atlanta area. DCX had planned a new
commercial van plant near Savannah, but cancelled the development in 2003.56
North Carolina is not known for major assembly plants of cars and light trucks, but
has a sufficient diversity of automotive industries to advance to eleventh from
fifteenth, having added 16,000 new automotive jobs.57 Alabama moved from
nineteenth to thirteenth, and is poised to advance further. Besides the Mercedes
Benz M-Class plant in Vance, Honda has opened a minivan and engine plant in
Lincoln, where it is planning to more than double employment in the near future.58
Meanwhile, Hyundai is returning to North American manufacturing as it builds a new
multi-product plant near Montgomery.59 South Carolina has also become a
significant player, moving from thirty-fourth to fourteenth in state rankings, even
without counting more than 2,000 employees at the BMW assembly plant in Greer,
who are not included in the BLS data.
Before writing the analysis noted above, Thomas Klier had also found that, even
in a system of “just-in-time” manufacturing, “having suppliers located in the
immediate vicinity of an assembly plant is not necessary to maintain a system of tight
linkages and low inventories.” Rather, he found that a larger radius — about 400
miles, or the equivalent to one day’s delivery time by truck, was sufficient for the
purpose of supplying assembly plants. Early transplant location decisions, not only
56 “DaimlerChrysler Drops Truck Plant,”Wall St. Journal (Sept. 24, 2003), p. A11.
57 Freightliner trucks and Thomas Built buses are also manufactured in North Carolina;
“UAW Scores a Touchdown at Thomas Built,” Solidarity (May-Jun. 2004).
58 See also, Lindsay Chappell, “Honda Adds N.A. Capacity,” Automotive News (May 3,
2004), p. 6.
59 See entry in Automotive News summary, “Transplants’ Changing Faces” (June 14, 2004).
CRS-36
Honda in Ohio, but also Toyota in Kentucky and Nissan in Tennessee, were
essentially within this delivery distance for most midwestern suppliers, even though
they may have stretched the definition of the auto belt to the south. Thus, Klier in
1999 defined the principal location of U.S. automaking, including the transplants, as
“reconcentrating” from dispersed locations around the country to the I-65/I-75
interstate corridors.60
A reconcentration of the industry along the I-65/I-75 corridor has particularly
led to a loss of auto industry jobs in the industrial Northeast, as seen in Table 2.
New York fell from fifth to tenth in industry rankings, with a loss of 13,000
employment positions; Pennsylvania declined from eighth to fifteenth, with a loss of
12,000 jobs; New Jersey, not shown in the table, declined from nearly 15,000
employees in 1979 to a little more than 2,000 in 2003, plus at least one remaining
uncounted assembly plant. California also suffered from this trend, as it lost 9,000
auto industry jobs, as shown in Table 2, and declined in the ranking from fourth to
sixth (probably seventh, in view of Tennessee’s unreported numbers in vehicle
assembly employment).
In a later presentation to a Chicago Federal Reserve Bank conference on
manufacturing in the Midwest, Klier noted that more recent location decisions
stretched his auto belt geography farther to the south and west.61 Nissan has located
a large new plant in Canton, Mississippi, near I-55, off the edge of the one-day
trucking corridor described by Klier. Moreover, the new Toyota full-size truck plant
— located in the Texas customer base for such vehicles (San Antonio) — discards
the corridor location model altogether. Nissan has addressed this issue by
developing an industrial park at the site of its Mississippi facility, and requiring
designated “Tier 1” (direct) suppliers to locate there; Toyota is considering the same
option in Texas.62
On the other hand, there are also some counter-trends. Most transplant-owned
supplier locations continue to be in or near the I-65/I-75 corridor (exemplified by the
Toyota-owned engine block plant in St. Louis, its engine and transmission plants in
West Virginia and Huntsville, Alabama, only a few hours’ drive from Georgetown,
Kentucky, and Nissan’s recent decision to expand its engine plant in Decherd,
Tennessee). Also, companies have found that they can manage the logistics of just-
in-time manufacturing from more distant and disparate suppliers through a trucking
60 Thomas H. Klier, “Agglomeration in the U.S. Auto Supplier Industry,”Chicago Federal
Reserve Bank Economic Perspectives, XXIII:4 (1st qtr., 1999), pp. 18-34. Location decisions
by Toyota and Honda in Ontario also fit this pattern. Klier did note that foreign-owned auto
parts suppliers tended to locate closer to transplants than domestic suppliers. Also, industries
might move to the South for other reasons, including lower operating and energy costs,
cheaper land for greenfield investments, and location incentives.
61 Thomas H. Klier, “Midwest Auto Industry — Performance and Outlook,” presentation at
Is Midwest Manufacturing at a Crossroads? Federal Reserve Bank of Chicago (Sept. 30,
2003).
62 U.S. International Trade Commission (ITC). Industry Trade and Summary: Motor
Vehicles (USITC Pub. 3545, Sept. 2002), p. 10. Comments from Nissan and Toyota officials
during plant visits in Smyrna, TN, and Georgetown, KY., Feb. 17-18, 2004.
CRS-37
relay system, known as “cross-docking.”63 Nevertheless, the conclusion of Klier
remains that the “risk for the upper Midwest” is that, “future Big Three capacity
reductions will disproportionately impact the northern end of the auto corridor.” In
view of recent Big Three contract decisions, he believes that such continued capacity
reductions are likely.64
Divergence in Labor Relations Organization
Whatever the impact of recent developments in the location of auto
manufacturing on state and regional employment levels, there can be no question but
that employment trends in recent decades have been adverse for union membership,
and specifically for the UAW. According to a 2004 press report, “The UAW’s active
membership dropped to 624,000 at the end of 2003 — the lowest level in more than
six decades and down from a peak of 1.5 million in 1979.”65 The same source
contains a chart showing that this decline has not abated in recent years, as the latest
annual total compared to more than 762,000 members in 1999 and 702,000 at the end
of 2002.
This decline is not isolated from developments in other industries, where union
membership — both absolutely and as a share of employees in industry sectors —
has tended to fall since the early 1980s.66 The overall decline in total membership
may be seen as an aspect of productivity gains and the steady decline recorded in the
U.S. automotive industry of the hours required to build a motor vehicle — and, thus,
a relative decline in production workers on the factory floor. But productivity alone
cannot explain the relative fall in the share of employees who are unionized in an
industry.
While the unionized Big Three have downsized, the unions have been generally
unable to organize transplant operations. The ITC’s 2002 report on the motor vehicle
industry cites three organizing failures at Nissan’s plant in Smyrna, Tennessee, and
other failures in recent years at Honda in Marysville, Ohio; Toyota in Georgetown,
Kentucky; and, Mercedes Benz in Tuscaloosa (Vance), Alabama. The ITC report
also cites the organizing successes of the UAW — all, as noted earlier in this report,
at assembly plants linked to the Big Three.67 Overall, BEA foreign investment data
indicate that 33.7% of employees of majority-owned U.S. automotive products
affiliates of foreign companies were represented by unions in 2002, for a total of
more than 110,000 organized workers.68 However, as of 2002, Chrysler Group alone
63 ITC. Motor Vehicles, pp. 9-10. Robert Mottley, “‘Henry Ford Would Be Horrified,’”
American Shipper (June 2004), p.8.
64 Klier, “Midwest Auto Industry.”
65 E. Mayne, “UAW Slashes Staff, Travel to Cut Costs,” Detroit News (Jun. 22, 2004), p.
1.
66 See CRS Report RL32179, pp. 9-10.
67 ITC. Motor Vehicles, pp. 7-8.
68 BEA. Survey of Current Business (Aug. 2004), p. 205, Table 10.
CRS-38
possibly accounted for the majority of these union members, as it reported that its
UAW union contract covered 58,000 employees.69
Womack et al. present the view in The Machine That Changed the World that
union organization of the work force, in both the United States and abroad, is an
artifact of old style mass production in the motor vehicle industry. The nature of the
organization and quality of work under “Fordism” led to a stratification of factory
operations, with little opportunity for advancement by production workers in terms
of skill development or possibility of achievement of management positions.
Consequently, the critical determinant of worker advancement and security became
purely a matter of seniority, with the union as the buffer between workers and
management on issues such as contract terms and disputes within a highly formalized
system of work rules.
Such a system was considered unacceptable in the context of “lean production”
as it evolved in Japan, and then was transferred by Japanese companies to the United
States and Canada in transplant operations. Key features of the system became
known throughout the automotive manufacturing world by their Japanese names,
such as kaizen (continuous improvement), andon (ability of a single worker to stop
an entire production line when a quality problem is observed), and kanban (“just-in-
time” inventory management). The MIT team who wrote The Machine That
Changed the World reported that Toyota, author of lean production in its most
refined form, the “Toyota Production System” (TPS), studied Big Three methods in
the 1940s and 1950s, and concluded that smaller market volumes and higher material
costs in Japan would not support the inventory methods and rates of product
reworking that were observed in Big Three management of production and inventory
control. Toyota, Honda and other leading Japanese manufacturers concluded that
they needed tighter control of quality throughout the manufacturing process and even
beyond — from customer order to supplier relations to order fulfilment. They also
needed a system of “flexible manufacturing,” which enabled them to alter production
output among different models and to introduce new models off existing platforms
in a fashion that was faster, more efficient and less costly than Big Three retooling
and design procedures. In all facets of lean production as operated by the Japanese
companies and their competitors, a key element is a closer and more continuous
relationship between engineers and production staff — at both assembly operations
and parts suppliers — than was considered possible in a bifurcated union-
management dichotomy in the mass production system.70
Many representatives of the Big Three and the UAW today challenge such an
analysis. The Big Three have become highly sensitive about plant visits, being
concerned that they actually originated many TPS and lean production techniques,
which were then copied by the Japanese companies. The Japanese companies
learned from the Big Three, some representatives say, when the Big Three opened
69 DaimlerChrysler 2002 annual report, p. 50.
70 This analysis is based on Womack et al., The Machine That Changed the World. See esp.
the comments on pp. 40-43 and 252-253 on the evolution of the union role in automotive
mass production, and the UAW response to the transplants and the lean production model.
On mass production and worker organization in Europe, see pp. 227-235.
CRS-39
their factories and were candid in discussing technology application issues.71 But a
study by the Harbor automotive consulting organization, which surveys plant
efficiencies every year, reportedly found in June 2004 that manufacturing
inefficiencies contributed to an average loss by Ford of $48 on every vehicle that it
produced in North America, while Nissan, the industry leader, had a profit of $2,402
per vehicle, and Toyota followed with a profit of $1,742.72
The UAW has been skeptical about the goals of “flexible” manufacturing, the
outsourcing of parts and components by nameplate manufacturers, and other Big
Three work reorganization tactics, which reduce reliance on the centrally organized
workforce and workplace practices that have been developed over time through
collective bargaining agreements. A recent report by the International Metalworkers’
Federation argued that “flexibility” is a codeword for the global industry’s
“deregulation agenda,” aimed at reducing regulations designed to protect the public
interest, as well as workers’ interests, in health and safety, wages, and working
conditions.73 This concern has been amplified as the UAW reacted to the downsizing
in employment at the core automaking activities of the Big Three, the outsourcing of
parts and components to spun-off or third-party manufacturers and the continued
market pressure from non-union foreign-based companies.
UAW-Big Three contracts are multiyear agreements based on pattern
negotiations, typically after the union has selected a specific target employer for each
new industry contract. The most recent contracts were signed in 1999 and 2003. The
UAW has focused in recent contract negotiating rounds on job security, as well as
security of defined benefits as included in union contracts, while conceding the
necessity for the Big Three to close plants and downsize the workforce in view of
technological change, as well as changes in product market share.74 Recent contract
agreements with the Big Three addressed the UAW concerns that in-house sourcing
of new work is being given inadequate consideration by management. “The union
may at any time appeal any sourcing grievance to an umpire ... [who] is empowered
71 See quote from former CEO Philip Caldwell of Ford in Brinkley, Wheels for the World,
p. 588. This view led to a general closure of Big Three plants to outside visitors. It was only
recently reversed by Ford CEO William C. Ford, Jr. He has wanted to make Ford’s new
truck plant on the River Rouge site a model of environmentally and ergonomically
progressive industrial engineering: “I would like the Rouge again to be the most copied and
studied industrial complex in the world.” (Ibid., p. 746). In the “Motor City” region of
Detroit and southeast Michigan, it is the only automobile factory that tourists can visit today,
unlike some transplant operations, which welcome tourists (the BMW plant in Greer, South
Carolina, has included a company museum, theater and gift shop on the site for several
years).
72 Bill Koenig, “Ford to put $300 Million in Michigan Truck Plant,” Detroit Free Press
(Dec. 16, 2004).
73 International Metalworkers’ Federation. Auto Report 2004 (presented to UAW, June
2004), pp. 19-22.
74 A summary of key issues with each of the Big Three in the 2003 agreements is reported
in CRS Report RL32179, pp. 28-29. Comprehensive analyses of employment benefits and
economic security gains are presented in UAW Ford Report, UAW GM and Delphi Report,
and Newsgram: UAW DaimlerChrysler Hourly workers, all dated Sept. 2003.
CRS-40
to make the union whole if he or she finds the company violates the contract, even
if there are no layoffs as a result of the sourcing violation.”75
The UAW has also sought to minimize enrollment losses as the Big Three have
downsized their core automaking operations. One approach has been to use “card
checks,” by which companies agree to recognize and bargain with a union whenever
a majority of workers has signed union recognition cards. Card checks are generally
considered easier and cheaper for unions to organize than a formal election under
National Labor Relations Board (NLRB) auspices, as well as being more reliable in
terms of the anticipated result. GM, along with Delphi, in the 1999 and 2003
contract negotiations, agreed to allow a “card-check recognition process” in
determining representation at manufacturing facilities. They further agreed to inform
suppliers of their “positive and constructive relationship” with the UAW, in order to
signal that Big Three companies are not seeking to move sourcing to non-union
shops, or to discourage union organization of suppliers.76
The use of card checks has been challenged before the NLRB, as the UAW has
sought to regain membership by organizing supplier plants. The UAW had gained
recognition through use of card checks at plants operated by two auto supplier
companies, Dana Corp. and Metaldyne Corp. But some workers at the plants
petitioned to decertify the UAW, on the grounds that card checks do not constitute
a secret ballot on union representation, as guaranteed under the National Labor
Relations Act. By a 3-2 vote, reportedly on political party lines, the NLRB on June
7, 2004, decided to take a “critical look” at whether the process of card checks with
management neutrality agreements constitute a fair system in determining whether
employees desire a union. UAW president Ron Gettelfinger has said that he does not
believe that the NLRB will overturn the widespread practice of card checks.77
However, the UAW has suspended organization of a local at a foreign-owned North
Carolina bus manufacturing plant, where it had succeeded in gaining recognition
through a card check, in order to avoid being accused of acting prejudicially while
the NLRB is investigating the issue.78 On the other hand, on April 8, 2005, an NLRB
administrative law judge dismissed complaints by several workers and the national
Right to Work Legal Foundation that an agreement between the UAW and Dana at
a Michigan plant constituted an illegal “pre-recognition” agreement between
management and the UAW prior to any decision by employees to choose the union
as their collective bargaining agent. This decision is subject to appeal.79
75 UAW Ford Report (Sept. 2003), p. 13.
76 UAW GM and Delphi Report (Sept. 2003), p. 3.
77 Automotive News, “NLRB May Stifle UAW’s Efforts to Grow,” (June 14, 2004) and
“Gettelfinger Not Worried About Card-Check Decision,” (June 28, 2004).
78 Detroit Free Press, “UAW Yields to Organizing Protest, Awaits Vote” (Feb. 26, 2005).
79 NLRB Decision JD-24-05 (Apr. 8, 2005); Mary-Beth McLaughlin, “Key Union Tactic at
Dana Plant Is Upheld,” Toledo Blade (Apr. 16, 2005); “Labor Relations Board Upholds
UAW Neutrality Agreement with Dana,” UAW press release (Apr. 15, 2005); “Statement
of National Right to Work Foundation on Preliminary Upholding of UAW Union ‘Neutrality
Agreement’ with Dana Corp.,” press release (Apr. 15, 2005).
CRS-41
Legislation was introduced in the 108th Congress that would specifically have
allowed representation to be determined by card checks and would increase penalties
for employers that interfere in attempts to unionize. The bill, entitled, the “Employee
Free Choice Act,” was introduced on November 21, 2003, in the House by
Representative George Miller, and gained 207 cosponsors. A companion bill was
introduced in the Senate on the same day by Senator Edward Kennedy, with 36
cosponsors. Congress took no action on either measure. In an August 2004
interview, AFL-CIO president John J. Sweeney indicated that the legislation was a
priority for the labor movement, and was supported by the Democratic presidential
and vice-presidential candidates.80 This legislation has not been reintroduced in the
109th Congress.
Another issue that has been contested in automotive industry labor-management
relations is modularization, which has been utilized by motor vehicle manufacturers
in an effort to improve efficiency, while reducing their upfront costs. But it has been
considered as a form of outsourcing and, therefore, controversial to the UAW.
Modularization was pioneered by Volkswagen in South America, particularly
at a new bus and truck factory that the company built in Brazil. VW did not build or
operate the factory alone: key suppliers not only manufactured complete component
systems on site, but also invested directly in the parts of the complex that they
operated.81 The ITC report notes that modularization was derived from studying how
Dell revolutionized computer manufacturing and contrasts it with “traditional”
assembly line manufacturing as follows:
Although the traditional model for auto manufacturing is to have the vehicle
move down an assembly line as components are installed piece by piece, modular
assembly shifts a large portion of the supply chain management and component
integration responsibility to Tier 1 suppliers, which deliver a complete module
— e.g., a cabin cockpit fitted with instrument clusters, airbags, audio equipment,
and wiring — to the automaker. Studies have reportedly shown that outsourcing
of basic parts assembly to module producers could save automakers as much as
20% on production costs.82
Modularization may remove the nameplate assembler from directly
manufacturing much of the product; it becomes rather the marketer, coordinator and
distributor of the final vehicle. Notwithstanding that the VW experiment in Brazil
was not highly successful in terms of productivity or product quality, it spawned
imitations locally, perhaps due to local labor conditions, and then in North America.83
The ITC notes that GM attempted to bring the concept to its new Lansing Grand
80 Washington Post, “AFL-CIO Sets Its Sights on a Kerry Victory” (Aug. 25, 2004), p. E1.
81 Alice Abreu, Huw Beynon and José Ricardo Ramalho, “‘The Dream Factory:’ VW’s
Modular Production System in Resende, Brazil,”Work, Employment & Society , XIV:2
(2000), pp. 265-82. Interestingly, the article notes that the VW plant at Resende has not been
especially successful in terms of productivity, when compared with other automotive
operations.
82 ITC, Motor Vehicles, pp. 13-14.
83 Abreu et al., “Dream Factory,” p. 272, 277-80.
CRS-42
River Cadillac factory, but UAW opposition may have discouraged implementation
of the “supplier-next-door” concept, although not the installation of complete
modules received from suppliers.84
Chrysler is making the boldest step so far to establish modularization at a union-
represented North American site. It is building a new Jeep plant on the site of one
of its oldest factories, in Toledo, Ohio. Chrysler is investing about $900 million in
the venture, with about $300 million invested by suppliers that will build the body
and chassis, and paint the vehicles, on site. Out of a planned 4,000 production
workers, drawn mostly from currently laid off auto workers, about 40% will be
directly managed and employed by the suppliers. The UAW local has agreed to this
arrangement, and is negotiating separate contracts, with different rates of pay and
benefits, with the suppliers.85
Modularization does not yet appear to be accepted as the inevitable next
evolutionary step in North American automotive manufacturing. At a 2004
conference, for example, a Toyota executive answered a question about “modular
assembly” by stating that it is not used by Toyota. Since his company, the executive
stated, viewed its comparative advantage as being in manufacturing, Toyota prefers
to build all major assemblies itself, though sometimes it might assemble them off-site
from the final vehicle assembly point.86
This report has discussed the decline or slow growth of Big Three production
in North America, the link between the Big Three and the UAW, and the relatively
rapid growth of non-unionized transplant production. But this is not to imply that
international companies investing in the United States have not also experienced
mistakes and difficulties in implementing their manufacturing investment decisions.
Nissan’s new factory in Mississippi, for example, experienced a number of
problems across its product lines, which caused its product quality ratings by a
84 ITC, Motor Vehicles, p. 14.
85 Jeremy Grant, “Chrysler Rolls Out Assembly Work,” Financial Times (Aug. 3, 2004), p.
18; Mark Phelan, “DCX, UAW, Suppliers OK Historic Teamwork, Detroit Free Press (Aug.
4, 2004); “DaimlerChrysler, Suppliers Team Up,” Detroit News (Aug. 4, 2004); Sholnn
Freeman, “Chrysler to Expand Ohio Plant, In Novel Venture with Suppliers,” Wall St.
Journal (Aug. 4, 2004), p. 8; James Flanigan, “In U.S., a New Model for Auto Industry,”
Los Angeles Times (Aug. 8, 2004), p. C1; John Seewer, “Suppliers to Partner with Jeep in
Toledo,” Cincinnati Post (Aug. 4, 2004), p. B6; Mary Connelly, “Test in Toledo: Can Four
Work as One?” and, Ralph Kisiel, “The Past Haunts the ‘Plant of the Future,’” Automotive
News (Aug. 9, 2004), pp. 1 and 4. Some articles note that, although Chrysler has experience
with supplier integration in assembly plant operations in Brazil, the specific DCX precedent
for the approach in Toledo is the Mercedes Benz small car manufacturing plant,
“Smartville,” in Hambach, France. Mary Connelly, “Zetsche: Haden Looks Like Partner in
Toledo,” Automotive News (Oct. 11, 2004), p. 26, covers the story that one of the three
initial suppliers pulled out of its investment, to be prospectively replaced by another
company.
86 Robert J. Ried, plant manager of a new Toyota assembly plant in Baja California, Mexico,
speaking at the Global Insight “Global Automotive Conference,” Dearborn, MI (Sept. 30,
2004).
CRS-43
respected private authority to decline substantially compared to its competitors.
Analysts speculated that the problem lay in overreaching by the company, which
sought to introduce new products, in a new-concept plant in a new location, while
training thousands of new employees.87 Far worse than the problem faced by Nissan
is the series of mistakes and problems faced by Mitsubishi. The already-struggling
company announced that it had hidden quality and design defects on cars sold in
Japan, leading to a public apology, resignation of the CEO, and serious declines in
sales and market shares both in the home market and North America. Its affiliate
DCX announced that it would invest no more in the ailing Japanese automaker and
has begun to reduce its 37% shareholding in the company, despite contracts for
development and production of joint platforms and vehicles. The Japanese
government and creditors, including the Japanese corporate parent, have stepped in
to prevent a complete collapse of the Mitsubishi automotive entity.88 Overall, veteran
automotive reporter Lindsay Chappell in a recent survey demonstrated that
transplants — the “New American Manufacturers” — have had a number of quality
problems, ageing product lines with declining profits, and some less than successful
North American manufacturing investments. “The days of easy growth are over,” he
wrote.89
Pension and Health Care Issues
Big Three representatives say that they are unfairly burdened in competing with
both imports and domestic production from foreign-based automakers by their own
rising pension and health care costs. Though most are non-union operations, the
transplants also provide an equivalent level of benefits. But being newer investors
in the United States, they do not yet face a burden of health care and other benefit
costs, which have accumulated over the decades for the Big Three, as the number of
retirees increases. Moreover, the average age of current employees is higher for the
Big Three, and health care costs are correspondingly higher. Like some other long-
unionized American industries, such as integrated steel mills, the Big Three face
aggressive non-union competition less burdened by these costs.
87 Business Week “Nissan: The Squeaks Get Louder”(May 17, 2004), p. 44;and, “The Way
of Carlos Ghosn” (Oct. 4, 2004), esp. p. 54; “Nissan Hustles Engineers to the U.S. —
Carmaker Scrambles to Improve Scores for New-Vehicle Quality,” Automotive News (June
28, 2004).
88 Sarah A. Webster, “DCX Decides It Won’t Bail Out Struggling Mitsubishi,” Detroit Free
Press (Apr. 23, 2004); “MMC Reels as Daimler Walks Away,” and “Mitsubishi Pledges
Support for Car Unit,” Financial Times (Apr. 24, 2004), pp. 1 and 8; FT.com, “Mitsubishi
Motors CEO Steps Down,” and “Crisis at Mitsubishi Motors Deepens,” (Apr. 26, 2004);
and, “Mitsubishi Motors’ Rescue Tops $10 Billion” (Jan. 28, 2005).
89 Lindsay Chappell, “Trouble on the Horizon,” Automotive News (June 14, 2004), pp. 23-
24. See also, “How Honda Is Stalling in the U.S.,” Business Week (May 24, 2004), pp. 62-
63, and Hyundai’s concerns about maintaining its recently regained quality rating,
“Hyundai: Kissing Clunkers Goodbye,” Business Week (May 17, 2004), p. 45; and, L.
Chappell, “Hyundai Double-Checks Supply Chain as Production Nears at Alabama Plant,”
Automotive News (Oct. 25, 2004).
CRS-44
GM CEO G. Richard Wagoner, Jr. estimated in 2004 that every GM vehicle
built in North America included $1,400 in health care costs — typically more than
the value of the steel in the same vehicle.90 In February 2005, he raised this estimate
to $1,525.91 According to the Detroit Free Press, “GM ... has estimated its future
retiree health care obligation is $67.54 billion, but has set aside less than $10 billion
for that obligation. GM provides health care to about 1.1 million people, more than
any other corporation in the country.”92 With ageing labor forces and retirees now
outnumbering active employees, Ford and Chrysler face similar pressures.93 The
Automotive Trade Policy Council (ATPC), the joint representative organization in
Washington of the Big Three, estimated in 2004 that the overall Big Three average
health care costs per vehicle are $1,220, compared to an average of $450 estimated
for Japanese and other foreign-owned manufacturers. The total Big Three health care
bill in 2003 was $10 billion, compared to an estimated $1.6 billion for their
competitors, ATPC said. In terms of retirees and surviving spouses supported by
pension benefits, ATPC estimated that the Big Three support more than 800,000
persons, compared to less than 1,000 now supported by foreign-owned competitors
operating in the United States — though that latter number is bound to grow over
time, while the Big Three number should peak in the next few years, and then
decline.94
More recent data in an Automotive News article gave even higher estimates and
greater discrepancies, based on 2004 data. It stated that GM paid for the health care
of 339,000 retirees, accounting for more than two-thirds of GM’s $5.2 billion
spending on health care (and not counting a $9 billion contribution to a trust fund for
health care costs). Ford spent $2 billion on retiree health care in 2004, and the
Chrysler Group spent $1.3 billion. By comparison, Toyota’s employees in Japan are
switched from the company health care plan to a national health care system within
two years of retirement; the company is thus responsible currently for retiree health
care coverage of only 3,000 persons in Japan.95
Furthermore, the Big Three have been locked into multiyear labor contracts that
require them to support laid off workers at 95% of salary, plus benefits, for the length
of the contract. Under these circumstances, the companies, led by GM, decided not
to cut back production and close plants after an economic recession and the
September 11, 2001, terrorist attacks threatened growth prospects. They decided to
90 “Health Care Costs Burden GM by $4 Billion, CEO Says,” Detroit Free Press (Feb. 11,
2005); a Toyota executive was quoted as saying that health care costs at one of his
company’s plants cost his company $12,000 annually per employee.
91 ; “U.S. Firms Losing Health Care Battle, GM Chairman Says,” Washington Post (Feb. 11,
2005), p. E1.
92 Jeffrey McCracken, “Retiree Costs Weigh on Firms: Health, Pension Debts Multiply,”
Detroit Free Press (May 28, 2004).
93 See also David Welch, “Has GM Outrun Its Pension Problems?” Business Week (Jan. 19,
2004), p. 70.
94 ATPC, Contribution of U.S. Auto Industry, charts 10-14.
95 James B. Treece, “Japan’s Health Care Gives Toyota Edge,” Automotive News (Mar. 28,
2005), p. 26.
CRS-45
maintain production levels, then heavily discounted their products. At GM this
meant incentives of up to $6,000 per vehicle or interest-free financing for up to 72
months. Ford has also followed a similar strategy in recent years. Chrysler, which
has successfully introduced two major new products in 2004, has at least been able
to cut back on its incentives. However, even the leading Japanese producers —
Toyota, Honda and Nissan — have offered incentives, especially to move some of
their older product lines. The consequence has perhaps been positive for the overall
U.S. economy, by stimulating vehicle production and purchases, thus offsetting
recessionary forces in late 2001 and afterward. But the cost may be overbuilt
inventory and production capacity, especially for the Big Three. By the end of 2004,
Ford and GM were cutting production and working time. Both were losing money
on North American automaking operations, as well as losing market share in both
cars and trucks. The issue was seen as especially critical at GM, which has
maintained eight separate brand identities (after terminating Oldsmobile in 2000),
and whose investment-grade credit rating has become endangered in early 2005.96
In the first quarter of 2005, GM issued a profit warning, subsequently
announced a $1.1 billion loss for the quarter, then suspended all further earnings
“guidance” for the year.97 GM focused attention on the rising cost of health care as
a “crisis” and requested that the UAW consider changes in health care coverage to
assist the company in resolving its financial problems. The UAW refused to consider
a reopening of its contract, though it did state that there might be means of alleviating
the problem, without a full-blown renegotiation. For example, its contract with
Chrysler had been amended after earlier losses for that company, so that union
members picked up some portions of the their health care costs.98
The Big Three also have sought assistance from Congress in offsetting their
health care costs in their effort to remain competitive. Representatives of the
companies met with members of Congress, with the support of the UAW and the
United Steelworkers, in an effort to gain tax credits for health care payments for 55-
to 64-year-old workers and retirees. They pointed out that corporate tax cuts
ultimately approved by Congress in the American Jobs Creation Act, containing tax
96 Business Week, “GM: A Dangerous Skid” (Nov. 1, 2004), pp. 40-41; and “Running Out
of Gas” (Mar. 28, 2005), pp. 29-31; Automotive News, “Downsizing Detroit” (Mar. 14,
2005), pp. 1 and 55; Wall St. Journal “Ford and GM Lose Ground to Imports: Heavy
Incentives Don’t Stem Flight” (Nov. 4, 2004); Detroit Free Press, “First Quarter reactions:
GM Tries to Make 8 Brands Salable” (Apr. 20, 2005). On GM incentive programs, see K.C.
Crain, “GM’s Bold Promos Hit and Miss in 2004,” Automotive News (Dec. 6, 2004), p. 43.
There is some question as to whether transaction prices have really fallen, or whether GM
and Ford have both increased incentives while raising base prices; “Car and Truck Pricing:
Despite Deals, Buyers End Up Paying More,” Detroit Free Press (Jan. 27, 2005); and,
“GM’s Sticker Shock,” Business Week (Mar. 7, 2005), p. 50.
97 Greg Schneider, “Industry Giant Falling Behind: GM Reports $1.1 Billion Loss” (Apr. 20,
2005), p. A1; Bloomberg.com, “GM Has $1.1 Bln 1st-Qtr Loss, Withdraws 2005 Forecast”
(Apr. 19, 2005).
98 Detroit Free Press, “UAW Won’t Reopen GM Contract” (Apr. 15, 2005), and “Widening
Burden: GM Confirms That Cost of Health Care Is a Crisis” (Apr. 20, 2005); Automotive
News, “UAW to GM: Go Slow on Health Care” (Apr. 18, 2005), p. 3.
CRS-46
law changes in response to a WTO decision (P.L. 108-357), would do little to assist
their firms in competition with foreign-based manufacturers, because of low rates of
profit in recent years from domestic manufacturing. Despite an effort by Senators
Arlen Specter and John Rockefeller to add such a provision to the legislation, it was
not included.99 Failing to gain relief in the 108th Congress on this issue, the domestic
automotive manufacturers also reportedly held discussions on the issue with
representatives of Senator John Kerry’s unsuccessful presidential campaign, and have
expressed interest in both Senator Kerry’s health reform plan and a different
approach proposed by Senator William Frist, the Republican Majority Leader.100
U.S. Automotive Trade: Data and Policy Issues
Growth of Foreign-Based Competition in the U.S. Market
As shown in Figure 9, the U.S. consumer automotive market, including cars and
light trucks (pickups, minivans and SUVs), has grown moderately over the past 25
years, when considered in terms of total unit sales. From more than 14 million units
in 1979, at a then-peak in general manufacturing output and employment, total motor
industry sales since 2000 have averaged more than 17 million units per year. The
market is cyclical, and it dipped substantially during general recessions in the early
1980s, just before and during the recession of 1990-91 and again, more moderately,
during the most recent recession after 2000. Moreover, as also shown in the figure,
most of the overall growth in sales has come from vehicles produced by foreign-
owned companies, primarily from production at foreign direct investment
“transplant” manufacturing operations in North America, rather than from Big Three
North American plants.
In 1979, nearly 80% of all consumer vehicles — cars and light trucks — sold
in the United States were built by the domestic Big Three manufacturers. Already
by that date, imported cars, largely from VW of Germany or the Japanese
manufacturers, were making an impact in the market, as they accounted for 26% of
sales of cars alone. Imported trucks had a smaller share of the domestic market, but
99 Harry Stoffer, “Big Three Ask for Help on Health Care,” Automotive News (May 31,
2004), p. 3. Legislation was offered as an amendment to the Senate version of the tax bill,
by Sen. Specter (printed in Congressional Record, May 10, 2004, p. S5166). An exchange
of correspondence and analyses on the issue between Sen. Rockefeller and the leadership
of the Senate Finance Committee is contained in Sen. Rockefeller’s “Dear Colleague” letter
of Aug. 9, 2004, and attachments, and “Dear Colleague” letter from Sens. Grassley and
Baucus of Sept. 24, 2004, with attachment. No votes were held on the legislation.
100 Financial Times, “Motor Industry Signals Interest in Kerry’s Healthcare Proposals” (Oct.
13, 2004); Jason Stein, “GM CEO Likes Health Care Idea,” Automotive News (Nov. 1,
2004), p. 3. For a pessimistic assessment of the likelihood of government assistance in early
2005, see Harry Stoffer, “Health Care: Odds Are that GM Won’t Get Much Government
Help,” Automotive News (Apr. 11, 2005), p. 51. Other views on the background and
development of the issue are in Allan Sloan, “General Motors Getting Eaten Alive by a Free
Lunch,” Washington Post (Apr. 19, 2005), p. E3; and, J. McCracken and K. Merz, “Auto
Industry’s Role in Health Care,” Detroit Free Press (Apr. 14, 2005).
CRS-47
at that time light trucks were less than a quarter of the total vehicle market. As the
economy recovered and the dollar strengthened in the mid-1980s, imported vehicles
increased to more than three million units in 1984-85, and to more than four million
units in 1986-87. In those years, for example, imported cars accounted for almost
40% of sales, the highest level ever. During this period, the United States and Japan
negotiated a “voluntary export restraint,” discussed below, which effectively capped
the level of imports from that country. In the 1990s, the total level of vehicle imports
remained below three million units annually, though it has again been higher than
that level since 2001.
As shown in Figure 9, with further details provided in Appendix Table 4,
transplant output by foreign-owned manufacturers (which excludes facilities of the
Daimler-owned Chrysler Group), in recent years has equaled or even surpassed
imported units in terms of vehicle sales. In 1995, the two million transplant-
produced units sold in the United States surpassed the number of imported vehicles
sold here for the first time. This balance was maintained until 2002, when imports
again were slightly higher than transplants, as both surpassed the three-million mark
in unit sales.101
Foreign-brand vehicles now are the dominant market force in passenger car
sales. If one adds imports and transplants together, they account for 55% of the 7.6
million passenger cars sold in the United States in 2003. Moreover, the share of sales
taken by imported passenger cars in 2003 is now actually higher than in 1979: 28%
of sales, compared to 21% then.
Part of the reason for this is that the Big Three have focused more on the light
truck market. Annual U.S. car sales have been surpassed by light trucks (9.4 million
in 2003), and the position of the Big Three is relatively stronger in this category.
Nevertheless, foreign nameplates are growing here as well. Imported light trucks
have exceeded one million vehicles per year since 2001, although in view of the fast
growth of the domestic market, in 2003 they accounted for only about the same share
as in 1979 — 13% as against 14%. However, transplants, which were virtually non-
existent in 1979, accounted for another one million in light truck sales annually since
2001. Together, imports and transplants accounted for almost 25% of all U.S. light
truck sales in 2003, compared to only 11% as recently as 1995.102 Through the first
101 A small share of transplant production is affiliated with the Big Three, but it is still
counted as transplant activity. Besides the NUMMI joint venture between Toyota and GM
in Fremont, California, other transplants that were or are affiliated with the Big Three
include the Ford-Mazda “AutoAlliance” plant in Michigan, and the Mitsubishi plant in
Illinois, originally formed in the “DiamondStar” alliance with Chrysler. NUMMI continues
as a highly successful operation, producing mainly Toyotas, but also some GM-branded
vehicles. In general, however, the Big Three-affiliate transplants have been smaller in
volume and less successful than independently established transplant operations. See
Automotive News summary of transplant operations, “Transplants’ Changing Faces” (June
14, 2004).
102 Veteran auto industry journalist Jerry Flint stated that in October 2004, foreign
nameplates had risen to 30.4% of the light truck market, and their inevitable increase was
forcing the Big Three to re-emphasize their car lines with new models; “The Year of the
Car,” Forbes.com (Nov. 23, 2004).
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ten months of 2004, foreign brands (including imports and transplants) together
reportedly accounted for about 40% of all U.S. new car and light truck sales.103
Figure 9. U.S. Motor Vehicle Sales
Units in millions
20
Big Three Sales
Transplant Sales
Import Sales
15
10
5
0
1979
1982
1985
1988
1991
1994
1997
2000
2003
Sources: Ward’s Motor Vehicle Facts & Figures (from 2000), various years; and, American Automobile
Manufacturers’ Association. Motor Vehicle Facts & Figures (through 1999), various years.
Note: “Imports” are vehicles assembled outside North America.
The results of these sales, production and import trends, in terms of sales by
motor vehicle companies in the U.S. market, are shown in Table 3. The Big Three
strength in light trucks has not been enough to offset their overall decline in vehicle
market share. GM is particularly affected by this decline, dropping more than a third
of its market share between 1979 and 2003, from 44% to 28%. Ford’s sales have
fallen by one-half in cars — but doubled in trucks; still, they have lost about three
points in market share. Chrysler’s strength in SUVs and minivans have helped the
company, moribund in 1979, actually gain market share over the past quarter-century,
though only from 11% to 12.8%. Still, Chrysler’s gain did little to offset the overall
Big Three decline in sales shares, from nearly 80% to less than 62% — and
preliminary data for 2004 indicate even more dramatic losses in market share for the
two largest Big Three producers.
103 Jerry Flint, “Stranded in Washington,” Forbes.com (Dec. 7, 2004).
CRS-49
Table 3. U.S. Motor Vehicle Sales by Manufacturer
(sales numbers in thousands)
Sales 1979
Sales 2003
Light
Light
Cars
Trucks
Total
%
Cars
Trucks
Total
%
GM
4,918
1,428
6,346
44.8
1,959
2,757
4,716
28.3
Ford
2,140
1,198
3,338
23.6
1,169
2,268
3,437
20.7
Chrys.
1,167
391
1,558
11.0
457
1,671
2,128
12.8
Big
8,225
3,017
11,242
79.4
3,585
6,696
10,281
61.8
Three
Toyota
508
130
638
4.5
996
870
1,866
11.2
Honda
353
NA
353
2.5
820
530
1,350
8.1
Nissan
472
102
574
4.1
505
289
794
4.8
Hyundai/Kia N.A.
N.A.
N.A.
N.A.
439
198
637
3.8
Mazda
157
8
165
1.2
164
95
259
1.6
Mitsubishi* N.A.
N.A.
N.A.
N.A.
162
95
257
1.5
Subaru
128
—
128
0.9
116
70
186
1.1
Suzuki
N.A.
N.A.
N.A.
N.A.
23
36
59
0.4
Asian-
owned
1,618
240
1,858
13.1
3,225
2,183
5,408
32.5
mfrs.
VW
334
2
336
2.4
262
27
289
1.7
BMW
35
—
35
0.2
236
41
277
1.7
Mercedes-
4
57
0.4
187
32
219
1.3
Benz
53
Ger.-
owned
369
6
428
3.0
685
100
785
4.7
mfrs.
Other
461
217
625
4.4
115
50
165
1.0
Total
10,673
3,480
14,153
100.0
7,610
9,029
16,639
100.0
Sources: Ward’s Automotive Yearbook 1980, 2004; total vehicle sales numbers for 1979 from Motor
Vehicle Manufacturers Association, MVMA Motor Vehicle Facts and Figures ‘80.
* Some Mitsubishi vehicles sold by Chrysler Corp. under Chrysler brand names in 1979.
CRS-50
Among foreign brands, the big winners over the past 25 years are obviously
Asian-based producers, who increased their share of total consumer vehicle sales by
a factor of about 2.5, from 13% to 32.5%. Three companies account for most of the
change: Toyota, which increased its share of sales from 4.5% to 11.2%; Honda,
which more than tripled sales share from 2.5% to 8.1%; and, Hyundai, which was not
even selling cars in the United States in 1979, but took nearly 4% of the market in
2003. Even Nissan, which registered a much more modest sales gain over the entire
period, has done well to increase its share, after virtual bankruptcy as a company, and
serious losses of market share to other import brands in the late 1990s. The only
other foreign-based producers with significant U.S. market share are three companies
from Germany. Among them, gains by the BMW and Mercedes brands have more
than offset VW’s decline, but total market share is still less than 5%.104
The initial year-end sales data for 2004 confirmed, or even accelerated, these
trends. Industry light vehicle sales overall were 16.9 million units, fractionally ahead
of 2003. But domestic Big Three brands’ share fell by a further 1%. Chrysler
Group’s 3.7% sales gain in the year could not offset declines by GM (down 1.3% to
about 25%) and Ford (down 4.5%, to less than 20%), which occurred despite those
two companies heavy incentive programs. Toyota (sales up 10.4% for the year) and
Nissan (up 24%), introduced new brands and products, and saw exceptional sales
gains for the year; Toyota became the first foreign brand to sell more than two
million vehicles in the U.S. market. Honda (up 3.3%), Hyundai (plus 4.6%), and
Subaru also registered gains, though at more modest levels. Among Asian brands
only Mitsubishi saw a decline in U.S. sales in 2004. Its sales in 2004 were down
37%, and the CEO of its U.S. operating company resigned at the end of the year.
Overall, Asian manufacturers gained another two points in U.S. light vehicles market
share. Some of this gain came at the expense of European manufacturers,
particularly VW, whose sales fell 13.6%. Mercedes Benz sales were flat, but BMW
increased U.S. sales by 7% in 2004.105
The performance of the two remaining U.S.-owned manufacturers worsened
further in early 2005. GM’s loss of $1.1 billion in the first quarter was largely due
to weak performance in the U.S. domestic market, and as seen above, was partly
attributed by the company to a continuing rise in health care costs. Shortly after the
GM announcement, Ford announced substantially reduced earnings in the first
quarter of 2005 and that the company would not achieve CEO Ford’s earlier
announced goal of $7 billion in profits by 2006.106
104 On VW’s U.S. decline, see Jerry Flint, “VW’s Future Is in the Future,” Forbes.com (Oct.
26, 2004).
105 USA Today, “Ford, GM See Slipping Sales in 2004” (Jan. 5, 2005), p. 1B, and ibid.,
“U.S. Mitsubishi Chief Announces Surprise Resignation,” p. 2B; Automotive News, “In a
Big Year, GM and Ford Lose Share to Toyota, Nissan,” and “Toyota, Nissan Gain Share,”
plus sales tables (Jan. 10, 2005), pp. 1 and 49-51; Jim Mateja, Chicago Tribune, “‘I Didn’t
Bail Out,’ Mitsubishi Chief Says” (Jan. 6, 2005), p. 1; Business Week, “Mitsubishi: Falling
Further Behind” (Jan. 17, 2005), p. 38.
106 Wall St. Journal, “Ford’s Profits Fall Sharply as Competition Dents Sales,” (Apr. 20,
2005); Detroit Free Press, “Ford Hauls in $1.2 Billion,” (Apr. 21, 2005); Washington Post,
“Ford Profit Plunges as SUV Sales Drop” (Apr. 21, 2005), p. E2.
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Some critics argue that the loss of market share by GM and Ford, particularly
in passenger cars, reflects more than issues such as exchange rates, or health care
costs, or cyclical trends. These critics argue that there is a qualitative difference in
corporate management and organization, which means that foreign-owned companies
seem to be able to identify consumer needs and tastes more readily than the two
largest Big Three auto manufacturers.107 Moreover, through flexible manufacturing
techniques, pioneered by the Japanese car manufacturers, other companies have been
able to respond to changes in market demand in a manner more agile than the Big
Three, with high-quality products, even as they have been also able to ramp up
volume. Nine of the top 10 choices in the 2005 annual ranking of cars and trucks by
Consumer Reports magazine, for example, were from one of three Japanese
nameplates (Toyota, Honda and Subaru). “Twenty-one vehicles, all of them
Japanese [emphasis added], scored combined ‘high’ ratings for safety, reliability,
fuel economy and owner satisfaction,” according to a press report. The article further
noted that, “A reputation for quality has helped Asian brands increase their market
share for eight straight years ... [reaching] a record monthly high of 36.3% in January
[2005].”108
The Changing U.S. Automotive Trade Balance
The growth of transplants has been the major change in the structure of the U.S.
automotive market since import levels peaked in the early 1980s. The number of
foreign-brand vehicles made domestically now roughly equals the number of
imported units, for both cars and light trucks. Moreover, encouraged by provisions
in federal legislation, such as the American Automotive Labeling Act and corporate
average fuel economy requirements, as well as the business realities of “just-in-time”
inventory control and manufacturing processes, foreign investing companies have
steadily increased the local content of their transplant vehicles. Nevertheless, as
shown in Figure 10, the U.S. trade deficit in automotive products, including vehicles,
engines and parts, has continued to increase steadily over the past two decades.
Figure 10 presents the automotive trade balances as reported annually by the
Commerce Department on an “end use” basis for selected years over recent decades.
As illustrated by the figure, the deficit has increased steadily. Although part of this
increase is due to price inflation of motor vehicles, the increase in the deficit is
mainly due to the fact that exports grew at less than half the rate of imports in both
the 1980s and 1990s. Thus, a U.S. deficit of $9 billion in 1979 became a deficit of
$50 billion in 1990, and more than doubled again, to $117 billion in 2000. Even
though the domestic automotive market grew slowly after 2000 and exports did not
fall, the automotive trade deficit increased further to more than $140 billion in 2004.
107 This argument is made most forcefully and comprehensively in Maynard, End of Detroit.
Hyde, Riding the Roller Coaster, attributes Chrysler’s relative success in introducing new
products to having learned “lean engineering” from the acquisition of AMC, pp. 279-84.
108 “Japan Dominates Magazine List,” Detroit Free Press (Mar. 7, 2005).
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The details of how this deficit has grown and changed, and trade patterns with other
countries, are shown in Appendix Table 5.109
The detailed data indicate that the U.S. automotive deficit is structural. The
global auto market is not integrated, and is shaped on the regional level by different
tastes and priorities, notably a much higher emphasis on fuel economy in major
European and Asian markets than is shared in the United States and Canada. When
the Big Three pioneered the mass production and marketing of automobiles in the
early years of the Twentieth Century, both Ford and GM from an early date expanded
internationally by direct investment and building vehicles in other markets, more than
they did by exporting.110 But even in trade with Canada, the U.S. deficit has been
steadily increasing over the long term. Indeed, more than half of the approximately
$100 billion increase in the automotive trade deficit since 1990 is due to increases
with the NAFTA trading partners.
Figure 10. U.S. Trade Balance in Automotive Products
The following subsections review U.S. automotive trade on a detailed basis with
major trading partners. The data are drawn from Appendix Table 5.
109 Note that the numbers in the table do not exactly match those in Figure 11, because they
were calculated by the Commerce Department on the basis of the harmonized tariff schedule
(HTS) as reported by the International Trade Commission, instead of end-use trade data.
However, the amounts and direction of the balances are essentially similar. Data for 1979
on this more detailed basis are not available.
110 For example, Ford’s third great commercial success of the pre-World War II era (after
the “T” and “A” Models) was the “Model Y,” which was never introduced in the United
States. It was designed and built for the British and European markets, and manufactured
only there. Brinkley, Wheels for the World, pp. 397-99, 406-7.
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NAFTA Automotive Trade. U.S. exports of motor vehicles and parts have
mainly gone to the NAFTA trading partners, both before and after the agreement
went into effect in 1994, although the automotive deficit has widened with both
countries. In 2004, 65% of all U.S. motor vehicle exports and 78% of all parts
exports went to the NAFTA partners, which are about the same shares as in 1990.
The value of U.S. vehicle exports to Mexico did increase from $300 million to more
than $4 billion, as Mexico liberalized its import substitution rules, and parts exports
more than doubled, from $4.3 billion to $11.3 billion. Canada remains the largest
single foreign market for the United States in both categories, with more than $18
billion in vehicle exports and nearly $30 billion in parts, more than half the total U.S
exports in both cases. Both totals were more than double the 1990 levels.
But the United States in 2004 ran automotive trade deficits with both countries,
even though it did have a $10 billion surplus in parts with Canada. Thus, in addition
to being the largest U.S. automotive export market, NAFTA also plays a dominant
role on the import side. NAFTA now supplies 46% of all U.S. vehicle imports and
more than 50% of all parts imports. These facts are possibly not widely publicized,
because, to a major extent, this is due to the operations of the Big Three and their
suppliers in the two countries. While in 1990, the value of U.S. vehicle imports
from Canada were $3.5 billion less than from Japan, by 2004, imports from Canada
were about 50% ahead of both Japan and the European Union, and accounted for a
third of all imports. Mexico supplied less than 5% of U.S. total vehicle imports in
1990, but more than 13% in 2004. Mexico is also the leading supplier of motor
vehicle parts imports, just ahead of Canada. The United States in 2004 imported ten
times the dollar value of parts imports from the two NAFTA neightbors, in roughly
equal shares, than it did from China, which has been of such concern to many people
as a new competitor.
Trade with Other Countries. The U.S. automotive trade balance with the
European Union (EU, formerly known as the European Community) in recent years
has shifted more than with any other non-NAFTA partner. U.S. trade with the EU
has been historically unbalanced in favor of the European side in both cars and parts.
However, the level of motor vehicle imports from the EU (mostly Germany) has
increased since 1990 dramatically faster than the rate from Japan, the national
competitor traditionally of greatest concern to the U.S. motor industry in recent
decades. With $31 billion in total vehicle imports in 2004, the EU is now
challenging Japan for second place behind Canada in this category. Moreover, with
a total surplus of $42 billion in cars and parts, the EU is also now beginning to
approximate Japan’s bilateral automotive surplus, which was $48 billion in 2003; on
the other hand U.S. exports of vehicles and parts was $10.7 billion to the EU in 2003,
compared with only $2.0 billion to Japan.
Korea has also become a significant factor in the U.S. automotive trade deficit,
as the bilateral U.S. deficit in vehicles and parts rose from just $1.5 billion in 1990
to $11 billion in 2003. Moreover, among all major trading partners, the Korean
market remains most restrictive in terms of U.S. exports — only about $500 million
in total in 2004.
As mentioned above, automotive imports from Japan are widely believed to be
the continuing major source of a U.S. automotive trade deficit. However, in recent
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years Japan has played little role in increasing this deficit. Vehicle imports from
Japan increased only modestly compared to other sources since 1990 — from $26
billion to $32.9 billion in 2000, and virtually no increase between 2000 and 2004.
The increase in parts imports — once of concern to those who felt that transplants are
only “screwdriver” operations — has been even more modest. Parts imports from
Japan increased from $10.4 billion in 1990 to $15.4 billion in 2004, while they
increased by four times overall.
Another country that has been of heightened concern to U.S. manufacturers in
recent years has been China. But although China may now be a major global player
in automotive manufacturing, it has played little role so far in terms of the U.S. trade
account. There are so far virtually no motor vehicle imports from China. Parts
imports have been growing but the totals are still relatively modest — from $1.6
billion in 2000, and $3.8 billion in 2003. While China is growing rapidly as a
manufacturer of motor vehicles, parts and components, sheer distance may limit
China’s role as a supplier for original equipment manufacturers using “just-in-time”
inventory control and supply techniques. The former chairman of GM China, Philip
F. Murtaugh, was quoted as saying “I don’t see China becoming a major car exporter
in the foreseeable future. There is no economic rationale.”111 Nevertheless, there are
persistent reports of plans to export vehicles from China to other markets.112 China
may play a more significant role with respect to the supply of parts for the
replacement market, where timeliness of delivery is not such a key issue.113
Development of Trade Policy Issues
In the late 1970s, as the Big Three and the UAW reacted to the intensification
of competition from imports, there was also a period of highly charged debates about
issues of fairness in automotive trade and about the possibility of corrective trade
policy actions. Congress and the Reagan Administration took a number of steps to
ameliorate foreign competitive pressures, most notably the negotiation of a
“voluntary export restraint” on the part of Japan. These restraints eventually lapsed
(the United States and its trading partners agreed to eliminate trade quotas of this
type in creating the World Trade Organization in 1995). Measures specifically aimed
at automotive trade were still being initiated in the 1990s, but have gradually become
111 In Business Week special report, “The China Price” (Dec. 6, 2004), p. 112.
112 Nissan and Honda are cited in ibid. as at least considering some export possibilities with
their local Chinese investment partner. Chrysler Group CEO Dieter Zetsche has said that
DCX could export vehicles from China at some point, including possibly to the U.S. market,
and reportedly DCX is already in negotiations to set up such an operation; Automotive News,
“DCX Is Open to China Exports” (Mar. 14, 2005), p. 8; and Autonews.com, “DCX Eyes
Exporting Chinese-Built Chryslers to NA” (Apr. 21, 2005). An importer who first brought
Yugo and Subaru automobiles to the U.S. has signed a deal with Chinese automaker Chery,
with a goal of selling 250,000 vehicles in 2007; AP, “Goal of New Chinese Car Importer:
Japanese Quality for a Bargain,” Detroit Free Press (Jan. 3, 2005).On the logistical
difficulties of long-distance sourcing from China generally, see T. Aeppel, “Manufacturers
Cope with Costs of Strained Global Supply Lines,” Wall St. Journal (Dec. 10, 2004), p. A1.
113 For further discussion on the development of China as an automotive producer, see p. 76.
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dormant. The Big Three continue to argue that the exchange value of the Japanese
yen against the dollar remains too low, and thus favors Japanese producers.
The Chrysler “Bailout”. Events surrounding the threatened financial
collapse of the Chrysler Corporation in the late 1970s and the federal loan guarantees
provided that company in 1980-81 serve to mark the beginning of an activist era of
federal intervention in automotive policy linked to imports and automotive trade
issues. The smallest of the Big Three (but nevertheless the tenth-largest U.S.
corporation at the time), Chrysler ended the 1970s on the brink of bankruptcy. In
1979, after the Treasury Department had rejected the company’s appeal for financial
aid, corporate chairman John Riccardo resigned, and was replaced by Lee Iacocca,
who succeeded in gaining from the Carter Administration and Congress the Chrysler
Loan Guarantee Act, signed into law on December 21, 1979. Under this statute,
which was accompanied by employment and corporate cost reductions, union labor
cost concessions and state-level aid packages, the company borrowed $1.2 billion
from private sector sources in 1980. Within three years, the company had paid off
its loans. The federal government actually sold at a substantial profit the warrants it
had required on Chrysler stock as collateral.114
The 1980 Safeguard Case on Foreign Imports. While the drama over
Chrysler was being played out, the Big Three automotive industry more broadly was
affected by the impacts of the Iran crisis of 1979, the so-called “second oil price
shock” that also hit in that year, and the onset of a recession in 1980. Car production
fell from 14.7 million units in 1978 to 9 million in 1980. A total of 800,000 workers
in the automotive and related industries were laid off, because of reduced demand,
and the unemployment rate within the industry stood at 30%. Meanwhile, fuel-
efficient Japanese car imports had increased by 500% between 1973 and 1980.
Douglas Fraser, president of the UAW, sought congressional action to force
trade restraints on Japan, in order to assist domestic manufacturers. Failing to obtain
immediate legislative relief, the UAW, joined by Ford, filed a petition in mid-1980
with the U.S. International Trade Commission (ITC), requesting relief under Section
201, the safeguard or “escape clause” provision of the 1974 U.S. Trade Act. But the
ITC in such a case had to find that imports were a “substantial” cause of injury to the
producing industry, i.e., not less than any other cause. The ITC agreed that imports
had damaged the U.S. automotive industry, but, on a 3-2 vote, decided that they were
not a substantial cause. It ascribed the industry’s difficulties more to the effects of
the recession, higher interest rates, and consumer preference for smaller vehicles than
to the rise in imports, and thus declined to recommend any limitations on imports
under the safeguard provisions of the law.115
114 Hyde, Riding the Roller Coaster, pp. 241-248, 254-257.
115 John M. Rothgeb, Jr. U.S. Trade Policy (Washington: CQ Press, 2001), pp. 165-67. The
full details of this case are in: USITC. Certain Motor Vehicles and Certain Chassis and
Bodies Therefor: Report to the President on Investigation TA-201-44 under Section 201 of
the Trade Act of 1974, Publ. 1110 (Dec. 1980).
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Voluntary Export Restraints on Japan.116 The failure of the UAW-Ford
safeguards petition to obtain trade relief increased pressure in Congress for legislative
action. A bill was proposed in 1981 to enact quotas on imports from Japan, which
would have been less than the totals actually being imported annually. Senator Robert
Dole of Kansas, then Chairman of the Finance Committee,117 reportedly informed the
new Reagan Administration that this legislation would be passed in the Senate by a
veto-proof majority.
The Reagan Administration pressed Japan instead to take action on its own by
enacting “voluntary” restraints on its automotive exports. To avoid a possible
conflict with U.S. antitrust rules by purely private manufacturers’ action, the
Japanese government had to issue an order, on May 1, 1981, to the auto
manufacturers, by which exports to the United States were limited to 1.68 million
units for one year. This so-called voluntary export restraint (VER) avoided further
action on the quota bill being considered in the Senate. However, as the U.S. auto
industry continued to struggle in the early 1980s, the House twice passed domestic
content legislation that would have forced Japanese automotive manufacturers to
produce vehicles in the United States for the local market. To discourage such
measures, the Japanese export restraints were extended annually for several years,
with some upward adjustment in the volume numbers.
The three leading Japanese manufacturers in terms of sales in the United States
(Toyota, Honda, Nissan) all established manufacturing plants in the United States
by 1985. This result had been sought by both the UAW and the Big Three. Their
view was apparently that in taking such a step, the Japanese manufacturers would
have to hire U.S. workers, would thus face the same competitive manufacturing
conditions as the domestic Big Three, and would also lose the export advantage of
a currency that was then falling substantially against the U.S. dollar.
But things did not play out exactly as the U.S. auto interests had planned.
Forced to manufacture in the North American market, the Japanese companies
developed new and larger products more specifically designed for this market. While
imports did decline, vehicles produced at the transplant operations more than filled
the market gap, so that Big Three domestic market share has also tended to fall.
Vehicles such as the Toyota Camry and Honda Accord, for example, have been the
largest-selling passenger car models for the past 20 years, save for a period when they
were topped by Ford’s Taurus. Also, as noted above, though the Japanese companies
did become large U.S. employers, the UAW was not able to organize most of their
operations. While successfully manufacturing in the United States, the Japanese
companies were also able to move their imports up-market, gaining large profits on
vehicles, in part because of the scarcity value accruing from trade restrictions.
By the mid-1980s, the officially supported VER was lifted, though export limits
were continued for several more years by the Japanese on a more informal basis. In
part, the lifting of restraints resulted from a return to higher sales and profits by the
116 The account in this subsection is primarily based on Rothgeb, U.S. Trade Policy, pp. 168-
71.
117 In ibid., Sen. Dole is misidentified as the Senate Majority Leader in 1981.
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Big Three. It reportedly reflected disagreement among them as to whether they
supported any continued formal U.S. policy of promoting export restrictions.
U.S.-Japan Autos and Auto Parts Issue in the 1990s. The last major
U.S.-Japan automotive trade dispute was the Clinton Administration’s use of Section
301 of the 1974 Trade Act in the mid-1990s in an effort to open the Japanese market
wider to U.S. auto and automotive parts exports. The increase in both Japanese
imports and Japanese-owned motor vehicle manufacturing in the United States had
led Japan to become the biggest supplier of auto parts imports into the United States
by 1990. Furthermore, Japan had not only overtaken Canada in that category by a
substantial margin ($10.4 billion to $9.1 billion), but U.S.-Japan trade was much
more unbalanced. Thus, the United States had a surplus with Canada in parts, and,
though it ran an overall automotive two-way trade deficit, Canada was also the
biggest U.S. export market for vehicles. By comparison, U.S. exports of cars and
parts to Japan were each less than $1 billion.
The Reagan and George H.W. Bush Administrations had increasingly dealt with
industrial trade issues with Japan by adopting “results oriented” policies and by
focusing on “structural impediments” to U.S. exports and a more balanced bilateral
trade account. President Clinton updated this approach in an effort focused on two
industrial product sectors (autos and parts, and photographic film), where it was felt
that U.S. manufacturers could successfully export to Japan, and where the trade
balance was heavily in Japan’s favor.
Already, the George H.W. Bush Administration had reached a new agreement
on auto parts with Japan, but the issue of balance in market access had not been
resolved. Subsequently, the Clinton Administration announced in 1994 the initiation
of a “Super 301” trade policy action, wherein it might recommend punitive
retaliation, if the issue were not resolved on a bilateral or multilateral basis.
President Clinton announced in May 1995 that, if Japan did not satisfactorily
respond, the United States would establish punitive 100% tariffs on luxury
automobiles from Japan, such as the Lexus, which were (and still are) largely
imported into the United States. The United States also initiated a WTO case, and
Japan then retaliated by countersuing in the WTO against the U.S. procedure.
Eventually, the issue was resolved to the modest benefit of the United States.
An agreement was reached just before the negotiating deadline set by the U.S.
government, in late June 1995, and the WTO cases were shelved. The U.S. side did
not achieve a specific import target as it had sought, but it did gain a Japanese
promise to allow a substantial increase in the dealer networks of foreign-owned
companies, and to allow the use of foreign-made parts in the repair of cars that fail
the rigorous Japanese automobile inspections. But Japanese imports of U.S.-made
vehicles in 2004 remained lower than the level of 1990, despite some highly
publicized “reverse exports,” such as Honda station wagons, from the United States
to Japan. While the number of dealerships did not increase dramatically, the real
explanatory variable may have been the prolonged period of slow Japanese growth
from the 1990s forward. U.S. exports of auto parts to Japan totaled $1.5 billion by
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2004, compared to $900 million in 1990 (some of these exports may be engines and
transmissions exported from Japanese-owned U.S. plants).118
American Automobile Labeling Act (AALA). This measure was
introduced by Senator Barbara Mikulski as an amendment to Transportation
appropriations legislation and added by voice vote in the Senate on August 30, 1992.
It was signed into law as Section 355 of P.L. 102-388 on October 6, 1992. The
AALA established origin labeling requirements for every new vehicle sold in the
United States beginning on October 1, 1994. The labeling rules were designed to
ensure “truth in advertising,” according to then-president Andrew Card of the
American Automobile Manufacturers Association, which represented the Big Three
interests in Washington at that time and which supported the law. A UAW
spokesman added, “We think it gives consumers important information. The
Japanese dislike it because it doesn’t allow them to hide the fact that a large part of
their parts still come from abroad.”119
The law, as implemented in regulations by the National Highway Transportation
Safety Administration (NHTSA), requires that prominently displayed labels on
vehicles should show where a vehicle is assembled, plus the percentages of content
from principal sources of parts in any car for which 15% or more of the total value
of the parts content (excluding labor costs) comes from countries other than the
United States or Canada. Critics noted that the law established a third separate
standard for measuring automotive content: the AALA rule for labeling disclosure
purposes, plus a 60% NAFTA content rule for customs purposes; and, a 75%
domestic content rule to determine whether the vehicle is foreign or domestic for
purposes of complying with corporate average fuel economy standards (see below in
this report). They also noted that somewhat arbitrary differences in applying AALA
rules to suppliers meant, for example, that content in a Toyota-badged vehicle and
a GM-badged vehicle from the same joint venture operation (Fremont, California)
118 Rothgeb, U.S. Trade Policy, pp. 215-17; Charles S. Pearson. United States Trade Policy:
A Work in Progress (Hoboken, NJ: John Wiley & Sons, 2004), pp. 70-72. A more detailed
study of U.S.-Japan trade relations in the 1990s is Edward Lincoln, Troubled Times: U.S.-
Japan Trade Relations in the 1990s (Washington, DC: Brookings Institution, 1999). In his
earlier work, Japan’s Unequal Trade, Lincoln made the point that Japan’s low propensity
to import foreign manufactured goods is related to the generally low rate of direct foreign
investment in Japan. However, in addition to the Renault acquisition of a controlling share
of Nissan, followed by its appointment of Carlos Ghosn as Nissan’s CEO and the institution
of a radical downsizing and streamlining program in Japan, a number of the U.S. Big Three
and related companies maintain major stakes in the Japanese motor industry. Ford owns
33.4% of Mazda, GM owns 12% of Isuzu, 20.3% of Suzuki and a 20% stake in Subaru’s
parent, Fuji Heavy Industries. Chrysler’s parent, DaimlerChrysler, owned 37.4% of
Mitsubishi Motors, but is in the process of reducing its stake during Mitsubishi’s financial
restructuring; see Automotive News, Guide to Global Automotive Partnerships(Sept. 2004).
119 Quotations from Donald W. Nauss, “New U.S. Car Labeling Law Criticized as Being
Confusing ... U.S. Auto Makers Insist Disclosure Is Full and Fair,” Los Angeles Times (Sept.
25, 1994), p. D4. The most recent report from the Japan Automobile Manufacturers
Association states that purchases of parts from the United States by Japanese automakers
was $41.5 billion in “fiscal 2003” (Apr. 2003-Mar. 2004), compared to $2.5 billion in fiscal
1986; Growing Investment and Employment in America (2004), p. 8.
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could be counted in different ways, because Toyota and GM might have different
relationships with the original equipment suppliers.120
NHTSA reportedly conducted a survey of consumer use of the labeling
information in 2001, which found that “just 5% said that they were influenced by the
label to any degree whatsoever,” and “Even among consumers who described
themselves as Buy American advocates, just 20% said they knew of the ... content
labels and only 9% had read one at a dealership.” The same source noted that early
problems confirming sourcing from various suppliers had been compounded by
various industry developments that had increased cross-ownership and sourcing
locations among domestic and foreign brands. Nonetheless, representatives of both
the Big Three and their foreign-owned competitors questioned by a reporter did not
assign a high priority to efforts to change the law.121
U.S. Initiatives Against Automotive Trade Barriers. While U.S. trade
policy on automotive issues had earlier concentrated on problems viewed as caused
by imports, in the late 1980s, it began to focus more on foreign export barriers.
While not necessarily opening large immediate markets for U.S. products, these
initiatives are aimed at opening markets for U.S. companies as foreign markets grow
and develop, as well as at creating a “level playing field” in trade rules, as sought by
many critics of U.S. trade policy, both inside and outside Congress. This policy
escalated with the inauguration of the World Trade Organization (WTO) on January
1, 1995, because a defendant country could no longer block an adverse finding
against itself. The Office of the U.S. Trade Representative (USTR) cites four WTO
cases against foreign automobile development regimes, which had established trade
barriers against imports or promoted domestic content and exports in ways contrary
to WTO rules.122
Indonesia. The USTR brought a case in 1998 against Indonesia’s auto regime,
designed to promote and protect its domestic motor industry. As a result of an
adverse WTO finding, the Indonesian government substantially liberalized its auto
regime in 1999.
India. In 2000, USTR initiated a dispute settlement proceeding in the WTO,
later joined by the EU, to challenge India’s auto regime under the WTO Agreement
on Trade-Related Investment Measures (“TRIMs”). In response to the WTO
findings, India introduced a new automobile investment policy in 2002.
120 Detailed commentary on the AALA from Nauss, “New U.S. Car Labeling Law;” also,
Terry Box, “Sum of Their Parts,” Dallas Morning News (Oct. 6, 2004), p. 1A; Cindy
Skrzycki, “A Clash over Content Labeling,” Washington Post (Sept. 30, 1994), p. B1.
121 Ann Job, “Your Car’s Nationality,” Associated Press (Mar. 10, 2003); see also, Cheryl
Jensen, “Label of Contents Window Stickers Show How Tricky It Is to ‘Buy American,’”
Chicago Tribune (Aug. 11, 2002), p. 1.
122 The summaries of U.S. WTO cases and their outcomes in this subsection, as well as the
comments on Korea, are taken from country entries in USTR. 2004 National Trade Estimate
Report on Foreign Trade Barriers (NTE, April 2004). All U.S. WTO cases, including these
four auto regime cases are listed in USTR. “Snapshot of WTO Cases Involving the United
States” (Updated Oct. 6, 2004), as listed at [http://www.ustr.gov].
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Philippines. The Philippines in 1995, pursuant to the TRIMs Agreement,
notified the WTO of its intention to maintain local content and foreign exchange
balancing requirements to promote foreign investment. In 1999, it requested a five-
year extension for the measures applying in the motor vehicle sector. After
consultations under WTO rules with the United States, the Philippines announced in
November 2001 the immediate termination of the exchange balancing requirements,
and a final phaseout of all motor vehicle local content requirements in July 2003,
a commitment still being monitored by USTR. The Philippines also amended its
excise tax on automobiles in August 2003 from one based on engine displacement,
which is biased against large vehicles exported from the United States, to a system
based on value.
Brazil. USTR has also challenged the Brazilian automotive licensing regime,
and has noted that, pursuant to a 1998 agreement, this was a WTO case “resolved to
U.S. satisfaction without completing litigation.” However, USTR also notes in its
most recent National Trade Estimate that the Mercosur free trade area, of which
Brazil is a member, established a special “automotive list” of 55 items (vehicles and
parts) under its common external tariff, and the rate is 35%. Moreover, Brazil has
negotiated automotive agreements with third countries to allow duty-free treatment
within agreed quotas.
In addition to these specific policy changes negotiated under WTO rules, USTR
has been acting to reduce perceived market barriers and discriminatory treatment in
two other major Asian automotive producers:
Korea. In 1998, South Korea and the United States concluded a memorandum
of understanding (MOU) aimed at improving market access for foreign motor
vehicles. While USTR notes Korean implementation of the MOU, it has also found
little progress in opening the Korean market to imports (less than 20,000 units, for
a market share under 2% in 2003), while Korean exports to the United States have
boomed. One issue is the Korean tax structure, and USTR is negotiating with the
Korean government to change the basis for its tax, which discriminates against
vehicles with large engine capacity more typical of imported cars. USTR has also
made progress in gaining Korean acceptance of internationally agreed product
standards used in imported vehicles.
China. The United States and other members of the WTO had been highly
critical of China’s 1994 Industrial Policy for the Automotive Sector. This policy was
replaced by a new “Development Policy of the Automobile Industry,” announced on
June 1, 2004. The new policy abolished many formal restrictions and domestic
content rules. This included an issue particularly noted by the United States —
China’s former refusal to allow non-banks (such as automotive credit companies) to
finance consumer purchases of automobiles. However, USTR remains concerned at
the vague and unclear nature of many statements in the new policy (such as how
China plans to regulate imports in keeping with its new registration system for auto
manufacturers, and whether China will effectively allow imports of complete
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knockdown kits).123 Moreover, the new policy still requires foreign-owned
manufacturers in China to operate through joint ventures, in which their ownership
will be limited to a maximum of 49%. U.S. and other foreign motor vehicle
companies in China have also expressed concern that China’s new automotive fuel
efficiency standards discriminate against larger and heavier imported vehicles, such
as SUVs.124
Automotive Nontariff Trade Barriers in WTO Doha Round. In addition
to these case-by-case initiatives, the United States also proposed on January 28, 2005,
that WTO open discussions on removing nontariff barriers (NTBs) to trade in
automobiles and automotive parts within its Doha Development Round negotiations
on revising WTO rules. The U.S. proposal would add this subject to the ongoing
talks on nonagricultural market access. It noted that trade in motor vehicle and parts
constituted 13.3% of all world manufactured goods trade in 2003, and a high
percentage of exports of many coutries, both industrial and developing. The United
States proposal stated that, “We do not foresee the end result of NTB negotiations to
resemble the Aircraft Agreement [a self-contained agreement applying to one specific
industry], but rather to result in a series of results, each of which addresses a
particular NTB facing the automotive industry.”
The proposal specified in particular five examples of the kind of barriers to be
addressed: restrictions on financing of vehicle purchases; distribution channels;
taxation; equity restrictions on foreign investment; and, barriers to importation and
sale of remanufactured parts (all of which have been mentioned in specific cases
above). The modalities of the negotiations were indeterminate, as automotive trade
NTBs could be addressed in a range of specific ongoing Doha negotiation fora.125
Thailand Free Trade Agreement and U.S. Pickup Truck Tariff. An
additional trade issue that created concern in Congress in 2004 is a possible U.S. free
trade agreement with Thailand that would give Thai-made pickup trucks duty-free
access to the U.S. market. Domestic manufacturers of pickup trucks still benefit
from the 25% “chicken tariff” on imported pickup trucks. This tariff was established
in 1963 in response to European restrictions on U.S. frozen chicken parts, as a
component of its Common Agricultural Policy (CAP). In retaliation, the United
States established high tariffs on a number of products then imported mainly from
Europe, including pickup trucks.126 U.S. imports at that date were primarily produced
by VW in Germany, where U.S. chickens had been frozen out of a lucrative market
by the CAP.
123 USTR, 2004 NTE, p. 79; WTO. “China’s Transitional Review Mechanism:
Communication from the United States,” G/MA/W/58 (Doc. 04-3613, Aug. 31, 2004), p.
2.
124 Keith Bradsher, “China Sets Its First Fuel-Economy Rules,” New York Times (Sept. 23,
2004), p.1.
125 DER, “U.S. Calls for WTO Talks on Ending Nontariff Barriers to Automotive Trade”
(Feb. 2, 2005), p. A-4. The full U.S. proposal is on the WTO website under
TN/MA/W/18/Add.6 (Jan. 28, 2005), doc. No. 05-0371. The quote is from p. 1.
126 Presidential Proclamation 3564 at 28 Federal Register 13247-48 (Dec. 5, 1963).
CRS-62
The exceptionally high tariff has never been reduced or repealed. An early U.S.
government ruling on imported SUVs excluded them from classification with pickup
trucks, with respect to application of the 25% tariff level.127 NAFTA has also eroded
some of the protective benefits of this measure, especially with respect to Mexico.
Toyota, Mazda and Nissan now primarily produce their pickup trucks in the United
States for the domestic market, though Toyota is opening a new plant for its Tacoma
line in Mexico, and Nissan is already there.
USTR has begun negotiations for a free trade agreement with Thailand, as part
of a general policy to promote bilateral and regional free trade deals. Thailand is
already the world’s second-largest producer of pickup trucks, having attracted a wide
range of foreign investors to open plants. These are primarily Japanese and Korean
companies, though Ford has an interest there through Mazda, and GM also has a
presence. The Big Three, while generally supporting free trade agreements, have
opposed allowing Thai pickups tariff-free access to the U.S. market through a free
trade deal. They note that their Japanese and Korean competitors would thereby gain
access to the U.S. market for Thai-made vehicles, without having been forced to
reduce their own home market barriers to U.S. exports. The UAW and the AFL-CIO,
generally skeptical of free trade deals, have opposed any U.S. elimination of the tariff
on pickup trucks for Thailand as part of a free trade package.128
Resolutions on this issue were introduced in each House in the 108th Congress
on February 24, 2004, with 38 co-sponsors in the Senate and 91 in the House. The
108th Congress took no action on the resolutions, and they have not been reintroduced
in the 109th Congress. These resolutions did not oppose the Thailand FTA outright,
but sought to express a sense of Congress that negotiations on access to critical
segments of the United States automobile market should not take place on a
piecemeal basis, but rather as part of broader negotiations that included all major
automobile producing nations. On March 18, 2005, 40 senators co-signed a letter to
the USTR advocating that U.S. tariff barriers should not be reduced on automotive
imports in the context of this FTA, unless a broader, multilateral agreement
addressed non-tariff barriers in the automotive industry.129
Exchange Rates and Automotive Trade Issues. The rapid rise in the
dollar’s exchange rate in the first half of the 1980s was a major issue affecting U.S.
manufacturers, including the Big Three, who complained that the dollar’s rise against
the yen in particular gave Japanese exporters additional assistance to compete in the
U.S. market. That issue was allayed with a subsequent decline in the dollar’s
exchange rate against the entire basket of industrial country currencies from 1985
127 Flint, “Stranded in Washington.”
128 CRS Report RL32314, U.S.-Thailand Free Trade Agreement Negotiations, by Raymond
J. Ahearn and Wayne M. Morrison, pp. 9 and 14; BNA. International Trade Reporter,
“U.S. Auto Workers Urge Bush to Maintain Truck Tariffs in Thai FTA” (March 4, 2004),
p. 398; AFL-CIO Executive Council Actions, Statement on “U.S.-Thailand Free Trade
Agreement” (Mar. 11, 2004); Jenalia Moreno, “Ending Tariff on Pickup Trucks Could Mean
Jobs, Sales, Competition,” Houston Chronicle (Jul. 6, 2004).
129 Letter from Sens. Carl Levin, George Voinovich, et al. to Acting USTR Peter Allgeier
(Mar. 18, 2005).
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until the mid-1990s.130 But the dollar’s resurgence against all currencies from 1995
to 2001, especially the yen, was again a serious concern to the Big Three, and they
still believe that the yen is undervalued.
While much of U.S. industry has been most worried about the value of the
Chinese currency (which they believe the Chinese government has maintained at a
level that is too low to the dollar, given the large and growing U.S. bilateral trade
deficit), the auto industry remains fixated on the yen. The recent report of the ATPC,
cited above, illustrates a declining share of U.S. auto market shares held by the Big
Three that parallels a decline in the dollar exchange value of the yen, especially in the
late 1990s. Thus, as the yen’s value fell from about 85 to the dollar in early 1995 to
140 in 1999 , the Big Three’s monthly U.S. market share declined from almost 80%
to about 70% (excluding a brief drop to a much lower level in 1999 when GM was
on strike). After that, however, the yen rose in value, to fewer than 120 to the dollar
in early 2004 (the last date on the ATPC chart), while the Big Three share on ATPC’s
chart continued to fall, to less than 60%. The ATPC claims that the yen was still
being held down by massive amounts of intervention in exchange markets by
Japanese monetary authorities, peaking at $140 billion in the first quarter of 2004.131
However, by the end of 2004, the yen had risen to about 103 to the dollar, with no
further market intervention by Japanese monetary authorities.132
Globalization of the Automotive Industry
Near its beginning, this report quoted a Commerce Department report,
Manufacturing in America, as evidence of a general understanding that
manufacturing is being globalized. This development is not unique to the automotive
industry, and indeed, it may superficially seem less globalized than many other
industry sectors. Because of differences in customer priorities, dictated in part by
considerations such as the price of fuel, vehicles differ radically from market to
market.133 Nevertheless, in terms of industry ownership, and including parts
suppliers, some companies have been global for a long time, while mid-size and
strictly regional companies have increasingly been acquired by larger competitors.
130 For exchange rate impact on U.S. manufactures trade in general in the 1980s and the
early 1990s, see CRS Report RL32179, Manufacturing Output, Productivity and
Employment, coordinated by Steven Cooney.
131 ATPC. The Contribution of the U.S. Auto Industry to the American Economy (distributed
2004), charts 17-19.
132 Paul Blustein, “U.S. Dollar Continues Its Broad Decline,” Washington Post (Dec. 2,
2004), p. E1; DER, “Japan’s Finance Minister Expresses Concern over Dollar Drop; No
November Intervention” (Dec. 8, 2004), p. A2.
133 Even in the area of fuel economy and efficiency, the regional approaches may be
radically different. For example, nearly half the cars now sold in Europe have diesel engines,
while such vehicles are relatively rare in the United States. Two Japanese manufacturers,
Toyota and Honda, pioneered gas/electric “hybrid” engine technology in their home market,
then found an avid niche market for this product in the United States, especially as gasoline
price soared in 2003-4. See summary in Maxton and Wormald, Time for a Model Change,
ch. 3.
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Ford and GM played pioneering roles in the first half of the twentieth century
in globalizing automotive technology and manufacturing. They have continued to
play active roles in consolidation of motor vehicle assembly operations and global
market supply chains. But the two U.S. industry leaders have nevertheless
experienced significant losses of global market shares. Chrysler, the third member
of the Big Three, has never been strong in overseas markets, abandoned them
altogether in the 1970s and has been itself acquired by a foreign-based company.
With respect to the parts supply industry, which employs far more Americans today
than the vehicle assembly companies, the two major spinoffs of the GM and Ford
parts divisions are among the global leaders in sales, but have not performed well
financially. Both they and the other U.S.-based automotive parts companies have
reportedly been hindered by their continued reliance on the Big Three for the bulk of
their sales.134
Globalization and the U.S. Market
Figures 11 and 12 address the issue of who is expanding faster, U.S. automotive
manufacturers abroad, or foreign manufacturers in the U.S. domestic market. To
measure expansion on a comparable basis, these two figures are based on sales of
affiliates. It might have been preferable to measure relative changes in direct
investment positions, but these data might be misleading, in part because U.S.
manufacturers have increasingly used finance affiliates in third countries in equity
transactions, and this practice may distort statistical reporting on the destination of
investments.135 The two figures cover the period from 1983, when the earliest data
on a comparable basis are readily available, to 2002, which is the latest year for such
complete data.
Figure 11 shows the value of sales of direct investment affiliates abroad of U.S.
companies (10% or more equity ownership) in the “transportation equipment”
manufacturing sector (more than 90% of which represents automotive vehicles and
parts). Figure 12 illustrates trends in the sales of domestic affiliates of foreign direct
investors in the United States (10% or higher equity ownership). The figures in this
latter case include transportation equipment manufacturing investments through
1986, and then motor vehicle and equipment manufacturing thereafter, when those
data were broken out separately. Additionally, however, on the inward investment
side the figure includes investment in wholesale trade — motor vehicles and
equipment. As described earlier in this report, under the “primary line of business”
rule many foreign investors in the auto industry with both manufacturing and trading
134 Automotive News, “Analysts Pound Big 3 Suppliers” and “TRW Stock Drops as Earnings
Lag” (Sept. 6, 2004), pp. 1 and 4.
135 BEA. Survey of Current Business (July 2001), “Direct Investment Positions for 2000:
Country and Industry Detail,” by Maria Borga and Raymond J. Mataloni, Jr. , technical note,
pp. 23-25, and additional comments to this author by Mr. Mataloni. There is also the
longstanding issue of measurement of investments on an “historical cost” basis, by which
the equity value of an investment is not updated, until it is transferred or revalued for some
other purpose, and may not therefore reflect current market value. Direct investment and
production overseas by GM and Ford goes back decades, and is much older than transplant
investment in the United States, contributing to a possible distortion of relative values.
CRS-65
operations in the United States have chosen to report details of their operations under
the latter category. In the early years of this series, virtually no Japanese motor
vehicle investment in the United States was reported under manufacturing, and in
2002, about two-thirds of the sales of Japanese motor vehicle affiliates was still
reported under investment in wholesale trade. U.S. companies operating through
affiliates abroad could make the same choice in reporting outward data, but sales by
the Big Three under this heading do not seem to be significant.
Looking at the sales figures for this 20-year period as a whole, there seems to
be relatively little difference in the magnitude of sales in the two directions. Foreign
sales by U.S. multinational affiliates of U.S. automotive companies (cars and parts)
increased from $62 billion in 1983 to $357 billion in 2002; sales by affiliates of
foreign companies investing in the U.S. market increased from $54 billion in 1983
to $321 billion in 2002. Investigation of the details of performance by different
regions and for different sub-periods does illustrate some dramatic shifts.
Figure 11. Sales of Foreign Affiliates of U.S. Automotive
Manufacturers
$ billions
400
Total
North America
Europe
Asia & Pacific
350
300
250
200
150
100
50
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Note: Canadian data for majority-owned foreign affiliates (MOFAs) only; Mexico data for 1991, 1993, 1994
include estimates for data from non-MOFAs, and data for 1999 interpolated from 1998-2000. Asia-Pacific data
for 1999 interpolated from 1998-2000.
Source: BEA. “U.S. Direct Investment Abroad: Financial and Operating Data for U.S. Multinational
Companies,” at www.bea.gov.
On the outward investment side, U.S. sales to North America and Europe grew
at about the same pace during the 1980s, about 9 to10% per year. At that time, the
North America number was dominated by Canada, with Mexico accounting for less
than 10% of affiliate sales annually until the later years of the period.136 Sales in Asia
136 Note that Canadian data are for majority-owned affiliates only, but this appears to
account for well over 90% of U.S. investment in the automotive vehicle and equipment
CRS-66
grew twice as fast (19%), but this is misleading, since typically 80% of these sales
were in Japan — and U.S. companies were not invested in the largest and most
successful local auto producers, or were limited to small equity shares. For the years
in which the Commerce Department has published data for sales of majority-owned
U.S. affiliates in Japan, the total was usually less than 1% of all affiliate sales.
In the 1990s, the solid growth of the North American market continued (8.7%
annually through 1997), but Mexico came to account for a third of total sales of $114
billion by U.S. affiliates in the two countries. This share was boosted by NAFTA’s
impact on U.S. parts exports, as well as Mexico becoming a significant market for
vehicle exports. Sales of U.S. affiliates in Europe slowed to around 5% per year in
1990-1997, but it remained the single largest market for U.S. companies’ sales, as
Ford and GM expanded their presence through acquisition of a number of mid-range
brands ($140 billion total sales by 2002). By comparison, sales fell in the
Asia/Pacific region, averaging a decline of 6% per year in 1990-97, as the entire
Japanese economy and domestic auto market were both characterized by weak
performance during this period. From 1998 to 2002, sales to Asia by affiliates
recovered. They doubled from less than $40 billion annually in 1997-98 to more than
$80 billion in 2002, a performance highlighted by the appearance of China as a major
market.
Domestic sales of U.S. affiliates of foreign investors grew more slowly than
sales of outward investors through 1995. But while sales by Japanese-owned
affiliates grew steadily from $32 billion in early 1980s to more than $160 billion
annually in 2000-2002, as shown in Figure 12, the sales of European investing
companies stagnated around $20-30 billion per year through the early 1990s. VW
closed its U.S. plant and declined as a competitor of the Japanese in the import
market. Renault sold off its controlling interest in American Motors, as part of that
company’s eventual acquisition by Chrysler. Then, in 1998, Daimler Benz acquired
Chrysler, in a so-called “merger of equals,” and sales by U.S. affiliates of European
automotive manufacturers were once more close to par with the Japanese ($142
billion in 2002).
industry.
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Figure 12. Sales of U.S. Affiliates of Foreign Automotive
Manufacturers
$ billions
350
Total
Japan
Europe
300
250
200
150
100
50
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Note: Sales of foreign affiliates in manufacturing (transportation equipment through 1986, thereafter for motor vehicles
and equipment), plus wholesale trade (motor vehicles and equipment). Sales of Japanese affiliates in motor
manufacturing not given in source for 1983-84, 1986-87, but less than $500 million annually. European affiliates’
sales for 2000 and 2002, and Japanese affiliates’ sales for 2002 include estimates for sales of wholesale affiliates.
Source: BEA. “Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,”
at www.bea.gov.
Global Performance of Automotive Manufacturing Companies
The world market shares of the two largest and remaining U.S.-owned members
of the Big Three have experienced major declines. Table 4 shows the leading
vehicle manufacturers globally, generally according to size rank.
As worldwide output of vehicles increased from 41 million in 1979 to more than
60 million in 2003, the table illustrates the notable decline in the share produced by
the two largest Big Three companies.137 Although General Motors’ total vehicle
output only fell marginally over the 25-year period, and it was still the largest
producer with more than eight million vehicles, its share dropped from nearly 21%
to less than 14%, a fall of one-third. Meanwhile, Ford, the number two U.S. motor
vehicle manufacturer, fell from second to third worldwide, despite increasing vehicle
production by one million. Ford’s share dropped from 13.6% to 10.8%. The Ford
137 Total vehicle sales in Table 4 include commercial trucks and buses, but buses and heavy
trucks comprise only a small share total production. In comparing global performance by
automotive companies, one must deal with radically different market segmentation from
region to region. For example, the light-truck SUV or pickup for private non-commercial
use is almost uniquely U.S.-Canadian phenomenon. Light trucks in Asia and Latin America
are mainly for farm or commercial use, though they may double as passenger vehicles, while
in Europe, light trucks are almost exclusively for commercial use; Maxton and Wormald,
Time for a Model Change, pp. 16-17.
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and GM share declines occurred despite extensive and aggressive acquisitions and
investments abroad by both companies.
In the late 1980s and 1990s, GM acquired Saab cars of Sweden and increased
its stake in several Japanese manufacturers. It then bought a 20% stake in Italian
producer Fiat in 2000, with an agreement reportedly to purchase the entire vehicle
manufacturing company if the Fiat management decided to sell. In 2005, GM agreed
to pay Fiat $2 billion to be relieved of this obligation, as both GM and Fiat have been
recording poor results in Europe in recent years.138 GM claims that the deal was
nevertheless a “net positive,” as Fiat supplied GM a diesel powertrain that it will use
in most of its diesel fleet — about half of its European sales in 2005 will be diesel,
up from only 10% in 2000.139 Reportedly, GM has lost $3 billion in Europe since
1999. In addition to backing out of the Fiat commitment, GM has taken steps to
downsize in Europe by a 20% employment cut, although, as in the United States, the
company’s deals with the unions include a commitment not to reduce employment
further before 2010.140
GM has sought to counter its problems in Europe and North America with an
aggressive policy in Asia. It acquired a controlling 45% interest in the financially
troubled Korean manufacturer Daewoo in 2003, and will use Daewoo’s Korean
production facilities as a worldwide source for small cars, frequently branded under
the Chevrolet name.141 It has been extremely aggressive in China, particularly in
establishing Buick as a leading brand and, in recent years, running second there to
VW through its alliances with Shanghai Automotive Industry Corporation (SAIC).142
GM CEO G. Richard Wagoner is recently quoted as saying that investment and
cooperation are essential in securing shares of the market in China (and India), which
will help GM gain sales and earnings — and thus enable it to better meet both the
competition and its own commitment to workers in the United States: “We invest it
138 “GM to Pay Fiat to Settle Dispute over Alliance,”Wall St. Journal (Feb. 14, 2005), p.
A1; “GM to Pay $2 Billion to End Ties with Fiat,” Detroit Free Press (Feb. 14, 2005).
Table 4 excludes the GM-Fiat investment.
139 Jason Stein, “Fiat Finale: Bargain or Blunder,” Automotive News (Feb. 21, 200%), p.
8.
140 Financial Times, “GM to Axe 12,000 Jobs in Europe as Part of $500m-a-Year Cost
Drive” (Oct. 12, 2004); and, “Workers Put Blame Firmly on Company,” (Oct. 15, 2004);
FT.com, “GM Reaches Deal with Unions” (Dec. 9, 2004); Detroit Free Press, “GM Europe
Plans Hefty Buyouts to Cut Staffing” (Dec. 10, 2004); Associated Press, “German Plant to
Make GM’s Midsize Vehicles” (Mar. 4, 2005); Automotive News, “GM Shifts Saab
Production to Germany” (Mar. 14, 2005), p. 8.
141 Business Week, “Daewoo: GM’s Hot New Engine” (Nov. 29, 2004), pp. 52-53.
142 “Guide to Global Automotive Partnerships,” as cited in Table 4, below.
CRS-69
there, we get a higher return, and we can use that to pay off obligations here.”143 GM
has also turned around losses and gained market share in other regions.144
After several unsuccessful efforts to acquire holdings in major foreign
automotive firms, Ford acquired the car making unit of the Swedish manufacturer
Volvo in the 1990s, as well as three British up-market automotive manufacturers:
Aston Martin in 1985, then Jaguar and Land Rover in the next decade. These
acquisitions were combined into Ford’s “Premier Automotive Group.” Ford had also
acquired a small stake in Toyo Kogyo, the Japanese company that produced Mazdas.
As that company’s financial problems worsened, Ford acquired a controlling 33%
interest in Mazda in 1996.145
Chrysler’s situation developed in the opposite direction; instead of expanding
overseas, it was acquired by a foreign-based automaker. Chrysler shed its overseas
operations during financial difficulties in the 1970s. By 1979, it produced only 1.4
million vehicles, good for ninth place worldwide. Daimler Benz, a specialist
producer of up-market cars and trucks, in 1979 produced 604,000 vehicles,
eighteenth place on the global auto manufacturers lists (the Chrysler and Daimler
totals are shown together in Table 4 in 1979, but the companies were not then
affiliated). Chrysler’s subsequent brushes with bankruptcy highlighted an apparent
need for a more robust global partnership. In 1998, the company was acquired by
Daimler, in what was described initially as a “merger of equals,” but subsequent
developments have made it clear that the merged company is controlled fully from
headquarters in Stuttgart, Germany (the head of Chrysler Group at this writing is
Dieter Zetsche, a German national appointed by the German management board after
serious Chrysler losses after 2000). The combined company in 2003 produced 4.3
million vehicles, which raised it to fifth place on the global motor vehicles
production list.146
143 Detroit Free Press, “GM Looks to Gain Ground in Asia, Control Costs Back Home”
(Dec. 20, 2004), part of an extensive series, “GM, Asia and the New Reality,” focused on
GM activities in China and India (Dec. 20-21, 2004). The impact on domestic suppliers is
explored in a separate series, “Tough Calls at Home,” in ibid., Dec. 23, 2004.
144 Jason Stein, “Latin America, Africa, Middle East Reap Biggest Net Income for GM,”
Automotive News (Nov. 29, 2004), p. 16.
145 Brinkley, Wheels for the World, 720-29.
146 Hyde, Riding the Roller Coaster, ch. 16. This author makes it clear, however, that he
believes that Chrysler could have survived as an independent company.
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Table 4. Selected Leading Global Motor Vehicle Producers
Home
Production
Company
Country
(millions of vehicles)
Owns/(Owned By), %:
1979
(%)
2003
(%)
1) General Motors
USA
Holden — Australia,
Opel, Vauxhall, Saab,
Hummer,
8.6
20.8
8.2
13.6
GM Daewoo (45),
Fuji Heavy Ind. (20),
Suzuki (20), Isuzu (12)
2) Toyota
Japan
Daihatsu, Hino Trucks
3.0
7.2
6.7
11.1
3) Ford
USA
Aston Martin, Jaguar,
Land Rover,Volvo,
5.5
13.2
6.5
10.8
Mazda (33)
4) Volkswagen
Germany Audi, Bentley, Bugatti,
2.1
5.2
5.0
8.3
Skoda, Lamborghini, Seat
5) DaimlerChrysler* Germany Chrysler Group,
2.0
4.9
4.3
7.1
Mercedes Benz
6) Peugeot-Citroën
France
2.3
5.5
3.3
5.5
7) Hyundai
Korea
Kia (47)
n/a
0.0
3.1
5.1
8) Nissan
Japan
(Renault, 44)
2.4
5.7
3.0
5.0
Dongfeng — China (50)
9) Honda
Japan
0.8
1.9
3.0
4.9
10) Renault**
France
Nissan (44)
2.2
5.3
2.4
4.0
11) Fiat
Italy
Ferrari, Maserati,Alfa
2.2
5.4
2.1
3.5
Romeo, Seat (in 1979)
12) Suzuki
Japan
(GM — 20)
0.3
0.8
1.9
3.2
13) Mitsubishi
Japan
(DaimlerChrysler, 25)
0.9
2.3
1.6
2.6
14) BMW
Germany Mini, Rolls-Royce
0.3
0.8
1.1
1.9
15) Mazda
Japan
(Ford, 33)
1.0
2.3
1.0
1.7
16) Fuji Heavy Ind.
Japan
Subaru (GM — 20)
0.3
0.8
0.5
0.9
17) MG Rover***
Britain
0.6
1.5
0.1
0.2
Sources: Automotive News Market Data Book, 1979 and 2004. Ownership data from ibid., “Guide
to Global Automotive Partnerships” ( Sept., 2004), excl. GM-Fiat. Details on corporate mergers and
acquisitions through 2001 in CRS Report RL30633, The World Automobile and Truck-Building
Industry: Consolidation and Globalization, by John Williamson.
* 1979 total includes Chrysler Corp. and Daimler Benz production.
** 1979 total includes American Motors production.
CRS-71
*** 1979 - British Leyland.
Ahead of DaimlerChrysler in the rankings in 2003 was Volkswagen, which
more than doubled its production output, from 2.1 million vehicles in 1979 to five
million in 2003. VW to a great extent has increased its sales by acquisitions and
production alliances. In addition to the Audi brand, which it acquired in the 1960s,
VW has bought specialist up-market brands (Bugatti, Bentley, Lamborghini), has
acquired Seat, formerly the Spanish affiliate of Fiat, and acquired the Skoda brand
and facilities in the Czech Republic after the fall of the Communist government.
Moreover, through its Chinese alliances with First Automobile Works Group and
Shanghai Automotive, VW became the leading producer in the rapidly expanding
Chinese market, with half the market in 1999. VW’s increase in production has not
resulted in great financial success for the company. It has especially been bedeviled
by high labor costs combined with slow market growth in its German and continental
European home market. It furthered suffered in 2004 as a Chinese financial
clampdown reduced automotive credit and sales growth, and VW also lost as much
as half its Chinese market share.147
By contrast with GM, Ford, DCX and VW, the largest U.S. and German-based
auto manufacturers, the major Japanese companies have expanded more by exporting
and by direct investment abroad in new production facilities, than by foreign or
domestic acquisitions of companies and brands. Toyota, already number three in the
world in vehicle production in 1979, moved past Ford into the global number two
position with production of 6.7 million vehicles in 2003, more than double the total
of 1979, and an 11% market share. But unlike the other leading vehicle
manufacturers, Toyota controls only one other producer, Daihatsu, and a truck
manufacturer, Hino. Both were in financial distress when they were acquired in
1998-2000, and have very limited product distribution outside Japan.148 Toyota has
been aggressive in establishing joint ventures, in China, in the United States (with
GM at NUMMI), and in several other countries.
Honda, which has moved from the fifteenth position globally to the ninth spot,
more than tripled vehicle production from 800,000 in 1979 to three million in 2003,
and increased its market share from 1.9% to 4.9% during this period. But it did this
without any acquisitions of other companies or brands. Like Toyota, Honda has
established a number of joint venture operations, all in Asia.
Nissan is somewhat the reverse of this story. As of 1979, it was not only the
second-ranking vehicle producer in Japan, but also number four in the world, with
total output of 2.4 million vehicles. Its Datsun 240Z sports coupe was arguably the
147 FT.com, “Moody’s Warns on VW Plan for Cost Savings” (Jul. 2, 2004); and, “VW Faces
Erosion of Dominance in China” (Aug. 3, 2004); Business Week, “Volkswagen Slips into
Reverse” (Aug. 9, 2004), p. 40; Wall St. Journal.Online “Volkswagen to Cut Investment;
Chief Strategist to Step Down” (Nov. 12, 2004). Lack of strong-selling new models has also
caused VW sales to stagnate in the U.S. — the company may fall behind BMW in total
vehicle unit sales when final 2004 numbers are tallied; Automotive News, “BMW
Approaches VW as Top European Seller Here” (Dec. 6, 2004), p. 1.
148 CRS Report RL30633, pp. 9-10 (excluding Toyota’s in-house brands, Scion and Lexus).
CRS-72
first Japanese-made “halo”(iconic) motor vehicle in the U.S. market. But Nissan,
along with other Japanese manufacturers, had problems in the domestic market in the
1990s, which it was unable to offset with rising sales overseas. By the late 1990s, the
company was in serious financial difficulties, and sold a controlling equity stake to
Renault — a deal made by Renault only after the French company’s deal to acquire
Volvo fell through because of opposition in Sweden. Under the leadership of
Renault-appointed CEO Carlos Ghosn, Nissan substantially reduced its workforce
and closed a number of Japanese factories. But Ghosn did manage to turn the
company around. By 2003, Table 4 shows Nissan with only a modest gain in
production over 1979 to three million vehicles, and it fell in global rank, from fourth
to eighth, with market share down from 5.7% to 5.0%. But it is reportedly the
world’s most profitable car manufacturer, and in 2004 showed major gains in the
U.S. market. Ghosn became the head of the combined company in 2005.149
The other Japanese companies are minor players in the context of today’s
automotive top league. Mitsubishi Motors Corporation (MMC) is an offshoot of the
Mitsubishi Heavy Industries empire, and remains the fourth largest Japanese motor
vehicle producer. But, as noted above, its sales in both Japan and North America
have plummeted after corporate scandals, mismanagement and overexpansion, and
its long-term continuation at its present level of production is problematic.150 The
DCX holding in Mitsubishi shown in the table is in the process of being wound
down, and the company is currently being reorganized. Mazda, a long-time
proponent of rotary engine technology, nearly went bankrupt in the 1970s, and
remains a minor producer, effectively controlled by Ford. Similarly, Fuji Heavy
Industries, a large industrial conglomerate with some co-investment from GM,
controls the Subaru and Isuzu brands. The latter is mainly a Japanese-based truck
producer, which has contracted to provide diesel engines for GM in Europe.
Hyundai is the only Korean company to have made the major league of
automotive production, rising to seventh place globally and having acquired control
over Kia, the second-largest selling Korean brand. After initial failures to expand in
North America because of quality issues, Hyundai has succeeded in relaunching its
brand in North America with a new emphasis on quality and a ten-year, 100,000-mile
new car warranty. However, Hyundai has also actively sought to diversify
manufacturing outside its Korean base. Not only is it opening a new factory in
Alabama, but it also has established joint ventures that manufacture smaller vehicles
in India and China, for both local markets and possibly for export. In January and
February 2005, Hyundai vehicles actually outsold GM and VW products in China for
the first time.151
149 James Mackintosh, “A Superstar Leader in an Industry of Icons,” FT.com (Dec. 16,
2004); Jathon Sapsford, “Nissan’s Ghosn, on Track to Run Renault, Faces Bumpy Road,”
Wall St. Journal (Jan. 7, 2005), p. B1; Carlos Ghosn and Philippe Riès, Shift: Inside
Nissan’s Historic Revival (New York: Doubleday, 2005), chs. 8-21.
150 See, for example, Business Week, “More Bad News for Mitsubishi Motors” (Nov. 22,
2004), p. 65.
151 Joann Muller and Robyn Meredith, “Last Laugh: How Hyundai Went from Punchline to
Powerhouse,” Forbes (Apr. 25, 2005).
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The remaining major companies in the table are all based in Europe, and all
have limited exposure elsewhere. BMW has been very successful with a limited
market offering. It was originally a Munich-based manufacturer of aircraft engines
and motorcycles. However, with a 2003 output of only 1.1 million vehicles, BMW
has been more of an up-market and niche producer, than a volume seller. Its venture
into that market, through an acquisition of Britain’s Rover Group, was a failure, and
was spun off. Of the two large French companies, Peugeot, which acquired the
Citroën brand in the late 1970s, has generally been successful with a strategy that was
primarily based on European sales, and is one of the global leaders in producing
diesel engines for smaller passenger cars. Recently, Peugeot also announced that,
because of strong growth in sales in Iran and Latin America, areas outside western
Europe accounted for almost 25% of total sales in 2004.152 Renault, as discussed
earlier, tried and failed to establish its presence in North America through an
acquisition of American Motors, but has been more successful through taking a
controlling position in Nissan. The two brands to date have not been integrated. Fiat
has been moribund, with declining market shares and production, as foreign
producers increasingly penetrate its home market in Italy, and its positions have also
been weakening elsewhere.153 MG Rover is only included on the list to illustrate the
end of the independent British-owned motor industry. Its name reflects two brands
spun off by BMW, after it tried and failed to resurrect British Leyland’s vehicle
brands (but BMW kept the Mini and Rolls-Royce products).154 In April 2005, MG
Rover ran out of money, ceased operating, and went into receivership.155
In terms of market share, European producers are now beginning to face the
issue of serious import penetration at home by Japanese and Korean brands. Prior
to 1991, automotive trade between many individual European countries and Japan
was limited by a series of restrictive provisions — allegedly loose or non-existent in
some cases (Germany, U.K.) and extremely limited and tightly enforced in others
(France, Italy, Spain, Portugal). In 1991, the European Commission and Japan
negotiated a “transitional” agreement, under which authority over trade limits was
transferred to the Commission, with national quotas loosened through 1999. After
that, all quotas and restraints, such as local content rules, were to be lifted.156 Maxton
and Wormald note that, apparently due to differing consumer product tastes and other
market differences, the termination of quotas in the EU did not result in a major
increase in market penetration by Japanese and other Asian-branded vehicles,
whether imported or produced in Europe. The Asian producers held 11.2% of the
market in 1992, increased share to 14.8% by 1999, but saw a drop thereafter,
according to their data.157 However, their conclusion may have been premature. A
152 Tom Griggs, “Peugeot sales Rise on Strong Global Demand,” FT.com (Jan. 7, 2005).
153 See Business Week, “‘Fiat Is in Deep, Deep Trouble’” (Dec. 13, 2004).
154 MG Rover went into bankruptcy and ceased operations, at least temporarily, in April
2005; Associated Press, “MG Rover Seeks Bankruptcy” (April 9, 2005).
155 Wall St. Journal, “MG Rover Will Be Broken Up, Layoff of 5,000 Expected” (Apr. 15,
2005).
156 CRS Report 92-94 E, The European Community-Japan Automobile Agreement.
157 Maxton and Wormald, Time for a Model Change, pp. 28-29.
CRS-74
recent report in the Wall St. Journal notes that the five largest European car makers
lost 1.2 points of market share in the first three quarters of 2004, most of which was
gained by the five largest Asian companies. By 2004, the Asian companies’ market
share in Europe had risen to nearly 18%.158
The table omits from the lower part of the rankings two manufacturers from the
former Soviet Union, AvtoVaz of Russia (producer of the Lada) and AvtoGaz of the
Ukraine. They produced together a total of about one million cars in 2003, but are
otherwise of no international market significance. The table also omitted several
Chinese producers, because they are in joint ventures with other leading companies,
and their output would be double-counted; in no case did they produce one million
vehicles in 2003. Given the strength, size and rapid growth of the Chinese market,
these companies have been interested in acquiring partners’ technologies.159 They
may soon become formidable players in their own right, though there is debate on the
export potential they represent.160 There are also a number of Indian producers,
including a subsidiary of the industrial conglomerate Tata, which has independently
produced vehicles for the local market and has export ambitions.161
Performance by Producing Countries
Most of the major motor vehicle companies now produce vehicles not only in
more than one country, but also in more than one geographical region. The spread
of technology has occurred primarily through joint venture, vehicle design and
technology-sharing arrangements between top-level international producers, based
in the United States, Europe or Japan, and manufacturing partners in other countries.
And, although the total motor vehicle market has expanded by about 50% since
1997-80 — from about 40 million to about 60 million vehicles produced annually —
the industrial, developed nations “triad” still dominates global manufacturing,
production and sales in the industry. As shown in Figure 13, out of a little more than
60 million total motor vehicles produced in 2003, approximately three-quarters were
built in the European Union, North America and Japan. Maxton and Wormald
conclude in their industry analysis that, overall, this is a mature, slow-growth
industry, and that dynamic will be little affected by demand growth in developing
economies over the foreseeable future, even including China.162
In recent years, the largest markets have seen relatively little total volume
growth in production and sales, though as shown earlier with respect to North
America, there have been significant changes in market shares by types of vehicle
158 Stephen Power, “Europe’s Car Makers Face Turmoil as Japanese Gain in Market
Share,”Wall St. Journal (Oct. 14, 2004), p. A1.
159 Honda and GM, for example, are currently involved in disputes in which they claim that
local Chinese companies over allegedly copied cars; FT.com, “Honda Sues Chinese
Carmaker over Copying” (Dec. 9, 2004), and “GM Sues Chinese Company over ‘Copied’
Car” (Dec. 16, 2004). See also Maxton and Wormald, Time for a Model Change, p.131.
160 See Jamie Butters, “China as a Competitive Threat,” Detroit Free Press (Dec. 22, 2004).
161 Maxton and Wormald, Time for a Model Change, pp. 134-36.
162 Ibid., especially ch. 4.
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sold and by different producers. North American output (including transplants and
exports, but net of imports) peaked at nearly 18 million vehicles in 2000, but has
fallen since then to closer to 16 million vehicles annually.
European Union vehicle output has remained higher than in North America,
around 17.5 million, and it, too, has fallen since 2000. Germany, with about 5.5
million vehicles annually, accounts for around 30% of EU production. To the total
for western Europe, one might also add the eastern Europe total of just under 3
million vehicles annually, most in assembly plants directly owned by EU-based
manufacturers (such as the Skoda plants in the Czech Republic, owned by VW, or
Renault’s low-cost Dacia Logan model, produced in Romania), or in joint ventures.
Figure 13. Major Motor Vehicle
Production Countries and Regions
Despite advances by its
producers in foreign markets,
Japan’s own production has not
markedly grown over the past
fifteen years. It peaked at more than
10 million vehicles in the early
1990s, fell below that level for most
of the decade, before rising just
above that level again since 2000.
The successful expansion of some
of the Japanese manufacturers in
foreign markets has been to some
extent undermined by weakness in
domestic demand and the existence
of too many separate producers —
many of which have been
effectively taken over by larger and
stronger domestic or foreign
companies, as described earlier in
this report. Overall, a recent forecast by the automotive team at Global Insight
(formerly DRI), sees only very slow (less than 2% each year) or negative growth in
light vehicle sales in the United States, western Europe and Japan over the next five
years.163
No country has developed an independent, world-class motor vehicle industry
since Japan in the 1950s and 1960s. Korea tried to do so, based on a significant and
highly protected domestic market, as described by the U.S. Trade Representative and
discussed above, and expanding export sales, but largely failed. By 2002, Hyundai
was its sole locally owned, internationally successful motor-vehicle producing
company. Kia was taken over by Hyundai after the country’s severe financial crisis
of 1998, and the other domestic producers are now effectively controlled by foreign
163 Global Insight, World Car Industry Forecast Report (Dec. 2004), Table W3(b).
CRS-76
interests.164 Figure 13 shows that Korean industry stabilized at around 3.5 million
units annually since 2000.
But as Maxton and Wormald point out, other countries keep trying to develop
their own auto industries, because they view the industry as an essential “pillar” of
domestic economic growth. Without a modern motor vehicle industry, leaders of
both developing and “transitional” (e.g., Communist or ex-Communist) economies
do not see a way to generate homegrown demand for full industrialization.
Moreover, expanding the availability of motor vehicles may validate successful
development strategies through the achievement of enhanced personal mobility at the
mass level. These authors argue that most industrializing countries thus cling to a
model of motor vehicle industry development, which seeks to capture technology
from established international manufacturers, through joint venture arrangements,
enforced by de facto or de jure protectionism, that require technology transfers.
Furthermore, given the low levels of income per capita in such countries, their usual
highly unequal nature of income distribution, and the strain that large-scale
automotive import levels would place on the balance of payments, the authors state
that a policy of satisfying motor vehicle demand through imports would not be
politically or economically feasible.
Maxton and Wormald conclude owning a private automobile (or light truck for
personal use, as in North America) remains essentially an accouterment of citizens
of wealthy countries, requiring a current minimum income level equivalent of
$10,000 per year for the vehicle owner. Thus, although, by their calculations, 11%
of global gross domestic product is connected with the motor vehicle industry, and
15% of all steel, 40% of all rubber, 25% of all glass and “a staggering 40% of annual
oil output” in the world are consumed by motor vehicles, 70% of all vehicles
produced are still sold in western Europe, North America and Japan. Nor do they see
the balance changing, except at a slow pace, and one at which new capacity is
brought on stream faster than the ability of markets, even fast-growing ones in
developing countries, to absorb product at a rate that is both economically efficient
and profitable for producers.165
The key market in their analysis, as well as in that of most major motor vehicle
manufacturers, is China. Alone among all national or regionally integrated markets
in which more than one million vehicles were sold in 2003, China has exhibited fast
growth since 2000. Production has increased by 2.5 times, moving China from just
a little ahead of Brazil, at more than two million vehicles of all types in 2000, to
more than 5.5 million in 2003, fourth only on a national basis to the United States,
Japan and Germany. During this period alone, China has passed Canada, all of
eastern Europe, Spain, Korea, and France (3.6 million vehicles in 2003). Global
Insight’s world car industry forecast for September 2004 reported that in 2002,
Chinese sales of light vehicles exploded by 37% in one year alone. It grew another
13% to more than 4 million vehicles of this type in 2003, before slowing to an
estimated 2004 level of 9%, as the government clamped down on credit to cool an
164 ITC, Motor Vehicles, pp. 60-61; the EU, Japanese and Korean industries and vehicle
markets are summarized more generally in pp. 49-61.
165 Maxton and Wormald, Time for a Model Change, pp. 3-8.
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overheating economy. Nevertheless, Global Insight forecasts double-digit sales
increases through 2008, and a total level of light vehicle sales in China of more than
7.5 million by 2009. The net forecast increase of three million units in light vehicle
sales between 2003 and 2009 accounts for 55% of the projected 5.5 million unit
increase in sales for all of Asia, outside Japan, during the next five years.166
Maxton and Wormald rate China as having the best chance among countries still
trying to develop an independently based auto industry, through aggressive
manipulation of joint venture agreements between national companies and overeager
foreign investment partners. But they are skeptical that even China, with a coherent,
state-developed industry plan and the world’s largest market potential can achieve
this goal within a reasonable market plan time frame. Each additional one million
vehicles per year sold in China, they note, is only about the equivalent of week’s
sales in the advanced industrial countries. And, even if China succeeds in creating
an export industry, they hypothesize, its greatest impact on export markets by the end
of the present decade will be in small vehicles, with an emphasis on low-priced
products.167
Among other producers, these two authors rate Russia, India, and surprisingly,
Iran, as having some chance of creating “new competitors” with a global impact.
Russia now produces about 1.5 million cars annually, or about half the total in the
former Soviet Union-eastern European countries. The key issue that the authors saw
there was the overall economic organization of society and the economy. Iran, which
in most recent data produced about 600,000 cars, or more than 80% of the Middle
East total, with technology acquired from Peugeot, was rated by the authors as having
a chance of expanding its low-end production and export base in the Middle East and
Central Asia region, and perhaps beyond.168 India produces less than one million cars
annually, but is gradually emerging from its uncompetitive, autarchic policies.
Independent companies have been negotiating joint venture deals with major
international manufacturers, but Indian policy is less coherent and developed than
China’s, while the state of road development also remains a significant barrier.169
Maxton and Wormald rate other countries as “peripheral” or “networked.”
These are countries they describe as maintaining an automotive manufacturing base,
but that they judge are unable to develop and sustain products independently of the
major international “core” producers. This would include countries with formerly
independent producers, such as Britain, Sweden and Spain. It also includes a variety
166 Global Insight, World Car Industry Forecast Report, pp. 25-26, 474-78. Note that in total
motor vehicle production reported in Fig. 14, China has a relatively high proportion of heavy
trucks, as compared to other major producing countries.
167 Ibid., pp. 127-36. See also the discussion above on China in connection with U.S. trade
patterns and Appx. Table 5.
168 Global Insight, World Car Industry Forecast Report, p. 12, estimates total light vehicle
sales in Iran of 800,000 in 2004, in a closed market, with the industrial country
manufacturing affiliates being Peugeot, Renault and Hyundai.
169 On these countries, Maxton and Wormald, Time for a Model Change, 132-136; on India,
see also the articles on that country in Detroit Free Press, “GM, Asia and the New Reality”
(Dec. 21, 2004).
CRS-78
of countries such as Australia, Indonesia, Brazil, Argentina and Mexico, which once
had “autarchic,” government-controlled import-substitution policies, but where they
felt a protected local industry mainly survives as a “satellite” of major producers
elsewhere. The authors believe that Korea and Italy are headed generally in this
direction, as is Malaysia, whose market is too small to support an independent motor
industry. One interesting, high-growth example of this phenomenon, as shown in
Figure 13, is Thailand, which because of comparative advantage in pickup truck
production has been the only substantial producer with a high rate of growth since
2000 (its total 2003 vehicle output of about 900,000 nearly equaled that of India).170
The Global Automotive Supplier Industry
As noted earlier in this report, the U.S. motor vehicle parts and equipment
industry employs far more people than the brand-name motor vehicle assemblers.
This industry has been under increasing pressure, as motor vehicle manufacturers
seek both to rationalize and globalize their supply chains.
The U.S. auto parts industry in recent years has thus faced pressure from two
directions. First, while proliferating models in hopes of filling more market niches,
the major vehicle manufacturers have also sought to reduce costs by driving model
designs off a smaller number of vehicle “platforms,” emphasizing greater
commonality of parts, but with more distinctive features, while reducing the number
of suppliers. Ford and GM have also stressed that they intend to source more parts
from cheaper production locations, especially China. As the vehicle manufacturers,
especially the U.S. Big Three, have increasingly “deintegrated” their manufacturing
processes — relying more on outside suppliers who must compete to supply parts,
components and modules — they have used their market power to force a “cost-
down” model of ever-decreasing unit prices on suppliers.171
This pressure has been exacerbated by the growth of Japanese- and European-
based transplants, which has increased the presence of foreign-based auto suppliers
in the U.S. market, and added to competition and capacity in a market that is already
mature. For example, three of the five Japanese suppliers among the top 25 globally
have about a quarter or more of their sales in North America. One of them, Yazaki,
sold nearly as much in North America in 2003 as it did in Japan.172
The second factor that has squeezed this industry is the rising cost of materials,
especially steel. Motor vehicle parts manufacturers were among the leaders in calling
for a rollback of the safeguard tariffs applied by President Bush in 2002 to a wide
range of steel imports, under Section 201 of the U.S. Trade Act of 1974. Eventually,
the President terminated the safeguards about halfway through the planned term of
three years, in December 2003. However, instead of falling, the rise in the price of
170 Maxton and Wormald, Time for a Model Change, pp. 91-126.
171 Maxton and Wormald, Time for a Model Change, pp. 154-63, especially complaints by
suppliers about GM, summarized in Fig. 5-23; also, Lindsay Chappell, “Big 3 Pay Price for
Bad Supplier Relations,” Automotive News (Dec. 27, 2004), p. 1.
172 Details on these data are in Table 6, later in this report.
CRS-79
steel dramatically accelerated, more than doubling earlier levels. To some extent, the
major systems and parts suppliers, the “Tier 1” companies, were shielded from the
price rise. They are allocated steel by the Big Three, who directly negotiate long-
term supply contracts with the steel companies. This does not protect Tier 2 and Tier
3 suppliers in many cases. These are frequently smaller companies, especially
located in the Midwest, who must buy steel on a spot basis after they have
successfully bid on a contract. Furthermore, many of the Big Three supply contracts,
which are negotiated on a rolling basis, have expired as prices are peaking, leaving
customers to decide whether to lock in high current prices in long-term contracts.173
Table 5. Automotive Industry Supplier Location
Location
from
assembly
Product characteristics
Parts/components
Global
! High technology
! Integrated
! Low variability
circuits
! Light, compact
2,000 km
! Economy of scale
! Alternators
! Moderate variability
! Starters
! Moderate weight and
! Radiators
bulk
! Hub units
300-400 km
! Modules/system
! Heating,
assemblies for
ventilation, air
specific vehicles
conditioning
! Moderate variability
systems
! Heavy or bulky
! Fuel tanks
20-30 km
! Modules/system
! Seats
assemblies
! Alarms
! Sequenced exactly in
! Dashboards
vehicle assembly
! Painted
! Heavy or bulky
bumpers
Source: Maxton and Wormald, Time for a Model Change, pp. 151-52 and Fig. 5-15.
Maxton and Wormald contend that the motor vehicle parts and equipment
industry is moving toward internationalization and consolidation at the global level.
This may be either through supply of the global market by increased international
trade, or, as may be compelled in the automotive industry because of “just-in-time”
173 See CRS Report RL32333, Steel: Price and Availability Issues; and, Brian Becker and
Kevin Hassett, The Steel Industry: An Automotive Supplier Perspective (Washington: Motor
& Equipment Manufacturers Assn., 2005). Ford and U.S.-based auto parts manufacturers,
including Delphi, the largest such company, testified at an ITC hearing on “sunsetting”
antidumping and countervailing duties on imported hot-rolled steel from Japan, Brazil and
Russia; USITC. “Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products from Brazil,
Japan and Russia” (Investigations 701-TA-384 and 731-TA-806-808, review), public
hearing, Mar. 2, 2005.
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manufacturing, by increased direct international investment in production facilities
near assembly plants. A typology that seeks to explain supplier location, as outlined
by the two British authors, is summarized in Table 5. T his gl oba l a na l ys i s i s
interesting to compare with discussion above of the auto parts supply business by the
Chicago Federal Reserve Bank. Both approaches stress that changes in location of
parts manufacturing operations would move incrementally. But the Chicago Fed
emphasized that the key determinant would be the location of the assembly plant
itself and the associated transportation infrastructure. Maxton and Wormald
emphasize instead the size, complexity and specificity of the part, component or
system. These authors believe that, as with the vehicle manufacturers, the parts
industry will move in the direction of consolidation (following the recent trend of
deintegration from the vehicle assemblers). But, if ownership is consolidated at the
global level, the typology outlined in Table 5 may help determine to what extent
local manufacturing operations are consolidated globally or regionally.
Notwithstanding the arguments put forward for globalization, via exporting,
direct foreign greenfield investments, or mergers and acquisitions, an analysis of
Table 6 shows that the original equipment manufacturers (OEM) sales of most major
automotive parts manufacturers tend to focus on one region, with possibly a
secondary focus in one other region. Few are spread more widely, to any significant
degree.
This not surprising with respect to Delphi and Visteon, the spun-off GM and
Ford parts makers, respectively, who are the largest U.S.-based suppliers on the list.
Both make a wide range of parts for their former parents; about 50% of Delphi’s
sales in 2004 were to GM, while fully two-thirds of Visteon’s revenues came from
Ford. For Delphi, 74% of sales are in North America, 21% in Europe and only 5%
in Asia and the rest of the world. For Visteon, the concentration is slightly different,
but similar: 67% North America, 18% in Europe, and 15% elsewhere. Johnson
Controls, another top-ten, U.S.-based supplier, follows the same pattern, with 92%
of OEM sales in North America and Europe — though as an independent supplier,
the distribution between the U.S. and Europe is more equal. The other two U.S.-
based companies in the top ten, Lear and TRW Automotive, are well-established in
Europe as well as North America, but have no sales at all in Asia.
Magna, the large Canadian-based supplier, again follows the pattern: 60% of
sales in North America, 30% in Europe, 2% elsewhere. Bosch, the leading
European-based auto parts supplier, which may have overtaken Delphi as the world’s
largest in 2004, follows a similar pattern from the European perspective.174 Most of
its sales are in Europe, it is well-represented in North America and elsewhere, but has
no sales in Asia. This also applies to the next four European suppliers (Faurecia,
Valeo, ZF Friedrichshafen and the automotive unit of the German electrical
174 FT.com, “Bosch Sales Lead Delphi for the First Time” (Jan. 27, 2005). In comparison
with Delphi, Bosch’s ranking was helped by the large share of its 2004 euro-valued sales in
Europe, which also gained from exchange rate appreciation against the dollar. According
to the article, Bosch also “profited in part from heightened demand in Europe for diesel
engines [as] it is the market leader [there] for diesel injection systems.”
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engineering company, Siemens): concentration in Europe, double-digit shares of
sales in North America, only single-digit sales in Asia.
Conversely, the top two Japanese companies, Denso and Aisin Seiki, have 65%
and 80% of sales in Asia, respectively, and about 90% each there and in North
America. As was mentioned in the earlier section on trade policy issues, the U.S.
Trade Representative has long alleged that Japanese and Korean markets are closed,
or tightly restricted, for foreign auto parts manufacturers. Many European countries
also applied formal or de facto restrictions that favored local content and suppliers
for decades. While U.S. automotive policy rules have been established that
distinguished between foreign-made and locally produced parts, such rules in general
have not discouraged higher levels of direct investment in the United States by
foreign-based parts manufacturers.175
Another interesting feature of Table 6 is that after placing five suppliers in the
global top ten, the heft of U.S.-based suppliers falls off dramatically. Only four other
U.S.-based companies are in the top 25: Dana ranks fourteenth ($7.9 billion), the
automotive products sales of chemical company Du Pont place it eighteenth ($5.5
billion), Collins & Aikman is number 23 ($4 billion), and ArvinMeritor right behind
($3.9 billion). The low and falling rankings of many U.S.-based suppliers is not a
statistical artifact or illusion:
Their share of the shrinking pie is disappearing faster than the market around
them. In the past five years, U.S. factories have lost $47.4 billion in original-
equipment business to rivals in other countries ...176
Many U.S. auto parts manufacturers are medium- or smaller-sized specialist
companies. Most are concentrated in the North American market, which, as this
report has generally shown, is a mature market with limited growth potential.
Stagnant growth, especially among the Big Three, higher steel and other material
costs, and increased competition from foreign-based companies have put this
domestic industry under increased financial pressure. Two major U.S. suppliers,
Federal-Mogul (no. 37 in the global top 100) and Tower Automotive (no. 40), are
operating in bankruptcy. Oxford Automotive (no. 88) only recently left bankruptcy
by selling or closing all ten of its U.S. manufacturing plants. Others, such as Collins
& Aikman have been in financial distress, and two smaller suppliers of castings to
the industry have recently gone bankrupt.177
175 Maxton and Wormald discuss the relative rates of regional concentration market shares
held by foreign investors in Fig. 5-17, and on p. 152.
176 Lindsay Chappell, “U.S. Parts Factories Lose More Ground,” Automotive News (Feb. 28,
2005), p. 10; the quote from the article is based on “U.S. Commerce Department data
compiled by Des Rosiers Automotive Consultants Inc. of Richmond Hill, Ontario.”
177 Automotive News, “Analysts Pound Big Three Suppliers” (Sept. 6, 2004), p. 1; Bernard
Simon, “Gloom Sets in Across U.S. Motor Industry,” Financial Times (Oct. 13, 2004);
Detroit Free Press, “Auto Supplier Profits Dwindle” (AP wire story, Nov. 20, 2004);
“Tower Automotive Files for Chapter 11 Bankruptcy Aid” (Feb. 3, 2005); “Oxford
Automotive Is Out of Bankruptcy” (Mar. 25, 2005); and “S&P Cuts C&A Rating;
Bankruptcy Possible” (Mar. 31, 2005).
CRS-82
Table 6. Leading Automotive Parts Suppliers
(Sales and rankings data for 2003)
Total OEM automotive parts sales and %
distribution
HQ
Company
country
$ bils.
N.Am.
Europe
Asia
R.o.W.
1) Delphi
USA
26.2
74
21
3
2
2) Robert Bosch
Germany
23.2
23
61
16
3) Denso
Japan
16.9
23
12
65
4) Visteon
USA
16.5
67
18
8
7
5) Lear
USA
15.7
60
36
4
6) Magna Intl.
Canada
15.3
68
30
1
1
7) Johnson
USA
15.2
53
39
7
1
Controls
8) Aisin Seiki
Japan
13.5
12
7
80
1
9) Faurecia
France
12.7
10
86
3
1
10) TRW Auto.
USA
11.3
41
50
9
11) Siemens VDO
Germany
9.5
18
73
7
2
12) Valeo
France
8.9
19
71
7
3
13) ZF Frhafen.
Germany
8.2
20
70
7
3
14) Dana
USA
7.9
70
19
6
5
15) Continental
Germany
7.6
30
60
5
5
16) ThyssenKrupp
Germany
7.3
50
46
1
3
17) Yazaki
Japan
5.9
38
11
43
8
18) DuPont
USA
5.5
50
35
11
4
19)
Japan
5.4
26
8
66
CalsonicKansei
20) Autoliv
Sweden
5.3
35
50
10
5
21) Michelin
France
4.7
27
44
29
22) Koyo Seiko
Japan
4.1
11
27
60
2
23) Collins &
USA
4.0
73
25
1
1
Aikman
24) ArvinMeritor
USA
3.9
50
40
7
3
25) GKN
UK
3.9
50
38
12
Source: Automotive News, “Top 100 Global Suppliers” (June 28, 2004).
The recent Ford and GM losses in market share and production have contributed
to losses for Delphi and Visteon, their former subsidiaries, and consequently for their
smaller Tier 2 and Tier 3 suppliers. Visteon, the number four global supplier, has not
made a full-year profit in its four years of existence, and has lost a total of $3.2
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billion. In terms of providing more business or other assistance, William Clay Ford,
Jr., CEO of Visteon’s former parent and leading customer, said, “We’re willing to
sit down with them and to say where we can be helpful. But we’re not Santa
Claus.”178 But Ford nevertheless reached an agreement with Visteon that provided
$390 million in anticipated savings in 2005, including payment of about one-quarter
of the employment costs of 18,000 UAW members who were technically “leased”
by Ford to Visteon as part of the original spin-off deal.179 Delphi in 2004 recorded
losses for the second straight year, and it anticipates another loss for 2005. Its
problems were compounded by accounting irregularities involving rebates from their
own suppliers. The company’s CEO and CFO have both resigned.180
Fuel Economy and Emissions Standards181
Since the 1960s and 1970s, environmental issues, including vehicle emissions,
fossil fuel consumption, and resource use, have played an increasing role in shaping
the U.S. auto industry. Environmental decisions play a key part in automotive
design, research and development of new vehicles, and marketing to consumers.
In response to increasing ground-level ozone pollution (smog), California
established the first requirements for auto emissions control technology in 1961.
With the passage of the Clean Air Act in 1970, the first federal auto emissions
standards went into effect in 1975. In response to the 1973-1974 Arab oil embargo,
the Energy Policy and Conservation Act of 1975 established Corporate Average Fuel
Economy (CAFE) standards for passenger cars in the 1977 model year (MY), and the
Department of Transportation established standards for light trucks in MY1978.
While not enacted for environmental reasons, fuel economy standards are seen by
some as a key strategy for reducing fossil fuel consumption, and, with it, greenhouse
gas emissions. Since the 1970s, federal CAFE standards, as well as federal and
California emission standards, have become increasingly stringent. For example,
from 1978 to 1990, passenger car CAFE standards rose from 18.0 miles per gallon
(mpg) to 27.5 mpg; light truck standards rose from 17.5 mpg in 1982 to 21.0 mpg in
2005. Similarly, by 2009, federal standards for nitrogen oxide emissions from
178 B. Simon, “No Santa for Troubled Visteon,” FT.com (Nov. 23, 2004); and Doron Levin,
“Car Glut Has Repercussions for Visteon and Delphi,” Bloomberg.com (Dec. 13, 2004).
179 Detroit Free Press, “Ford Deal to Save Visteon $390 Million” (Mar. 11, 2005);
Automotive News, “Downsizing Detroit,” “Once Again, Ford Has to Bail Out Visteon,” and
“Small Suppliers Hit the Hardest” (Mar. 14, 2005), pp. 1 and 54-55.
180 Detroit Free Press, “Delphi Loses; Outlook Bleak” (Jan. 21, 2005); “Accounting
Scandal Hits Delphi; Exec Ousted” (Mar. 5, 2005); “Delphi Scandal Rocks Industry” (Mar.
5, 2005); “Delphi Accounting Woes Rattle Through Industry” (Mar. 11, 2005); “Battenberg
Defends His Departure” (Mar. 15, 2005); and Automotive News, “Supply Chain ‘Rebate’
Part of Delphi Trap” (Mar. 14, 2005).
181 This section was written by Brent Yacobucci.
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passenger cars will have decreased by over 90% from 1980 levels, while allowable
hydrocarbon emissions will have been cut by roughly 80%.182
These standards have affected the U.S. auto industry in many ways. Now, auto
makers must design and build vehicles that meet environmental standards, or face
fines. These standards have promoted the use of new technologies and helped create
whole new businesses (e.g., emissions control devices, emissions testing equipment).
At the same time, these standards have had noticeable effects on the consumer auto
market.
Fuel Economy Standards183
Transportation consumes over 25% of annual U.S. energy demand, and the
majority of that energy is consumed by passenger vehicles (nearly 60%). In total,
highway vehicles (including passenger vehicles, buses, and heavy trucks) account for
over 75% of transportation energy consumption, and roughly 21% of all U.S. energy
consumption (see Figure 14). The majority of this consumption is petroleum, a
fossil fuel, and environmentalists see curbing fossil fuel use as a key component of
strategies to reduce greenhouse gas emissions.
Figure 14. U.S. Consumption of Total Energy by
End-Use Sector
quadrillion Btu
100
80
60
40
20
0
1973
1978
1983
1988
1993
1998
2003
Residential
Commercial
Industrial
Transportation
Source: U.S. Department of Energy, Energy Information Administration, Monthly Energy Review.
Because of a growing motor vehicle fleet, and increasing miles traveled per
vehicle, annual fuel consumption by passenger vehicles has increased dramatically
since 1970, despite the introduction of fuel economy standards (see Figure 15).
182 U.S. Environmental Protection Agency, Office of Mobile Sources. Milestones in Auto
Emissions Control. Ann Arbor, MI. August 1994. CRS Report RS20247, EPA’s Tier 2
Emission Standards for New Motor Vehicles: A Fact Sheet, by David Bearden.
183 For information on the history of fuel economy standards, as well as current legislative
action, see CRS Issue Brief IB90122, Automobile and Light Truck Fuel Economy: The
CAFE Standards, by Robert Bamberger.
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Much of this increase in consumption is attributed to the growth in the use of light
trucks, including minivans and SUVs, as passenger vehicles. It is expected that in
the absence of fuel economy standards, fuel consumption would have increased at an
even faster rate. According to the National Research Council:
While it is difficult to say what fuel consumption would have been had there
been no CAFE standards, it is clear that if light-duty fuel use had continued to
grow at the same rate as light-duty VMT [vehicle miles traveled], the United
States would be consuming approximately 55 billion more gallons of gasoline
each year.184
This 55 billion gallons would represent roughly a 40% increase in gasoline
consumption. While there is no guarantee that fuel consumption would have risen
this much, it is clear that the CAFE standards have been effective at reducing fuel
consumption from what it otherwise would have been.
Figure 15. Annual Passenger Vehicle Fuel
Use, 1970-2000
billion gallons
140
120
100
80
60
40
20
0
1970
1980
1990
2000
Light Trucks
Passenger Cars
Source: Stacy C. Davis, Oak Ridge National Laboratory,
Transportation Energy Data Book.
One of the most significant environmental standards faced by auto makers are
the CAFE standards.185 Although not enacted for environmental reasons, fuel
economy standards are seen by some as a key strategy for reducing fossil fuel
consumption, and thus, greenhouse gas emissions. In a given model year, the average
fuel economy of a manufacturer’s passenger car and light truck sales must meet or
exceed the CAFE standard for that year. Otherwise, manufacturers are subject to
184 National Research Council, Effectiveness and Impact of Corporate Average Fuel
Economy (CAFE) Standards. Washington, D.C. 2000. p. 19.
185 Energy Policy and Conservation Act of 1975 (P.L. 94-163).
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fines. The structure of CAFE and manufacturers’ responses to it have shaped the
evolution of the auto industry over nearly three decades.
Structure of CAFE System. For a given model year, each manufacturer’s
vehicles are divided in to three fleets: domestically-produced passenger cars, foreign-
produced passenger cars, and light trucks. Each of these fleets must meet the
applicable CAFE standard separately. For MY2005, the passenger car (both
domestic and foreign) standard is 27.5 miles per gallon (mpg), while the light truck
standard is 21.0 mpg. The specific definitions of passenger car vs. light truck and
foreign vs. domestic have had direct effects on vehicle design and plant location, as
will be discussed below.
If a manufacturer’s fleet fails to meet the average standard, the company is
assessed a fine of $5.50 per vehicle, for each 1/10th of an mpg below the standard.
For example, if a manufacturer sold 1 million light trucks in MY2005, with an
average fuel economy of 20.8 mpg (2/10 below the standard), the total fine would be
$11 million. However, if manufacturer’s fuel economy exceeds the CAFE standard
in a given year, that manufacturer may bank credits for future use (up to three years).
Likewise, a manufacturer may borrow credits from future years (up to three years)
if the manufacturer expects to exceed the standard in the future.186 Manufacturers
may also generate CAFE credits through the manufacture and sale of alternative fuel
vehicles. Credits may not be traded among manufacturers, nor may a manufacturer
trade credits among its various fleets (e.g., a manufacturer may not transfer credits
from its domestic car fleet to its light truck fleet).
Since 1983, the National Highway Traffic Safety Administration (NHTSA),
which administers the CAFE program, has assessed over $500 million in fines on
European auto manufacturers.187 To date, no American or Asian auto maker has ever
paid a CAFE fine.188 But regardless of whether a manufacturer has paid a fine, the
CAFE program has had a noticeable effect on the U.S. auto industry, as has the
specific structure of CAFE.
Light Truck and Passenger Car Fleets. The distinction between light
trucks and cars under CAFE has directly affected the U.S. industry, especially the
ways in which new vehicles are designed. A vehicle is classified as a light truck if
it has off-road capability or has significant “truck-like” features. These features
include an open bed, an enclosed loading area, or a loading area that can be made flat
through the removal of rear seats.189 Under this definition, all pickup trucks, vans,
186 To use so-called “carry-back” credits, the manufacturer must submit a plan for approval
by the National Highway Traffic Safety Administration (Department of Transportation),
which oversees the CAFE program.
187 National Highway Traffic Safety Administration, CAFE Overview.
[http://www.nhtsa.dot.gov/cars/rules/CAFE/overview.htm] Accessed January 10, 2005.
188 In some cases, this is due to significant banking of CAFE credits, including alternative
fuel vehicle credits.
189 49 CFR 523.
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and minivans qualify as light trucks as do the majority of SUVs.190 The original
justification for the separate standards is that when CAFE was enacted, light trucks
were used mainly as commercial and agricultural work vehicles and needed more
hauling capacity, and would thus be less able to meet the car standard. Further, these
vehicles were a relatively small portion of the U.S. automobile market in the
1970s.191
The distinction between cars and trucks under CAFE has drawn criticism by
some environmental groups because light trucks are used more and more as
passenger vehicles (as opposed to work vehicles), as evidenced by the fact that light
trucks claim more than half of the passenger vehicle market. Further, critics of the
auto industry are concerned that a manufacturer may be able to make minor
modifications to a passenger car to turn it into a light truck. They argue that if the
original car has a fuel economy below the passenger car standard, but above the light
truck standard, then an auto maker could improve both its CAFE averages without
improving its overall fuel economy. In fact, some vehicle models that were originally
declared passenger cars by automakers are now considered light trucks for CAFE
purposes.
The Two-Fleet Rule. In addition to the distinction between passenger cars
and light trucks, there is also a distinction between domestically-produced passenger
cars and those produced in foreign countries.192 If 75% or more of a vehicle’s parts
and labor originate in the United States or Canada (and Mexico, under NAFTA), it
is considered part of a manufacturer’s domestic fleet. Otherwise, it is considered part
of its foreign fleet. Except in some specific cases, the ownership of the manufacturer
does not affect whether the vehicle is considered foreign or domestic.
This distinction was enacted by Congress to keep U.S. manufacturers from
relocating small car production abroad and closing small car plants in the United
States.193 If a manufacturer were to do so, then the relocated production could not be
counted in the average with vehicles produced domestically. In the case of smaller
cars, which tend to have higher fuel economy, this became a major disincentive to
relocate those plants outside of the United States.
However, this two-fleet rule also created a barrier preventing foreign-owned
manufacturers from using American-made parts in their North American assembly
plants. Under the two-fleet rule, a foreign manufacturer (operating in the United
States) that produces a vehicle using 75% domestic content (parts and labor) must
190 Vehicles which are similar in design to both cars and SUVs, frequently referred to as
Crossover Utility Vehicles (CUVs), may fall into the light truck category or the passenger
car category, depending on design.
191 For more information on the differences between passenger car and light truck standards,
see CRS Report RS20298, Sport Utility Vehicles, Mini-Vans, and Light Trucks: An
Overview of Fuel Economy and Emissions Standards,by Brent Yacobucci.
192 There was a similar two-fleet rule for light trucks, but this rule was eliminated after
MY1995.
193 P.L. 94-163, Sec. 503(b).
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classify that vehicle as domestic, and the vehicle cannot be counted toward that
manufacturer’s import fleet average. If that manufacturer’s import CAFE average
is just meeting the standard, reclassifying one vehicle from import to domestic could
suddenly take that manufacturer out of compliance and make them subject to
penalties.
Soon after the enactment of the CAFE standards, Volkswagen established a
plant in the United States. However, the company chose to use foreign parts so that
the high-efficiency vehicles it was producing could be counted toward its import fleet
average. Therefore, in 1980, Congress established an exemption for foreign makers
who had established plants in the United States by the end of 1985.194 These
manufacturers may petition NHTSA to claim U.S.-produced vehicles as part of their
import average, as long as doing so would not harm U.S. auto industry
employment.195 This waiver allows foreign manufacturers to build plants in the
United States and use American-made parts without the risk of CAFE penalties.
In 2004, Nissan petitioned to include vehicles produced in a plant in Mexico as
part of its import average. As a result of NAFTA, those vehicles, which were
previously classified as imports, were reclassified as domestic. However, as these
were smaller, more efficient vehicles, the reclassification made their import fleet
noncompliant with the standard. NHTSA concluded that denying Nissan’s request
would result in the use of fewer American-made parts, which would lead to fewer
jobs in the U.S. auto industry.196
Alternative Fuel Vehicles. In addition to the credits generated by exceeding
the CAFE standard in a given year, auto makers may also generate credits through
the sale of alternative fuel vehicles — those that run on fuels other than gasoline or
diesel fuel. The Alternative Motor Fuels Act of 1988 was enacted to promote the
expanded use of alternative fuels and establish a market for alternative fuel
vehicles.197 Alternative fuel vehicles are treated as having a significantly higher fuel
economy than their conventional counterparts. However, there is a limit to the level
of CAFE increase attributable to the sale of alternative fuel vehicles — 0.9 mpg in
MY2004 and thereafter.
In 2002, the Department of Transportation (DOT) concluded that the CAFE
incentives have been “successful in stimulating a significant increase in the
availability of alternative fuel vehicles.”198 The majority of these vehicles are dual-
fuel and flex-fuel vehicles, which have the capability of fueling on alternative fuels
194 Automotive Fuel Efficiency Act of 1980 (P.L. 96-425).
195 49 U.S.C. 32904 (b)(6)(B).
196 69 Federal Register 21883, Nissan North America, Inc.; Petition for Exemption From
Two-Fleet Rule Affecting Compliance With Passenger Automobile Fuel Economy Standards.
197 P.L. 100-94.
198 U.S. Department of Transportation, U.S. Department on Energy, and U.S. Environmental
Protection Agency, Effects of the Alternative Motor Fuels Act CAFE Incentives Policy.
March 2002. p. iii.
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or gasoline.199 However, DOT also stated that the availability of alternative fuel has
not kept pace with the increase in the number of alternative fuel vehicles.200 Critics
of the incentives argue that the sale of dual-fuel natural gas/gasoline vehicles and
flex-fuel ethanol/gasoline vehicles has allowed automakers to sidestep CAFE
requirements without affecting gasoline consumption. Their argument is supported
by the findings of the Energy Information Administration, which indicate that the
majority of these vehicles are sold and used as traditional gasoline-powered
vehicles.201 Further, despite the number of vehicles on the road, alternative fuel use
for transportation is still low compared to petroleum (see Figure 16), and the
majority of alternative fuel use in the United States is as a blending component in
conventional gasoline, not as a fuel in alternative fuel vehicles.202
Figure 16. Estimated Consumption of Vehicle
Fuels, 2003
Equivalent Gasoline Gallons
132,961,000
2,232,383
39,930,170
Alternative Fuels
Gasoline
Diesel Fuel
Source: U.S. Energy Information Administration,
Alternatives to Traditional Transportation Fuels 2003.
Safety Concerns. One of the key policy concerns over CAFE has been its
effect on vehicle safety. A key criticism of the CAFE standards is that more traffic
fatalities have resulted from the enactment of the standards. CAFE critics argue that
199 Dual-fuel vehicles are capable of operating on either an alternative or conventional fuel,
depending on which mode is chosen. Flex-fuel vehicles are capable of operating on an
alternative fuel, a conventional fuel, or any mixture of the two. In the United States, most
of these vehicles are operated on gasoline.
200 Ibid. p. iii
201 U.S. Energy Information Administration, Alternatives to Traditional Transportation Fuels
2003.
202 Ibid.
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one of the cheapest and easiest ways to make vehicles compliant with CAFE is to
reduce their size and weight, thus reducing fuel consumption. They argue that as a
result of the standards, vehicle size and weight rapidly decreased from the early
1970s to the late 1970s, and that more traffic deaths have resulted.203 Opponents of
this view argue that other factors (such as size, as opposed to weight) may have
played a role in the number of fatalities, and that the effects of CAFE on safety are
more limited.204
The conclusion that traffic fatalities have increased from an earlier downsizing
or downweighting of the passenger car fleet could inform any future policy
discussion on CAFE. Such a conclusion does not necessarily mean, however, that
any future increases in CAFE would result in more traffic deaths. The National
Research Council concluded that given sufficient lead time, and with proper design,
CAFE can be improved significantly without jeopardizing overall passenger safety.
They argue that new technologies can be implemented to improve fuel economy
without changing other vehicle specifications, if manufacturers are given sufficient
lead time.205 Further, in the case of a collision between to vehicles of different
weights, passengers in the lighter vehicle are more likely to be hurt or killed. It has
been argued that if the heaviest vehicles were downweighted (larger light trucks),
while keeping the weight of smaller vehicles constant, any increased risk to
passengers in the heavier vehicles could be offset by a decreased risk to the
passengers in the smaller vehicles. Therefore, the specific structure of changes to
CAFE would likely affect the safety of the vehicle fleet.206
Effects of CAFE on the Auto Industry. It is difficult to separate the
economic effects of the CAFE standards from other factors affecting the auto
industry. However, the total effects of CAFE on industry employment and output
seem to be limited. According to the National Research Council:
Examination of the data shows little evidence of a dramatic impact of fuel
economy regulations. General economic conditions, and especially globalization
of the automobile industry, seem to have been far more important than fuel
economy regulations in determining the profitability and employment shares of
the domestic automakers and their competitors.207
However, CAFE standards have affected the ownership of U.S. manufacturing plants,
if not the total level of employment. As was stated above, the two-fleet rule has had
a noticeable impact on the parts used in foreign-owned U.S. facilities. This effect
seems to be even more likely in the future, as more and more foreign manufacturers
203 It should be noted that traffic deaths, measured as a ratio of the number of vehicles, the
number of vehicle-miles traveled, or population, have dropped significantly since the 1970s.
The area of debate is whether the number of deaths would have been even lower in the
absence of CAFE standards.
204 National Research Council, op. cit. p. 117.
205 Ibid., p. 4.
206 Ibid., p. 119.
207 Ibid., p. 22.
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locate plants in the United States. Those manufacturers not grandfathered by the
two-fleet rule may choose to assemble vehicles using foreign parts, instead of parts
made in North America.
Further, it is likely that the CAFE standards have given a competitive advantage
to some manufacturers over others. Those auto makers with a history of building
smaller and more efficient vehicles have had less need to adjust their design and
manufacturing, as well as marketing,208 in response. If CAFE standards were
tightened, the advantage for small car producers would likely be expanded.
In addition to competitive effects of the CAFE structure, the alternative fuel
CAFE incentives have undoubtedly motivated auto makers to produce more
alternative fuel vehicles then they might have otherwise. Whether or not these
vehicles have helped reduce petroleum consumption, several automakers have
focused on producing flex-fuel and dual-fuel vehicles to increase their CAFE
averages. In some cases, the result has been the use of additional components to
make the vehicle flex fuel compatible — a capability consumers may not even know
their vehicles have, and thus never use.
Current Issues. Several issues have dominated the discussion of fuel
economy standards over the past few years. At the federal level, these include a
proposal by NHTSA to examine the structure of the CAFE system, legislative
proposals to increase CAFE standards for cars and/or light trucks, and debate over
whether to continue the CAFE alternative fuel vehicle incentives. Other relevant
issues include state actions to control greenhouse gas emissions from automobiles,
and actions by other countries to set fuel economy standards or greenhouse gas
emissions limits.
California’s Greenhouse Gas Rule. Perhaps the most significant current
issue regarding automotive fuel economy is the decision by the state of California to
require carbon dioxide emissions standards for passenger cars and light trucks.
Enacted in 2002, California’s A.B. 1498 requires the state to promulgate regulations
to achieve the maximum feasible and cost-effective reduction of greenhouse gases
from cars and trucks.209 The regulations, adopted by the California Air Resources
Board on September 24, 2004, require a reduction of greenhouse gas emissions of
30% by 2016. The regulation covers passenger vehicles, but would not affect heavier
vehicles such as commercial trucks or buses.
Under the Clean Air Act, California may petition the Environmental Protection
Agency to establish its own emissions standards for automobiles, as long as those
standards are at least as stringent as the federal standard, and as long as the standards
are enacted to meet “compelling and extraordinary conditions.”210 However, there
208 It is argued that some manufacturers subsidize the sale of their smaller vehicles in order
to improve their fleet fuel economy and avoid paying CAFE penalties.
209 Carolyn Whetzel, “California Agency Adopts Nation’s First Rule to Limit Greenhouse
Gases from Vehicles,” Daily Environment Report. September 27, 2004. p. A-1.
210 Clean Air Act, section 209. 42 U.S.C. 7543.
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is no current federal standard for greenhouse gas emissions; federal standards focus
on designated pollutants with direct effects on air quality and health, including
ground-level ozone (smog) and carbon monoxide. Critics argue that greenhouse
gases are not designated pollutants, and that the greenhouse gas standard is a de facto
fuel economy standard, since reducing emissions of carbon dioxide — the key
greenhouse gas — requires reductions in fuel consumption. Under CAFE, states do
not have the authority to set their own mileage standards; authority remains solely
with the federal government.211
Several auto dealers and a group representing auto makers have challenged the
California auto greenhouse gas standard in court.212 Two of the plaintiffs’ main
arguments are that California is preempted from setting a fuel economy standard
under CAFE, and that greenhouse gases are not a pollutant under the Clean Air
Act.213 California officials maintain that they have the authority under the Clean Air
Act to regulate vehicle greenhouse gas emissions.
The outcome of this case will likely have major effects on the U.S. auto
industry. If the standards are upheld, New York and other states are likely to adopt
California’s standards. The state of California estimates that complying with the
standard could cost $1,000 per vehicle by 2016, while opponents argue that costs
could be as much as $3,000 per vehicle. While reducing greenhouse gas emissions
and fuel consumption, the new standards would likely increase purchase costs. Such
standards would likely have varying effects on automakers depending on the fuel
efficiency of their products.
International Fuel Economy Standards. Over the past few years, several
countries have acted to increase passenger vehicle fuel economy, generally as a
strategy to reduce greenhouse gas emissions and comply with mandated emissions
limits under the Kyoto Protocol on climate change.214 Other countries have promoted
greater fuel economy as part of a strategy to reduce energy consumption. Most
recently, automakers and the Canadian government signed a Memorandum of
Understanding (MOU) on automotive greenhouse gas emissions. All major
automotive manufacturers have agreed to reduce emissions from passenger cars and
211 49 U.S.C. 32919.
212 Central Valley Chrysler v. California Air Resources Board, E.D. Cal., No. CV-
F0466663, December 7, 2004.
213 Carolyn Whetzel, “Automakers, Dealers Challenge Regulation in California to Limit
Vehicle Carbon Dioxide,” Daily Environment Report. December 8, 2004. p. A-12.
214 The Kyoto Protocol entered into force on February 16, 2005. Developed countries must
meet country-specific emission reduction targets. However, the United States did not ratify
the treaty, and thus is not bound by its requirements. For more information on the Kyoto
Protocol, see CRS Report RL30692, Global Climate Change: The Kyoto Protocol, by Susan
R. Fletcher.
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light trucks roughly 6% below the Canadian government’s 2010 reference case.215
If the reference case is accurate, this could mean an increase in Canadian new
passenger vehicle fuel economy of as much as 25% or more. However, if the
reference case overstates growth in fuel consumption, then the overall effect of the
agreement could be lessened. Likewise, if the reference case underestimates
consumption growth, than reducing consumption below the reference case could
require an even more drastic increase in fuel economy. In addition to Canada, the
European Union and Australia have established voluntary greenhouse gas and fuel
economy standards, respectively; Japan and China have established mandatory fuel
economy standards.216
Emissions Standards
Motor vehicles are a major source of key air pollutants. In 2001, highway
vehicles accounted for over 50% of all U.S. carbon monoxide (CO) emissions, 35%
of nitrogen oxide (NOx) emissions, and nearly 30% of volatile organic compound
(VOC) emissions (Figure 17). These pollutants either directly affect human health
through respiratory distress, or promote the formation of ground-level ozone (smog).
However, as a direct result of state and federal emissions standards for light- and
heavy-duty vehicles, total emissions from highway vehicles have dropped
significantly, largely due to tighter emissions standards (Figure 18). Between 1970
and 2002, annual carbon monoxide emissions from highway vehicles dropped 62%,
nitrogen oxide emissions dropped 42%, VOC emissions dropped 73%, and PM-10
(particulate matter of 10 microns diameter or greater) emissions dropped 58%.
California first enacted motor vehicle emissions standards in the 1960s, in
response to worsening air quality in the state, especially in the Los Angeles area. In
response to growing national concerns over air quality, as well as concerns raised by
auto makers over varying state standards, the federal government promulgated
national emissions standards (for light-duty vehicles) in the 1970s. Since that time,
emissions standards have been tightened several times, both in California and
federally. In addition, emissions standards have been enacted for heavy-duty
highway vehicles, as well as non-highway mobile sources, from all-terrain vehicles
to heavy construction equipment.
While annual emissions have dropped since the development of vehicle and
engine standards, attaining air quality standards — especially in the largest urban
areas — remains a difficult goal and a major policy issue. As was stated above,
highway vehicles are still a key emitter of pollutants. New technologies and new
strategies will need to be employed if further vehicle emission reductions are to be
achieved.
215 Memorandum of Understanding Between the Government of Canada and the Canadian
Automotive Industry Respecting Automobile Greenhouse Gas Emissions. April 5, 2005.
Windsor, Ontario.
216 Feng An and Amanda Sauer. Pew Center on Global Climate Change. Comparison of
Passenger Vehicle Fuel Economy and Greenhouse Gas Emissions Standards Around the
World. December, 2004. Arlington, VA.
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Figure 17. U.S. Transportation Emissions, 2002
million short tons
CO
NOx
62.16
7.64
4.09
25.44
24.45
9.65
VOC
PM-10
2.69
4.54
0.31
21.64
0.2
9.31
Highway Vehicles
Other Transportation
Other Sources
Figure 18. Pollutant Emissions from Highway Vehicles, 1970-
2002
million short tons
200
20
160
15
120
10
80
5
40
0
0
1970
1975
1980
1985
1990
1995
2000
CO (Y1)
NOx (Y2)
VOC (Y2)
PM (Y2)
Source for Figs. 17-18: U.S. Environmental Protection Agency, National Emission Inventory Air
Pollutant Emission Trends
[http://www.epa.gov/ttn/chief/trends/trends02/trendsreportallpollutants010505.xls].
CRS-95
New Emission Standards. In the early 2000s, the Environmental Protection
Agency (EPA) promulgated new standards for both light- and heavy-duty vehicles,
through its authority under the Clean Air Act. In February 2000, EPA promulgated
“Tier 2” regulations for passenger cars and light trucks, reducing allowable NOx
emissions by 77% to 95% by MY2009 as compared to pre-2004 standards.217
Further, for the first time, all passenger cars and light trucks will be held to the same
emissions standards.218 EPA estimates that the ultimate cost per vehicle will range
from $70 to $250, depending on the type of vehicle — cost estimates increase with
vehicle size and power.219
In addition to the light-duty Tier 2 standards, in January 2001, EPA promulgated
new standards for heavy-duty (primarily diesel) engines. Beginning in MY2007,
heavy-duty engine NOx standards will be reduced by 90% from MY2004 standards.
These standards will be fully phased in by MY2010.220 EPA estimates that the new
standards will cost $1,200 to $1,900 per vehicle, or roughly 1% of the cost of a new
truck or bus.
Effects of Emissions Standards on the Auto Industry. Over the past
four decades, auto emissions standards have directly affected the auto industry.
Before the 1960s, there was virtually no market for auto emission control devices.
The California standards of the 1960s and the federal standards of the 1970s created
a market for the catalytic converter, now a standard component in any passenger car
or light truck. An entire category of auto parts suppliers — emission control
manufacturers — has evolved since the 1960s. Further, the emissions profile has
become a key component of a new vehicle’s design, especially in terms of the
vehicle’s engine and exhaust systems.
As can be seen from Figure 18, highway vehicle emissions have dropped
significantly from the 1970s, and they can be expected to continue to decline with the
introduction of new technologies to meet the Tier 2 light-duty vehicle standards and
the 2007 heavy-duty standards. Despite concerns about costs of meeting increasingly
stringent emissions standards, in the past auto makers have succeeded in meeting the
challenge, even when the technology to meet the standard had not necessarily been
identified at the time the standards were initially promulgated. The costs of meeting
the standards have likely limited auto manufacturer’s profits, but by and large the
costs of compliance have been lower than those predicted by policy makers when the
standards were promulgated. However, whether this will be true of the new
standards remains a matter for speculation.
217 65 Federal Register 6698. For more information, see CRS Report RS20247, EPA’s Tier
2 Emission Standards for New Motor Vehicles: A Fact Sheet.
218 Before the Tier 2 standards, passenger cars and light trucks were regulated separately for
emissions, as they currently are for fuel economy.
219 U.S. Environmental Protection Agency (EPA), Clean Vehicles + Clean Fuel = Clean Air.
January 2004.
220 66 Federal Register 5002. For more information, see CRS Report RL30737, Diesel Fuel
and Engines: An Analysis of EPA’s New Regulations, by Brent Yacobucci, et al.
CRS-96
It should be noted that there are differential effects from emissions standards.
On average, smaller vehicles with smaller engines tend to emit less than larger
vehicles with larger engines. Therefore, those manufacturers that produce larger
vehicles may have more difficulty and likely need to invest more to comply with the
standards. As the Tier 2 standards eliminate the separate treatment for passenger cars
and light trucks, the effects on large vehicle producers may increase. Therefore, auto
makers that focus on small cars may be better positioned than manufacturers that
produce a larger proportion of light trucks.
In addition to the above distinctions, separate emissions standards for California
(as well as other states that adopt the California standards) could expand the
competitive advantage for small vehicle producers, as the California standards are
even more stringent than the Tier 2 standards.
Fuel Quality. Improved fuel quality is a key component in the success of any
technology to improve vehicle emissions. The elimination of lead in gasoline paved
the way for the use of catalytic converters in automobiles, in addition to eliminating
lead itself as a source of air pollution.
To meet more and more stringent vehicle emissions standards, even cleaner fuel
is necessary. To allow the use of advanced catalysts and other technologies, fuel
must be virtually sulfur-free. As part of EPA’s Tier 2 and heavy-duty engine
emissions strategies, by 2010 gasoline sulfur content will be reduced by over 90%,
while diesel sulfur content will be reduced by 97%. It is expected that these
reductions in sulfur content will improve the durability of new emission control
systems, potentially reducing the cost to the auto industry. It should be noted,
however, that these improvements have costs, and that fuel prices will likely increase
as a result. It is possible that if fuel costs increase too much, miles driven will
decrease, limiting demand for new vehicles.
Current Issues. While EPA’s management of the implementation of new
emissions regulations is a matter of Congressional oversight, there has been limited
Congressional action on auto emissions in recent years.
CRS-97
Appendix Table 1. North American Vehicle Production, by
Country
(Millions of units)
United States
Canada
Mexico
% of
% of
North
% of North
North
America
America
America
Total vehicle
Year
Vehicles
total
Vehicles
total
Vehicles
total
production
1977
12.7
85.8%
1.8
12.2%
0.3
2.0%
14.8
1978
12.9
85.4%
1.8
11.9%
0.4
2.6%
15.1
1979
11.5
85.2%
1.6
11.9%
0.4
3.0%
13.5
1980
8.0
80.8%
1.4
14.1%
0.5
5.1%
9.9
1981
7.9
80.6%
1.3
13.3%
0.6
6.1%
9.8
1982
7.0
80.5%
1.2
13.8%
0.5
5.7%
8.7
1983
9.2
83.6%
1.5
13.6%
0.3
2.7%
11.0
1984
10.9
83.8%
1.8
13.8%
0.3
2.3%
13.0
1985
11.6
82.9%
1.9
13.6%
0.5
3.6%
14.0
1986
11.3
83.7%
1.9
14.1%
0.3
2.2%
13.5
1987
10.9
84.5%
1.6
12.4%
0.4
3.1%
12.9
1988
11.2
81.8%
2.0
14.6%
0.5
3.7%
13.7
1989
10.9
80.7%
2.0
14.8%
0.6
4.4%
13.5
1990
9.8
78.4%
1.9
15.2%
0.8
6.4%
12.5
1991
8.8
75.2%
1.9
16.2%
1.0
8.5%
11.7
1992
9.7
75.8%
2.0
15.6%
1.1
8.6%
12.8
1993
10.9
76.8%
2.2
15.5%
1.1
7.7%
14.2
1994
12.2
78.2%
2.3
14.7%
1.1
7.1%
15.6
1995
12.0
78.4%
2.4
15.7%
0.9
5.9%
15.3
1996
11.8
76.6%
2.4
15.6%
1.2
7.8%
15.4
1997
12.1
75.2%
2.6
16.1%
1.4
8.7%
16.1
1998
12.0
74.5%
2.6
16.1%
1.5
9.3%
16.1
1999
13.0
73.9%
3.1
17.6%
1.5
8.5%
17.6
2000
12.8
72.3%
3.0
16.9%
1.9
10.7%
17.7
2001
11.4
72.2%
2.5
15.8%
1.9
12.0%
15.8
2002
12.3
73.7%
2.6
15.6%
1.8
10.8%
16.7
2003
12.1
74.2%
2.6
16.0%
1.6
9.8%
16.3
Source: Ward’s Communications. Ward’s Automotive Yearbook 2004. p. 117.
Note: The term “production” does not mean that all components used in assembling the vehicle were
necessarily from the country of final assembly.
CRS-98
Appendix Table 2. North American Motor Vehicle Production by
Company
(Thousands of Units, Cars and Light Trucks)
A. Big Three
1979
1990
2000
2003
GM
7,057
4,977
5,631
5,301
— USA
6,270
4,127
4,223
3,890
— Canada
787
714
963
940
— Mexico
†
136†
445
471
Ford
3,601
3,410
4,613
3,725
— USA
3,069
2,723
3,759
3,119
— Canada
531
517
630
462
— Mexico
†
170†
224
144
Chrysler
1,692
1,813
2,893
2,488
Group*
— USA
1,445
1,253
1,784
1,731
— Canada
247
394
704
448
— Mexico
†
167†
405
309
Other**
22
1
40
Big 3 Totals
12,350
10,222
13,138
11,554
— USA
10,785
8,125
9,767
8,780
— Canada
1,565
1,624
2,297
1,850
— Mexico
—
473
1,074
924
Source: Automotive News Market Data Book (1980, 1991, 2004), except as noted, for both parts 2A
and 2B.
* Unit of DaimlerChrysler; Chrysler Corp. prior to 2000 data. DaimlerChrysler’s U.S. production unit
of Mercedes Benz is under transplants. Chrysler totals for 1979 include Jeep, then made by
American Motors.
** AM General specialty vehicles for government purchase, 1990; Hummer, 2000-2003.
† Mexican data for 1979 not available in source; data for 1990 from Ward’s Automotive Yearbook
1991.
CRS-99
Appendix Table 2 (Continued)
B. Foreign-
Based Mfrs.
1979
1990
2000
2003
Toyota
484
1,153
1,350
— USA
217
625
728
— NUMMI
205
344
395
(w/GM)
— Canada
61
184
227
Honda
537
1,023
1,259
— USA
433
677
845
— Canada
104
327
392
— Mexico
19
22
Nissan
371
690
814
— USA
235
377
522
— Mexico
136†
313
292
Mitsubishi
148
222
174
(US)
BMW (US)
84
166
Subaru-Isuzu
72
209
122
(US)
Mercedes
80
84
Benz (US)
Volkswagen
175
193†
426
287
(US/Mex.)***
Other‡
287
215
150
Transplant
175
2,093
4,102
4,407
Totals
— USA
175
1,493
2,726
3,120
— Canada
271
619
670
— Mexico
329
758
617
*** 1979: U.S. production only; 1990-2003: Mexican production.
† Mexican data for 1979 not available in source; data for 1990 from Ward’s Automotive Yearbook
1991.
‡ Includes Mazda-Ford AutoAlliance, GM-Suzuki CAMI, Hyundai and Volvo (Canada), Renault
(Mexico) for relevant years.
CRS-100
Appendix Table 3. U.S. Motor Vehicle Production by Company
Type
Car Production
Light Truck/SUV Production
1990
2003
1990
2003
Units
Share
Units
Share
Units
Share
Units
Share
(mils.)
(%)
(mils.)
(%)
(mils.)
(%)
(mils.)
(%)
GM
2.65
43.6
1.39
30.8
1.47
41.3
2.48
33.9
Ford
1.38
22.7
0.82
18.2
1.39
39.0
2.29
31.3
Chrysler*
0.73
12.0
0.36
8.0
0.53
14.8
1.36
18.6
Total Big
4.76
78.3
2.57
57.0
3.38
95.1
6.13
83.9
Three
Foreign-Based
1.32
21.7
1.94
43.0
0.17
4.9
1.18
16.1
Mfrs.
Total U.S.
6.08
100.0
4.51
100.0
3.55
100.0
7.31
100.0
Production
Source: Ward’s Automotive Yearbook, 2004.
* Chrysler Corp. prior to 1999, now Chrysler Group of DaimlerChrysler.
CRS-101
Appendix Table 4. U.S. Motor Vehicle Sales
(units in millions)
Total Sales
Transplants
Imports
Light
Light
Light
Year
Cars
Trucks
Total
Cars
Trucks
Total
Cars
Trucks
Total
1979
10.7
3.5
14.2
0.2
0.0
0.2
2.3
0.5
2.8
1980
9.0
2.5
11.5
0.2
0.0
0.2
2.4
0.5
2.9
1981
8.5
2.3
10.8
0.2
0.0
0.2
2.3
0.5
2.8
1982
8.0
2.6
10.6
0.1
0.0
0.1
2.2
0.4
2.6
1983
9.2
3.1
12.3
0.1
0.0
0.1
2.4
0.5
2.9
1984
10.4
4.1
14.5
0.2
0.0
0.2
2.4
0.6
3.0
1985
11.0
4.7
15.7
0.3
0.0
0.3
2.8
0.8
3.6
1986
11.5
4.9
16.4
0.4
0.1
0.5
3.2
0.9
4.1
1987
10.3
4.9
15.2
0.5
0.1
0.6
3.2
0.9
4.1
1988
10.5
5.1
15.6
0.6
0.1
0.7
3.0
0.6
3.6
1989
9.8
4.9
14.7
0.8
0.1
0.9
2.7
0.5
3.2
1990
9.3
4.8
14.1
1.1
0.2
1.3
2.4
0.6
3.0
1991
8.2
4.2
12.4
0.9
0.2
1.1
2.0
0.5
2.5
1992
8.2
4.9
13.1
1.2
0.3
1.5
1.9
0.4
2.3
1993
8.5
5.7
14.2
1.3
0.4
1.7
1.8
0.4
2.2
1994
9.0
6.4
15.4
1.5
0.5
2.0
1.7
0.4
2.1
1995
8.6
7.0
15.6
1.6
0.4
2.0
1.5
0.4
1.9
1996
8.5
7.0
15.5
1.9
0.5
2.4
1.3
0.5
1.8
1997
8.3
7.2
15.5
1.9
0.5
2.4
1.4
0.6
2.0
1998
8.2
7.8
16.0
2.1
0.6
2.7
1.4
0.7
2.1
1999
8.7
8.7
17.4
2.1
0.7
2.8
1.8
0.8
2.6
2000
8.9
9.0
17.9
2.2
0.9
3.1
1.6
0.9
2.5
2001
8.4
9.1
17.5
2.2
1.0
3.2
2.1
1.0
3.1
2002
8.1
9.0
17.1
2.1
1.0
3.1
2.2
1.1
3.3
2003
7.6
9.4
17.0
2.1
1.1
3.2
2.1
1.2
3.3
Sources: Ward’s Motor Vehicle Facts & Figures (from 2000), various years; and, American
Automobile Manufacturers’ Association. Motor Vehicle Facts & Figures (through 1999), various
years.
CRS-102
Appendix Table 5. Details of U.S. Automotive Trade
(All totals in billions of dollars)
1990
2000
2004
Trading partners
Exports
Imports
Exports
Imports
Exports
Imports
Canada — Vehicles
8.1
20.4
14.9
40.9
18.4
46.5
— Auto Parts
13.7
9.1
29.6
17.6
29.9
19.2
Mexico — Vehicles
0.3
2.9
3.8
21.0
4.1
19.1
— Auto Parts
4.3
4.5
12.6
18.2
11.3
21.4
NAFTA Totals:
8.4
23.3
18.7
61.9
22.5
65.6
— Vehicles
— Auto Parts
18.0
13.6
42.2
35.8
41.2
40.6
European Union*
1.7
9.3
2.2
22.2
6.1
31.0
— Vehicles
— Auto Parts
1.9
4.6
4.8
7.7
4.6
10.9
Japan — Vehicles
0.9
23.9
0.8
32.6
0.5
32.9
— Auto Parts
0.9
10.4
2.2
14.5
1.5
15.4
Korea — Vehicles
0.1
1.1
0.0
4.9
0.1
10.0
— Auto Parts
0.2
0.7
0.5
1.1
0.5
1.9
China — Vehicles
0.0
0.0
0.0
0.0
0.1
0.1
Auto Parts
0.0
0.1
0.2
1.6
0.6
3.8
World — Vehicles
13.6
60.6
24.7
127.0
34.6
141.8
— Auto Parts
22.9
31.7
53.7
67.0
52.6
80.4
Source: U.S. International Trade Commission. Trade Dataweb, from U.S. Harmonized Tariff
Schedule, using Department of Commerce definitions.
* Includes the 15 members of the European Union as of January 1, 1995, for all data years.
CRS Report for Congress
Received through the CRS Web
U.S. Automotive Industry:
Recent History and Issues
April 25, 2005
Stephen Cooney
Industry Specialist
Resources, Science, and Industry Division
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
U.S. Automotive Industry: Recent History and Issues
Summary
More than one million Americans are employed in manufacturing motor
vehicles, equipment and parts. But the industry has changed dramatically since the
U.S. “Big Three” motor vehicle corporations (General Motors, Ford and Chrysler)
produced the overwhelming majority of cars and light trucks sold in the United
States, and directly employed more than that many people themselves. By 2003,
most passenger cars sold in the U.S. market were either imported or manufactured
by foreign-based producers at new North American plants (so-called “transplant”
facilities). The Big Three now dominate only in light trucks, and are being
challenged there by the foreign brands. The Big Three have shed about 600,000 U.S.
jobs since 1980, while about one-quarter of Americans employed in automotive
manufacturing (nearly 300,000) work for foreign-owned companies — and that
excludes Chrysler, which was acquired by Daimler Benz of Germany in 1998.
These changes have had major effects on the structure and location of the U.S.
motor vehicle industry. Michigan has been the state most directly and adversely
affected, losing about 100,000 auto industry jobs since the late 1970s. Most other
Midwest auto belt states have either held steady or posted gains in total industry
employment, even if they have lost Big Three jobs. Some southern states, notably
Kentucky and Tennessee, have been the largest net gainers of jobs in the industry.
The transplant vehicle manufacturers virtually all began and have remained non-
union; the United Auto Workers (UAW) union has lost more than half its members
since 1979 — from 1.5 million to less than 700,000. Big Three representatives state
that they are now burdened with health care and pension costs of as much as $1,500
per vehicle in competing with foreign-based companies and have sought tax relief
from Congress to alleviate this disadvantage.
The global industry also has changed. In North America, there has been
regional consolidation, enabled by trade policy changes leading to the North
American Free Trade Agreement of 1994. Congress approved a federal bailout of
Chrysler in 1979 and forced the Reagan Administration to negotiate quotas on
imports from Japan in the 1980s. Nevertheless, the overall U.S. deficit in automotive
trade widened from $9 billion in 1979 to more than $100 billion annually since 2000.
Acting under World Trade Organization rules, the United States has pressed Japan,
Korea and China, among others, to reduce their automotive trade and investment
barriers.
Fuel economy and environmental issues in the automotive industry have also
been subjects of major concern in Congress, and these issues have had important
effects on the motor vehicle market. Currently, the manufacturers are suing
California to prevent its regulation of emissions of carbon dioxide and other
greenhouse gases, which they claim is preempted by federal statute. This report will
be updated as warranted by developments.
Contents
Introduction and Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Developments in the U.S. Domestic Automotive Industry . . . . . . . . . . . . . . 2
The Automotive Industry in the International Context . . . . . . . . . . . . . . . . . 4
Impact of Fuel Economy and Emissions Standards . . . . . . . . . . . . . . . . . . . . 6
Automotive Industry Outlook and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Policy Issues for the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pension and Health Care Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Currency Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Labor Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fuel Economy and Emission Standards . . . . . . . . . . . . . . . . . . . . . . . . 10
Pickup Trucks in U.S.-Thailand Free Trade Agreement (FTA) . . . . . 11
Broader Issues of Automotive Trade Policy . . . . . . . . . . . . . . . . . . . . 11
North American Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Size and Growth of the U.S. Automotive Industry . . . . . . . . . . . . . . . . . . . 11
Consolidation of the North American Industry . . . . . . . . . . . . . . . . . . . . . . 18
Rise of International Investment in North America . . . . . . . . . . . . . . . . . . . 23
Big Three Lead in Light Trucks — Transplants Grow Rapidly . . . . . . . . . 27
Shifts in Employment Among Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Changes Among States in Automotive Employment . . . . . . . . . . . . . . . . . 32
Divergence in Labor Relations Organization . . . . . . . . . . . . . . . . . . . . . . . . 37
Pension and Health Care Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
U.S. Automotive Trade: Data and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . 46
Growth of Foreign-Based Competition in the U.S. Market . . . . . . . . . . . . . 46
The Changing U.S. Automotive Trade Balance . . . . . . . . . . . . . . . . . . . . . . 51
NAFTA Automotive Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Trade with Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Development of Trade Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Chrysler “Bailout” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
The 1980 Safeguard Case on Foreign Imports . . . . . . . . . . . . . . . . . . . 55
Voluntary Export Restraints on Japan . . . . . . . . . . . . . . . . . . . . . . . . . 56
U.S.-Japan Autos and Auto Parts Issue in the 1990s . . . . . . . . . . . . . . 57
American Automobile Labeling Act (AALA) . . . . . . . . . . . . . . . . . . . 58
U.S. Initiatives Against Automotive Trade Barriers . . . . . . . . . . . . . . 59
Thailand Free Trade Agreement and U.S. Pickup Truck Tariff . . . . . 61
Exchange Rates and Automotive Trade Issues . . . . . . . . . . . . . . . . . . 62
Globalization of the Automotive Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Globalization and the U.S. Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Global Performance of Automotive Manufacturing Companies . . . . . . . . . 67
Performance by Producing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
The Global Automotive Supplier Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Fuel Economy and Emissions Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Fuel Economy Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Structure of CAFE System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Alternative Fuel Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Safety Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Effects of CAFE on the Auto Industry . . . . . . . . . . . . . . . . . . . . . . . . . 90
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Emissions Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Effects of Emissions Standards on the Auto Industry . . . . . . . . . . . . . 95
Fuel Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
List of Figures
Figure 1. U.S. Automotive Industry Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 2. Real Output of Automotive and Total Manufacturing . . . . . . . . . . . . 14
Figure 3. U.S. Employment in Automotive Manufacturing . . . . . . . . . . . . . . . . 15
Figure 4. U.S. Total and Automotive Manufacturing Employment . . . . . . . . . . 16
Figure 5. Location of North American Motor Vehicle Production . . . . . . . . . . . 22
Figure 6. Production in North America by Type of Company . . . . . . . . . . . . . . . 24
Figure 7. U.S. Car and Light Truck Production by Manufacturer . . . . . . . . . . . . 28
Figure 8. Total Car and Truck Production by Company Type . . . . . . . . . . . . . . . 29
Figure 9. U.S. Motor Vehicle Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 10. U.S. Trade Balance in Automotive Products . . . . . . . . . . . . . . . . . . . 52
Figure 11. Sales of Foreign Affiliates of U.S. Automotive Manufacturers . . . . . 65
Figure 12. Sales of U.S. Affiliates of Foreign Automotive Manufacturers . . . . . 67
Figure 13. Major Motor Vehicle Production Countries and Regions . . . . . . . . . 75
Figure 14. U.S. Consumption of Total Energy by End-Use Sector . . . . . . . . . . . 84
Figure 15. Annual Passenger Vehicle Fuel Use, 1970-2000 . . . . . . . . . . . . . . . . 85
Figure 16. Estimated Consumption of Vehicle Fuels, 2003 . . . . . . . . . . . . . . . . 89
Figure 17. U.S. Transportation Emissions, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 94
Figure 18. Pollutant Emissions from Highway Vehicles, 1970-2002 . . . . . . . . . 94
List of Tables
Table 1. Employment by Automotive Manufacturing Categories . . . . . . . . . . . . 17
Table 2. Leading States in Automotive Employment . . . . . . . . . . . . . . . . . . . . . 33
Table 3. U.S. Motor Vehicle Sales by Manufacturer . . . . . . . . . . . . . . . . . . . . . 49
Table 4. Selected Leading Global Motor Vehicle Producers . . . . . . . . . . . . . . . 70
Table 5. Automotive Industry Supplier Location . . . . . . . . . . . . . . . . . . . . . . . . . 79
Table 6. Leading Automotive Parts Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Appendix Table 1. North American Vehicle Production, by Country . . . . . . . . 97
Appendix Table 2. North American Motor Vehicle Production by Company . . 98
Appendix Table 3. U.S. Motor Vehicle Production by Company Type . . . . . . 100
Appendix Table 4. U.S. Motor Vehicle Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Appendix Table 5. Details of U.S. Automotive Trade . . . . . . . . . . . . . . . . . . . 102
Assistance in providing data, graphs and tables by John Williamson, Information Resources
Specialist.
U.S. Automotive Industry: Recent History
and Issues
Introduction and Key Findings
In the immediate post-World War II era, the auto industry was seen as both a
pillar and a beneficiary of American growth and economic achievement. General
Motors Chairman Charles Wilson proclaimed in the 1950s, “What’s good for the
country is good for General Motors, and vice-versa.” More than half the automobiles
sold in the United States were then produced by General Motors (GM). Its
organizational genius, Alfred Sloan, had succeeded in creating a company that built
cars “for every purse and purpose,” as opposed to the original concepts of Ford, the
first icon of automotive mass production, whose sole major product for 20 years, the
Model T, was “any color you wanted, as long as it was black.”1 The other “Big
Three” producers of the postwar era, Ford and Chrysler, together with the still-
surviving lesser domestic manufacturers (American Motors, Studebaker-Packard and
Kaiser), built a range of vehicles that met every consumer need. Among foreign
producers, only Volkswagen and a few luxury and sports cars had even small niches
in the U.S. marketplace.
From this once-dominant position in the domestic market, the Big Three today
produce less than 60% of all automobiles and light trucks sold in the United States.
Their market share has been steadily declining. The Big Three developed a
consumer-oriented light truck product, the “sports utility vehicle” (SUV), which
market they still dominate, but Japanese and German-based manufacturers have been
making major inroads in this class as well. Moreover, to some critics the Big Three
have been on the wrong side of every environmental, safety and social issue, from
opposition to the Clean Air Act, corporate average fuel economy (“CAFE”)
standards, and mandatory seat belt requirements in the 1960s and 1970s, to slowness
in developing alternative fuel vehicles today.2
The Big Three are still the largest domestic producers, but one of them,
Chrysler, is a subsidiary of DaimlerChrysler, a German-controlled and managed
company. The smaller U.S. producers have all disappeared, and imports, especially
from Asia, have surged. The smaller manufacturers have been replaced in the
1 Although, “in its first five years of production the Model T could be had in red, green, gray
or dark blue as well as basic black.” Ford pared its vehicle color choices down to black to
reduce costs and production time. Douglas Brinkley, Wheels for the World (New York:
Penguin Books, 2003), pp. 129, 181-82.
2 Graeme P. Maxton and John Wormald, Time for a Model Change (Cambridge, U.K.: CUP,
2004), pp. 60-61.
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domestic market by “transplanted” units of Japanese, German and Korean
companies, which now build in North America significant and increasing shares of
their vehicles that are sold in the United States. Most of the major companies now
compete globally, through cross-ownership and investment in manufacturing plants
more than through trade in finished vehicles. They also compete through what a
2004 Commerce Department report described as “global supply chains:”
Whereas U.S. automobile manufacturers once provided a ready market for many
domestic suppliers of parts and components, the manufacturers now operate on
a global basis. Thus, automotive parts suppliers must now find niches in the
global supply chains of U.S. auto companies or their foreign competitors to
succeed in today’s market ... The possibility of relying on increased auto sales
that automatically translate into increased orders and components for U.S.
suppliers simply no longer exists.3
Developments in the U.S. Domestic Automotive Industry
The U.S. automotive manufacturing sector is large and dynamic,
but its structure is changing. Whatever changes are occurring globally or
within the domestic market, production and sales in the United States remain at
historically high levels. The overall picture of North American production is,
however, accompanied by tension within the industry created by the entrance of new
international competitors as domestic manufacturers. Growth has been due in part
to internationally based companies (“transplants,” especially from Japan) investing
in the North American market initially as a substitute for importing, while the Big
Three struggled with downsizing issues. With growing automotive manufacturing
capacity elsewhere, especially in Asia, there are concerns that the motor industry may
be creating a problem of global overcapacity. The result could be accelerating
rationalization and industry closures, which could have especially negative
consequences for the Big Three and their U.S. employees.
Such changes do not necessarily portend a declining automotive industry in the
United States. Gross output in the U.S. automotive manufacturing sector in 2004,
including motor vehicle parts, trailers, bodies and heavy trucks, was $424 billion
(current dollars). That was the largest output of any durable goods manufactured
product grouping measured by the Commerce Department Bureau of Economic
Analysis (BEA).4 Although annual U.S. motor vehicle output has moved up and
down since 2000, the automotive industry still grew faster than domestic
manufacturing overall in 1990-2003. Real output has increased 55% since 1990,
compared to 35% for manufacturing as a whole. But the balance of production
between traditional, Big Three manufacturers and foreign-owned transplants has been
shifting in favor of the latter, and that shift has recently been accelerating.
3 U.S. Department of Commerce. Manufacturing in America (January 2004), pp. 29-30.
4 For a discussion of why gross output, rather than value added, is used to measure the total
size of the automotive manufacturing sector, see below in this report, p. 12.
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The automotive sector employs more people than in 1990, while
employment in overall domestic manufacturing significantly declined.
The Big Three-dominated automotive manufacturing sector struggled in the 1980s,
and shed hundreds of thousands of jobs. But between 1990 and the end of that
decade, while employment growth in the rest of manufacturing was just about flat,
automotive manufacturing employment increased almost 25%, or about 250,000 jobs.
Despite an employment decline in the industry in 2001-2004, there were still 55,000
more people employed in automotive manufacturing than in 1990, while
manufacturing in general lost more than three million jobs over the whole period.
This report examines how the strategies of both the Big Three and the transplants
have contributed to maintaining or increasing employment.
There appears increasingly to be two U.S. automotive industries
based on organization of the labor force: the traditionally unionized Big
Three and the foreign-owned “transplants,” which are mostly non-
union. The Big Three assembly plants are all organized by the United Auto
Workers (UAW) union.5 The Big Three have reduced direct employment by about
600,000 jobs since 1979. Many of these jobs have been shifted to specialized parts
suppliers, who employ far more people than the vehicle manufacturers. The two
largest are the parts manufacturing spinoffs from formerly integrated Big Three
companies (Delphi from GM, Visteon from Ford). Both companies are still
organized by the UAW. The UAW has also obtained “benevolent neutrality”
agreements, whereby the Big Three promise not to encourage suppliers to oppose
unionization, and agreements under which the Big Three promise to give fair
consideration to sourcing manufacturing activities in-house rather than from outside
suppliers. As the Big Three have lost market share in recent years, the UAW has
experienced a serious membership decline — from 1.5 million in the late 1970s, to
less than 700,000 today.
There are few union shops among the transplant assembly operations. The
transplants have encouraged direct investment from their traditional home country
suppliers into the United States, as well as development of local supplier networks.
Based on U.S. official foreign investment data, we estimate that foreign-owned
automotive companies by 2002 employed about one quarter of the 1.1 million
workers in automotive manufacturing in the United States, not counting the
employees of the Chrysler Group of DaimlerChrysler.
The bifurcation of the industry has led to serious competitive cost
issues for the Big Three manufacturers. The Big Three maintain that paying
pension and health care costs for retirees, as negotiated under union contracts over
past decades, may cost $1,500 or more per vehicle produced today. The Big Three
have supported both health care and tax policy changes in Congress that would have
alleviated this burden, but such changes have not been passed into law.
Moreover, the Big Three have contracts with the UAW that require them to pay
employees and provide benefits, even when production lines are not operating. In the
5 The full name is the United Automobile, Aerospace and Agricultural Implement Workers
of America, but its shorter abbreviation and title are commonly used.
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period after the September 11, 2001, terrorist attacks in New York and Washington,
they kept their factories producing vehicles and used big consumer incentives to keep
selling those vehicles. But GM and Ford have begun to lose market share in the
United States nevertheless. This strategy was initially profitable and helped the
country pull out of the recession of 2001, but now Ford and GM have begun to lose
money in their North American automotive operations. The three largest Japanese-
owned companies in the United States, Toyota, Honda and Nissan, are all currently
profitable and have held or increased market share in recent years.
“Card checks” are a key strategy for the UAW in trying to regain
members. The UAW is seeking to maintain its active membership level by
insuring that the Big Three do not outsource parts supply jobs to non-union
operations. They are aggressively using a “card check” approach to try to expedite
organizing activities at independent parts-making companies. Under a card check
system, employers may recognize a union as representing employees at a facility for
collective bargaining purposes, once a majority of the employees have signed a card
authorizing the union to represent them, as opposed to formal elections supervised
by the National Labor Relations Board (NLRB).
The UAW so far has failed to organize any transplant assembly operations that
are independent of links to the Big Three. The use of card checks is also under legal
challenge before the NLRB. The UAW and the AFL-CIO have supported legislation
in Congress that would clarify the legality of the use of card checks in establishing
union representation.
The changes in the structure of the U.S. automotive industry and
the decline in the market share of the Big Three has most adversely
affected Michigan and the Northeast. The core of the U.S. industry, including
its major supplier base, is shifting from the traditional Midwest “auto belt” to the
Sunbelt, and to other locations in the South and West. Michigan has lost a minimum
of 100,000 jobs since the peak of automotive manufacturing employment in the late
1970s. Losses in other midwestern states appears to have been offset by the shift of
production jobs from the Big Three to outside suppliers and by increased inward
foreign direct investment. Ohio, Illinois and Missouri may have marginally gained
or lost automotive jobs, and Indiana appears to be a significant net gainer. Major
northeastern industrial states, particularly Pennsylvania, New York and New Jersey,
have lost automotive jobs as the Big Three have rationalized suppliers and assembly
plants. Kentucky and Tennessee have been the biggest job gainers, while South
Carolina, Alabama, North Carolina and Texas have all gained automotive
employment. Shift of jobs away from the Midwest may have been reduced by the
widespread adoption of “just-in-time” manufacturing, modern trucking supply
strategies and the development of interstate highways, which typically enable parts
manufacturers to supply assembly plants up to 400 miles away.
The Automotive Industry in the International Context
The domestic automotive industry is completely integrated within
North America. Trade barriers affecting vehicles and parts production within
North America have been eliminated by successive trade agreements, culminating in
the North American Free Trade Agreement (NAFTA). After producing about 12
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million vehicles annually in the late 1970s, the U.S. domestic industry went through
cyclical periods of decline and recovery, and next reached that level again in 2000.
It has subsequently declined somewhat from that total. Canada during this period has
increased production from less than two million units per year to an average of nearly
three million; Mexico has increased from less than half a million to about two million
annually. Each of the Big Three, and now most of the transplants, have vehicle
assembly plants in each of the three countries.
The U.S. automotive trade deficit in 2004 was nearly $150 billion.
The deficit has grown from less than $10 billion in 1979 to $150 billion, despite high
levels of inward investment by foreign-brand manufacturers, and a decline in imports
relative to vehicles built at transplant assembly facilities. U.S. policies in the 1980s,
aimed at requiring foreign-owned companies to produce here more of the vehicles
that they sell in the United States, and other policies aimed at heightening consumer
awareness about imported vehicles and parts, such as the American Automobile
Labeling Act, appear to have had little effect on the growth of this sectoral trade
deficit.
About $40 billion of the automotive trade deficit is with the NAFTA partners;
the United States has a large deficit in vehicles with these two countries, though as
of 2004 it had a small surplus in automotive parts. The United States had a deficit
of more than $30 billion with the European Union, where exports of U.S.-made
vehicles and parts of more than $10 billion were more than offset by imports in both
categories. The largest component of the deficit was bilateral trade with Japan, from
which U.S. imports were more than $48 billion, and U.S. exports were about $2
billion. The United States also imported nearly $12 billion in vehicles and parts from
Korea, with less than $1 billion in exports. China’s role in the automotive trade
deficit in 2004 was relatively insignificant, though imports of parts from that country
are rising.
Automotive trade issues have had a high priority in U.S. trade
policy since the early 1980s. In the wake of the Chrysler bailout and the
unsuccessful effort of Ford and the UAW to request that the U.S. International Trade
Commission (ITC) establish import safeguards protection, the focus of this policy
was on rising levels of imports. Responding to congressional pressures and the
request of the Reagan Administration, the Japanese government formally agreed to
voluntary export restraints (VER) and Japanese companies began to undertake
investments here. The policy shifted in the 1990s to focus more on opening the
Japanese market to imports of motor vehicles and parts from the United States and
other countries. This effort culminated in a U.S.-Japanese bilateral agreement in
1996.
With the establishment of the World Trade Organization (WTO) in 1995, U.S.
policy shifted again to focus more on multilateral pressure against trade-related
investment measures and other barriers aimed at creating protected automotive
markets for domestically established manufacturers in many of the industrializing
countries. The United States has brought or participated in trade cases against such
countries as Brazil, India, Indonesia, Korea and the Philippines. Criticism from the
United States and other WTO members of China’s official policy on the automotive
industry led to establishment of a new automotive development policy in 2004 in that
CRS-6
country, though it is not clear if implementation of that policy will be free from all
violations of WTO rules. The United States has also proposed that elimination of
nontariff barriers to trade in motor vehicles and parts be added to the agenda of the
WTO Doha Round of negotiations on revised trade rules.
Meanwhile, inauguration of free trade talks between the United States and
Thailand has led to concerns in Congress that one result could be duty-free entry into
the U.S. market of pickup trucks made in that country, the world’s second-largest
producer. Since 1963, the United States has maintained a high tariff on imported
pickups. Many in Congress are concerned that Japanese and Korean manufacturers
could evade this duty by importing trucks made at their Thai facilities.
Globalization means major changes for the U.S. automotive
industry and its suppliers. The largest motor vehicle markets for the foreseeable
future are the advanced industrial countries, where vehicle sales have been slow (or
even negative) during the past fifteen years. The fastest growth has been in certain
large developing countries, or countries in transition from planned to capitalist
market economies (namely, China, India and Russia). Some analysts believe that
there is already excess capacity in the global market, and that capacity will increase
out of proportion to new demand from developing markets. The major motor vehicle
manufacturers, especially including Ford and GM, increasingly source their vehicles
from manufacturing facilities in the regions where they are sold, in part due to
differing customer demands and tastes. As the vehicle manufacturers globalize and
rationalize their supply base, the impact on the U.S. auto parts manufacturing base,
which employs several times as many people as the vehicle manufacturers
themselves, could be the closure of many companies and facilities. With the Ford
and GM market share in North America having declined, a large number of major
U.S. automotive suppliers are in financial difficulties. Moreover, many of the
historically independent suppliers who sold directly to the Big Three, or indirectly
through “Tier 1” suppliers, may lack the scale to be competitive in the global market.
Impact of Fuel Economy and Emissions Standards
Environmental issues, including vehicle emissions, fossil fuel consumption, and
resource use, have played an increasing role in shaping the U.S. auto industry.
Environmental decisions play a key part in automotive design, research and
development of new vehicles, and marketing to consumers.
Fuel economy standards have been effective in reducing energy
consumption, but have had a significant effect on U.S. auto
manufacturing. Corporate average fuel economy (CAFE) standards are estimated
to have reduced fuel consumption by as much as one-third from what it otherwise
would have been. Undoubtedly, the standards have significantly affected vehicle
design, as well as manufacturing and marketing decisions. However, because of
separate standards for passenger cars and light trucks, as well as distinction between
imported and domestic vehicles, the current standards likely have had differential
effects on various manufacturers. Further, any future changes to the CAFE system
would likely leave some manufacturers better positioned than others.
CRS-7
While individual manufacturers may have been advantaged or disadvantaged by
the current CAFE system, the total effects of CAFE on U.S. auto industry
employment and output seem to be limited, according to an analysis by the National
Research Council. However, CAFE standards have affected the ownership of U.S.
manufacturing plants, if not the total level of employment.
Emissions standards have directly affected the automotive industry
over the past four decades and this effect may increase. Highway vehicle
emissions have dropped dramatically over the past few decades. For example,
allowable nitrogen oxide emissions from passenger cars have been cut by roughly
70% from 1980 levels. They will be cut further with the introduction of the Tier 2
light-duty vehicle standards set by EPA.
Like CAFE standards, the emissions standards may give a competitive
advantage to some manufacturers over others. On average, smaller vehicles with
smaller engines tend to emit less than larger vehicles with larger engines. Therefore,
those manufacturers that produce larger vehicles may have more difficulty and may
likely need to invest more to comply with the standards. Furthermore, as the Tier 2
standards eliminate separate treatment for passenger cars and light trucks, the effects
on large vehicle producers may increase. Therefore, auto makers that focus on small
cars may have a competitive advantage over manufacturers that produce a larger
proportion of light trucks.
California’s Greenhouse Gas Rule may be the most significant
current issue regarding automotive fuel economy and emissions
standards. California adopted regulations in 2004 to require a reduction of
greenhouse gas emissions of 30% by 2016 in passenger vehicles. There are no
current federal standards for greenhouse gas emissions, and critics of the regulation
maintain that greenhouse gases (including carbon dioxide) are not pollutants under
the federal Clean Air Act. Thus, they argue that the greenhouse gas standard is a de
facto fuel economy standard, and they maintain that reducing emissions of carbon
dioxide — the key greenhouse gas — requires reductions in fuel consumption.
Opponents of the rule argue that authority to set fuel economy standards rests solely
with the federal government.
The California rule has been challenged in court. The Big Three and many
international auto manufacturers oppose the California rule. California officials
maintain that they have the authority under the Clean Air Act to regulate vehicle
greenhouse gas emissions. The outcome of this case could have major effects on the
U.S. auto industry as California is a major vehicle market, and some other states are
likely to adopt the California standards if upheld.
Automotive Industry Outlook and Policy Issues
The prospects for the automotive industry in the United States are mixed. Sales
have been maintained at a high level since 2000, although only by liberal use of
manufacturers’ incentives — and neither sales nor total production has grown since
then. Heavy use of incentives, especially by GM and Ford, have promoted sales
CRS-8
since 2001, but at the price of reducing current profits and future demand. If
companies continue promoting sales through financial incentives, then higher interest
rates, which are widely expected in financial markets, will raise the cost of incentives
and further reduce earnings. Big Three earnings have also been adversely affected
by “legacy costs,” such as rising contributions to pension funds and retiree health
care. Thus, the prospects for this industry as 2005 began were not as robust as in
many other sectors.6
However, GM and Ford were profitable overall in 2004, despite declines in
domestic market share, losses on U.S. automotive operations, legacy costs, and
problems in Europe.7 Chrysler has overcome annual losses of as much as $3 billion
in recent years, has introduced successful new products in North America, and
increased both sales and market share in 2004.
All three leading Japanese transplant producers (Honda, Toyota and Nissan) are
operating profitably in the U.S. market, and Toyota and Nissan scored double-digit
percentage sales increases in 2004. Hyundai, the remaining independent Korean
manufacturer, is opening a major new manufacturing plant in Alabama in 2005,
while the Ford-Mazda plant in Michigan will produce the new Mustang, whose sales
forecasts are strong. At the end of 2004, even the Japanese companies were using
incentives on popular models, as consumers had come to expect them. However,
their incentives were much lower per vehicle, than those offered by GM and Ford.8
Among foreign-brand motor vehicle manufacturers, only Volkswagen, which does
not assemble cars in the United States, and Mitsubishi have experienced major
declines in sales in 2004. These two companies’ problems are linked to global
competition and management issues, not confined to the U.S. market.
Recent Legislation
In terms of legislative action, the final version of the major corporate tax bill
(P.L. 108-357, the American Jobs Creation Act of 2004), which passed at the end of
the 108th Congress, saw deletion of some provisions that were favorable to the
automotive industry, or at least to parts of it. The legislation as passed:
! Deleted tax credits that had been proposed of up to $4,000 for
purchase of gasoline-electric hybrid vehicles, and up to $8,000 for
purchase of fuel cell-powered vehicles;
6 Business Week, “Borrowing from the Future,” analysis of automotive sector in special
“Outlook” section (Jan. 10, 2005), p. 100.
7 GM stock values and creditworthiness were reduced in March 2005, however, when CEO
G. Richard Wagoner announced the company would lose money in the first quarter,
followed by reduced earnings the rest of the year; Greg Schneider, “General Motors CEO
Takes over American Unit,” Washington Post (Apr. 5, 2005), p. E2.
8 According to Autodata information reproduced in ibid., GM incentives per automobile in
March 2005 averaged more than $4,000 per vehicle, Ford and Chrysler averaged more than
$3,000, while Nissan averaged $2,000, and Toyota and Honda about $1,000. See also
Detroit Free Press, “Auto Industry Report: Japanese Use Incentives” (Jan. 7, 2005).
CRS-9
! Eliminated a proposed two-year deferral of taxes, supported by the
National Automobile Dealers Association, on payments by GM to
Oldsmobile dealers, who lost their franchises when the company
discontinued that brand — the deferral would have allowed dealers
to reinvest the payments and would reportedly have been worth an
average of $67,000 per dealer;
! Reduced the amount that business persons can deduct from their
taxable income in one year for purchases of large SUVs — the
amount was lowered to $25,000, although the full, original
deduction of up to $100,000 remains in effect for large pickups and
vans used in businesses.9
Policy Issues for the 109th Congress
While the automotive industry in the United States may not be in a crisis, the
109th Congress may address a number of policy issues that deal with the subject of
equitable competition, both internationally and in the domestic market.
Pension and Health Care Issues. A report issued on behalf of the Big
Three stated that their ageing work forces, increasing numbers of retirees and
generous health care benefits impose an average cost of at least $1,200 per vehicle
in 2004, compared to little or no “legacy” costs of this type for transplant producers.
The Big Three, along with the UAW, supported amending tax legislation in the 108th
Congress to give manufacturers tax credits for health care payments for older workers
and retirees, but no such amendment or separate legislation was introduced. This
subject could again become a legislative issue in the 109th Congress.
Currency Exchange Rates. The Automotive Trade Policy Council,
representing the Big Three, has complained that exchange market intervention by
Japanese monetary authorities has frequently prevented market forces from
appreciating the yen and thus make it easier for the Big Three to compete against
imports from Japan. At the end of 2001, the value of the dollar was about 132 yen.
It fell to nearly 100 by the end of the first quarter in 2004, the last period of publicly
acknowledged intervention by Japan. The dollar by April 2005 was a little above that
level.
More broadly, many U.S. manufacturers, including automotive suppliers, have
pressed for a revaluation of China’s currency, the yuan, which has been fixed at 8.28
per dollar for a decade. As China’s bilateral trade surplus has risen with the United
States rapidly during this period, they have pressed to secure a currency realignment
that would be more reflective of China’s competitiveness. At least ten legislative
measures were introduced in the 108th Congress that addressed this issue. One
industry coalition filed a petition urging the Bush Administration to take action under
Section 301 of U.S. trade law, and another threatened to do so. The Bush
Administration did not accept such petitions in 2004, as its representatives stated that
it was not appropriate to address exchange rate issues with trade policy instruments.
9 Automotive News: Harry Stoffer, “Tax Bill Losses Outnumber Wins” (Oct. 11, 2004); and,
(editorial) “Congress Closed 3 Auto Loopholes — Good Riddance” (Oct. 18, 2004).
CRS-10
Instead the Administration pressed China in consultations to adopt a more flexible
exchange policy.10
In the 109th Congress, a provision to address the China currency revaluation
issue was introduced as Section 321 of S. 14, a broad bill introduced by Senator
Debbie Stabenow and 13 co-sponsors, addressing job creation, fair trade,
competitiveness and other issues. It would mandate that a 27.5% tariff be applied to
imports from China, unless the President could certify within six months that China,
following negotiations required in the legislation, had either made efforts to revalue
its currency upward or was no longer accumulating foreign reserves to prevent
appreciation of its currency against the dollar. S. 295, introduced by Senator Charles
Schumer and 13 co-sponsors, imposed the same level of duty on imports from China,
unless the President certified that China is no longer manipulating its exchange rate
and had adopted market-based trading policies. A version of this legislation was
added as an amendment to S. 600, the Foreign Affairs Authorization Act, on April
6, 2005, when the motion to table failed on a vote of 33-67. Subsequently, it was
reported that the amendment would be stripped from that legislation, with a promise
by the Senate leadership to Senator Schumer that he would receive a floor vote on S.
295 by July 27, 2005.11 On the House side, Representatives Tim Ryan and Duncan
Hunter with 35 cosponsors introduced on April 6, 2005, H.R. 1498, which would
approach this issue in a different way. H.R. 1498 would clarify existing U.S. trade
law to allow remedies to be sought against imports from China that are shown to
benefit from Chinese government exchange rate manipulation.
Labor Representation. Decisions on whether to allow union representation
to be determined by the card check process, as described in the previous section, at
plants owned by automotive parts suppliers are pending before the NLRB.
Legislation introduced in the 108th Congress would have validated the card check
process by law. It may be anticipated that similar legislation would be introduced
again, especially if the NLRB took a negative position regarding card checks.
Fuel Economy and Emission Standards. Requiring higher fuel economy
standards, and establishing a different process for setting such standards for SUVs
and other light trucks, were issues debated in the context of energy legislation in the
108th Congress. With the world price of oil in early 2005 at times exceeding $55 per
barrel, and with no comprehensive energy bill having been passed, these issues may
10 The Sec. 301 petition of the China Currency Coalition was covered especially in
American Metal Market, “Tired of ‘Tacit’ Nod, US Group Confronts China on Currency”
(Sept. 10, 2004), p. 1, and “China Currency Plea Falls on Deaf Ears” (Sept. 13, 2004 print
ed.), p. 2. On Administration policy, see DER, “Treasury’s Speltz Says China Should Make
Exchange Rate Flexible” (Sept. 14, 2004), p. A-9. For the CRS analysis, see CRS Report
RL32165: China’s Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy.
The China currency issue in the 108th Congress, including legislative proposals, were
summarized in Gary C. Hufbauer and Yee Wong, “China Bashing 2004,” International
Economic Policy Brief PB04-5, Institute for International Economics (Sept. 2004), pp. 4-9
and App. 1-2.
11 Congressional Record, April 6, 2005, pp. S3248-53; Greg Hitt, “Senate Slams China
Currency Policy,” Wall St. Journal (Apr. 7, 2005), p. A2; R.K. Morris, “Editor’s Letter:
China Alarm,” Global Positions Notebook (Apr. 11, 2005).
CRS-11
be addressed again in the 109th Congress. In addition, California has proposed
emission standards for carbon dioxide and other greenhouse gases. The vehicle
manufacturers have brought suit in federal court, claiming that the U.S. Clean Air
Act allows California only to regulate specifically identified pollutants, not other
emissions, and that the proposed standard is a de facto fuel economy standard, on
which state action is specifically preempted by federal law.
Pickup Trucks in U.S.-Thailand Free Trade Agreement (FTA). In the
FTA it is negotiating with the United States, Thailand is seeking to remove the
general U.S. 25% import duty on pickup trucks that it would export here. Most Thai-
made pickups are built by local affiliates of Japanese and Korean companies. U.S.
Big Three manufacturers oppose duty-free entry of pickup trucks from Thailand,
outside the context of a broader trade agreement that addresses what they believe are
continuing trade restrictions on automotive imports in Japan and Korea. Resolutions
were introduced in the 108th Congress that any FTA with Thailand should not include
duty-free access for Thai-made pickup trucks to the U.S. market. A letter co-signed
by 40 senators in March 2005 in support of this position indicates that this will
continue as an issue in the 109th Congress.
Broader Issues of Automotive Trade Policy. The U.S. government has
been active in WTO cases aimed at removing foreign government trade restrictions
and policies that have distorted trade in motor vehicles and parts. These included
cases in which countries such as Brazil, India, Indonesia and the Philippines had
discriminatory policies to require domestic content in locally made vehicles,
subsidize exports, or restrict imports as part of national automotive development
strategies. The Administration is continuing to review implementation of a new and
less prescriptive automobile policy in China. It is working with Korea in an effort
to change features of that country’s tax policies that discriminate against imported
vehicles. It is continuing to monitor policies in Japan that affect the establishment
and activities of foreign-owned vehicle and parts manufacturers. Tying all these
approaches together, the Administration in early 2005 proposed including a wide-
ranging approach to elimination of automotive trade restrictions as part of the
ongoing Doha Round negotiations on revising WTO rules.
North American Industry Profile
Size and Growth of the U.S. Automotive Industry
Figure 1 illustrates the growth of the U.S. motor vehicle manufacturing industry
since the late 1970s, in terms of gross output as reported by the Bureau of Economic
Analysis (BEA) of the Department of Commerce. In current dollars, the industry has
expanded from just over $100 billion per year in the late 1970s to nearly $500 billion
in 1999, which is still the all-time peak. Gross output declined in 2000-01, rose to
$436 billion in 2002, but then fell again slightly to $424 billion in 2004. The motor
vehicle industry is defined in this figure to include automotive parts manufacturing.
It also includes heavy trucks, truck trailers, mobile homes, travel trailers and
campers, not just automobiles, light trucks and parts, which are the focus of this
CRS-12
report. But 92% of 2003 total industry output as shown in Figure 1 was accounted
for by the principal subjects of the present report.
Figure 1. U.S. Automotive Industry Output
Gross Output in Billions of Current Dollars
500
400
300
200
100
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: Department of Commerce. Bureau of Economic Analysis. “1947-1997 Historic SIC Data” and “1998-2003 NAICS
Data Gross Output by Industry.”
Note: SIC 371 (Motor Vehicles and Equipment), 1977-88; NAICS 3361 (Motor Vehicles); NAICS 3362 (Motor Vehicle
Bodies and Trailers); and NAICS 3363 (Motor Vehicle Parts), 1987-2003.
Gross output is used in this report as the most accurate measure of the scale of
the industry. Gross output includes the value of intermediate inputs as well as that
of the final assembly process, whereas gross domestic product originating in the
motor vehicle industry, a common measure, reflects only the value added by final
assembly. Intermediate input production, whether done by nameplate assemblers or
by suppliers, is an integral part of this industry, as these inputs are specifically
designed for automotive applications. Gross output excludes imported or exported
intermediate inputs.12 The gross output of automotive manufacturing represented
10.8% of the total gross output of U.S. manufacturing in 2003.
Through 1997, the industry is defined for statistical purposes as Standard
Industrial Classification (SIC) category 371, “motor vehicles and equipment.”
Beginning in 1998, the Commerce Department switched to the North American
Industry Classification System (NAICS), and it has subsequently recalculated
industry output on the NAICS basis back to 1987. In this report, the domestic
automotive industry since 1987 is defined as including the categories of motor
vehicles (NAICS 3361), separately produced motor vehicle bodies (NAICS 3362),
and motor vehicle parts (NAICS 3363); these are commonly combined in BEA data
12 Definition of terms as applied by the U.S. Department of Commerce, Bureau of Economic
Analysis (BEA); information from discussions with Robert McCahill, BEA Office of
Industry Analysis, July 23, 2004.
CRS-13
as “motor vehicles, bodies and trailers, and parts.” Under the NAICS system, using
these definitions, industry output is somewhat higher than on the basis of SIC 371,
because NAICS 3363 incorporates products that were previous included under non-
automotive categories (for example, automotive air conditioning equipment).
However, the SIC and NAICS automotive data track closely enough that they are
presented here as a single output series. The one-time switch from SIC to NAICS-
based industry definition partially explains most of the jump in output in 1987 to
$241 billion from $198 billion the previous year.
Figure 2 illustrates the growth of U.S. automotive industry output on a real
basis since 1977, and compares it to overall U.S. real growth in manufacturing
output.13 The figure illustrates that U.S. automotive manufacturing did not grow as
strongly as U.S. manufacturing overall between 1979 and 1990, but did outperform
manufacturing in general from 1990 to 2000. The principal reason for this higher
relative rate of automotive growth, detailed examination later in the report will show,
is increased output from new plants owned by foreign-based manufacturers, the so-
called “transplants.”
Inflation-adjusted output in the automotive sector increased about 75% between
the late 1970s and 1999, some of which may be accounted for by the definitional
change from SIC to NAICS. The figure shows the sensitivity of the industry to the
business cycle, with declines in the real value of output during recessionary periods
in the early 1980s, the early 1990s, and 2000-01 (starting even before the recession
in the latter year). Growth resumed in 2002, but real output again fell slightly in
2003, leaving the industry 13% behind where it was in 1999. Overall, from 1977 to
2003, the inflation-corrected real dollar value of the sector increased by less than 2%
per year. But as the number of major motor vehicle assemblers operating in the
United States increased significantly, this implies possibly smaller profit margins and
downsized workforces for some manufacturers.
Before 1990, the growth in real domestic automotive output was weaker than
the rate of overall real manufacturing output growth; the industry barely recovered
from the recession of the early 1980s, before the next recession was upon it. Since
1990, automotive industry output has outperformed the rest of the manufacturing
sector of the economy.
The inflation-adjusted index for all manufacturing increased
by 31.5% between 1977 and 1990. For the automotive sector, the net change was
essentially zero from 1977 to1990. It is true that automotive output peaked one year
earlier than total manufacturing, but even at the 1989 peak, the level was less than
10% higher than in 1977. Both automotive and general manufacturing sectors did
much better in the 1990s, but the auto sector significantly outperformed general
manufacturing. In 1999 it peaked at 75% above the 1990 level, compared to a level
for all industry of about 40% above the 1990 base. After four years of slower
growth, the automotive output index for 2003 (the latest available data year) was still
much higher than that for all manufacturing (55% above the 1990 base, compared to
35%).
13 In Figure 2, the definitions of both automotive and general manufacturing real output
switch from SIC to NAICS in 1987. For purposes of comparison, both series are indexed
to 1990, when the NAICS definition applies.
CRS-14
Figure 2. Real Output of Automotive and Total Manufacturing
Index: 1990=100.0
200
150
100
50
All Manufacturing
Motor Vehicles, Bodies, and Parts
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Sources: All manufacturing output data, U.S. Department of Labor. Bureau of Labor Statistics.
“Major Sector Productivity and Costs Index” (http://www.bls.gov, SIC basis as viewed Sept. 17,
2003; NAICS basis, as viewed March 1, 2005.). Automotive data as for Figure 1.
Employment in the automotive sector may not have grown on a net basis over
the past 25 years, but neither has it fallen substantially, unlike some other industrial
sectors. A direct comparison is difficult, because there are two different data series
for automotive employment, and they only overlap for the period 1990-2002. Figure
3 shows that on the basis of SIC 371 (for which 2002 was the last year for annual
data), total employment in the automotive sector peaked at more than 1 million in
1978, and then reached that level again 20 years later, before falling lower during the
recent “down” cycle. The employment levels reported by BLS on the current NAICS
basis are significantly higher than the equivalent SIC 371 data, because of the
inclusion of specialized parts manufacturing. The NAICS-based employment figure,
which has been calculated by BLS back to 1990, is shown as a separate line in
Figure 3. On this basis, total employment in all automotive-related industries was
more than 1.3 million in 1999-2000, and is still more than one million, despite falling
since then.
CRS-15
Figure 3. U.S. Employment in Automotive Manufacturing
Millions
1.4
1.2
1
1.0
0.8
0.6
0.4
All Employees, based on SIC 371
0.2
All Employees, based on NAICS 3361, 3362, 3363
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Sources: Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings.” http://data.bls.gov (as viewed on March 3, 2005)
As in the case of real output, automotive manufacturing has maintained its
employment level better than manufacturing overall since 1990. Figure 4 compares
the patterns of automotive employment with that for manufacturing generally. The
chart uses index values to normalize the percentage change in the respective
categories. The SIC 371 data are shown for the period 1977-2002, when that series
was terminated, and the NAICS-basis automotive data available from 1990.
However, as the figure shows, the rates of change, whether measured on an SIC or
NAICS basis for automotive manufacturing employment, are virtually identical, so
the growth rate of employment in the 1990s is not a statistical artifact.
The index of total manufacturing employment and automotive manufacturing
employment both peaked around 1978-79. Since then, manufacturing employment
has trended slowly and steadily down, with some cyclical variations. The all-time
record level of manufacturing employment was 19.4 million jobs in 1979, and the
U.S. economy has never come close to creating so many manufacturing jobs since
then. After the most recent economic recession, overall manufacturing employment
fell almost 20% below the latest peaks in1990 and 1998.14
After worse performance than general manufacturing before 1990, automotive
manufacturing in the United States has demonstrated superior performance since then
14 A detailed discussion of the long-term downward trend in manufacturing employment is
presented in CRS Report RL32179, Manufacturing Output, Productivity and Employment:
Implications for U.S. Policy, pp. 4-10. The contrasting experience of the automotive industry
is discussed in that report on pp. 28-29.
CRS-16
in creating manufacturing jobs during the strong-growth 1990s, and in maintaining
jobs since 2000. For automotive manufacturing employment, the cyclical swings of
the late 1970s and early 1980s were stronger than for general manufacturing
employment, and the relative decline in jobs between 1979 and 1990 was twice as
large: 18% against 9%. But between 1990 and the end of that decade, while
manufacturing employment was just about flat, automotive manufacturing
employment increased almost 25%, or about 250,000 jobs (NAICS basis). Even by
2004, after four years of slow growth, there were still 55,000 more people employed
in automotive manufacturing than in 1990, while manufacturing in general lost more
than three million jobs over the period. This report will later examine in detail how
the strategies of both the Big Three and the transplants have contributed to
maintaining or increasing employment in the sector.
Figure 4. U.S. Total and Automotive Manufacturing Employment
Index: 1990=100.0
140
120
100
80
60
40
All Manufacturing Employment
Employment SIC 371
20
Employment NAICS 3361, 3362, 3363
0
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings” (http://data.bls.gov as viewed on March 3, 2005).
As a consequence of these trends, employment in automotive manufacturing has
increased as a share of all manufacturing jobs. As of 1990, when NAICS-based data
become available, automotive manufacturing employment of more than 1 million
represented 6% of all U.S. manufacturing employment. At its peak in 2000,
employment in automotive manufacturing represented 7.6% of all manufacturing
employment. Levels of both total and automotive manufacturing employment have
subsequently fallen, but because auto-related employment fell more slowly in
absolute terms, in 2004 it actually represented a slightly higher rate of all
manufacturing employment than in 2000 — 7.7%. The key employment question in
the industry is whether it is due for more rationalizing and downsizing, as has been
the pattern in other manufacturing sectors.
Table 1 shows how employment has shifted among the three NAICS
automotive sector categories. Motor vehicle manufacturing accounted for only
20,000 new positions between 1990 and 2000, and by 2004 had fewer employees
CRS-17
than in 1990. This change reflects a downsizing of the Big Three, especially through
spinoffs, which were not fully offset by expansion of assembly operations by the
transplant competition. Motor vehicle parts added almost 200,000 jobs between
1990 and 2000 (from 653,000 to 839,000 employees), and as of 2004 still employed
35,000 more people than at the beginning of the period. The smallest category,
motor vehicle bodies and trailers, had the largest percentage rate of growth between
1990 and 2000, increased employment by more than 40%. By 2004, the number had
retreated to 164,000, still 35,000 (27%) higher than in 1990.
Table 1. Employment by Automotive Manufacturing Categories
(Thousands)
1990
2000
2004
NAICS 3361 (Motor Vehicles)
271.4
291.4
256.1
NAICS 3362 (Bodies, Trailers, etc.)
129.8
182.7
164.5
NAICS 3363 (Motor Vehicle Parts)
653
839.5
688.5
Total
1054.2
1313.6
1109.1
Source: U.S. Department of Labor. Bureau of Labor Statistics. “National Employment, Hours and
Earnings” [http://data.bls.gov], as viewed Mar. 4, 2005.
Formerly, the Big Three domestic manufacturers were highly integrated, with
the assemblers of cars and trucks manufacturing many of their own parts, as well as
the vehicles and engines.15 In recent years, assemblers have increasingly outsourced
more of their parts, subassemblies and systems; “modularization” of outsourced
systems and components has become a new key concept in the motor vehicle
manufacturing business. For example, both GM and Ford have spun off their parts
manufacturing operations. GM spun off its main parts operation as Delphi in 1999,
while Ford did the same, creating Visteon in 2000. Notwithstanding its long tradition
of vertically integrated manufacturing, the U.S. automotive industry also has an
equally long tradition of specialist suppliers. As the major Japanese and European
assemblers have established manufacturing operations in North America since the
1980s, the domestic industry has seen both the establishment of foreign-owned parts
and systems suppliers that have accompanied them, and domestic U.S. firms’ efforts
to compete for the supply business.16
15 Most famously, Henry Ford not only poured his own steel at the Ford steel mill in the
River Rouge manufacturing complex, but the mill used iron ore from Ford-owned mines,
transported to the “Rouge” on Ford-owned ships. James P. Womack, Daniel T. Jones and
Daniel Roos, The Machine That Changed the World (New York: Rawson Associates, 1990),
p. 39. Rouge Steel still operates on the same site today, where it continues to supply Ford,
although, after more than a decade as a spun-off company, it was acquired in 2003 by the
Russian company, Severstal.
16 An analysis of its impact on South Carolina, commissioned by BMW, included a review
of the suppliers that moved or expanded operations in the state: The Economic Impact of
BMW on South Carolina (University of South Carolina, Moore School of Business, 2002),
pp. 11-19, esp. Figure 8. The 1998 Report on the Significance of Toyota Motor
CRS-18
Consolidation of the North American Industry
This report has initially focused on the size and growth of the motor vehicle
production sector in the United States. The context has been the consolidation of
motor vehicle manufacturing in North America into a single, albeit somewhat
bifurcated, industry. This development has proceeded in three important phases:
! The U.S.-Canadian Automotive Products Trade Agreement of 1965
effectively created a single industry in the two countries, owned by
the U.S. Big Three (plus American Motors). By the agreement and
an associated “letter of understanding” between the Canadian
government and representatives of the U.S. automotive
manufacturing companies (to which the U.S. government
“acquiesced,” but was not a party), the manufacturers agreed to
increase Canadian-origin content in vehicles and parts, as a
percentage of the gross value of their Canadian sales each year. In
exchange, the manufacturers did not pay U.S. or Canadian tariffs on
automotive products in bilateral trade. Both Canadian and U.S.
analysts believe that the agreement was not sectoral free trade, as it
is often described, but rather a form of managed trade, in which
duties were eliminated on a two-way basis, as long as certain
Canadian sourcing conditions, closely monitored by the Canadian
government, were met.17
! In 1988, the auto agreement was subsumed into the broader U.S.-
Canadian Free Trade Agreement (FTA). The principal U.S.
automotive negotiating goal within the FTA appears to have been to
“freeze” the Canadian duty remission program to the existing (Big
Three) registrants, rather than having Canada extend it to Japanese
and Korean investing companies. However, the FTA contained
general provisions that effectively phased out the remaining
Canadian incentives, restrictions, and performance requirements on
automotive operations.18
! On January 1, 1994, the North American Free Trade Agreement
(NAFTA) entered into effect. Under NAFTA, Mexico agreed to
gradually liberalize and then eliminate the restrictive provisions of
Manufacturing, Kentucky, Inc. by Prof. Charles F. Haywood found that 120 of 175
automotive suppliers had moved to Kentucky since the location of Toyota’s plant there.
17 This conclusion is drawn from separate analyses of the agreement by the U.S.
International Trade Commission and a Canadian source, quoted in CRS Report 88-122E,
Automotive Products Trade with Canada and the U.S.-Canada Free Trade Area Agreement
(available from the author of the present report), pp. 6-7.
18 Ibid., pp. 14-19. Although, according to Gary Hufbauer and Jeffrey J. Schott, certain
Canadian auto industry safeguard provisions from the 1965 deal were even later “untouched
by NAFTA ... a tribute to the negotiating skills, if not the economic wisdom, of the
Canadian team.” See their NAFTA: An Assessment, rev. ed. (Washington: Institute for
International Economics, 1993), p. 38n.
CRS-19
the Mexican Auto Decree, a policy that had been developed in
accordance with the theory of import substitution. This policy had
restricted the distribution of automobiles and trucks in Mexico to
locally established manufacturers (the Big Three, VW and Nissan),
and subjected them to extensive performance requirements. The
most notable of these rules was a “trade balancing” requirement that
a manufacturer had to export twice the value of vehicles that it
imported. Trade balancing and local sourcing rules were gradually
eliminated over a ten-year period, though restrictions remain on
imports of used cars and trucks. NAFTA requires automotive goods
to meet special rules of origin. For passenger cars, light trucks, and
their engines and transmissions, the rule is 62.5% North American
content, compared to 50% under the original U.S.-Canada
automotive agreement.19
These agreements, over a period of thirty years, have curtailed Canadian and
Mexican attempts to promote and protect automotive assembly and supplier
industries through restrictive and interventionist government policies. Of course,
both the central governments of Mexico and Canada, as well as provincial, state and
local governments, continue to seek to attract or keep auto plants through incentive
programs, as do U.S. states and localities.20
In Canada, automotive exports now account for 23% of total national exports.
But concern has been expressed in Canada that the automotive trade surplus has been
declining since 1999. A Canadian Automotive Partnership Council (CAPC) has been
formed, with representatives of all groups with an interest in the industry (including
the Big Three, Honda, Toyota, parts manufacturers, dealers, the Canadian Auto
Workers union, the academic community, and federal and provincial governments).
CAPC has produced a study and policy recommendations, with the explicit target of
reversing declines in the trade balance in both vehicles and parts.21
In Mexico, automotive products have been among the major products of the
maquiladora program. Prior to NAFTA, manufacturers could minimize both
exposure to Mexican trade and tariff laws, while minimizing exposure to U.S. tariffs
at maquiladora plants that exported at least 50% of their production. According to
19 Governments of Canada, the United Mexican States and The United States of America.
Description of the Proposed North American Free Trade Agreement (Aug. 12, 1992), pp.7-
10; Hufbauer and Schott, pp. 37-40.
20 See, for example, “Canada Pledges Millions for Ford Plant,” Automotive News (June 21,
2004), p. 6, on Canadian federal and provincial support worth $Canadian 200 million to
meet Ford “demands” for help in a major revamp of its Oakville, Ont. assembly operations.
GM has received $350 million from the same sources in support of $2 billion worth of new
investment in three Ontario projects; “GM Steers $2 Billion into Ontario,” Detroit Free
Press (Mar. 3, 2005).
21 CAPC. A Call for Action: A Canadian Auto Strategy (Oct. 2004). Full report available at
[http://capcinfo.ca]. The report is discussed in: Bureau of National Affairs. Daily Report for
Executives (DER), “Group Urges Canadian Government to End Barriers to Auto Trade with
U.S.” (Oct. 29, 2004), p. A-15.
CRS-20
the U.S. General Accounting Office (GAO), 112,000 Mexicans worked in such
establishments that produced items of “transportation equipment” in 1991. That was
about a quarter of the total of all maquiladora workers, and equal with electronic and
electrical products as the two largest employing sectors.22 With the establishment of
NAFTA, the export minimum for maquiladora facilities has been eliminated, and any
product now manufactured in Mexico (under NAFTA origin rules) enters the United
States duty-free.
There is still a low-cost production, comparative advantage logic to locating the
manufacture of certain products or components for the U.S. market in Mexico, and
as some analysts note, some maquiladora operations have moved into more
sophisticated manufacturing and R&D activities.23 The significance of Mexican
manufacturing establishments for automotive parts in North America automotive
assembly industry is indicated by the fact that the value of parts imported into the
United States from Mexico rose from less than 12% of all parts imports to almost
30% between 1993 and 2002. Mexico displaced Canada as the leading source during
this period. Imports of complete vehicles from Mexico also increased more than
fivefold, to more than $20 billion in value by 2002. This was greater than the value
of imports from Germany, though still much less than Canada or Japan.24
The maquiladora industries in total lost 278,000 jobs between late 2000 and
early 2002, but they remain an important aspect of North American motor vehicle
production. Some analysts have asserted that Mexico as a low-cost location for sub-
assemblies, parts and components for manufactures has been overtaken by
competition from China. But a sectoral breakdown of apparent trade share gains and
losses for maquiladoras indicates that, trade gains in automotive parts and systems
by Chinese producers appear to complement, rather than subtract from, market shares
held by Mexican maquiladora exporters.25 A late 2004 article also noted that, as
Mexico moves away from the import-substitution model, the low-cost high-volume
models sold in Mexico are actually imported from lower-cost production areas, and
that Mexican auto factories are actually beginning to specialize in higher-cost
vehicles for the global market (such as the VW “new” Beetle, and the Chrysler PT
Cruiser).26
22 Program described in CRS Report 93-1050E, Mexico’s Maquiladora Industry, by M.
Angeles Villarreal; GAO data reported on p. 6.
23 Federal Reserve Bank of Dallas, El Paso Branch. “Maquila Industry: Past, Present and
Future,” Business Frontier (Issue 2, Aug. 26, 2004).
24 See CRS Report RL32179, pp. 51-52 and Table 5. U.S. automotive trade data will be
covered in detail later in this report.
25 Federal Reserve Bank of Dallas, El Paso Branch. “Maquila Downturn: Structural Change
or Cyclical Factors?” Business Frontier (Issue 2, Aug. 26, 2004), Table 2, reporting results
of research by Ernesto Acevedo Fernández of the Mexican Ministry of Finance and Public
Credit.
26 Joel Millman, “Mexico Blazes Trade Success; Auto Industry Matures to Supply Global
Markets,” Wall St. Journal (Nov. 29, 2004), p. A12.
CRS-21
Press reports also note a 2004 comeback in hiring at Mexican maquiladora
operations, which may indicate that the economic problems of maquiladoras have
been the result of the U.S. recession and some confusion over Mexican tax law
changes, more than competition from China.27 With respect to the North American
motor industry and its growing reliance on “just-in-time” inventory systems, it could
be difficult to replace Mexican sources for original equipment (OEM) suppliers with
product shipped long distances from China. Moreover, in an effort to reassure
maquiladora operators and to retain or expand their investment within global supply
chain systems, Mexico has launched a Sectoral Promotion Program (“PROSEC”),
which gives producers in 20 maquiladora sectors an opportunity to import non-
NAFTA components at reduced Mexican tariff rates (0% to 5%).28 Recent data
indicate that both output and employment at maquiladora plants expanded strongly
in 2004.29 A Mexican official has also stated that the Mexico-Japan Free Trade
Agreement, signed in September 2004, and which entered into effect on April 1,
2005, could substantially increase Mexico’s role as a supplier to the U.S. market for
Japanese automobile and auto parts manufacturers.30
Figure 5 shows the impact of these changes on the U.S. and North American
motor vehicle assembly industry.31 As of the late 1970s, the U.S. automotive
industry, then almost exclusively the Big Three, built an average of about 12 million
vehicles (cars and light trucks) per year. This was more than 85% of total vehicle
production in North America. Canada at that time built less than two million
vehicles per year, and Mexico fewer than 500,000. During the recessionary period
1980-82, the U.S. auto industry averaged fewer than 8.0 million units per year. From
that low point, U.S. production output expanded, with one other big recessionary dip
in the early 1990s, to 13.0 million vehicles by 1999. Once again there was a decline
in demand as a recession overtook the U.S. economy, but this time, the decline in
units built in the United States was relatively modest: in 2002-03, U.S. output was
more than 12 million vehicles, or about the same as the totals of the late 1970s. As
of 2003, 74% of the vehicles produced in North America were still assembled in the
United States.32
27 “Made in the Maquilas — Again,” Business Week (Aug. 16, 2004), p.45.
28 “Maquila Industry: Past, Present and Future.”
29 “It’s Hot South of the Border,” Business Week (Mar. 7, 2005), p.32.
30 Bureau of National Affairs. Daily Executive Report (DER), “Mexico says FTA with Japan
Will Boost Japanese Exports in U.S. after April 1” (Mar. 15, 2005), p. A-10.
31 See Appendix Table 1 for the detailed numbers.
32 The automotive industry tends to measure output in terms of “units,” rather than value,
even though vehicle unit values, and the profits per unit sold, vary significantly between
lower-cost and higher-cost cars and light trucks.
CRS-22
Figure 5. Location of North American Motor Vehicle Production
Millions of units
14
12
United States
10
8
6
4
Canada
2
Mexico
0
1977
1979
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Ward’s Automotive Yearbook, 2004.
Both Canada and Mexico have seen fairly steady increases in their total output
and shares of North American production. Canada produced about 12% of the
industry’s North American total in the late 1970s, after the U.S.-Canada automotive
trade agreement was in place. Output there declined with the recession of the early
1980s. By 1988-89, as the FTA entered into effect, Canada’s output hit 2.0 million,
and close to a 15% market share. By 1999, when NAFTA had been in effect for six
years, Canada’s total output exceeded 3.0 million units and a 17.6% share of a record
North American production of 17.7 million units. In the post-2000 industry
downturn, Canada has continued to produce about 2.5 million units annually.
From the late 1970s through the end of the century, Mexico’s automotive unit
production advanced even more steadily, to one million units by 1991, and just under
two million in 2000-01 — despite a major decline in the mid-1990s because of a
serious domestic financial crisis. Mexico’s percentage share of total North American
production, which was around 2% in the late 1970s, reached double-digit levels in
2000-02, before declining to just less than 10% in 2003. Mexico’s own internal
demand in 2004 reached a record high of 1.1 million vehicles, as the economy again
grew strongly.33
Total North American vehicle production has thus steadily risen for the past 20
years, while sectoral and regional trade deals have created the basis for a fully
regionalized industry. In the early 1980s, output took a devastating fall, from 14.5
million units per year in 1977-79, to an average of just 9.5 million units during the
next three years, a fall of 35%. Since then, production has never been less than 11
33 “Hot South of the Border,” Business Week.
CRS-23
million units, and has been in the 15-18 million unit range annually since 1994. The
share of vehicles assembled in the United States has fallen, though not dramatically,
while the absolute number of vehicles assembled in the United States has remained
about the same, allowing for changes in economic trends and overall demand.
Rise of International Investment in North America
The overall picture of growth in North American production masks the tension
within the industry created by the entrance of new international competitors as
domestic manufacturers. Growth has been due in part to internationally based
companies (especially from Japan) investing in the North American market initially
as a substitute for importing, while the Big Three struggled with downsizing issues,
as will be reviewed in a later section. Together with growing automotive
manufacturing capacity elsewhere, especially in Asia, there are concerns that the
motor industry may be creating a problem of overcapacity. The result could be more
serious rationalization and industry closures, especially in North America, as well as
in Japan and Europe, the other two traditional major producing regions.34
Figure 7 illustrates the increasing role of international (foreign-based) producers
in the U.S. motor vehicle market (cars and light trucks, the latter including pickup
trucks, minivans and SUVs). The figure uses 1979, 1990 and 2000 as growth years,
at or near peaks of domestic U.S. economic growth and automotive production. The
year 2003 is also shown, to provide the latest complete annual data. Detailed data for
manufacturers within North America are provided in Appendix Table 2.
The total number of vehicles produced in North America by the traditional Big
Three manufacturers has not changed very much overall since the late 1970s, as can
be seen in Figure 7, when one looks at the growth peaks. The Big Three produced
more than 12 million vehicles in North America in 1979. Production dropped
dramatically in the recessionary period 1980-82. Despite a recovery in the later
1980s, by 1990 total production was still two million vehicles less than in 1979. By
2000, production in North America by the Big Three companies35 was more than 13
million vehicles, less than one million more than in 1979. With the onset of
recession and slower economic growth after 2000, total Big Three production
declined by 1.8 million units, to about 11.5 million, in 2003.36
34 See special section, “Perpetual Motion: A Survey of the Car Industry,” The Economist
(Sept. 4, 2004).
35 While Chrysler had effectively been acquired by Daimler Benz in 1998, these data count
the subsequent Chrysler Group operations separately from Mercedes Benz production in the
United States, which had already begun in 1995. Other Big Three links with foreign-based
investors to establish North American production facilities are also counted as “transplants,”
as noted in Appendix Table 2. This is how such operations are treated in industry sources.
36 Sales were disappointing overall through the first eight months of 2004, especially for GM
and Ford, which reported plans to cut production for the balance of the year. Chrysler sales
increased, especially for some new products, and results were mixed, though generally
somewhat higher for imports and foreign-brand vehicles; Associated Press, “Ford, GM Sales
Drop; Both Cut Production” (Sept. 1, 2004); Reuters, “Ford Cuts Production after Sales
Fall” (Sept. 1, 2004); John K. Teahen, Jr. “Dog Days of August Are a Dog for Ford, Too,”
CRS-24
Figure 6. Production in North America by Type of Company
A closer look at Appendix Table 2 reveals significant variations within North
America and among the Big Three. GM produced more than seven million vehicles
in 1979; by the 1990s, its annual production level was around 5-6 million units per
year. In 2000, GM produced 5.6 million vehicles, and by 2003, despite a slow
economy, that level had fallen only minimally, to 5.3 million. However, this level,
it can be argued, was artificially maintained by high levels of discounted fleet sales
and expensive customer incentives of up to $6,000 per vehicle.37 Ford production at
the end of the 1970s was just over half the GM level; in 1990 it had reached nearly
70% of GM’s total, and in 2000, Ford produced more than 80% of the number of
vehicles produced in North America by GM. But with the economic recession and
an aging Ford lineup of models, the ratio declined somewhat to 71% in 2003.
Similarly, Chrysler also gained on GM in North American production totals. It
produced less than a quarter of the number of vehicles manufactured by GM in 1979,
but by 2000-03, its North American output was about half the GM level. As will be
shown later, some of this change is because of greater relative success of Ford and
Chrysler in producing light trucks, including minivans and SUVs.
Automotive News (Sept. 13, 2004).
37 When GM reported disappointing earnings for the third quarter of 2004, it was noted in
one source that, “In North America, GM reported a $22 million loss,” despite a September
sales surge, in part because “it led the industry with an average incentive of $4,340 a
vehicle;”Associated Press, “Pricing, Europe Weigh on GM Results” (Oct. 14, 2004). On GM
incentives, see “General Motors Incentives to ‘Stay High,’ Executive Says,” Bloomberg.com
(Aug. 14, 2004); David Welch, “GM: Enough with the Come-Ons,” Business Week (July 26,
2004), p. 44.
CRS-25
Another shift in vehicle output within the Big Three is the increasing role of
Canada and Mexico in final vehicle assembly. Appendix Table 2 illustrates that the
U.S. production level of 9.8 million vehicles in 2000 was about one million below
the level of 1979, and was another one million less in 2003. Meanwhile, Canada had
substantially higher production levels in 2000-03 than in 1979 or 1990, and Mexico’s
Big Three production in 2000-03 was double the level of 1990 (before NAFTA).
This relative decline of the U.S. role in Big Three North America production appears
solely due to a decline at GM, particularly at its U.S. plants. In 1990, 2000 and 2003,
GM produced at least two million fewer vehicles in the United States than in 1979.
Both Ford and Chrysler produced more vehicles annually in the United States in
2000-03 than in 1979 or 1990, although Ford vehicle output by its U.S. factories in
2003 was barely higher than in 1979.
Foreign transplants have increased their share of North American motor vehicle
production from virtually nothing to more than a quarter of the total in 25 years, as
shown in Figure 7 and, in more detail, in Appendix Table 2. Volkswagen was the
only foreign-based producer in 1979, when it produced 175,000 units at its plant in
New Stanton, Pennsylvania. That plant proved to be unsuccessful, and has since
been closed, with subsequent VW production in North America located in Mexico.
By 1990, most Japanese manufacturers had vehicle production facilities in North
America. Some transplants were built in direct collaboration with the Big Three, but
most of the production came from plants independently designed, built and operated
by the Japanese-based producers. The initial decisions of Japanese manufacturers to
locate in North America was in part a function of U.S.-Japan trade relations, as will
be described in a subsequent section of this report. But whatever the cause, by 1990,
more than two million vehicles were assembled each year by the transplants in North
America, and more than two-thirds were built in the United States.
This total doubled to more than four million annually by the end of the decade.
Moreover, while Big Three output dropped by 1.6 million units between 2000 and
2003, transplant output continued to increase, despite the economic slowdown: from
4.1 million to 4.7 million units assembled in North America, with all the net gain
coming at U.S. plants. The Japanese producers were joined by BMW and Mercedes
Benz, which opened their first North American production facilities in South
Carolina and Alabama respectively in 1994 and 1997. The German
manufacturers’confidence in the ability to assemble world-class vehicles in the
United States may be indicated by exclusive production of certain models in these
plants for distribution to both U.S. and worldwide markets.
A close examination of the transplants’ data in Appendix Table 2 also shows
that the more profitable or higher-volume transplants have been those that were
started up by the foreign-based companies themselves, rather than those that were
developed in conjunction with the Big Three. Honda’s plants in Ohio, Ontario, and,
most recently, Alabama, were all initiated by the company on its own.38 Nissan’s
38 See the special section in Automotive News (Sept. 6, 2004) commemorating the 20th
anniversary of Honda’s manufacturing beginnings in Ohio, which started with a motorcycle
plant. The first article, “Changing the Rules,” by Lindsay Chappell, emphasizes the different
approaches from traditional U.S. automotive manufactures employed by Honda.
CRS-26
plants were also built and operated on their own, as was the large Toyota plant at
Georgetown, Kentucky, the largest of the transplant operations in North America, in
terms of annual vehicle output. The one major exception is “NUMMI” (for New
United Motor Manufacturing Inc.). This was a closed GM plant in Fremont,
California, which Toyota reopened and has successfully managed as a joint venture
with GM (and with UAW-represented workers).39 By contrast, the plant built by
Mitsubishi in the “Diamond-Star” alliance with Chrysler in Normal, Illinois; the
Ford-Mazda “AutoAlliance” plant in Flat Rock, Michigan; and the GM-Suzuki
CAMI operation in Cambridge, Ontario, have all been more limited or less successful
in terms of output growth. The Subaru-Isuzu plant in Lafayette, Indiana, was a joint
venture between Subaru (owned by Fuji Heavy Industries of Japan) and Isuzu (partly
owned by GM); but the Isuzu truck operation at that facility has now been shut
down.40 About three-quarters of the net increase in transplant production of 2.4
million vehicles in North America since 1990 has come from the independently built
and operated facilities of Honda, Nissan and Toyota (excluding NUMMI) alone, to
which should be added the 250,000 vehicles produced by BMW and Mercedes Benz
at new plants (Mercedes Benz started production before the acquisition of Chrysler
by Daimler Benz, the common parent).
Transplant activity thus represents a permanent new competitive force in North
American vehicle manufacturing, one which, in general, has no ties to the Big Three.
By contrast, Big Three-linked “transplants” primarily represent an effort by the Big
Three to defend market share in some segments through vehicles produced by
controlled or allied foreign producers. But this effort has had limited success and
impact on the North American vehicle market to date. GM has also tried to create
a homegrown “transplant” operation, the Saturn company, based on new models of
relationships with customers, dealers and labor, which would allow it to compete
more effectively with economy models from foreign-based producers. While the
initial approach and the resulting product were well received, “the unit has posted
only one profitable year since 1990 ...” and “Saturn [sales have] never moved past
the 300,000 mark. Its best year was a decade ago.” GM is reinvesting in the
operation, and reorganizing it as a corporate division.41
Not only have the transplants increased their total output since 2000, but new
operations are ramping up or are in development. Nissan has started producing a
range of new products in Mississippi. Hyundai, having earlier closed a plant in
Quebec, is building a new facility in Alabama, and Toyota is building a new large
pickup truck plant in Texas. International investors have thus become a large,
established, independent, and growing part of the U.S. and North American
automotive manufacturing picture.
39 Womack et al., The Machine That Changed The World, pp. 82-84.
40 For an excellent overview of transplant activities and recent developments in North
America, see the special section on “New American Manufacturers” in Automotive News,
(June 14, 2004), pp. 23-30DD, esp. the summaries by Lindsay Chappell in “The
Transplants’ Changing Faces,” p. 26.
41 Dave Guilford, “Once Different Saturn Looks More like GM,” Automotive News (June
14, 2004), p. 30V; Jerry Flint, “Saturn: The Forgotten Promise,” Forbes.com (Aug. 17,
2004); “GM to Invest in Plant to Help Saturn Brand,” Detroit Free Press (Aug. 27, 2004).
CRS-27
Big Three Lead in Light Trucks — Transplants Grow Rapidly
As noted in a previous CRS report,42 the major difference between the
development of the Big Three’s domestic product output and that of the transplants
in terms of their production output is the increasing shift of the former from cars to
light trucks. This shift is summarized in Figure 7, with more statistical detail
provided in Appendix Table 3, the latter adapted and updated from the earlier CRS
report.
As of 1990, despite its substantial downsizing in the 1980s, GM still produced
more than 2.6 million cars in the United States, compared to 1.47 million trucks —
cars represented 64% of its U.S. motor vehicle output. Somewhat surprisingly,
perhaps, given its acquisition of Jeep and its minivans, Chrysler in that year produced
about 40% more cars in the United States than trucks (730,000 against 530,000).
Only Ford, whose pickup trucks had been outselling Chevrolet since 1968, and which
in 1990 began producing the highly successful Explorer SUV on a truck chassis,
produced more light trucks than cars at its U.S. assembly plants in that year.43 And
overall, despite the popularity of some models produced at U.S. transplant facilities
by the 1990s (Honda Accord in Ohio, Toyota Camry in Kentucky), more than 78%
of all cars produced in the United States were still made by the Big Three, as well as
more than 95% of all light trucks.
By 2003, the Big Three product mix had changed dramatically in favor of a
greater focus on truck output from U.S. plants. Most notable was a reversal of the
ratio at GM, whose U.S. output was 64% trucks in 2003, exactly the opposite of the
1990 ratio. The ratio of trucks to cars from Ford and Chrysler was even higher.
Ford’s Explorer continued to register strong sales despite a safety controversy over
rollovers and Firestone tires; trucks represented 74% of Ford’s U.S. output in 2003.
Chrysler dedicated almost 80% of its U.S. production in 2003 to the light truck
segment. In particular, as both Big Three and Japanese-based companies struggled
to launch models competitive in the minivan segment that Chrysler invented,
“Chrysler dominated the market for minivans from 1984 until the late 1990s,
capturing half the total sales.”44 Overall, according to a study prepared for the
Alliance of Automobile Manufacturers, light trucks, including SUVs, now account
for around 60% of total U.S. motor vehicle production of cars and light trucks
(including the output of both the Big Three and foreign-based manufacturers).45
42 CRS Report RL32179. See the section on “Automobiles and Light Trucks,” by M.
Angeles Villarreal, pp. 24-30 and Fig. 6.
43 Brinkley, Wheels for the World, p. 593.
44 Charles K. Hyde, Riding the Roller Coaster: A History of the Chrysler Corporation
(Detroit: Wayne State University Press, 2003), pp. 265-269.
45 Alliance of Automobile Manufacturers, Economic Contribution of the Automotive
Industry to the U.S. Economy — An Update (Fall 2003), p. 3, cited in CRS Report RL32179,
p. 25.
CRS-28
Figure 7. U.S. Car and Light Truck Production by Manufacturer
By contrast to the Big Three, foreign-based producers have developed a strong
position in the U.S. car market, and now account for 43% of all passenger car
production at their U.S. transplant facilities; see Figure 8, which compares Big Three
and transplant total car and light truck sales. (As will be shown below, foreign-based
companies actually sell a majority of the cars sold in the U.S. market, when imports
are also counted.) Combined transplant car production in 2003, as indicated in
Figure 7, was greater than that of GM, Ford or Chrysler individually, whereas in
1990 it was only ahead of Chrysler, the smallest of the Big Three in car output.
Michelene Maynard, in her book, The End of Detroit, documents how Ford
successfully developed the Taurus in the mid-1980s, and how it became the leading
seller among all car models in 1992-95. But then as the Toyota Camry and Honda
Accord were redesigned in the late 1990s, the Ford product declined in sales, and is
set to be discontinued.46 On the other hand, it should be added that the Big Three
have not given up on the passenger car segment. For example, GM has launched new
luxury Cadillac models from a modernized plant in Lansing, Michigan; Ford is
launching several new models for the 2005 model year, including a completely
redesigned Mustang; and, Chrysler has had recent initial successes in launching two
new rear-wheel-drive vehicles, the redesigned Chrysler 300 and the Dodge Magnum
“sports wagon.”
46 Micheline Maynard, The End of Detroit: How the Big Three Lost Their Grip on the
American Car Market (New York: Doubleday, 2003), pp. 43-54. Significantly, Brinkley in
Wheels for the World devotes a full chapter to the successful development and launch of the
Taurus, but fails to note the model’s subsequent unsuccessful redesign and decline in sales;
see pp. 696-714, 727.
CRS-29
Figure 8. Total Car and Truck Production by Company Type
However, foreign-based motor vehicle manufacturers have not been content
only to gain increasing shares of the car segment. They have also rolled out new
products from their domestic U.S. production facilities to challenge the Big Three in
the light truck segment. By 2003, transplant production of light trucks had reached
14% of total U.S. light truck output (see Figure 8), and every indication is that they
intend to compete vigorously in that segment. Mercedes Benz specifically designed
its Alabama plant to inaugurate production of its first SUV, the new “M-class.”
BMW introduced its “sports activity” vehicles into production at its South Carolina
plant. Honda now builds its Odyssey minivan at a new Alabama plant, and is adding
production of its Pilot SUV there. Toyota builds a wide range of light truck vehicles
in its U.S. plants, and is planning to build its first full-size pickup truck at a new plant
in San Antonio, Texas. Nissan has introduced its own full-size pickup, the Titan,
along with other light truck products at a new plant in Mississippi.47
Shifts in Employment Among Companies
A generation ago, the U.S. automotive manufacturing industry was dominated
by the domestic Big Three, integrated, unionized nameplate assembly companies,
located, with their suppliers, predominantly in a Midwest “Auto Belt,” with branch
assembly plants around the country. Today, that structure has been significantly
modified.
The number of U.S. automotive manufacturing employment workers directly
employed by the Big Three has declined substantially since the early 1980s,
47 Some of these plans are reviewed by Chappell, “Transplants’ Changing Faces.”
CRS-30
especially at GM and Ford. As of 1979, the Big Three together employed almost one
million persons in the United States: 618,000 at GM; 240,000 at Ford; and 109,000
at Chrysler. GM also employed 39,000 persons in Canada and Ford employed
18,000 there; they may be considered as integrated with domestic U.S. production.
In addition, 28,000 persons were employed by American Motors in the United States
and Canada, so the total employed by U.S.-based nameplate manufacturers was more
than one million in the two countries.48
The 1980s witnessed a dramatic downsizing of Big Three employment,
especially domestically. The rise of imports and the recession of the early 1980s
resulted in much lower Big Three production and large-scale layoffs. Employment
levels did not recover to pre-recession levels after prosperity returned to the domestic
industry. By 1990, GM had shed more than half its total number of U.S. employees,
with a total of 279,000 listed in its annual report of that year. Ford and Chrysler
each reduced domestic employment by about a quarter; to 181,000 for Ford, and
79,000 for Chrysler.
As shown above, the production focus of the Big Three shifted to the light truck
market in the 1990s, and particularly to the SUV and minivan segments. But this did
not prevent a further substantial decline in direct employment levels, despite a decade
of strong market growth. As also noted earlier, GM and Ford both downsized
especially by spinning off major parts operations in the late 1990s. The location
breakouts reported in corporate annual reports are not consistent over time, but for
2000, GM reported total North American automotive employment of 212,000,
compared to 365,000 on a similar basis ten years earlier. For 2003 the total
employment level reported for North America for GM automotive operations was
down to 190,000. Ford’s total reported decline in 1990-2000 in U.S. employment
was smaller, to 163,000, but this still included some employees being shifted to the
newly spun off Visteon Corporation in the latter year. By 2003, Ford reported total
North American automotive employment as only 122,000.49
Chrysler’s story is more complicated, both because of its acquisition of
American Motors (AMC) in the 1980s, and its merger with Daimler Benz in 1998 to
form DaimlerChrysler (DCX). But it seems probable that it has also downsized,
though by a lesser number. Annual reports indicate that the combined Chrysler and
AMC totals in 1979 were 162,000 employees worldwide (mainly U.S. and
Canadian). The Chrysler worldwide total was 110,000 in 1990 (the latter would
mainly represent both Chrysler’s automotive operations and those it acquired with
AMC in the United States and Canada). The Chrysler Group of DaimlerChrysler
(DCX) reported a total of 93,000 employees for 2003, primarily in the United States,
and total DCX employment for the United States was 102,000.50
48 These figures are taken from 1979 annual reports of the Big Three, plus American Motors.
Chrysler indicated that it employed an additional 25,000 persons outside the United States,
but did not specifically break out data for Canada.
49 Ford annual reports, 1990, 2000 and 2003; GM annual report, 1990 and U.S. Securities
and Exchange Commission annual 10-K report, 2000 and 2003.
50 Chrysler Corp. annual report, 1990; DCX annual reports, 2000 and 2003; American
Motors annual report/10-K filing, 1986.
CRS-31
From about one million Big Three employees in the United States and Canada
in 1979, the level has thus declined to about 400,000 by 2003, or a net fall of almost
600,000 jobs. Not all of the jobs were simply eliminated. Some of them were
transferred to spun off or independent supplier companies.
How many of these jobs have been replaced by new transplant investments?
The Japanese Automobile Manufacturers Association (JAMA) reported that their
members employed more than 56,000 U.S. workers at 20 “manufacturing plants” in
2003. JAMA further states that, “Japanese automakers now supply 64% of their total
U.S. sales from their North American plants, compared with less than 12% in
1986.”51
A more comprehensive figure for the United States is provided by BEA.
According to its foreign investment data, the total number of persons employed by
foreign-affiliated manufacturers of motor vehicles, bodies and parts (NAICS 3361-
62-63) was 328,000 in 2002, as reported in that year’s benchmark survey of inward
foreign investment. This compares with 188,000 in the 1997 benchmark, and 58,000
(on the basis of SIC 371) in 1992. However, most of the net gain in 1997-2002 is
presumably due to the DCX merger, and the Chrysler Group is not counted in the
industry as a transplant. Chrysler Group’s employment total was 95,000 in 2002,
including some employees in Canada and Mexico, meaning that only about 50,000
of the net 1997-2002 increase of 140,000 employees of foreign-affiliated automotive
companies was due to employment expansion by other manufacturers. Another
feature of this data is the “primary line of business rule,” which means that foreign-
owned companies with multiple U.S. operations need report all their corporate data
under only one line of business. Thus, foreign automotive companies with both
importing and manufacturing operations in the United States may report their
investment data, not as manufacturing, but as “wholesale trade — motor vehicles and
motor vehicle parts and supplies.” In 1992, this item added 71,000 employees to the
total for U.S. affiliates of foreign companies in the motor vehicle industry, or more
than the 58,000 reported as working in motor vehicle manufacturing. In 1997, the
motor vehicle wholesale activities business number went up to 88,000, but in 2002
it declined to 54,000 (implying that the primary line of business for some foreign
companies may have shifted from importing to manufacturing). This number could
be added to the total for motor vehicles and parts manufacturing.
The net result would be that perhaps about 287,000 persons worked for foreign-
affiliated automotive companies (excluding Chrysler) operating in the United States
in 2002.52 This number may be compared to the approximately 1.1 million persons
51 JAMA. Growing Investment and Employment in America (2004), pp. 2 and 7.
52 U.S. Department of Commerce. Bureau of Economic Analysis (BEA). “Operations of
Foreign Affiliates in 2002: Preliminary Results from the Benchmark Survey,” Survey of
Current Business (Aug. 2004), Tab. 19.2; “Foreign Direct Investment in the U.S.: Financial
and Operating Data for U.S. Affiliates of Foreign Multinational Companies — Final 1997
Estimates and Revised 1992 Estimates,” at [http://www.bea.gov]. Data on employment by
Japanese-based auto companies, Chrysler and DCX are from proprietary private sources,
and may not be compatible with BEA survey-reported data. The Association of
International Automobile Manufacturers in March 2005 released The Contribution of the
CRS-32
working in the United States in the automotive manufacturing industry in 2003
(NAICS 3361-62-63), as reported in Table 1 of the present report. This would mean
that roughly a quarter of those who work in some aspect of automotive
manufacturing now work for foreign-affiliated companies (again excluding Chrysler).
Changes Among States in Automotive Employment
Table 2 illustrates how the changes in automotive manufacturing employment,
including the arrival of transplants, have affected the distribution of auto industry
jobs among the leading states in automotive employment. It compares the changes
in levels of employment ascribed to automotive manufacturing industry categories,
as measured in the BLS county-level Quarterly Census of Employment and Wages,
a report based on company filings of unemployment compensation premiums.
The table compares state automotive industry employment levels in 1979, near
the peak U.S. automotive manufacturing employment peak year, with the levels of
2003, after two years of economic recovery from the 2001 recession. SIC 371 and
NAICS 3361-3362-3363 data are used for 1979 and 2003 respectively. As noted
earlier, with respect to Figure 3, this may result in an undercounting of employees
working in automotive manufacturing in the earlier year, especially in auto parts
businesses. The undercount could be as high as 25%, and may mean that state losses
in this industry are actually understated, while state gains are not as high as indicated.
Also, data may not be published when there are only one or two operations, with
the risk of disclosing proprietary corporate data. This constraint affected mostly
NAICS 3361 data, motor vehicle assembly, in 2003. In Table 2, the non-disclosure
issue affected data from three states, Tennessee, South Carolina and Wisconsin.
Other states affected by the data disclosure restriction do not appear to have enough
automotive employment to move into the upper tier of auto industry employment
shown in the table, regardless of the missing numbers.
International Auto Sector to the U.S. Economy: An Update, prepared by the Center for
Automotive Research. The estimates for direct employment by the “international” sector
(imports and transplants) based on annual BEA foreign investment data for 1999-2001 are
similar to those reported here, allowing for some differences in definitions (pp. 14-16).
CRS-33
Table 2. Leading States in Automotive Employment
Total employees,
2003
Total employees, 2003
1979
1979
State
Rank
Naics 3361-62-63
Rank
Sic 371
Michigan
1
269,902
1
394,048
Ohio
2
136,399
2
119,947
Indiana
3
125,367
3
67,225
Kentucky
4
53,096
14
14,262
Illinois
5
41,120
9
28,551
California
6
40,546
4
49,532
Tennessee
7*
38,040
13
14,747
Missouri
8
36,896
6
38,760
Texas
9
28,901
11
16,298
New York
10
28,623
5
41,814
North Carolina
11
26,907
15
10,879
Georgia
12
21,781
10
18,778
Alabama
13
21,136
19
8,061
South Carolina
14*
20,717
34
1,471
Pennsylvania
15
20,702
8
32,489
Wisconsin
16*
19,319
7
33,425
Source: U.S. Department of Labor. Bureau of Labor Statistics. “Quarterly Census of Employment
and Wages,” viewed on [http://www.bls.gov] (Oct. 21-22, 2004).
* 2003 total excludes non-disclosable data.
The most striking change is the apparent loss of auto industry-related jobs in
Michigan. It is still by far the leading state in terms of auto industry employment, but
experienced a decline of at least 125,000 employees between 1979 and 2003 in
automotive-related industries. Michigan not only ranked first among all states in
automotive employment in 1979, but accounted for 43% of all employment counted
under SIC 371. Though still the leader under the corresponding NAICS categories
in 2003, Michigan’s share was down to 23%. Also, late 2004 estimates provided by
Ward’s, an auto industry data source, indicate that in 2004 Michigan will be passed
for the first time by Ontario as the largest auto-producing regional jurisdiction in
North America. Ontario was estimated to produce 2.7 million vehicles in 2004,
compared to 2.6 million from Michigan. Ontario would show a gain of about
CRS-34
600,000 from 1994, compared to a decline of 800,000 in Michigan over the same
period.53
Other midwestern “auto belt” states were not as severely affected. The number
two state from 1979, Ohio, gained about 17,000 jobs, from 119,000 to 136,000,
though the gain could be a statistical artifact, caused by the switch from SIC to
NAICS-based data. On the other hand, Marysville, Ohio, is the site of the Honda
assembly plant, which in 1979 was the first transplant manufacturing operation
established in North America by a Japanese automotive company. By 2003, Honda
employed more than 14,000 workers there and at other assembly, engine and
transmission plants in Ohio. Indiana, which ranked third in auto-related employment
in both 1979 and 2003, apparently gained the most auto-related jobs between the two
years. It nearly doubled its total, from 67,000 to 125,000. Indiana also has seen the
establishment in recent years of two major assembly plants by Japanese-owned
companies, a Toyota truck plant in Princeton and the Subaru plant in Lafayette.54
Thomas Klier of the Federal Reserve Bank of Chicago has analyzed job loss in
the automotive industry on a shorter term basis, since the year 2000, in these three
states. His data, based on the same source used in Table 2, plus industry data, also
show that the most severely affected state is Michigan. He found that Michigan in
2000-03 lost 15% of its automotive assembly jobs, and more than 20% of its
automotive parts employment (60,000 jobs in three years). Combined employment
declines since 2000 in Ohio and Indiana in automotive assembly operations were
somewhat less than in Michigan: 11.4% in assembly operations and 15% in parts, or
a combined total of 35,000 jobs. These three states accounted for most of the net
decline in employment nationally in assembly operations, as the net loss in the other
47 states was only 3.3% during the period. In parts, the net decline in employment
in the rest of the country was more proportionate, 10.7%. However, when Klier
reviewed this same data from a different source, plant-level data, the conclusion was
that the major employment losses in the automotive supply industry were largely
among “captive” suppliers owned and operated by the Big Three. Klier linked the
loss of automotive industry employment in these three states primarily to the loss of
market share by the Big Three.55
Among other midwestern “auto belt states,” Illinois also showed a net increase
in Table 2, from 29,000 to 41,000. However, this net increase in both states again
could be explained by the shift from an SIC basis to NAICS. The only midwestern
state besides Michigan to post a major decline in auto industry jobs was Wisconsin,
which fell from seventh in 1979, with more than 33,000 jobs, to sixteenth in 2003.
Its total of less than 20,000 employees in the industry by the latter date does exclude
NAICS 3361 assembly operations, but the major presence in this category, the AMC
plant in Kenosha, was closed by Chrysler soon after its acquisition of the smaller
53 Brian Dunn, “Ontario to Top Michigan in ‘04 Auto Production,” American Metal Market
(Dec. 3, 2004), p. 5.
54 Honda’s Ohio plant was originally a motorcycle manufacturing operation. JAMA, p. 3
chart summarizes 2003 data for statements about transplant activities in this section.
55 Thomas Klier, “Caution Ahead — Challenges to the Midwest’s Role in the Auto
Industry,” Chicago Fed Letter, no. 211 (Feb. 2005).
CRS-35
competitor. Missouri also registered a small decline in Table 2, and fell two places,
from sixth to eighth, in state rankings.
The biggest relative gainers in automotive industry employment were several
southern states, beneficiaries of increasing production in the South, particularly by
transplants, but also to some degree, by the Big Three. Kentucky, already the home
of a Ford truck plant in Louisville and the Chevrolet Corvette manufacturing plant
in Bowling Green, moved dramatically up the table of automotive manufacturing
states with the establishment of the Toyota plant in Georgetown, which produces
vehicles on the Camry, Avalon and Solara platform, as well as engines. With a head
count of more than 7,000 employees, it is the largest single transplant operation in
the United States. By 2003, Kentucky had moved up from thirteenth to fourth in
automotive employment, counting more than 50,000 employees. Tennessee would
probably rank next, if the employees at assembly plants established by Nissan in
Smyrna and GM Saturn in Spring Hill in the 1980s, which together employ more
than 7,000 persons, were added to the total of 38,000 shown in Table 2.
There are a group of southern states on the fringe of the top ten, which showed
employment gains. Texas is ninth, and will get a boost from the new Toyota truck
plant in San Antonio. Georgia fell slightly in rank, from tenth to twelfth, although
it showed a net small job gain to more than 21,000 employees. It has long-
established Ford and GM plants in the Atlanta area. DCX had planned a new
commercial van plant near Savannah, but cancelled the development in 2003.56
North Carolina is not known for major assembly plants of cars and light trucks, but
has a sufficient diversity of automotive industries to advance to eleventh from
fifteenth, having added 16,000 new automotive jobs.57 Alabama moved from
nineteenth to thirteenth, and is poised to advance further. Besides the Mercedes
Benz M-Class plant in Vance, Honda has opened a minivan and engine plant in
Lincoln, where it is planning to more than double employment in the near future.58
Meanwhile, Hyundai is returning to North American manufacturing as it builds a new
multi-product plant near Montgomery.59 South Carolina has also become a
significant player, moving from thirty-fourth to fourteenth in state rankings, even
without counting more than 2,000 employees at the BMW assembly plant in Greer,
who are not included in the BLS data.
Before writing the analysis noted above, Thomas Klier had also found that, even
in a system of “just-in-time” manufacturing, “having suppliers located in the
immediate vicinity of an assembly plant is not necessary to maintain a system of tight
linkages and low inventories.” Rather, he found that a larger radius — about 400
miles, or the equivalent to one day’s delivery time by truck, was sufficient for the
purpose of supplying assembly plants. Early transplant location decisions, not only
56 “DaimlerChrysler Drops Truck Plant,”Wall St. Journal (Sept. 24, 2003), p. A11.
57 Freightliner trucks and Thomas Built buses are also manufactured in North Carolina;
“UAW Scores a Touchdown at Thomas Built,” Solidarity (May-Jun. 2004).
58 See also, Lindsay Chappell, “Honda Adds N.A. Capacity,” Automotive News (May 3,
2004), p. 6.
59 See entry in Automotive News summary, “Transplants’ Changing Faces” (June 14, 2004).
CRS-36
Honda in Ohio, but also Toyota in Kentucky and Nissan in Tennessee, were
essentially within this delivery distance for most midwestern suppliers, even though
they may have stretched the definition of the auto belt to the south. Thus, Klier in
1999 defined the principal location of U.S. automaking, including the transplants, as
“reconcentrating” from dispersed locations around the country to the I-65/I-75
interstate corridors.60
A reconcentration of the industry along the I-65/I-75 corridor has particularly
led to a loss of auto industry jobs in the industrial Northeast, as seen in Table 2.
New York fell from fifth to tenth in industry rankings, with a loss of 13,000
employment positions; Pennsylvania declined from eighth to fifteenth, with a loss of
12,000 jobs; New Jersey, not shown in the table, declined from nearly 15,000
employees in 1979 to a little more than 2,000 in 2003, plus at least one remaining
uncounted assembly plant. California also suffered from this trend, as it lost 9,000
auto industry jobs, as shown in Table 2, and declined in the ranking from fourth to
sixth (probably seventh, in view of Tennessee’s unreported numbers in vehicle
assembly employment).
In a later presentation to a Chicago Federal Reserve Bank conference on
manufacturing in the Midwest, Klier noted that more recent location decisions
stretched his auto belt geography farther to the south and west.61 Nissan has located
a large new plant in Canton, Mississippi, near I-55, off the edge of the one-day
trucking corridor described by Klier. Moreover, the new Toyota full-size truck plant
— located in the Texas customer base for such vehicles (San Antonio) — discards
the corridor location model altogether. Nissan has addressed this issue by
developing an industrial park at the site of its Mississippi facility, and requiring
designated “Tier 1” (direct) suppliers to locate there; Toyota is considering the same
option in Texas.62
On the other hand, there are also some counter-trends. Most transplant-owned
supplier locations continue to be in or near the I-65/I-75 corridor (exemplified by the
Toyota-owned engine block plant in St. Louis, its engine and transmission plants in
West Virginia and Huntsville, Alabama, only a few hours’ drive from Georgetown,
Kentucky, and Nissan’s recent decision to expand its engine plant in Decherd,
Tennessee). Also, companies have found that they can manage the logistics of just-
in-time manufacturing from more distant and disparate suppliers through a trucking
60 Thomas H. Klier, “Agglomeration in the U.S. Auto Supplier Industry,”Chicago Federal
Reserve Bank Economic Perspectives, XXIII:4 (1st qtr., 1999), pp. 18-34. Location decisions
by Toyota and Honda in Ontario also fit this pattern. Klier did note that foreign-owned auto
parts suppliers tended to locate closer to transplants than domestic suppliers. Also, industries
might move to the South for other reasons, including lower operating and energy costs,
cheaper land for greenfield investments, and location incentives.
61 Thomas H. Klier, “Midwest Auto Industry — Performance and Outlook,” presentation at
Is Midwest Manufacturing at a Crossroads? Federal Reserve Bank of Chicago (Sept. 30,
2003).
62 U.S. International Trade Commission (ITC). Industry Trade and Summary: Motor
Vehicles (USITC Pub. 3545, Sept. 2002), p. 10. Comments from Nissan and Toyota officials
during plant visits in Smyrna, TN, and Georgetown, KY., Feb. 17-18, 2004.
CRS-37
relay system, known as “cross-docking.”63 Nevertheless, the conclusion of Klier
remains that the “risk for the upper Midwest” is that, “future Big Three capacity
reductions will disproportionately impact the northern end of the auto corridor.” In
view of recent Big Three contract decisions, he believes that such continued capacity
reductions are likely.64
Divergence in Labor Relations Organization
Whatever the impact of recent developments in the location of auto
manufacturing on state and regional employment levels, there can be no question but
that employment trends in recent decades have been adverse for union membership,
and specifically for the UAW. According to a 2004 press report, “The UAW’s active
membership dropped to 624,000 at the end of 2003 — the lowest level in more than
six decades and down from a peak of 1.5 million in 1979.”65 The same source
contains a chart showing that this decline has not abated in recent years, as the latest
annual total compared to more than 762,000 members in 1999 and 702,000 at the end
of 2002.
This decline is not isolated from developments in other industries, where union
membership — both absolutely and as a share of employees in industry sectors —
has tended to fall since the early 1980s.66 The overall decline in total membership
may be seen as an aspect of productivity gains and the steady decline recorded in the
U.S. automotive industry of the hours required to build a motor vehicle — and, thus,
a relative decline in production workers on the factory floor. But productivity alone
cannot explain the relative fall in the share of employees who are unionized in an
industry.
While the unionized Big Three have downsized, the unions have been generally
unable to organize transplant operations. The ITC’s 2002 report on the motor vehicle
industry cites three organizing failures at Nissan’s plant in Smyrna, Tennessee, and
other failures in recent years at Honda in Marysville, Ohio; Toyota in Georgetown,
Kentucky; and, Mercedes Benz in Tuscaloosa (Vance), Alabama. The ITC report
also cites the organizing successes of the UAW — all, as noted earlier in this report,
at assembly plants linked to the Big Three.67 Overall, BEA foreign investment data
indicate that 33.7% of employees of majority-owned U.S. automotive products
affiliates of foreign companies were represented by unions in 2002, for a total of
more than 110,000 organized workers.68 However, as of 2002, Chrysler Group alone
63 ITC. Motor Vehicles, pp. 9-10. Robert Mottley, “‘Henry Ford Would Be Horrified,’”
American Shipper (June 2004), p.8.
64 Klier, “Midwest Auto Industry.”
65 E. Mayne, “UAW Slashes Staff, Travel to Cut Costs,” Detroit News (Jun. 22, 2004), p.
1.
66 See CRS Report RL32179, pp. 9-10.
67 ITC. Motor Vehicles, pp. 7-8.
68 BEA. Survey of Current Business (Aug. 2004), p. 205, Table 10.
CRS-38
possibly accounted for the majority of these union members, as it reported that its
UAW union contract covered 58,000 employees.69
Womack et al. present the view in The Machine That Changed the World that
union organization of the work force, in both the United States and abroad, is an
artifact of old style mass production in the motor vehicle industry. The nature of the
organization and quality of work under “Fordism” led to a stratification of factory
operations, with little opportunity for advancement by production workers in terms
of skill development or possibility of achievement of management positions.
Consequently, the critical determinant of worker advancement and security became
purely a matter of seniority, with the union as the buffer between workers and
management on issues such as contract terms and disputes within a highly formalized
system of work rules.
Such a system was considered unacceptable in the context of “lean production”
as it evolved in Japan, and then was transferred by Japanese companies to the United
States and Canada in transplant operations. Key features of the system became
known throughout the automotive manufacturing world by their Japanese names,
such as kaizen (continuous improvement), andon (ability of a single worker to stop
an entire production line when a quality problem is observed), and kanban (“just-in-
time” inventory management). The MIT team who wrote The Machine That
Changed the World reported that Toyota, author of lean production in its most
refined form, the “Toyota Production System” (TPS), studied Big Three methods in
the 1940s and 1950s, and concluded that smaller market volumes and higher material
costs in Japan would not support the inventory methods and rates of product
reworking that were observed in Big Three management of production and inventory
control. Toyota, Honda and other leading Japanese manufacturers concluded that
they needed tighter control of quality throughout the manufacturing process and even
beyond — from customer order to supplier relations to order fulfilment. They also
needed a system of “flexible manufacturing,” which enabled them to alter production
output among different models and to introduce new models off existing platforms
in a fashion that was faster, more efficient and less costly than Big Three retooling
and design procedures. In all facets of lean production as operated by the Japanese
companies and their competitors, a key element is a closer and more continuous
relationship between engineers and production staff — at both assembly operations
and parts suppliers — than was considered possible in a bifurcated union-
management dichotomy in the mass production system.70
Many representatives of the Big Three and the UAW today challenge such an
analysis. The Big Three have become highly sensitive about plant visits, being
concerned that they actually originated many TPS and lean production techniques,
which were then copied by the Japanese companies. The Japanese companies
learned from the Big Three, some representatives say, when the Big Three opened
69 DaimlerChrysler 2002 annual report, p. 50.
70 This analysis is based on Womack et al., The Machine That Changed the World. See esp.
the comments on pp. 40-43 and 252-253 on the evolution of the union role in automotive
mass production, and the UAW response to the transplants and the lean production model.
On mass production and worker organization in Europe, see pp. 227-235.
CRS-39
their factories and were candid in discussing technology application issues.71 But a
study by the Harbor automotive consulting organization, which surveys plant
efficiencies every year, reportedly found in June 2004 that manufacturing
inefficiencies contributed to an average loss by Ford of $48 on every vehicle that it
produced in North America, while Nissan, the industry leader, had a profit of $2,402
per vehicle, and Toyota followed with a profit of $1,742.72
The UAW has been skeptical about the goals of “flexible” manufacturing, the
outsourcing of parts and components by nameplate manufacturers, and other Big
Three work reorganization tactics, which reduce reliance on the centrally organized
workforce and workplace practices that have been developed over time through
collective bargaining agreements. A recent report by the International Metalworkers’
Federation argued that “flexibility” is a codeword for the global industry’s
“deregulation agenda,” aimed at reducing regulations designed to protect the public
interest, as well as workers’ interests, in health and safety, wages, and working
conditions.73 This concern has been amplified as the UAW reacted to the downsizing
in employment at the core automaking activities of the Big Three, the outsourcing of
parts and components to spun-off or third-party manufacturers and the continued
market pressure from non-union foreign-based companies.
UAW-Big Three contracts are multiyear agreements based on pattern
negotiations, typically after the union has selected a specific target employer for each
new industry contract. The most recent contracts were signed in 1999 and 2003. The
UAW has focused in recent contract negotiating rounds on job security, as well as
security of defined benefits as included in union contracts, while conceding the
necessity for the Big Three to close plants and downsize the workforce in view of
technological change, as well as changes in product market share.74 Recent contract
agreements with the Big Three addressed the UAW concerns that in-house sourcing
of new work is being given inadequate consideration by management. “The union
may at any time appeal any sourcing grievance to an umpire ... [who] is empowered
71 See quote from former CEO Philip Caldwell of Ford in Brinkley, Wheels for the World,
p. 588. This view led to a general closure of Big Three plants to outside visitors. It was only
recently reversed by Ford CEO William C. Ford, Jr. He has wanted to make Ford’s new
truck plant on the River Rouge site a model of environmentally and ergonomically
progressive industrial engineering: “I would like the Rouge again to be the most copied and
studied industrial complex in the world.” (Ibid., p. 746). In the “Motor City” region of
Detroit and southeast Michigan, it is the only automobile factory that tourists can visit today,
unlike some transplant operations, which welcome tourists (the BMW plant in Greer, South
Carolina, has included a company museum, theater and gift shop on the site for several
years).
72 Bill Koenig, “Ford to put $300 Million in Michigan Truck Plant,” Detroit Free Press
(Dec. 16, 2004).
73 International Metalworkers’ Federation. Auto Report 2004 (presented to UAW, June
2004), pp. 19-22.
74 A summary of key issues with each of the Big Three in the 2003 agreements is reported
in CRS Report RL32179, pp. 28-29. Comprehensive analyses of employment benefits and
economic security gains are presented in UAW Ford Report, UAW GM and Delphi Report,
and Newsgram: UAW DaimlerChrysler Hourly workers, all dated Sept. 2003.
CRS-40
to make the union whole if he or she finds the company violates the contract, even
if there are no layoffs as a result of the sourcing violation.”75
The UAW has also sought to minimize enrollment losses as the Big Three have
downsized their core automaking operations. One approach has been to use “card
checks,” by which companies agree to recognize and bargain with a union whenever
a majority of workers has signed union recognition cards. Card checks are generally
considered easier and cheaper for unions to organize than a formal election under
National Labor Relations Board (NLRB) auspices, as well as being more reliable in
terms of the anticipated result. GM, along with Delphi, in the 1999 and 2003
contract negotiations, agreed to allow a “card-check recognition process” in
determining representation at manufacturing facilities. They further agreed to inform
suppliers of their “positive and constructive relationship” with the UAW, in order to
signal that Big Three companies are not seeking to move sourcing to non-union
shops, or to discourage union organization of suppliers.76
The use of card checks has been challenged before the NLRB, as the UAW has
sought to regain membership by organizing supplier plants. The UAW had gained
recognition through use of card checks at plants operated by two auto supplier
companies, Dana Corp. and Metaldyne Corp. But some workers at the plants
petitioned to decertify the UAW, on the grounds that card checks do not constitute
a secret ballot on union representation, as guaranteed under the National Labor
Relations Act. By a 3-2 vote, reportedly on political party lines, the NLRB on June
7, 2004, decided to take a “critical look” at whether the process of card checks with
management neutrality agreements constitute a fair system in determining whether
employees desire a union. UAW president Ron Gettelfinger has said that he does not
believe that the NLRB will overturn the widespread practice of card checks.77
However, the UAW has suspended organization of a local at a foreign-owned North
Carolina bus manufacturing plant, where it had succeeded in gaining recognition
through a card check, in order to avoid being accused of acting prejudicially while
the NLRB is investigating the issue.78 On the other hand, on April 8, 2005, an NLRB
administrative law judge dismissed complaints by several workers and the national
Right to Work Legal Foundation that an agreement between the UAW and Dana at
a Michigan plant constituted an illegal “pre-recognition” agreement between
management and the UAW prior to any decision by employees to choose the union
as their collective bargaining agent. This decision is subject to appeal.79
75 UAW Ford Report (Sept. 2003), p. 13.
76 UAW GM and Delphi Report (Sept. 2003), p. 3.
77 Automotive News, “NLRB May Stifle UAW’s Efforts to Grow,” (June 14, 2004) and
“Gettelfinger Not Worried About Card-Check Decision,” (June 28, 2004).
78 Detroit Free Press, “UAW Yields to Organizing Protest, Awaits Vote” (Feb. 26, 2005).
79 NLRB Decision JD-24-05 (Apr. 8, 2005); Mary-Beth McLaughlin, “Key Union Tactic at
Dana Plant Is Upheld,” Toledo Blade (Apr. 16, 2005); “Labor Relations Board Upholds
UAW Neutrality Agreement with Dana,” UAW press release (Apr. 15, 2005); “Statement
of National Right to Work Foundation on Preliminary Upholding of UAW Union ‘Neutrality
Agreement’ with Dana Corp.,” press release (Apr. 15, 2005).
CRS-41
Legislation was introduced in the 108th Congress that would specifically have
allowed representation to be determined by card checks and would increase penalties
for employers that interfere in attempts to unionize. The bill, entitled, the “Employee
Free Choice Act,” was introduced on November 21, 2003, in the House by
Representative George Miller, and gained 207 cosponsors. A companion bill was
introduced in the Senate on the same day by Senator Edward Kennedy, with 36
cosponsors. Congress took no action on either measure. In an August 2004
interview, AFL-CIO president John J. Sweeney indicated that the legislation was a
priority for the labor movement, and was supported by the Democratic presidential
and vice-presidential candidates.80 This legislation has not been reintroduced in the
109th Congress.
Another issue that has been contested in automotive industry labor-management
relations is modularization, which has been utilized by motor vehicle manufacturers
in an effort to improve efficiency, while reducing their upfront costs. But it has been
considered as a form of outsourcing and, therefore, controversial to the UAW.
Modularization was pioneered by Volkswagen in South America, particularly
at a new bus and truck factory that the company built in Brazil. VW did not build or
operate the factory alone: key suppliers not only manufactured complete component
systems on site, but also invested directly in the parts of the complex that they
operated.81 The ITC report notes that modularization was derived from studying how
Dell revolutionized computer manufacturing and contrasts it with “traditional”
assembly line manufacturing as follows:
Although the traditional model for auto manufacturing is to have the vehicle
move down an assembly line as components are installed piece by piece, modular
assembly shifts a large portion of the supply chain management and component
integration responsibility to Tier 1 suppliers, which deliver a complete module
— e.g., a cabin cockpit fitted with instrument clusters, airbags, audio equipment,
and wiring — to the automaker. Studies have reportedly shown that outsourcing
of basic parts assembly to module producers could save automakers as much as
20% on production costs.82
Modularization may remove the nameplate assembler from directly
manufacturing much of the product; it becomes rather the marketer, coordinator and
distributor of the final vehicle. Notwithstanding that the VW experiment in Brazil
was not highly successful in terms of productivity or product quality, it spawned
imitations locally, perhaps due to local labor conditions, and then in North America.83
The ITC notes that GM attempted to bring the concept to its new Lansing Grand
80 Washington Post, “AFL-CIO Sets Its Sights on a Kerry Victory” (Aug. 25, 2004), p. E1.
81 Alice Abreu, Huw Beynon and José Ricardo Ramalho, “‘The Dream Factory:’ VW’s
Modular Production System in Resende, Brazil,”Work, Employment & Society , XIV:2
(2000), pp. 265-82. Interestingly, the article notes that the VW plant at Resende has not been
especially successful in terms of productivity, when compared with other automotive
operations.
82 ITC, Motor Vehicles, pp. 13-14.
83 Abreu et al., “Dream Factory,” p. 272, 277-80.
CRS-42
River Cadillac factory, but UAW opposition may have discouraged implementation
of the “supplier-next-door” concept, although not the installation of complete
modules received from suppliers.84
Chrysler is making the boldest step so far to establish modularization at a union-
represented North American site. It is building a new Jeep plant on the site of one
of its oldest factories, in Toledo, Ohio. Chrysler is investing about $900 million in
the venture, with about $300 million invested by suppliers that will build the body
and chassis, and paint the vehicles, on site. Out of a planned 4,000 production
workers, drawn mostly from currently laid off auto workers, about 40% will be
directly managed and employed by the suppliers. The UAW local has agreed to this
arrangement, and is negotiating separate contracts, with different rates of pay and
benefits, with the suppliers.85
Modularization does not yet appear to be accepted as the inevitable next
evolutionary step in North American automotive manufacturing. At a 2004
conference, for example, a Toyota executive answered a question about “modular
assembly” by stating that it is not used by Toyota. Since his company, the executive
stated, viewed its comparative advantage as being in manufacturing, Toyota prefers
to build all major assemblies itself, though sometimes it might assemble them off-site
from the final vehicle assembly point.86
This report has discussed the decline or slow growth of Big Three production
in North America, the link between the Big Three and the UAW, and the relatively
rapid growth of non-unionized transplant production. But this is not to imply that
international companies investing in the United States have not also experienced
mistakes and difficulties in implementing their manufacturing investment decisions.
Nissan’s new factory in Mississippi, for example, experienced a number of
problems across its product lines, which caused its product quality ratings by a
84 ITC, Motor Vehicles, p. 14.
85 Jeremy Grant, “Chrysler Rolls Out Assembly Work,” Financial Times (Aug. 3, 2004), p.
18; Mark Phelan, “DCX, UAW, Suppliers OK Historic Teamwork, Detroit Free Press (Aug.
4, 2004); “DaimlerChrysler, Suppliers Team Up,” Detroit News (Aug. 4, 2004); Sholnn
Freeman, “Chrysler to Expand Ohio Plant, In Novel Venture with Suppliers,” Wall St.
Journal (Aug. 4, 2004), p. 8; James Flanigan, “In U.S., a New Model for Auto Industry,”
Los Angeles Times (Aug. 8, 2004), p. C1; John Seewer, “Suppliers to Partner with Jeep in
Toledo,” Cincinnati Post (Aug. 4, 2004), p. B6; Mary Connelly, “Test in Toledo: Can Four
Work as One?” and, Ralph Kisiel, “The Past Haunts the ‘Plant of the Future,’” Automotive
News (Aug. 9, 2004), pp. 1 and 4. Some articles note that, although Chrysler has experience
with supplier integration in assembly plant operations in Brazil, the specific DCX precedent
for the approach in Toledo is the Mercedes Benz small car manufacturing plant,
“Smartville,” in Hambach, France. Mary Connelly, “Zetsche: Haden Looks Like Partner in
Toledo,” Automotive News (Oct. 11, 2004), p. 26, covers the story that one of the three
initial suppliers pulled out of its investment, to be prospectively replaced by another
company.
86 Robert J. Ried, plant manager of a new Toyota assembly plant in Baja California, Mexico,
speaking at the Global Insight “Global Automotive Conference,” Dearborn, MI (Sept. 30,
2004).
CRS-43
respected private authority to decline substantially compared to its competitors.
Analysts speculated that the problem lay in overreaching by the company, which
sought to introduce new products, in a new-concept plant in a new location, while
training thousands of new employees.87 Far worse than the problem faced by Nissan
is the series of mistakes and problems faced by Mitsubishi. The already-struggling
company announced that it had hidden quality and design defects on cars sold in
Japan, leading to a public apology, resignation of the CEO, and serious declines in
sales and market shares both in the home market and North America. Its affiliate
DCX announced that it would invest no more in the ailing Japanese automaker and
has begun to reduce its 37% shareholding in the company, despite contracts for
development and production of joint platforms and vehicles. The Japanese
government and creditors, including the Japanese corporate parent, have stepped in
to prevent a complete collapse of the Mitsubishi automotive entity.88 Overall, veteran
automotive reporter Lindsay Chappell in a recent survey demonstrated that
transplants — the “New American Manufacturers” — have had a number of quality
problems, ageing product lines with declining profits, and some less than successful
North American manufacturing investments. “The days of easy growth are over,” he
wrote.89
Pension and Health Care Issues
Big Three representatives say that they are unfairly burdened in competing with
both imports and domestic production from foreign-based automakers by their own
rising pension and health care costs. Though most are non-union operations, the
transplants also provide an equivalent level of benefits. But being newer investors
in the United States, they do not yet face a burden of health care and other benefit
costs, which have accumulated over the decades for the Big Three, as the number of
retirees increases. Moreover, the average age of current employees is higher for the
Big Three, and health care costs are correspondingly higher. Like some other long-
unionized American industries, such as integrated steel mills, the Big Three face
aggressive non-union competition less burdened by these costs.
87 Business Week “Nissan: The Squeaks Get Louder”(May 17, 2004), p. 44;and, “The Way
of Carlos Ghosn” (Oct. 4, 2004), esp. p. 54; “Nissan Hustles Engineers to the U.S. —
Carmaker Scrambles to Improve Scores for New-Vehicle Quality,” Automotive News (June
28, 2004).
88 Sarah A. Webster, “DCX Decides It Won’t Bail Out Struggling Mitsubishi,” Detroit Free
Press (Apr. 23, 2004); “MMC Reels as Daimler Walks Away,” and “Mitsubishi Pledges
Support for Car Unit,” Financial Times (Apr. 24, 2004), pp. 1 and 8; FT.com, “Mitsubishi
Motors CEO Steps Down,” and “Crisis at Mitsubishi Motors Deepens,” (Apr. 26, 2004);
and, “Mitsubishi Motors’ Rescue Tops $10 Billion” (Jan. 28, 2005).
89 Lindsay Chappell, “Trouble on the Horizon,” Automotive News (June 14, 2004), pp. 23-
24. See also, “How Honda Is Stalling in the U.S.,” Business Week (May 24, 2004), pp. 62-
63, and Hyundai’s concerns about maintaining its recently regained quality rating,
“Hyundai: Kissing Clunkers Goodbye,” Business Week (May 17, 2004), p. 45; and, L.
Chappell, “Hyundai Double-Checks Supply Chain as Production Nears at Alabama Plant,”
Automotive News (Oct. 25, 2004).
CRS-44
GM CEO G. Richard Wagoner, Jr. estimated in 2004 that every GM vehicle
built in North America included $1,400 in health care costs — typically more than
the value of the steel in the same vehicle.90 In February 2005, he raised this estimate
to $1,525.91 According to the Detroit Free Press, “GM ... has estimated its future
retiree health care obligation is $67.54 billion, but has set aside less than $10 billion
for that obligation. GM provides health care to about 1.1 million people, more than
any other corporation in the country.”92 With ageing labor forces and retirees now
outnumbering active employees, Ford and Chrysler face similar pressures.93 The
Automotive Trade Policy Council (ATPC), the joint representative organization in
Washington of the Big Three, estimated in 2004 that the overall Big Three average
health care costs per vehicle are $1,220, compared to an average of $450 estimated
for Japanese and other foreign-owned manufacturers. The total Big Three health care
bill in 2003 was $10 billion, compared to an estimated $1.6 billion for their
competitors, ATPC said. In terms of retirees and surviving spouses supported by
pension benefits, ATPC estimated that the Big Three support more than 800,000
persons, compared to less than 1,000 now supported by foreign-owned competitors
operating in the United States — though that latter number is bound to grow over
time, while the Big Three number should peak in the next few years, and then
decline.94
More recent data in an Automotive News article gave even higher estimates and
greater discrepancies, based on 2004 data. It stated that GM paid for the health care
of 339,000 retirees, accounting for more than two-thirds of GM’s $5.2 billion
spending on health care (and not counting a $9 billion contribution to a trust fund for
health care costs). Ford spent $2 billion on retiree health care in 2004, and the
Chrysler Group spent $1.3 billion. By comparison, Toyota’s employees in Japan are
switched from the company health care plan to a national health care system within
two years of retirement; the company is thus responsible currently for retiree health
care coverage of only 3,000 persons in Japan.95
Furthermore, the Big Three have been locked into multiyear labor contracts that
require them to support laid off workers at 95% of salary, plus benefits, for the length
of the contract. Under these circumstances, the companies, led by GM, decided not
to cut back production and close plants after an economic recession and the
September 11, 2001, terrorist attacks threatened growth prospects. They decided to
90 “Health Care Costs Burden GM by $4 Billion, CEO Says,” Detroit Free Press (Feb. 11,
2005); a Toyota executive was quoted as saying that health care costs at one of his
company’s plants cost his company $12,000 annually per employee.
91 ; “U.S. Firms Losing Health Care Battle, GM Chairman Says,” Washington Post (Feb. 11,
2005), p. E1.
92 Jeffrey McCracken, “Retiree Costs Weigh on Firms: Health, Pension Debts Multiply,”
Detroit Free Press (May 28, 2004).
93 See also David Welch, “Has GM Outrun Its Pension Problems?” Business Week (Jan. 19,
2004), p. 70.
94 ATPC, Contribution of U.S. Auto Industry, charts 10-14.
95 James B. Treece, “Japan’s Health Care Gives Toyota Edge,” Automotive News (Mar. 28,
2005), p. 26.
CRS-45
maintain production levels, then heavily discounted their products. At GM this
meant incentives of up to $6,000 per vehicle or interest-free financing for up to 72
months. Ford has also followed a similar strategy in recent years. Chrysler, which
has successfully introduced two major new products in 2004, has at least been able
to cut back on its incentives. However, even the leading Japanese producers —
Toyota, Honda and Nissan — have offered incentives, especially to move some of
their older product lines. The consequence has perhaps been positive for the overall
U.S. economy, by stimulating vehicle production and purchases, thus offsetting
recessionary forces in late 2001 and afterward. But the cost may be overbuilt
inventory and production capacity, especially for the Big Three. By the end of 2004,
Ford and GM were cutting production and working time. Both were losing money
on North American automaking operations, as well as losing market share in both
cars and trucks. The issue was seen as especially critical at GM, which has
maintained eight separate brand identities (after terminating Oldsmobile in 2000),
and whose investment-grade credit rating has become endangered in early 2005.96
In the first quarter of 2005, GM issued a profit warning, subsequently
announced a $1.1 billion loss for the quarter, then suspended all further earnings
“guidance” for the year.97 GM focused attention on the rising cost of health care as
a “crisis” and requested that the UAW consider changes in health care coverage to
assist the company in resolving its financial problems. The UAW refused to consider
a reopening of its contract, though it did state that there might be means of alleviating
the problem, without a full-blown renegotiation. For example, its contract with
Chrysler had been amended after earlier losses for that company, so that union
members picked up some portions of the their health care costs.98
The Big Three also have sought assistance from Congress in offsetting their
health care costs in their effort to remain competitive. Representatives of the
companies met with members of Congress, with the support of the UAW and the
United Steelworkers, in an effort to gain tax credits for health care payments for 55-
to 64-year-old workers and retirees. They pointed out that corporate tax cuts
ultimately approved by Congress in the American Jobs Creation Act, containing tax
96 Business Week, “GM: A Dangerous Skid” (Nov. 1, 2004), pp. 40-41; and “Running Out
of Gas” (Mar. 28, 2005), pp. 29-31; Automotive News, “Downsizing Detroit” (Mar. 14,
2005), pp. 1 and 55; Wall St. Journal “Ford and GM Lose Ground to Imports: Heavy
Incentives Don’t Stem Flight” (Nov. 4, 2004); Detroit Free Press, “First Quarter reactions:
GM Tries to Make 8 Brands Salable” (Apr. 20, 2005). On GM incentive programs, see K.C.
Crain, “GM’s Bold Promos Hit and Miss in 2004,” Automotive News (Dec. 6, 2004), p. 43.
There is some question as to whether transaction prices have really fallen, or whether GM
and Ford have both increased incentives while raising base prices; “Car and Truck Pricing:
Despite Deals, Buyers End Up Paying More,” Detroit Free Press (Jan. 27, 2005); and,
“GM’s Sticker Shock,” Business Week (Mar. 7, 2005), p. 50.
97 Greg Schneider, “Industry Giant Falling Behind: GM Reports $1.1 Billion Loss” (Apr. 20,
2005), p. A1; Bloomberg.com, “GM Has $1.1 Bln 1st-Qtr Loss, Withdraws 2005 Forecast”
(Apr. 19, 2005).
98 Detroit Free Press, “UAW Won’t Reopen GM Contract” (Apr. 15, 2005), and “Widening
Burden: GM Confirms That Cost of Health Care Is a Crisis” (Apr. 20, 2005); Automotive
News, “UAW to GM: Go Slow on Health Care” (Apr. 18, 2005), p. 3.
CRS-46
law changes in response to a WTO decision (P.L. 108-357), would do little to assist
their firms in competition with foreign-based manufacturers, because of low rates of
profit in recent years from domestic manufacturing. Despite an effort by Senators
Arlen Specter and John Rockefeller to add such a provision to the legislation, it was
not included.99 Failing to gain relief in the 108th Congress on this issue, the domestic
automotive manufacturers also reportedly held discussions on the issue with
representatives of Senator John Kerry’s unsuccessful presidential campaign, and have
expressed interest in both Senator Kerry’s health reform plan and a different
approach proposed by Senator William Frist, the Republican Majority Leader.100
U.S. Automotive Trade: Data and Policy Issues
Growth of Foreign-Based Competition in the U.S. Market
As shown in Figure 9, the U.S. consumer automotive market, including cars and
light trucks (pickups, minivans and SUVs), has grown moderately over the past 25
years, when considered in terms of total unit sales. From more than 14 million units
in 1979, at a then-peak in general manufacturing output and employment, total motor
industry sales since 2000 have averaged more than 17 million units per year. The
market is cyclical, and it dipped substantially during general recessions in the early
1980s, just before and during the recession of 1990-91 and again, more moderately,
during the most recent recession after 2000. Moreover, as also shown in the figure,
most of the overall growth in sales has come from vehicles produced by foreign-
owned companies, primarily from production at foreign direct investment
“transplant” manufacturing operations in North America, rather than from Big Three
North American plants.
In 1979, nearly 80% of all consumer vehicles — cars and light trucks — sold
in the United States were built by the domestic Big Three manufacturers. Already
by that date, imported cars, largely from VW of Germany or the Japanese
manufacturers, were making an impact in the market, as they accounted for 26% of
sales of cars alone. Imported trucks had a smaller share of the domestic market, but
99 Harry Stoffer, “Big Three Ask for Help on Health Care,” Automotive News (May 31,
2004), p. 3. Legislation was offered as an amendment to the Senate version of the tax bill,
by Sen. Specter (printed in Congressional Record, May 10, 2004, p. S5166). An exchange
of correspondence and analyses on the issue between Sen. Rockefeller and the leadership
of the Senate Finance Committee is contained in Sen. Rockefeller’s “Dear Colleague” letter
of Aug. 9, 2004, and attachments, and “Dear Colleague” letter from Sens. Grassley and
Baucus of Sept. 24, 2004, with attachment. No votes were held on the legislation.
100 Financial Times, “Motor Industry Signals Interest in Kerry’s Healthcare Proposals” (Oct.
13, 2004); Jason Stein, “GM CEO Likes Health Care Idea,” Automotive News (Nov. 1,
2004), p. 3. For a pessimistic assessment of the likelihood of government assistance in early
2005, see Harry Stoffer, “Health Care: Odds Are that GM Won’t Get Much Government
Help,” Automotive News (Apr. 11, 2005), p. 51. Other views on the background and
development of the issue are in Allan Sloan, “General Motors Getting Eaten Alive by a Free
Lunch,” Washington Post (Apr. 19, 2005), p. E3; and, J. McCracken and K. Merz, “Auto
Industry’s Role in Health Care,” Detroit Free Press (Apr. 14, 2005).
CRS-47
at that time light trucks were less than a quarter of the total vehicle market. As the
economy recovered and the dollar strengthened in the mid-1980s, imported vehicles
increased to more than three million units in 1984-85, and to more than four million
units in 1986-87. In those years, for example, imported cars accounted for almost
40% of sales, the highest level ever. During this period, the United States and Japan
negotiated a “voluntary export restraint,” discussed below, which effectively capped
the level of imports from that country. In the 1990s, the total level of vehicle imports
remained below three million units annually, though it has again been higher than
that level since 2001.
As shown in Figure 9, with further details provided in Appendix Table 4,
transplant output by foreign-owned manufacturers (which excludes facilities of the
Daimler-owned Chrysler Group), in recent years has equaled or even surpassed
imported units in terms of vehicle sales. In 1995, the two million transplant-
produced units sold in the United States surpassed the number of imported vehicles
sold here for the first time. This balance was maintained until 2002, when imports
again were slightly higher than transplants, as both surpassed the three-million mark
in unit sales.101
Foreign-brand vehicles now are the dominant market force in passenger car
sales. If one adds imports and transplants together, they account for 55% of the 7.6
million passenger cars sold in the United States in 2003. Moreover, the share of sales
taken by imported passenger cars in 2003 is now actually higher than in 1979: 28%
of sales, compared to 21% then.
Part of the reason for this is that the Big Three have focused more on the light
truck market. Annual U.S. car sales have been surpassed by light trucks (9.4 million
in 2003), and the position of the Big Three is relatively stronger in this category.
Nevertheless, foreign nameplates are growing here as well. Imported light trucks
have exceeded one million vehicles per year since 2001, although in view of the fast
growth of the domestic market, in 2003 they accounted for only about the same share
as in 1979 — 13% as against 14%. However, transplants, which were virtually non-
existent in 1979, accounted for another one million in light truck sales annually since
2001. Together, imports and transplants accounted for almost 25% of all U.S. light
truck sales in 2003, compared to only 11% as recently as 1995.102 Through the first
101 A small share of transplant production is affiliated with the Big Three, but it is still
counted as transplant activity. Besides the NUMMI joint venture between Toyota and GM
in Fremont, California, other transplants that were or are affiliated with the Big Three
include the Ford-Mazda “AutoAlliance” plant in Michigan, and the Mitsubishi plant in
Illinois, originally formed in the “DiamondStar” alliance with Chrysler. NUMMI continues
as a highly successful operation, producing mainly Toyotas, but also some GM-branded
vehicles. In general, however, the Big Three-affiliate transplants have been smaller in
volume and less successful than independently established transplant operations. See
Automotive News summary of transplant operations, “Transplants’ Changing Faces” (June
14, 2004).
102 Veteran auto industry journalist Jerry Flint stated that in October 2004, foreign
nameplates had risen to 30.4% of the light truck market, and their inevitable increase was
forcing the Big Three to re-emphasize their car lines with new models; “The Year of the
Car,” Forbes.com (Nov. 23, 2004).
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ten months of 2004, foreign brands (including imports and transplants) together
reportedly accounted for about 40% of all U.S. new car and light truck sales.103
Figure 9. U.S. Motor Vehicle Sales
Units in millions
20
Big Three Sales
Transplant Sales
Import Sales
15
10
5
0
1979
1982
1985
1988
1991
1994
1997
2000
2003
Sources: Ward’s Motor Vehicle Facts & Figures (from 2000), various years; and, American Automobile
Manufacturers’ Association. Motor Vehicle Facts & Figures (through 1999), various years.
Note: “Imports” are vehicles assembled outside North America.
The results of these sales, production and import trends, in terms of sales by
motor vehicle companies in the U.S. market, are shown in Table 3. The Big Three
strength in light trucks has not been enough to offset their overall decline in vehicle
market share. GM is particularly affected by this decline, dropping more than a third
of its market share between 1979 and 2003, from 44% to 28%. Ford’s sales have
fallen by one-half in cars — but doubled in trucks; still, they have lost about three
points in market share. Chrysler’s strength in SUVs and minivans have helped the
company, moribund in 1979, actually gain market share over the past quarter-century,
though only from 11% to 12.8%. Still, Chrysler’s gain did little to offset the overall
Big Three decline in sales shares, from nearly 80% to less than 62% — and
preliminary data for 2004 indicate even more dramatic losses in market share for the
two largest Big Three producers.
103 Jerry Flint, “Stranded in Washington,” Forbes.com (Dec. 7, 2004).
CRS-49
Table 3. U.S. Motor Vehicle Sales by Manufacturer
(sales numbers in thousands)
Sales 1979
Sales 2003
Light
Light
Cars
Trucks
Total
%
Cars
Trucks
Total
%
GM
4,918
1,428
6,346
44.8
1,959
2,757
4,716
28.3
Ford
2,140
1,198
3,338
23.6
1,169
2,268
3,437
20.7
Chrys.
1,167
391
1,558
11.0
457
1,671
2,128
12.8
Big
8,225
3,017
11,242
79.4
3,585
6,696
10,281
61.8
Three
Toyota
508
130
638
4.5
996
870
1,866
11.2
Honda
353
NA
353
2.5
820
530
1,350
8.1
Nissan
472
102
574
4.1
505
289
794
4.8
Hyundai/Kia N.A.
N.A.
N.A.
N.A.
439
198
637
3.8
Mazda
157
8
165
1.2
164
95
259
1.6
Mitsubishi* N.A.
N.A.
N.A.
N.A.
162
95
257
1.5
Subaru
128
—
128
0.9
116
70
186
1.1
Suzuki
N.A.
N.A.
N.A.
N.A.
23
36
59
0.4
Asian-
owned
1,618
240
1,858
13.1
3,225
2,183
5,408
32.5
mfrs.
VW
334
2
336
2.4
262
27
289
1.7
BMW
35
—
35
0.2
236
41
277
1.7
Mercedes-
4
57
0.4
187
32
219
1.3
Benz
53
Ger.-
owned
369
6
428
3.0
685
100
785
4.7
mfrs.
Other
461
217
625
4.4
115
50
165
1.0
Total
10,673
3,480
14,153
100.0
7,610
9,029
16,639
100.0
Sources: Ward’s Automotive Yearbook 1980, 2004; total vehicle sales numbers for 1979 from Motor
Vehicle Manufacturers Association, MVMA Motor Vehicle Facts and Figures ‘80.
* Some Mitsubishi vehicles sold by Chrysler Corp. under Chrysler brand names in 1979.
CRS-50
Among foreign brands, the big winners over the past 25 years are obviously
Asian-based producers, who increased their share of total consumer vehicle sales by
a factor of about 2.5, from 13% to 32.5%. Three companies account for most of the
change: Toyota, which increased its share of sales from 4.5% to 11.2%; Honda,
which more than tripled sales share from 2.5% to 8.1%; and, Hyundai, which was not
even selling cars in the United States in 1979, but took nearly 4% of the market in
2003. Even Nissan, which registered a much more modest sales gain over the entire
period, has done well to increase its share, after virtual bankruptcy as a company, and
serious losses of market share to other import brands in the late 1990s. The only
other foreign-based producers with significant U.S. market share are three companies
from Germany. Among them, gains by the BMW and Mercedes brands have more
than offset VW’s decline, but total market share is still less than 5%.104
The initial year-end sales data for 2004 confirmed, or even accelerated, these
trends. Industry light vehicle sales overall were 16.9 million units, fractionally ahead
of 2003. But domestic Big Three brands’ share fell by a further 1%. Chrysler
Group’s 3.7% sales gain in the year could not offset declines by GM (down 1.3% to
about 25%) and Ford (down 4.5%, to less than 20%), which occurred despite those
two companies heavy incentive programs. Toyota (sales up 10.4% for the year) and
Nissan (up 24%), introduced new brands and products, and saw exceptional sales
gains for the year; Toyota became the first foreign brand to sell more than two
million vehicles in the U.S. market. Honda (up 3.3%), Hyundai (plus 4.6%), and
Subaru also registered gains, though at more modest levels. Among Asian brands
only Mitsubishi saw a decline in U.S. sales in 2004. Its sales in 2004 were down
37%, and the CEO of its U.S. operating company resigned at the end of the year.
Overall, Asian manufacturers gained another two points in U.S. light vehicles market
share. Some of this gain came at the expense of European manufacturers,
particularly VW, whose sales fell 13.6%. Mercedes Benz sales were flat, but BMW
increased U.S. sales by 7% in 2004.105
The performance of the two remaining U.S.-owned manufacturers worsened
further in early 2005. GM’s loss of $1.1 billion in the first quarter was largely due
to weak performance in the U.S. domestic market, and as seen above, was partly
attributed by the company to a continuing rise in health care costs. Shortly after the
GM announcement, Ford announced substantially reduced earnings in the first
quarter of 2005 and that the company would not achieve CEO Ford’s earlier
announced goal of $7 billion in profits by 2006.106
104 On VW’s U.S. decline, see Jerry Flint, “VW’s Future Is in the Future,” Forbes.com (Oct.
26, 2004).
105 USA Today, “Ford, GM See Slipping Sales in 2004” (Jan. 5, 2005), p. 1B, and ibid.,
“U.S. Mitsubishi Chief Announces Surprise Resignation,” p. 2B; Automotive News, “In a
Big Year, GM and Ford Lose Share to Toyota, Nissan,” and “Toyota, Nissan Gain Share,”
plus sales tables (Jan. 10, 2005), pp. 1 and 49-51; Jim Mateja, Chicago Tribune, “‘I Didn’t
Bail Out,’ Mitsubishi Chief Says” (Jan. 6, 2005), p. 1; Business Week, “Mitsubishi: Falling
Further Behind” (Jan. 17, 2005), p. 38.
106 Wall St. Journal, “Ford’s Profits Fall Sharply as Competition Dents Sales,” (Apr. 20,
2005); Detroit Free Press, “Ford Hauls in $1.2 Billion,” (Apr. 21, 2005); Washington Post,
“Ford Profit Plunges as SUV Sales Drop” (Apr. 21, 2005), p. E2.
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Some critics argue that the loss of market share by GM and Ford, particularly
in passenger cars, reflects more than issues such as exchange rates, or health care
costs, or cyclical trends. These critics argue that there is a qualitative difference in
corporate management and organization, which means that foreign-owned companies
seem to be able to identify consumer needs and tastes more readily than the two
largest Big Three auto manufacturers.107 Moreover, through flexible manufacturing
techniques, pioneered by the Japanese car manufacturers, other companies have been
able to respond to changes in market demand in a manner more agile than the Big
Three, with high-quality products, even as they have been also able to ramp up
volume. Nine of the top 10 choices in the 2005 annual ranking of cars and trucks by
Consumer Reports magazine, for example, were from one of three Japanese
nameplates (Toyota, Honda and Subaru). “Twenty-one vehicles, all of them
Japanese [emphasis added], scored combined ‘high’ ratings for safety, reliability,
fuel economy and owner satisfaction,” according to a press report. The article further
noted that, “A reputation for quality has helped Asian brands increase their market
share for eight straight years ... [reaching] a record monthly high of 36.3% in January
[2005].”108
The Changing U.S. Automotive Trade Balance
The growth of transplants has been the major change in the structure of the U.S.
automotive market since import levels peaked in the early 1980s. The number of
foreign-brand vehicles made domestically now roughly equals the number of
imported units, for both cars and light trucks. Moreover, encouraged by provisions
in federal legislation, such as the American Automotive Labeling Act and corporate
average fuel economy requirements, as well as the business realities of “just-in-time”
inventory control and manufacturing processes, foreign investing companies have
steadily increased the local content of their transplant vehicles. Nevertheless, as
shown in Figure 10, the U.S. trade deficit in automotive products, including vehicles,
engines and parts, has continued to increase steadily over the past two decades.
Figure 10 presents the automotive trade balances as reported annually by the
Commerce Department on an “end use” basis for selected years over recent decades.
As illustrated by the figure, the deficit has increased steadily. Although part of this
increase is due to price inflation of motor vehicles, the increase in the deficit is
mainly due to the fact that exports grew at less than half the rate of imports in both
the 1980s and 1990s. Thus, a U.S. deficit of $9 billion in 1979 became a deficit of
$50 billion in 1990, and more than doubled again, to $117 billion in 2000. Even
though the domestic automotive market grew slowly after 2000 and exports did not
fall, the automotive trade deficit increased further to more than $140 billion in 2004.
107 This argument is made most forcefully and comprehensively in Maynard, End of Detroit.
Hyde, Riding the Roller Coaster, attributes Chrysler’s relative success in introducing new
products to having learned “lean engineering” from the acquisition of AMC, pp. 279-84.
108 “Japan Dominates Magazine List,” Detroit Free Press (Mar. 7, 2005).
CRS-52
The details of how this deficit has grown and changed, and trade patterns with other
countries, are shown in Appendix Table 5.109
The detailed data indicate that the U.S. automotive deficit is structural. The
global auto market is not integrated, and is shaped on the regional level by different
tastes and priorities, notably a much higher emphasis on fuel economy in major
European and Asian markets than is shared in the United States and Canada. When
the Big Three pioneered the mass production and marketing of automobiles in the
early years of the Twentieth Century, both Ford and GM from an early date expanded
internationally by direct investment and building vehicles in other markets, more than
they did by exporting.110 But even in trade with Canada, the U.S. deficit has been
steadily increasing over the long term. Indeed, more than half of the approximately
$100 billion increase in the automotive trade deficit since 1990 is due to increases
with the NAFTA trading partners.
Figure 10. U.S. Trade Balance in Automotive Products
The following subsections review U.S. automotive trade on a detailed basis with
major trading partners. The data are drawn from Appendix Table 5.
109 Note that the numbers in the table do not exactly match those in Figure 11, because they
were calculated by the Commerce Department on the basis of the harmonized tariff schedule
(HTS) as reported by the International Trade Commission, instead of end-use trade data.
However, the amounts and direction of the balances are essentially similar. Data for 1979
on this more detailed basis are not available.
110 For example, Ford’s third great commercial success of the pre-World War II era (after
the “T” and “A” Models) was the “Model Y,” which was never introduced in the United
States. It was designed and built for the British and European markets, and manufactured
only there. Brinkley, Wheels for the World, pp. 397-99, 406-7.
CRS-53
NAFTA Automotive Trade. U.S. exports of motor vehicles and parts have
mainly gone to the NAFTA trading partners, both before and after the agreement
went into effect in 1994, although the automotive deficit has widened with both
countries. In 2004, 65% of all U.S. motor vehicle exports and 78% of all parts
exports went to the NAFTA partners, which are about the same shares as in 1990.
The value of U.S. vehicle exports to Mexico did increase from $300 million to more
than $4 billion, as Mexico liberalized its import substitution rules, and parts exports
more than doubled, from $4.3 billion to $11.3 billion. Canada remains the largest
single foreign market for the United States in both categories, with more than $18
billion in vehicle exports and nearly $30 billion in parts, more than half the total U.S
exports in both cases. Both totals were more than double the 1990 levels.
But the United States in 2004 ran automotive trade deficits with both countries,
even though it did have a $10 billion surplus in parts with Canada. Thus, in addition
to being the largest U.S. automotive export market, NAFTA also plays a dominant
role on the import side. NAFTA now supplies 46% of all U.S. vehicle imports and
more than 50% of all parts imports. These facts are possibly not widely publicized,
because, to a major extent, this is due to the operations of the Big Three and their
suppliers in the two countries. While in 1990, the value of U.S. vehicle imports
from Canada were $3.5 billion less than from Japan, by 2004, imports from Canada
were about 50% ahead of both Japan and the European Union, and accounted for a
third of all imports. Mexico supplied less than 5% of U.S. total vehicle imports in
1990, but more than 13% in 2004. Mexico is also the leading supplier of motor
vehicle parts imports, just ahead of Canada. The United States in 2004 imported ten
times the dollar value of parts imports from the two NAFTA neightbors, in roughly
equal shares, than it did from China, which has been of such concern to many people
as a new competitor.
Trade with Other Countries. The U.S. automotive trade balance with the
European Union (EU, formerly known as the European Community) in recent years
has shifted more than with any other non-NAFTA partner. U.S. trade with the EU
has been historically unbalanced in favor of the European side in both cars and parts.
However, the level of motor vehicle imports from the EU (mostly Germany) has
increased since 1990 dramatically faster than the rate from Japan, the national
competitor traditionally of greatest concern to the U.S. motor industry in recent
decades. With $31 billion in total vehicle imports in 2004, the EU is now
challenging Japan for second place behind Canada in this category. Moreover, with
a total surplus of $42 billion in cars and parts, the EU is also now beginning to
approximate Japan’s bilateral automotive surplus, which was $48 billion in 2003; on
the other hand U.S. exports of vehicles and parts was $10.7 billion to the EU in 2003,
compared with only $2.0 billion to Japan.
Korea has also become a significant factor in the U.S. automotive trade deficit,
as the bilateral U.S. deficit in vehicles and parts rose from just $1.5 billion in 1990
to $11 billion in 2003. Moreover, among all major trading partners, the Korean
market remains most restrictive in terms of U.S. exports — only about $500 million
in total in 2004.
As mentioned above, automotive imports from Japan are widely believed to be
the continuing major source of a U.S. automotive trade deficit. However, in recent
CRS-54
years Japan has played little role in increasing this deficit. Vehicle imports from
Japan increased only modestly compared to other sources since 1990 — from $26
billion to $32.9 billion in 2000, and virtually no increase between 2000 and 2004.
The increase in parts imports — once of concern to those who felt that transplants are
only “screwdriver” operations — has been even more modest. Parts imports from
Japan increased from $10.4 billion in 1990 to $15.4 billion in 2004, while they
increased by four times overall.
Another country that has been of heightened concern to U.S. manufacturers in
recent years has been China. But although China may now be a major global player
in automotive manufacturing, it has played little role so far in terms of the U.S. trade
account. There are so far virtually no motor vehicle imports from China. Parts
imports have been growing but the totals are still relatively modest — from $1.6
billion in 2000, and $3.8 billion in 2003. While China is growing rapidly as a
manufacturer of motor vehicles, parts and components, sheer distance may limit
China’s role as a supplier for original equipment manufacturers using “just-in-time”
inventory control and supply techniques. The former chairman of GM China, Philip
F. Murtaugh, was quoted as saying “I don’t see China becoming a major car exporter
in the foreseeable future. There is no economic rationale.”111 Nevertheless, there are
persistent reports of plans to export vehicles from China to other markets.112 China
may play a more significant role with respect to the supply of parts for the
replacement market, where timeliness of delivery is not such a key issue.113
Development of Trade Policy Issues
In the late 1970s, as the Big Three and the UAW reacted to the intensification
of competition from imports, there was also a period of highly charged debates about
issues of fairness in automotive trade and about the possibility of corrective trade
policy actions. Congress and the Reagan Administration took a number of steps to
ameliorate foreign competitive pressures, most notably the negotiation of a
“voluntary export restraint” on the part of Japan. These restraints eventually lapsed
(the United States and its trading partners agreed to eliminate trade quotas of this
type in creating the World Trade Organization in 1995). Measures specifically aimed
at automotive trade were still being initiated in the 1990s, but have gradually become
111 In Business Week special report, “The China Price” (Dec. 6, 2004), p. 112.
112 Nissan and Honda are cited in ibid. as at least considering some export possibilities with
their local Chinese investment partner. Chrysler Group CEO Dieter Zetsche has said that
DCX could export vehicles from China at some point, including possibly to the U.S. market,
and reportedly DCX is already in negotiations to set up such an operation; Automotive News,
“DCX Is Open to China Exports” (Mar. 14, 2005), p. 8; and Autonews.com, “DCX Eyes
Exporting Chinese-Built Chryslers to NA” (Apr. 21, 2005). An importer who first brought
Yugo and Subaru automobiles to the U.S. has signed a deal with Chinese automaker Chery,
with a goal of selling 250,000 vehicles in 2007; AP, “Goal of New Chinese Car Importer:
Japanese Quality for a Bargain,” Detroit Free Press (Jan. 3, 2005).On the logistical
difficulties of long-distance sourcing from China generally, see T. Aeppel, “Manufacturers
Cope with Costs of Strained Global Supply Lines,” Wall St. Journal (Dec. 10, 2004), p. A1.
113 For further discussion on the development of China as an automotive producer, see p. 76.
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dormant. The Big Three continue to argue that the exchange value of the Japanese
yen against the dollar remains too low, and thus favors Japanese producers.
The Chrysler “Bailout”. Events surrounding the threatened financial
collapse of the Chrysler Corporation in the late 1970s and the federal loan guarantees
provided that company in 1980-81 serve to mark the beginning of an activist era of
federal intervention in automotive policy linked to imports and automotive trade
issues. The smallest of the Big Three (but nevertheless the tenth-largest U.S.
corporation at the time), Chrysler ended the 1970s on the brink of bankruptcy. In
1979, after the Treasury Department had rejected the company’s appeal for financial
aid, corporate chairman John Riccardo resigned, and was replaced by Lee Iacocca,
who succeeded in gaining from the Carter Administration and Congress the Chrysler
Loan Guarantee Act, signed into law on December 21, 1979. Under this statute,
which was accompanied by employment and corporate cost reductions, union labor
cost concessions and state-level aid packages, the company borrowed $1.2 billion
from private sector sources in 1980. Within three years, the company had paid off
its loans. The federal government actually sold at a substantial profit the warrants it
had required on Chrysler stock as collateral.114
The 1980 Safeguard Case on Foreign Imports. While the drama over
Chrysler was being played out, the Big Three automotive industry more broadly was
affected by the impacts of the Iran crisis of 1979, the so-called “second oil price
shock” that also hit in that year, and the onset of a recession in 1980. Car production
fell from 14.7 million units in 1978 to 9 million in 1980. A total of 800,000 workers
in the automotive and related industries were laid off, because of reduced demand,
and the unemployment rate within the industry stood at 30%. Meanwhile, fuel-
efficient Japanese car imports had increased by 500% between 1973 and 1980.
Douglas Fraser, president of the UAW, sought congressional action to force
trade restraints on Japan, in order to assist domestic manufacturers. Failing to obtain
immediate legislative relief, the UAW, joined by Ford, filed a petition in mid-1980
with the U.S. International Trade Commission (ITC), requesting relief under Section
201, the safeguard or “escape clause” provision of the 1974 U.S. Trade Act. But the
ITC in such a case had to find that imports were a “substantial” cause of injury to the
producing industry, i.e., not less than any other cause. The ITC agreed that imports
had damaged the U.S. automotive industry, but, on a 3-2 vote, decided that they were
not a substantial cause. It ascribed the industry’s difficulties more to the effects of
the recession, higher interest rates, and consumer preference for smaller vehicles than
to the rise in imports, and thus declined to recommend any limitations on imports
under the safeguard provisions of the law.115
114 Hyde, Riding the Roller Coaster, pp. 241-248, 254-257.
115 John M. Rothgeb, Jr. U.S. Trade Policy (Washington: CQ Press, 2001), pp. 165-67. The
full details of this case are in: USITC. Certain Motor Vehicles and Certain Chassis and
Bodies Therefor: Report to the President on Investigation TA-201-44 under Section 201 of
the Trade Act of 1974, Publ. 1110 (Dec. 1980).
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Voluntary Export Restraints on Japan.116 The failure of the UAW-Ford
safeguards petition to obtain trade relief increased pressure in Congress for legislative
action. A bill was proposed in 1981 to enact quotas on imports from Japan, which
would have been less than the totals actually being imported annually. Senator Robert
Dole of Kansas, then Chairman of the Finance Committee,117 reportedly informed the
new Reagan Administration that this legislation would be passed in the Senate by a
veto-proof majority.
The Reagan Administration pressed Japan instead to take action on its own by
enacting “voluntary” restraints on its automotive exports. To avoid a possible
conflict with U.S. antitrust rules by purely private manufacturers’ action, the
Japanese government had to issue an order, on May 1, 1981, to the auto
manufacturers, by which exports to the United States were limited to 1.68 million
units for one year. This so-called voluntary export restraint (VER) avoided further
action on the quota bill being considered in the Senate. However, as the U.S. auto
industry continued to struggle in the early 1980s, the House twice passed domestic
content legislation that would have forced Japanese automotive manufacturers to
produce vehicles in the United States for the local market. To discourage such
measures, the Japanese export restraints were extended annually for several years,
with some upward adjustment in the volume numbers.
The three leading Japanese manufacturers in terms of sales in the United States
(Toyota, Honda, Nissan) all established manufacturing plants in the United States
by 1985. This result had been sought by both the UAW and the Big Three. Their
view was apparently that in taking such a step, the Japanese manufacturers would
have to hire U.S. workers, would thus face the same competitive manufacturing
conditions as the domestic Big Three, and would also lose the export advantage of
a currency that was then falling substantially against the U.S. dollar.
But things did not play out exactly as the U.S. auto interests had planned.
Forced to manufacture in the North American market, the Japanese companies
developed new and larger products more specifically designed for this market. While
imports did decline, vehicles produced at the transplant operations more than filled
the market gap, so that Big Three domestic market share has also tended to fall.
Vehicles such as the Toyota Camry and Honda Accord, for example, have been the
largest-selling passenger car models for the past 20 years, save for a period when they
were topped by Ford’s Taurus. Also, as noted above, though the Japanese companies
did become large U.S. employers, the UAW was not able to organize most of their
operations. While successfully manufacturing in the United States, the Japanese
companies were also able to move their imports up-market, gaining large profits on
vehicles, in part because of the scarcity value accruing from trade restrictions.
By the mid-1980s, the officially supported VER was lifted, though export limits
were continued for several more years by the Japanese on a more informal basis. In
part, the lifting of restraints resulted from a return to higher sales and profits by the
116 The account in this subsection is primarily based on Rothgeb, U.S. Trade Policy, pp. 168-
71.
117 In ibid., Sen. Dole is misidentified as the Senate Majority Leader in 1981.
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Big Three. It reportedly reflected disagreement among them as to whether they
supported any continued formal U.S. policy of promoting export restrictions.
U.S.-Japan Autos and Auto Parts Issue in the 1990s. The last major
U.S.-Japan automotive trade dispute was the Clinton Administration’s use of Section
301 of the 1974 Trade Act in the mid-1990s in an effort to open the Japanese market
wider to U.S. auto and automotive parts exports. The increase in both Japanese
imports and Japanese-owned motor vehicle manufacturing in the United States had
led Japan to become the biggest supplier of auto parts imports into the United States
by 1990. Furthermore, Japan had not only overtaken Canada in that category by a
substantial margin ($10.4 billion to $9.1 billion), but U.S.-Japan trade was much
more unbalanced. Thus, the United States had a surplus with Canada in parts, and,
though it ran an overall automotive two-way trade deficit, Canada was also the
biggest U.S. export market for vehicles. By comparison, U.S. exports of cars and
parts to Japan were each less than $1 billion.
The Reagan and George H.W. Bush Administrations had increasingly dealt with
industrial trade issues with Japan by adopting “results oriented” policies and by
focusing on “structural impediments” to U.S. exports and a more balanced bilateral
trade account. President Clinton updated this approach in an effort focused on two
industrial product sectors (autos and parts, and photographic film), where it was felt
that U.S. manufacturers could successfully export to Japan, and where the trade
balance was heavily in Japan’s favor.
Already, the George H.W. Bush Administration had reached a new agreement
on auto parts with Japan, but the issue of balance in market access had not been
resolved. Subsequently, the Clinton Administration announced in 1994 the initiation
of a “Super 301” trade policy action, wherein it might recommend punitive
retaliation, if the issue were not resolved on a bilateral or multilateral basis.
President Clinton announced in May 1995 that, if Japan did not satisfactorily
respond, the United States would establish punitive 100% tariffs on luxury
automobiles from Japan, such as the Lexus, which were (and still are) largely
imported into the United States. The United States also initiated a WTO case, and
Japan then retaliated by countersuing in the WTO against the U.S. procedure.
Eventually, the issue was resolved to the modest benefit of the United States.
An agreement was reached just before the negotiating deadline set by the U.S.
government, in late June 1995, and the WTO cases were shelved. The U.S. side did
not achieve a specific import target as it had sought, but it did gain a Japanese
promise to allow a substantial increase in the dealer networks of foreign-owned
companies, and to allow the use of foreign-made parts in the repair of cars that fail
the rigorous Japanese automobile inspections. But Japanese imports of U.S.-made
vehicles in 2004 remained lower than the level of 1990, despite some highly
publicized “reverse exports,” such as Honda station wagons, from the United States
to Japan. While the number of dealerships did not increase dramatically, the real
explanatory variable may have been the prolonged period of slow Japanese growth
from the 1990s forward. U.S. exports of auto parts to Japan totaled $1.5 billion by
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2004, compared to $900 million in 1990 (some of these exports may be engines and
transmissions exported from Japanese-owned U.S. plants).118
American Automobile Labeling Act (AALA). This measure was
introduced by Senator Barbara Mikulski as an amendment to Transportation
appropriations legislation and added by voice vote in the Senate on August 30, 1992.
It was signed into law as Section 355 of P.L. 102-388 on October 6, 1992. The
AALA established origin labeling requirements for every new vehicle sold in the
United States beginning on October 1, 1994. The labeling rules were designed to
ensure “truth in advertising,” according to then-president Andrew Card of the
American Automobile Manufacturers Association, which represented the Big Three
interests in Washington at that time and which supported the law. A UAW
spokesman added, “We think it gives consumers important information. The
Japanese dislike it because it doesn’t allow them to hide the fact that a large part of
their parts still come from abroad.”119
The law, as implemented in regulations by the National Highway Transportation
Safety Administration (NHTSA), requires that prominently displayed labels on
vehicles should show where a vehicle is assembled, plus the percentages of content
from principal sources of parts in any car for which 15% or more of the total value
of the parts content (excluding labor costs) comes from countries other than the
United States or Canada. Critics noted that the law established a third separate
standard for measuring automotive content: the AALA rule for labeling disclosure
purposes, plus a 60% NAFTA content rule for customs purposes; and, a 75%
domestic content rule to determine whether the vehicle is foreign or domestic for
purposes of complying with corporate average fuel economy standards (see below in
this report). They also noted that somewhat arbitrary differences in applying AALA
rules to suppliers meant, for example, that content in a Toyota-badged vehicle and
a GM-badged vehicle from the same joint venture operation (Fremont, California)
118 Rothgeb, U.S. Trade Policy, pp. 215-17; Charles S. Pearson. United States Trade Policy:
A Work in Progress (Hoboken, NJ: John Wiley & Sons, 2004), pp. 70-72. A more detailed
study of U.S.-Japan trade relations in the 1990s is Edward Lincoln, Troubled Times: U.S.-
Japan Trade Relations in the 1990s (Washington, DC: Brookings Institution, 1999). In his
earlier work, Japan’s Unequal Trade, Lincoln made the point that Japan’s low propensity
to import foreign manufactured goods is related to the generally low rate of direct foreign
investment in Japan. However, in addition to the Renault acquisition of a controlling share
of Nissan, followed by its appointment of Carlos Ghosn as Nissan’s CEO and the institution
of a radical downsizing and streamlining program in Japan, a number of the U.S. Big Three
and related companies maintain major stakes in the Japanese motor industry. Ford owns
33.4% of Mazda, GM owns 12% of Isuzu, 20.3% of Suzuki and a 20% stake in Subaru’s
parent, Fuji Heavy Industries. Chrysler’s parent, DaimlerChrysler, owned 37.4% of
Mitsubishi Motors, but is in the process of reducing its stake during Mitsubishi’s financial
restructuring; see Automotive News, Guide to Global Automotive Partnerships(Sept. 2004).
119 Quotations from Donald W. Nauss, “New U.S. Car Labeling Law Criticized as Being
Confusing ... U.S. Auto Makers Insist Disclosure Is Full and Fair,” Los Angeles Times (Sept.
25, 1994), p. D4. The most recent report from the Japan Automobile Manufacturers
Association states that purchases of parts from the United States by Japanese automakers
was $41.5 billion in “fiscal 2003” (Apr. 2003-Mar. 2004), compared to $2.5 billion in fiscal
1986; Growing Investment and Employment in America (2004), p. 8.
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could be counted in different ways, because Toyota and GM might have different
relationships with the original equipment suppliers.120
NHTSA reportedly conducted a survey of consumer use of the labeling
information in 2001, which found that “just 5% said that they were influenced by the
label to any degree whatsoever,” and “Even among consumers who described
themselves as Buy American advocates, just 20% said they knew of the ... content
labels and only 9% had read one at a dealership.” The same source noted that early
problems confirming sourcing from various suppliers had been compounded by
various industry developments that had increased cross-ownership and sourcing
locations among domestic and foreign brands. Nonetheless, representatives of both
the Big Three and their foreign-owned competitors questioned by a reporter did not
assign a high priority to efforts to change the law.121
U.S. Initiatives Against Automotive Trade Barriers. While U.S. trade
policy on automotive issues had earlier concentrated on problems viewed as caused
by imports, in the late 1980s, it began to focus more on foreign export barriers.
While not necessarily opening large immediate markets for U.S. products, these
initiatives are aimed at opening markets for U.S. companies as foreign markets grow
and develop, as well as at creating a “level playing field” in trade rules, as sought by
many critics of U.S. trade policy, both inside and outside Congress. This policy
escalated with the inauguration of the World Trade Organization (WTO) on January
1, 1995, because a defendant country could no longer block an adverse finding
against itself. The Office of the U.S. Trade Representative (USTR) cites four WTO
cases against foreign automobile development regimes, which had established trade
barriers against imports or promoted domestic content and exports in ways contrary
to WTO rules.122
Indonesia. The USTR brought a case in 1998 against Indonesia’s auto regime,
designed to promote and protect its domestic motor industry. As a result of an
adverse WTO finding, the Indonesian government substantially liberalized its auto
regime in 1999.
India. In 2000, USTR initiated a dispute settlement proceeding in the WTO,
later joined by the EU, to challenge India’s auto regime under the WTO Agreement
on Trade-Related Investment Measures (“TRIMs”). In response to the WTO
findings, India introduced a new automobile investment policy in 2002.
120 Detailed commentary on the AALA from Nauss, “New U.S. Car Labeling Law;” also,
Terry Box, “Sum of Their Parts,” Dallas Morning News (Oct. 6, 2004), p. 1A; Cindy
Skrzycki, “A Clash over Content Labeling,” Washington Post (Sept. 30, 1994), p. B1.
121 Ann Job, “Your Car’s Nationality,” Associated Press (Mar. 10, 2003); see also, Cheryl
Jensen, “Label of Contents Window Stickers Show How Tricky It Is to ‘Buy American,’”
Chicago Tribune (Aug. 11, 2002), p. 1.
122 The summaries of U.S. WTO cases and their outcomes in this subsection, as well as the
comments on Korea, are taken from country entries in USTR. 2004 National Trade Estimate
Report on Foreign Trade Barriers (NTE, April 2004). All U.S. WTO cases, including these
four auto regime cases are listed in USTR. “Snapshot of WTO Cases Involving the United
States” (Updated Oct. 6, 2004), as listed at [http://www.ustr.gov].
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Philippines. The Philippines in 1995, pursuant to the TRIMs Agreement,
notified the WTO of its intention to maintain local content and foreign exchange
balancing requirements to promote foreign investment. In 1999, it requested a five-
year extension for the measures applying in the motor vehicle sector. After
consultations under WTO rules with the United States, the Philippines announced in
November 2001 the immediate termination of the exchange balancing requirements,
and a final phaseout of all motor vehicle local content requirements in July 2003,
a commitment still being monitored by USTR. The Philippines also amended its
excise tax on automobiles in August 2003 from one based on engine displacement,
which is biased against large vehicles exported from the United States, to a system
based on value.
Brazil. USTR has also challenged the Brazilian automotive licensing regime,
and has noted that, pursuant to a 1998 agreement, this was a WTO case “resolved to
U.S. satisfaction without completing litigation.” However, USTR also notes in its
most recent National Trade Estimate that the Mercosur free trade area, of which
Brazil is a member, established a special “automotive list” of 55 items (vehicles and
parts) under its common external tariff, and the rate is 35%. Moreover, Brazil has
negotiated automotive agreements with third countries to allow duty-free treatment
within agreed quotas.
In addition to these specific policy changes negotiated under WTO rules, USTR
has been acting to reduce perceived market barriers and discriminatory treatment in
two other major Asian automotive producers:
Korea. In 1998, South Korea and the United States concluded a memorandum
of understanding (MOU) aimed at improving market access for foreign motor
vehicles. While USTR notes Korean implementation of the MOU, it has also found
little progress in opening the Korean market to imports (less than 20,000 units, for
a market share under 2% in 2003), while Korean exports to the United States have
boomed. One issue is the Korean tax structure, and USTR is negotiating with the
Korean government to change the basis for its tax, which discriminates against
vehicles with large engine capacity more typical of imported cars. USTR has also
made progress in gaining Korean acceptance of internationally agreed product
standards used in imported vehicles.
China. The United States and other members of the WTO had been highly
critical of China’s 1994 Industrial Policy for the Automotive Sector. This policy was
replaced by a new “Development Policy of the Automobile Industry,” announced on
June 1, 2004. The new policy abolished many formal restrictions and domestic
content rules. This included an issue particularly noted by the United States —
China’s former refusal to allow non-banks (such as automotive credit companies) to
finance consumer purchases of automobiles. However, USTR remains concerned at
the vague and unclear nature of many statements in the new policy (such as how
China plans to regulate imports in keeping with its new registration system for auto
manufacturers, and whether China will effectively allow imports of complete
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knockdown kits).123 Moreover, the new policy still requires foreign-owned
manufacturers in China to operate through joint ventures, in which their ownership
will be limited to a maximum of 49%. U.S. and other foreign motor vehicle
companies in China have also expressed concern that China’s new automotive fuel
efficiency standards discriminate against larger and heavier imported vehicles, such
as SUVs.124
Automotive Nontariff Trade Barriers in WTO Doha Round. In addition
to these case-by-case initiatives, the United States also proposed on January 28, 2005,
that WTO open discussions on removing nontariff barriers (NTBs) to trade in
automobiles and automotive parts within its Doha Development Round negotiations
on revising WTO rules. The U.S. proposal would add this subject to the ongoing
talks on nonagricultural market access. It noted that trade in motor vehicle and parts
constituted 13.3% of all world manufactured goods trade in 2003, and a high
percentage of exports of many coutries, both industrial and developing. The United
States proposal stated that, “We do not foresee the end result of NTB negotiations to
resemble the Aircraft Agreement [a self-contained agreement applying to one specific
industry], but rather to result in a series of results, each of which addresses a
particular NTB facing the automotive industry.”
The proposal specified in particular five examples of the kind of barriers to be
addressed: restrictions on financing of vehicle purchases; distribution channels;
taxation; equity restrictions on foreign investment; and, barriers to importation and
sale of remanufactured parts (all of which have been mentioned in specific cases
above). The modalities of the negotiations were indeterminate, as automotive trade
NTBs could be addressed in a range of specific ongoing Doha negotiation fora.125
Thailand Free Trade Agreement and U.S. Pickup Truck Tariff. An
additional trade issue that created concern in Congress in 2004 is a possible U.S. free
trade agreement with Thailand that would give Thai-made pickup trucks duty-free
access to the U.S. market. Domestic manufacturers of pickup trucks still benefit
from the 25% “chicken tariff” on imported pickup trucks. This tariff was established
in 1963 in response to European restrictions on U.S. frozen chicken parts, as a
component of its Common Agricultural Policy (CAP). In retaliation, the United
States established high tariffs on a number of products then imported mainly from
Europe, including pickup trucks.126 U.S. imports at that date were primarily produced
by VW in Germany, where U.S. chickens had been frozen out of a lucrative market
by the CAP.
123 USTR, 2004 NTE, p. 79; WTO. “China’s Transitional Review Mechanism:
Communication from the United States,” G/MA/W/58 (Doc. 04-3613, Aug. 31, 2004), p.
2.
124 Keith Bradsher, “China Sets Its First Fuel-Economy Rules,” New York Times (Sept. 23,
2004), p.1.
125 DER, “U.S. Calls for WTO Talks on Ending Nontariff Barriers to Automotive Trade”
(Feb. 2, 2005), p. A-4. The full U.S. proposal is on the WTO website under
TN/MA/W/18/Add.6 (Jan. 28, 2005), doc. No. 05-0371. The quote is from p. 1.
126 Presidential Proclamation 3564 at 28 Federal Register 13247-48 (Dec. 5, 1963).
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The exceptionally high tariff has never been reduced or repealed. An early U.S.
government ruling on imported SUVs excluded them from classification with pickup
trucks, with respect to application of the 25% tariff level.127 NAFTA has also eroded
some of the protective benefits of this measure, especially with respect to Mexico.
Toyota, Mazda and Nissan now primarily produce their pickup trucks in the United
States for the domestic market, though Toyota is opening a new plant for its Tacoma
line in Mexico, and Nissan is already there.
USTR has begun negotiations for a free trade agreement with Thailand, as part
of a general policy to promote bilateral and regional free trade deals. Thailand is
already the world’s second-largest producer of pickup trucks, having attracted a wide
range of foreign investors to open plants. These are primarily Japanese and Korean
companies, though Ford has an interest there through Mazda, and GM also has a
presence. The Big Three, while generally supporting free trade agreements, have
opposed allowing Thai pickups tariff-free access to the U.S. market through a free
trade deal. They note that their Japanese and Korean competitors would thereby gain
access to the U.S. market for Thai-made vehicles, without having been forced to
reduce their own home market barriers to U.S. exports. The UAW and the AFL-CIO,
generally skeptical of free trade deals, have opposed any U.S. elimination of the tariff
on pickup trucks for Thailand as part of a free trade package.128
Resolutions on this issue were introduced in each House in the 108th Congress
on February 24, 2004, with 38 co-sponsors in the Senate and 91 in the House. The
108th Congress took no action on the resolutions, and they have not been reintroduced
in the 109th Congress. These resolutions did not oppose the Thailand FTA outright,
but sought to express a sense of Congress that negotiations on access to critical
segments of the United States automobile market should not take place on a
piecemeal basis, but rather as part of broader negotiations that included all major
automobile producing nations. On March 18, 2005, 40 senators co-signed a letter to
the USTR advocating that U.S. tariff barriers should not be reduced on automotive
imports in the context of this FTA, unless a broader, multilateral agreement
addressed non-tariff barriers in the automotive industry.129
Exchange Rates and Automotive Trade Issues. The rapid rise in the
dollar’s exchange rate in the first half of the 1980s was a major issue affecting U.S.
manufacturers, including the Big Three, who complained that the dollar’s rise against
the yen in particular gave Japanese exporters additional assistance to compete in the
U.S. market. That issue was allayed with a subsequent decline in the dollar’s
exchange rate against the entire basket of industrial country currencies from 1985
127 Flint, “Stranded in Washington.”
128 CRS Report RL32314, U.S.-Thailand Free Trade Agreement Negotiations, by Raymond
J. Ahearn and Wayne M. Morrison, pp. 9 and 14; BNA. International Trade Reporter,
“U.S. Auto Workers Urge Bush to Maintain Truck Tariffs in Thai FTA” (March 4, 2004),
p. 398; AFL-CIO Executive Council Actions, Statement on “U.S.-Thailand Free Trade
Agreement” (Mar. 11, 2004); Jenalia Moreno, “Ending Tariff on Pickup Trucks Could Mean
Jobs, Sales, Competition,” Houston Chronicle (Jul. 6, 2004).
129 Letter from Sens. Carl Levin, George Voinovich, et al. to Acting USTR Peter Allgeier
(Mar. 18, 2005).
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until the mid-1990s.130 But the dollar’s resurgence against all currencies from 1995
to 2001, especially the yen, was again a serious concern to the Big Three, and they
still believe that the yen is undervalued.
While much of U.S. industry has been most worried about the value of the
Chinese currency (which they believe the Chinese government has maintained at a
level that is too low to the dollar, given the large and growing U.S. bilateral trade
deficit), the auto industry remains fixated on the yen. The recent report of the ATPC,
cited above, illustrates a declining share of U.S. auto market shares held by the Big
Three that parallels a decline in the dollar exchange value of the yen, especially in the
late 1990s. Thus, as the yen’s value fell from about 85 to the dollar in early 1995 to
140 in 1999 , the Big Three’s monthly U.S. market share declined from almost 80%
to about 70% (excluding a brief drop to a much lower level in 1999 when GM was
on strike). After that, however, the yen rose in value, to fewer than 120 to the dollar
in early 2004 (the last date on the ATPC chart), while the Big Three share on ATPC’s
chart continued to fall, to less than 60%. The ATPC claims that the yen was still
being held down by massive amounts of intervention in exchange markets by
Japanese monetary authorities, peaking at $140 billion in the first quarter of 2004.131
However, by the end of 2004, the yen had risen to about 103 to the dollar, with no
further market intervention by Japanese monetary authorities.132
Globalization of the Automotive Industry
Near its beginning, this report quoted a Commerce Department report,
Manufacturing in America, as evidence of a general understanding that
manufacturing is being globalized. This development is not unique to the automotive
industry, and indeed, it may superficially seem less globalized than many other
industry sectors. Because of differences in customer priorities, dictated in part by
considerations such as the price of fuel, vehicles differ radically from market to
market.133 Nevertheless, in terms of industry ownership, and including parts
suppliers, some companies have been global for a long time, while mid-size and
strictly regional companies have increasingly been acquired by larger competitors.
130 For exchange rate impact on U.S. manufactures trade in general in the 1980s and the
early 1990s, see CRS Report RL32179, Manufacturing Output, Productivity and
Employment, coordinated by Steven Cooney.
131 ATPC. The Contribution of the U.S. Auto Industry to the American Economy (distributed
2004), charts 17-19.
132 Paul Blustein, “U.S. Dollar Continues Its Broad Decline,” Washington Post (Dec. 2,
2004), p. E1; DER, “Japan’s Finance Minister Expresses Concern over Dollar Drop; No
November Intervention” (Dec. 8, 2004), p. A2.
133 Even in the area of fuel economy and efficiency, the regional approaches may be
radically different. For example, nearly half the cars now sold in Europe have diesel engines,
while such vehicles are relatively rare in the United States. Two Japanese manufacturers,
Toyota and Honda, pioneered gas/electric “hybrid” engine technology in their home market,
then found an avid niche market for this product in the United States, especially as gasoline
price soared in 2003-4. See summary in Maxton and Wormald, Time for a Model Change,
ch. 3.
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Ford and GM played pioneering roles in the first half of the twentieth century
in globalizing automotive technology and manufacturing. They have continued to
play active roles in consolidation of motor vehicle assembly operations and global
market supply chains. But the two U.S. industry leaders have nevertheless
experienced significant losses of global market shares. Chrysler, the third member
of the Big Three, has never been strong in overseas markets, abandoned them
altogether in the 1970s and has been itself acquired by a foreign-based company.
With respect to the parts supply industry, which employs far more Americans today
than the vehicle assembly companies, the two major spinoffs of the GM and Ford
parts divisions are among the global leaders in sales, but have not performed well
financially. Both they and the other U.S.-based automotive parts companies have
reportedly been hindered by their continued reliance on the Big Three for the bulk of
their sales.134
Globalization and the U.S. Market
Figures 11 and 12 address the issue of who is expanding faster, U.S. automotive
manufacturers abroad, or foreign manufacturers in the U.S. domestic market. To
measure expansion on a comparable basis, these two figures are based on sales of
affiliates. It might have been preferable to measure relative changes in direct
investment positions, but these data might be misleading, in part because U.S.
manufacturers have increasingly used finance affiliates in third countries in equity
transactions, and this practice may distort statistical reporting on the destination of
investments.135 The two figures cover the period from 1983, when the earliest data
on a comparable basis are readily available, to 2002, which is the latest year for such
complete data.
Figure 11 shows the value of sales of direct investment affiliates abroad of U.S.
companies (10% or more equity ownership) in the “transportation equipment”
manufacturing sector (more than 90% of which represents automotive vehicles and
parts). Figure 12 illustrates trends in the sales of domestic affiliates of foreign direct
investors in the United States (10% or higher equity ownership). The figures in this
latter case include transportation equipment manufacturing investments through
1986, and then motor vehicle and equipment manufacturing thereafter, when those
data were broken out separately. Additionally, however, on the inward investment
side the figure includes investment in wholesale trade — motor vehicles and
equipment. As described earlier in this report, under the “primary line of business”
rule many foreign investors in the auto industry with both manufacturing and trading
134 Automotive News, “Analysts Pound Big 3 Suppliers” and “TRW Stock Drops as Earnings
Lag” (Sept. 6, 2004), pp. 1 and 4.
135 BEA. Survey of Current Business (July 2001), “Direct Investment Positions for 2000:
Country and Industry Detail,” by Maria Borga and Raymond J. Mataloni, Jr. , technical note,
pp. 23-25, and additional comments to this author by Mr. Mataloni. There is also the
longstanding issue of measurement of investments on an “historical cost” basis, by which
the equity value of an investment is not updated, until it is transferred or revalued for some
other purpose, and may not therefore reflect current market value. Direct investment and
production overseas by GM and Ford goes back decades, and is much older than transplant
investment in the United States, contributing to a possible distortion of relative values.
CRS-65
operations in the United States have chosen to report details of their operations under
the latter category. In the early years of this series, virtually no Japanese motor
vehicle investment in the United States was reported under manufacturing, and in
2002, about two-thirds of the sales of Japanese motor vehicle affiliates was still
reported under investment in wholesale trade. U.S. companies operating through
affiliates abroad could make the same choice in reporting outward data, but sales by
the Big Three under this heading do not seem to be significant.
Looking at the sales figures for this 20-year period as a whole, there seems to
be relatively little difference in the magnitude of sales in the two directions. Foreign
sales by U.S. multinational affiliates of U.S. automotive companies (cars and parts)
increased from $62 billion in 1983 to $357 billion in 2002; sales by affiliates of
foreign companies investing in the U.S. market increased from $54 billion in 1983
to $321 billion in 2002. Investigation of the details of performance by different
regions and for different sub-periods does illustrate some dramatic shifts.
Figure 11. Sales of Foreign Affiliates of U.S. Automotive
Manufacturers
$ billions
400
Total
North America
Europe
Asia & Pacific
350
300
250
200
150
100
50
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Note: Canadian data for majority-owned foreign affiliates (MOFAs) only; Mexico data for 1991, 1993, 1994
include estimates for data from non-MOFAs, and data for 1999 interpolated from 1998-2000. Asia-Pacific data
for 1999 interpolated from 1998-2000.
Source: BEA. “U.S. Direct Investment Abroad: Financial and Operating Data for U.S. Multinational
Companies,” at www.bea.gov.
On the outward investment side, U.S. sales to North America and Europe grew
at about the same pace during the 1980s, about 9 to10% per year. At that time, the
North America number was dominated by Canada, with Mexico accounting for less
than 10% of affiliate sales annually until the later years of the period.136 Sales in Asia
136 Note that Canadian data are for majority-owned affiliates only, but this appears to
account for well over 90% of U.S. investment in the automotive vehicle and equipment
CRS-66
grew twice as fast (19%), but this is misleading, since typically 80% of these sales
were in Japan — and U.S. companies were not invested in the largest and most
successful local auto producers, or were limited to small equity shares. For the years
in which the Commerce Department has published data for sales of majority-owned
U.S. affiliates in Japan, the total was usually less than 1% of all affiliate sales.
In the 1990s, the solid growth of the North American market continued (8.7%
annually through 1997), but Mexico came to account for a third of total sales of $114
billion by U.S. affiliates in the two countries. This share was boosted by NAFTA’s
impact on U.S. parts exports, as well as Mexico becoming a significant market for
vehicle exports. Sales of U.S. affiliates in Europe slowed to around 5% per year in
1990-1997, but it remained the single largest market for U.S. companies’ sales, as
Ford and GM expanded their presence through acquisition of a number of mid-range
brands ($140 billion total sales by 2002). By comparison, sales fell in the
Asia/Pacific region, averaging a decline of 6% per year in 1990-97, as the entire
Japanese economy and domestic auto market were both characterized by weak
performance during this period. From 1998 to 2002, sales to Asia by affiliates
recovered. They doubled from less than $40 billion annually in 1997-98 to more than
$80 billion in 2002, a performance highlighted by the appearance of China as a major
market.
Domestic sales of U.S. affiliates of foreign investors grew more slowly than
sales of outward investors through 1995. But while sales by Japanese-owned
affiliates grew steadily from $32 billion in early 1980s to more than $160 billion
annually in 2000-2002, as shown in Figure 12, the sales of European investing
companies stagnated around $20-30 billion per year through the early 1990s. VW
closed its U.S. plant and declined as a competitor of the Japanese in the import
market. Renault sold off its controlling interest in American Motors, as part of that
company’s eventual acquisition by Chrysler. Then, in 1998, Daimler Benz acquired
Chrysler, in a so-called “merger of equals,” and sales by U.S. affiliates of European
automotive manufacturers were once more close to par with the Japanese ($142
billion in 2002).
industry.
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Figure 12. Sales of U.S. Affiliates of Foreign Automotive
Manufacturers
$ billions
350
Total
Japan
Europe
300
250
200
150
100
50
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Note: Sales of foreign affiliates in manufacturing (transportation equipment through 1986, thereafter for motor vehicles
and equipment), plus wholesale trade (motor vehicles and equipment). Sales of Japanese affiliates in motor
manufacturing not given in source for 1983-84, 1986-87, but less than $500 million annually. European affiliates’
sales for 2000 and 2002, and Japanese affiliates’ sales for 2002 include estimates for sales of wholesale affiliates.
Source: BEA. “Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,”
at www.bea.gov.
Global Performance of Automotive Manufacturing Companies
The world market shares of the two largest and remaining U.S.-owned members
of the Big Three have experienced major declines. Table 4 shows the leading
vehicle manufacturers globally, generally according to size rank.
As worldwide output of vehicles increased from 41 million in 1979 to more than
60 million in 2003, the table illustrates the notable decline in the share produced by
the two largest Big Three companies.137 Although General Motors’ total vehicle
output only fell marginally over the 25-year period, and it was still the largest
producer with more than eight million vehicles, its share dropped from nearly 21%
to less than 14%, a fall of one-third. Meanwhile, Ford, the number two U.S. motor
vehicle manufacturer, fell from second to third worldwide, despite increasing vehicle
production by one million. Ford’s share dropped from 13.6% to 10.8%. The Ford
137 Total vehicle sales in Table 4 include commercial trucks and buses, but buses and heavy
trucks comprise only a small share total production. In comparing global performance by
automotive companies, one must deal with radically different market segmentation from
region to region. For example, the light-truck SUV or pickup for private non-commercial
use is almost uniquely U.S.-Canadian phenomenon. Light trucks in Asia and Latin America
are mainly for farm or commercial use, though they may double as passenger vehicles, while
in Europe, light trucks are almost exclusively for commercial use; Maxton and Wormald,
Time for a Model Change, pp. 16-17.
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and GM share declines occurred despite extensive and aggressive acquisitions and
investments abroad by both companies.
In the late 1980s and 1990s, GM acquired Saab cars of Sweden and increased
its stake in several Japanese manufacturers. It then bought a 20% stake in Italian
producer Fiat in 2000, with an agreement reportedly to purchase the entire vehicle
manufacturing company if the Fiat management decided to sell. In 2005, GM agreed
to pay Fiat $2 billion to be relieved of this obligation, as both GM and Fiat have been
recording poor results in Europe in recent years.138 GM claims that the deal was
nevertheless a “net positive,” as Fiat supplied GM a diesel powertrain that it will use
in most of its diesel fleet — about half of its European sales in 2005 will be diesel,
up from only 10% in 2000.139 Reportedly, GM has lost $3 billion in Europe since
1999. In addition to backing out of the Fiat commitment, GM has taken steps to
downsize in Europe by a 20% employment cut, although, as in the United States, the
company’s deals with the unions include a commitment not to reduce employment
further before 2010.140
GM has sought to counter its problems in Europe and North America with an
aggressive policy in Asia. It acquired a controlling 45% interest in the financially
troubled Korean manufacturer Daewoo in 2003, and will use Daewoo’s Korean
production facilities as a worldwide source for small cars, frequently branded under
the Chevrolet name.141 It has been extremely aggressive in China, particularly in
establishing Buick as a leading brand and, in recent years, running second there to
VW through its alliances with Shanghai Automotive Industry Corporation (SAIC).142
GM CEO G. Richard Wagoner is recently quoted as saying that investment and
cooperation are essential in securing shares of the market in China (and India), which
will help GM gain sales and earnings — and thus enable it to better meet both the
competition and its own commitment to workers in the United States: “We invest it
138 “GM to Pay Fiat to Settle Dispute over Alliance,”Wall St. Journal (Feb. 14, 2005), p.
A1; “GM to Pay $2 Billion to End Ties with Fiat,” Detroit Free Press (Feb. 14, 2005).
Table 4 excludes the GM-Fiat investment.
139 Jason Stein, “Fiat Finale: Bargain or Blunder,” Automotive News (Feb. 21, 200%), p.
8.
140 Financial Times, “GM to Axe 12,000 Jobs in Europe as Part of $500m-a-Year Cost
Drive” (Oct. 12, 2004); and, “Workers Put Blame Firmly on Company,” (Oct. 15, 2004);
FT.com, “GM Reaches Deal with Unions” (Dec. 9, 2004); Detroit Free Press, “GM Europe
Plans Hefty Buyouts to Cut Staffing” (Dec. 10, 2004); Associated Press, “German Plant to
Make GM’s Midsize Vehicles” (Mar. 4, 2005); Automotive News, “GM Shifts Saab
Production to Germany” (Mar. 14, 2005), p. 8.
141 Business Week, “Daewoo: GM’s Hot New Engine” (Nov. 29, 2004), pp. 52-53.
142 “Guide to Global Automotive Partnerships,” as cited in Table 4, below.
CRS-69
there, we get a higher return, and we can use that to pay off obligations here.”143 GM
has also turned around losses and gained market share in other regions.144
After several unsuccessful efforts to acquire holdings in major foreign
automotive firms, Ford acquired the car making unit of the Swedish manufacturer
Volvo in the 1990s, as well as three British up-market automotive manufacturers:
Aston Martin in 1985, then Jaguar and Land Rover in the next decade. These
acquisitions were combined into Ford’s “Premier Automotive Group.” Ford had also
acquired a small stake in Toyo Kogyo, the Japanese company that produced Mazdas.
As that company’s financial problems worsened, Ford acquired a controlling 33%
interest in Mazda in 1996.145
Chrysler’s situation developed in the opposite direction; instead of expanding
overseas, it was acquired by a foreign-based automaker. Chrysler shed its overseas
operations during financial difficulties in the 1970s. By 1979, it produced only 1.4
million vehicles, good for ninth place worldwide. Daimler Benz, a specialist
producer of up-market cars and trucks, in 1979 produced 604,000 vehicles,
eighteenth place on the global auto manufacturers lists (the Chrysler and Daimler
totals are shown together in Table 4 in 1979, but the companies were not then
affiliated). Chrysler’s subsequent brushes with bankruptcy highlighted an apparent
need for a more robust global partnership. In 1998, the company was acquired by
Daimler, in what was described initially as a “merger of equals,” but subsequent
developments have made it clear that the merged company is controlled fully from
headquarters in Stuttgart, Germany (the head of Chrysler Group at this writing is
Dieter Zetsche, a German national appointed by the German management board after
serious Chrysler losses after 2000). The combined company in 2003 produced 4.3
million vehicles, which raised it to fifth place on the global motor vehicles
production list.146
143 Detroit Free Press, “GM Looks to Gain Ground in Asia, Control Costs Back Home”
(Dec. 20, 2004), part of an extensive series, “GM, Asia and the New Reality,” focused on
GM activities in China and India (Dec. 20-21, 2004). The impact on domestic suppliers is
explored in a separate series, “Tough Calls at Home,” in ibid., Dec. 23, 2004.
144 Jason Stein, “Latin America, Africa, Middle East Reap Biggest Net Income for GM,”
Automotive News (Nov. 29, 2004), p. 16.
145 Brinkley, Wheels for the World, 720-29.
146 Hyde, Riding the Roller Coaster, ch. 16. This author makes it clear, however, that he
believes that Chrysler could have survived as an independent company.
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Table 4. Selected Leading Global Motor Vehicle Producers
Home
Production
Company
Country
(millions of vehicles)
Owns/(Owned By), %:
1979
(%)
2003
(%)
1) General Motors
USA
Holden — Australia,
Opel, Vauxhall, Saab,
Hummer,
8.6
20.8
8.2
13.6
GM Daewoo (45),
Fuji Heavy Ind. (20),
Suzuki (20), Isuzu (12)
2) Toyota
Japan
Daihatsu, Hino Trucks
3.0
7.2
6.7
11.1
3) Ford
USA
Aston Martin, Jaguar,
Land Rover,Volvo,
5.5
13.2
6.5
10.8
Mazda (33)
4) Volkswagen
Germany Audi, Bentley, Bugatti,
2.1
5.2
5.0
8.3
Skoda, Lamborghini, Seat
5) DaimlerChrysler* Germany Chrysler Group,
2.0
4.9
4.3
7.1
Mercedes Benz
6) Peugeot-Citroën
France
2.3
5.5
3.3
5.5
7) Hyundai
Korea
Kia (47)
n/a
0.0
3.1
5.1
8) Nissan
Japan
(Renault, 44)
2.4
5.7
3.0
5.0
Dongfeng — China (50)
9) Honda
Japan
0.8
1.9
3.0
4.9
10) Renault**
France
Nissan (44)
2.2
5.3
2.4
4.0
11) Fiat
Italy
Ferrari, Maserati,Alfa
2.2
5.4
2.1
3.5
Romeo, Seat (in 1979)
12) Suzuki
Japan
(GM — 20)
0.3
0.8
1.9
3.2
13) Mitsubishi
Japan
(DaimlerChrysler, 25)
0.9
2.3
1.6
2.6
14) BMW
Germany Mini, Rolls-Royce
0.3
0.8
1.1
1.9
15) Mazda
Japan
(Ford, 33)
1.0
2.3
1.0
1.7
16) Fuji Heavy Ind.
Japan
Subaru (GM — 20)
0.3
0.8
0.5
0.9
17) MG Rover***
Britain
0.6
1.5
0.1
0.2
Sources: Automotive News Market Data Book, 1979 and 2004. Ownership data from ibid., “Guide
to Global Automotive Partnerships” ( Sept., 2004), excl. GM-Fiat. Details on corporate mergers and
acquisitions through 2001 in CRS Report RL30633, The World Automobile and Truck-Building
Industry: Consolidation and Globalization, by John Williamson.
* 1979 total includes Chrysler Corp. and Daimler Benz production.
** 1979 total includes American Motors production.
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*** 1979 - British Leyland.
Ahead of DaimlerChrysler in the rankings in 2003 was Volkswagen, which
more than doubled its production output, from 2.1 million vehicles in 1979 to five
million in 2003. VW to a great extent has increased its sales by acquisitions and
production alliances. In addition to the Audi brand, which it acquired in the 1960s,
VW has bought specialist up-market brands (Bugatti, Bentley, Lamborghini), has
acquired Seat, formerly the Spanish affiliate of Fiat, and acquired the Skoda brand
and facilities in the Czech Republic after the fall of the Communist government.
Moreover, through its Chinese alliances with First Automobile Works Group and
Shanghai Automotive, VW became the leading producer in the rapidly expanding
Chinese market, with half the market in 1999. VW’s increase in production has not
resulted in great financial success for the company. It has especially been bedeviled
by high labor costs combined with slow market growth in its German and continental
European home market. It furthered suffered in 2004 as a Chinese financial
clampdown reduced automotive credit and sales growth, and VW also lost as much
as half its Chinese market share.147
By contrast with GM, Ford, DCX and VW, the largest U.S. and German-based
auto manufacturers, the major Japanese companies have expanded more by exporting
and by direct investment abroad in new production facilities, than by foreign or
domestic acquisitions of companies and brands. Toyota, already number three in the
world in vehicle production in 1979, moved past Ford into the global number two
position with production of 6.7 million vehicles in 2003, more than double the total
of 1979, and an 11% market share. But unlike the other leading vehicle
manufacturers, Toyota controls only one other producer, Daihatsu, and a truck
manufacturer, Hino. Both were in financial distress when they were acquired in
1998-2000, and have very limited product distribution outside Japan.148 Toyota has
been aggressive in establishing joint ventures, in China, in the United States (with
GM at NUMMI), and in several other countries.
Honda, which has moved from the fifteenth position globally to the ninth spot,
more than tripled vehicle production from 800,000 in 1979 to three million in 2003,
and increased its market share from 1.9% to 4.9% during this period. But it did this
without any acquisitions of other companies or brands. Like Toyota, Honda has
established a number of joint venture operations, all in Asia.
Nissan is somewhat the reverse of this story. As of 1979, it was not only the
second-ranking vehicle producer in Japan, but also number four in the world, with
total output of 2.4 million vehicles. Its Datsun 240Z sports coupe was arguably the
147 FT.com, “Moody’s Warns on VW Plan for Cost Savings” (Jul. 2, 2004); and, “VW Faces
Erosion of Dominance in China” (Aug. 3, 2004); Business Week, “Volkswagen Slips into
Reverse” (Aug. 9, 2004), p. 40; Wall St. Journal.Online “Volkswagen to Cut Investment;
Chief Strategist to Step Down” (Nov. 12, 2004). Lack of strong-selling new models has also
caused VW sales to stagnate in the U.S. — the company may fall behind BMW in total
vehicle unit sales when final 2004 numbers are tallied; Automotive News, “BMW
Approaches VW as Top European Seller Here” (Dec. 6, 2004), p. 1.
148 CRS Report RL30633, pp. 9-10 (excluding Toyota’s in-house brands, Scion and Lexus).
CRS-72
first Japanese-made “halo”(iconic) motor vehicle in the U.S. market. But Nissan,
along with other Japanese manufacturers, had problems in the domestic market in the
1990s, which it was unable to offset with rising sales overseas. By the late 1990s, the
company was in serious financial difficulties, and sold a controlling equity stake to
Renault — a deal made by Renault only after the French company’s deal to acquire
Volvo fell through because of opposition in Sweden. Under the leadership of
Renault-appointed CEO Carlos Ghosn, Nissan substantially reduced its workforce
and closed a number of Japanese factories. But Ghosn did manage to turn the
company around. By 2003, Table 4 shows Nissan with only a modest gain in
production over 1979 to three million vehicles, and it fell in global rank, from fourth
to eighth, with market share down from 5.7% to 5.0%. But it is reportedly the
world’s most profitable car manufacturer, and in 2004 showed major gains in the
U.S. market. Ghosn became the head of the combined company in 2005.149
The other Japanese companies are minor players in the context of today’s
automotive top league. Mitsubishi Motors Corporation (MMC) is an offshoot of the
Mitsubishi Heavy Industries empire, and remains the fourth largest Japanese motor
vehicle producer. But, as noted above, its sales in both Japan and North America
have plummeted after corporate scandals, mismanagement and overexpansion, and
its long-term continuation at its present level of production is problematic.150 The
DCX holding in Mitsubishi shown in the table is in the process of being wound
down, and the company is currently being reorganized. Mazda, a long-time
proponent of rotary engine technology, nearly went bankrupt in the 1970s, and
remains a minor producer, effectively controlled by Ford. Similarly, Fuji Heavy
Industries, a large industrial conglomerate with some co-investment from GM,
controls the Subaru and Isuzu brands. The latter is mainly a Japanese-based truck
producer, which has contracted to provide diesel engines for GM in Europe.
Hyundai is the only Korean company to have made the major league of
automotive production, rising to seventh place globally and having acquired control
over Kia, the second-largest selling Korean brand. After initial failures to expand in
North America because of quality issues, Hyundai has succeeded in relaunching its
brand in North America with a new emphasis on quality and a ten-year, 100,000-mile
new car warranty. However, Hyundai has also actively sought to diversify
manufacturing outside its Korean base. Not only is it opening a new factory in
Alabama, but it also has established joint ventures that manufacture smaller vehicles
in India and China, for both local markets and possibly for export. In January and
February 2005, Hyundai vehicles actually outsold GM and VW products in China for
the first time.151
149 James Mackintosh, “A Superstar Leader in an Industry of Icons,” FT.com (Dec. 16,
2004); Jathon Sapsford, “Nissan’s Ghosn, on Track to Run Renault, Faces Bumpy Road,”
Wall St. Journal (Jan. 7, 2005), p. B1; Carlos Ghosn and Philippe Riès, Shift: Inside
Nissan’s Historic Revival (New York: Doubleday, 2005), chs. 8-21.
150 See, for example, Business Week, “More Bad News for Mitsubishi Motors” (Nov. 22,
2004), p. 65.
151 Joann Muller and Robyn Meredith, “Last Laugh: How Hyundai Went from Punchline to
Powerhouse,” Forbes (Apr. 25, 2005).
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The remaining major companies in the table are all based in Europe, and all
have limited exposure elsewhere. BMW has been very successful with a limited
market offering. It was originally a Munich-based manufacturer of aircraft engines
and motorcycles. However, with a 2003 output of only 1.1 million vehicles, BMW
has been more of an up-market and niche producer, than a volume seller. Its venture
into that market, through an acquisition of Britain’s Rover Group, was a failure, and
was spun off. Of the two large French companies, Peugeot, which acquired the
Citroën brand in the late 1970s, has generally been successful with a strategy that was
primarily based on European sales, and is one of the global leaders in producing
diesel engines for smaller passenger cars. Recently, Peugeot also announced that,
because of strong growth in sales in Iran and Latin America, areas outside western
Europe accounted for almost 25% of total sales in 2004.152 Renault, as discussed
earlier, tried and failed to establish its presence in North America through an
acquisition of American Motors, but has been more successful through taking a
controlling position in Nissan. The two brands to date have not been integrated. Fiat
has been moribund, with declining market shares and production, as foreign
producers increasingly penetrate its home market in Italy, and its positions have also
been weakening elsewhere.153 MG Rover is only included on the list to illustrate the
end of the independent British-owned motor industry. Its name reflects two brands
spun off by BMW, after it tried and failed to resurrect British Leyland’s vehicle
brands (but BMW kept the Mini and Rolls-Royce products).154 In April 2005, MG
Rover ran out of money, ceased operating, and went into receivership.155
In terms of market share, European producers are now beginning to face the
issue of serious import penetration at home by Japanese and Korean brands. Prior
to 1991, automotive trade between many individual European countries and Japan
was limited by a series of restrictive provisions — allegedly loose or non-existent in
some cases (Germany, U.K.) and extremely limited and tightly enforced in others
(France, Italy, Spain, Portugal). In 1991, the European Commission and Japan
negotiated a “transitional” agreement, under which authority over trade limits was
transferred to the Commission, with national quotas loosened through 1999. After
that, all quotas and restraints, such as local content rules, were to be lifted.156 Maxton
and Wormald note that, apparently due to differing consumer product tastes and other
market differences, the termination of quotas in the EU did not result in a major
increase in market penetration by Japanese and other Asian-branded vehicles,
whether imported or produced in Europe. The Asian producers held 11.2% of the
market in 1992, increased share to 14.8% by 1999, but saw a drop thereafter,
according to their data.157 However, their conclusion may have been premature. A
152 Tom Griggs, “Peugeot sales Rise on Strong Global Demand,” FT.com (Jan. 7, 2005).
153 See Business Week, “‘Fiat Is in Deep, Deep Trouble’” (Dec. 13, 2004).
154 MG Rover went into bankruptcy and ceased operations, at least temporarily, in April
2005; Associated Press, “MG Rover Seeks Bankruptcy” (April 9, 2005).
155 Wall St. Journal, “MG Rover Will Be Broken Up, Layoff of 5,000 Expected” (Apr. 15,
2005).
156 CRS Report 92-94 E, The European Community-Japan Automobile Agreement.
157 Maxton and Wormald, Time for a Model Change, pp. 28-29.
CRS-74
recent report in the Wall St. Journal notes that the five largest European car makers
lost 1.2 points of market share in the first three quarters of 2004, most of which was
gained by the five largest Asian companies. By 2004, the Asian companies’ market
share in Europe had risen to nearly 18%.158
The table omits from the lower part of the rankings two manufacturers from the
former Soviet Union, AvtoVaz of Russia (producer of the Lada) and AvtoGaz of the
Ukraine. They produced together a total of about one million cars in 2003, but are
otherwise of no international market significance. The table also omitted several
Chinese producers, because they are in joint ventures with other leading companies,
and their output would be double-counted; in no case did they produce one million
vehicles in 2003. Given the strength, size and rapid growth of the Chinese market,
these companies have been interested in acquiring partners’ technologies.159 They
may soon become formidable players in their own right, though there is debate on the
export potential they represent.160 There are also a number of Indian producers,
including a subsidiary of the industrial conglomerate Tata, which has independently
produced vehicles for the local market and has export ambitions.161
Performance by Producing Countries
Most of the major motor vehicle companies now produce vehicles not only in
more than one country, but also in more than one geographical region. The spread
of technology has occurred primarily through joint venture, vehicle design and
technology-sharing arrangements between top-level international producers, based
in the United States, Europe or Japan, and manufacturing partners in other countries.
And, although the total motor vehicle market has expanded by about 50% since
1997-80 — from about 40 million to about 60 million vehicles produced annually —
the industrial, developed nations “triad” still dominates global manufacturing,
production and sales in the industry. As shown in Figure 13, out of a little more than
60 million total motor vehicles produced in 2003, approximately three-quarters were
built in the European Union, North America and Japan. Maxton and Wormald
conclude in their industry analysis that, overall, this is a mature, slow-growth
industry, and that dynamic will be little affected by demand growth in developing
economies over the foreseeable future, even including China.162
In recent years, the largest markets have seen relatively little total volume
growth in production and sales, though as shown earlier with respect to North
America, there have been significant changes in market shares by types of vehicle
158 Stephen Power, “Europe’s Car Makers Face Turmoil as Japanese Gain in Market
Share,”Wall St. Journal (Oct. 14, 2004), p. A1.
159 Honda and GM, for example, are currently involved in disputes in which they claim that
local Chinese companies over allegedly copied cars; FT.com, “Honda Sues Chinese
Carmaker over Copying” (Dec. 9, 2004), and “GM Sues Chinese Company over ‘Copied’
Car” (Dec. 16, 2004). See also Maxton and Wormald, Time for a Model Change, p.131.
160 See Jamie Butters, “China as a Competitive Threat,” Detroit Free Press (Dec. 22, 2004).
161 Maxton and Wormald, Time for a Model Change, pp. 134-36.
162 Ibid., especially ch. 4.
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sold and by different producers. North American output (including transplants and
exports, but net of imports) peaked at nearly 18 million vehicles in 2000, but has
fallen since then to closer to 16 million vehicles annually.
European Union vehicle output has remained higher than in North America,
around 17.5 million, and it, too, has fallen since 2000. Germany, with about 5.5
million vehicles annually, accounts for around 30% of EU production. To the total
for western Europe, one might also add the eastern Europe total of just under 3
million vehicles annually, most in assembly plants directly owned by EU-based
manufacturers (such as the Skoda plants in the Czech Republic, owned by VW, or
Renault’s low-cost Dacia Logan model, produced in Romania), or in joint ventures.
Figure 13. Major Motor Vehicle
Production Countries and Regions
Despite advances by its
producers in foreign markets,
Japan’s own production has not
markedly grown over the past
fifteen years. It peaked at more than
10 million vehicles in the early
1990s, fell below that level for most
of the decade, before rising just
above that level again since 2000.
The successful expansion of some
of the Japanese manufacturers in
foreign markets has been to some
extent undermined by weakness in
domestic demand and the existence
of too many separate producers —
many of which have been
effectively taken over by larger and
stronger domestic or foreign
companies, as described earlier in
this report. Overall, a recent forecast by the automotive team at Global Insight
(formerly DRI), sees only very slow (less than 2% each year) or negative growth in
light vehicle sales in the United States, western Europe and Japan over the next five
years.163
No country has developed an independent, world-class motor vehicle industry
since Japan in the 1950s and 1960s. Korea tried to do so, based on a significant and
highly protected domestic market, as described by the U.S. Trade Representative and
discussed above, and expanding export sales, but largely failed. By 2002, Hyundai
was its sole locally owned, internationally successful motor-vehicle producing
company. Kia was taken over by Hyundai after the country’s severe financial crisis
of 1998, and the other domestic producers are now effectively controlled by foreign
163 Global Insight, World Car Industry Forecast Report (Dec. 2004), Table W3(b).
CRS-76
interests.164 Figure 13 shows that Korean industry stabilized at around 3.5 million
units annually since 2000.
But as Maxton and Wormald point out, other countries keep trying to develop
their own auto industries, because they view the industry as an essential “pillar” of
domestic economic growth. Without a modern motor vehicle industry, leaders of
both developing and “transitional” (e.g., Communist or ex-Communist) economies
do not see a way to generate homegrown demand for full industrialization.
Moreover, expanding the availability of motor vehicles may validate successful
development strategies through the achievement of enhanced personal mobility at the
mass level. These authors argue that most industrializing countries thus cling to a
model of motor vehicle industry development, which seeks to capture technology
from established international manufacturers, through joint venture arrangements,
enforced by de facto or de jure protectionism, that require technology transfers.
Furthermore, given the low levels of income per capita in such countries, their usual
highly unequal nature of income distribution, and the strain that large-scale
automotive import levels would place on the balance of payments, the authors state
that a policy of satisfying motor vehicle demand through imports would not be
politically or economically feasible.
Maxton and Wormald conclude owning a private automobile (or light truck for
personal use, as in North America) remains essentially an accouterment of citizens
of wealthy countries, requiring a current minimum income level equivalent of
$10,000 per year for the vehicle owner. Thus, although, by their calculations, 11%
of global gross domestic product is connected with the motor vehicle industry, and
15% of all steel, 40% of all rubber, 25% of all glass and “a staggering 40% of annual
oil output” in the world are consumed by motor vehicles, 70% of all vehicles
produced are still sold in western Europe, North America and Japan. Nor do they see
the balance changing, except at a slow pace, and one at which new capacity is
brought on stream faster than the ability of markets, even fast-growing ones in
developing countries, to absorb product at a rate that is both economically efficient
and profitable for producers.165
The key market in their analysis, as well as in that of most major motor vehicle
manufacturers, is China. Alone among all national or regionally integrated markets
in which more than one million vehicles were sold in 2003, China has exhibited fast
growth since 2000. Production has increased by 2.5 times, moving China from just
a little ahead of Brazil, at more than two million vehicles of all types in 2000, to
more than 5.5 million in 2003, fourth only on a national basis to the United States,
Japan and Germany. During this period alone, China has passed Canada, all of
eastern Europe, Spain, Korea, and France (3.6 million vehicles in 2003). Global
Insight’s world car industry forecast for September 2004 reported that in 2002,
Chinese sales of light vehicles exploded by 37% in one year alone. It grew another
13% to more than 4 million vehicles of this type in 2003, before slowing to an
estimated 2004 level of 9%, as the government clamped down on credit to cool an
164 ITC, Motor Vehicles, pp. 60-61; the EU, Japanese and Korean industries and vehicle
markets are summarized more generally in pp. 49-61.
165 Maxton and Wormald, Time for a Model Change, pp. 3-8.
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overheating economy. Nevertheless, Global Insight forecasts double-digit sales
increases through 2008, and a total level of light vehicle sales in China of more than
7.5 million by 2009. The net forecast increase of three million units in light vehicle
sales between 2003 and 2009 accounts for 55% of the projected 5.5 million unit
increase in sales for all of Asia, outside Japan, during the next five years.166
Maxton and Wormald rate China as having the best chance among countries still
trying to develop an independently based auto industry, through aggressive
manipulation of joint venture agreements between national companies and overeager
foreign investment partners. But they are skeptical that even China, with a coherent,
state-developed industry plan and the world’s largest market potential can achieve
this goal within a reasonable market plan time frame. Each additional one million
vehicles per year sold in China, they note, is only about the equivalent of week’s
sales in the advanced industrial countries. And, even if China succeeds in creating
an export industry, they hypothesize, its greatest impact on export markets by the end
of the present decade will be in small vehicles, with an emphasis on low-priced
products.167
Among other producers, these two authors rate Russia, India, and surprisingly,
Iran, as having some chance of creating “new competitors” with a global impact.
Russia now produces about 1.5 million cars annually, or about half the total in the
former Soviet Union-eastern European countries. The key issue that the authors saw
there was the overall economic organization of society and the economy. Iran, which
in most recent data produced about 600,000 cars, or more than 80% of the Middle
East total, with technology acquired from Peugeot, was rated by the authors as having
a chance of expanding its low-end production and export base in the Middle East and
Central Asia region, and perhaps beyond.168 India produces less than one million cars
annually, but is gradually emerging from its uncompetitive, autarchic policies.
Independent companies have been negotiating joint venture deals with major
international manufacturers, but Indian policy is less coherent and developed than
China’s, while the state of road development also remains a significant barrier.169
Maxton and Wormald rate other countries as “peripheral” or “networked.”
These are countries they describe as maintaining an automotive manufacturing base,
but that they judge are unable to develop and sustain products independently of the
major international “core” producers. This would include countries with formerly
independent producers, such as Britain, Sweden and Spain. It also includes a variety
166 Global Insight, World Car Industry Forecast Report, pp. 25-26, 474-78. Note that in total
motor vehicle production reported in Fig. 14, China has a relatively high proportion of heavy
trucks, as compared to other major producing countries.
167 Ibid., pp. 127-36. See also the discussion above on China in connection with U.S. trade
patterns and Appx. Table 5.
168 Global Insight, World Car Industry Forecast Report, p. 12, estimates total light vehicle
sales in Iran of 800,000 in 2004, in a closed market, with the industrial country
manufacturing affiliates being Peugeot, Renault and Hyundai.
169 On these countries, Maxton and Wormald, Time for a Model Change, 132-136; on India,
see also the articles on that country in Detroit Free Press, “GM, Asia and the New Reality”
(Dec. 21, 2004).
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of countries such as Australia, Indonesia, Brazil, Argentina and Mexico, which once
had “autarchic,” government-controlled import-substitution policies, but where they
felt a protected local industry mainly survives as a “satellite” of major producers
elsewhere. The authors believe that Korea and Italy are headed generally in this
direction, as is Malaysia, whose market is too small to support an independent motor
industry. One interesting, high-growth example of this phenomenon, as shown in
Figure 13, is Thailand, which because of comparative advantage in pickup truck
production has been the only substantial producer with a high rate of growth since
2000 (its total 2003 vehicle output of about 900,000 nearly equaled that of India).170
The Global Automotive Supplier Industry
As noted earlier in this report, the U.S. motor vehicle parts and equipment
industry employs far more people than the brand-name motor vehicle assemblers.
This industry has been under increasing pressure, as motor vehicle manufacturers
seek both to rationalize and globalize their supply chains.
The U.S. auto parts industry in recent years has thus faced pressure from two
directions. First, while proliferating models in hopes of filling more market niches,
the major vehicle manufacturers have also sought to reduce costs by driving model
designs off a smaller number of vehicle “platforms,” emphasizing greater
commonality of parts, but with more distinctive features, while reducing the number
of suppliers. Ford and GM have also stressed that they intend to source more parts
from cheaper production locations, especially China. As the vehicle manufacturers,
especially the U.S. Big Three, have increasingly “deintegrated” their manufacturing
processes — relying more on outside suppliers who must compete to supply parts,
components and modules — they have used their market power to force a “cost-
down” model of ever-decreasing unit prices on suppliers.171
This pressure has been exacerbated by the growth of Japanese- and European-
based transplants, which has increased the presence of foreign-based auto suppliers
in the U.S. market, and added to competition and capacity in a market that is already
mature. For example, three of the five Japanese suppliers among the top 25 globally
have about a quarter or more of their sales in North America. One of them, Yazaki,
sold nearly as much in North America in 2003 as it did in Japan.172
The second factor that has squeezed this industry is the rising cost of materials,
especially steel. Motor vehicle parts manufacturers were among the leaders in calling
for a rollback of the safeguard tariffs applied by President Bush in 2002 to a wide
range of steel imports, under Section 201 of the U.S. Trade Act of 1974. Eventually,
the President terminated the safeguards about halfway through the planned term of
three years, in December 2003. However, instead of falling, the rise in the price of
170 Maxton and Wormald, Time for a Model Change, pp. 91-126.
171 Maxton and Wormald, Time for a Model Change, pp. 154-63, especially complaints by
suppliers about GM, summarized in Fig. 5-23; also, Lindsay Chappell, “Big 3 Pay Price for
Bad Supplier Relations,” Automotive News (Dec. 27, 2004), p. 1.
172 Details on these data are in Table 6, later in this report.
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steel dramatically accelerated, more than doubling earlier levels. To some extent, the
major systems and parts suppliers, the “Tier 1” companies, were shielded from the
price rise. They are allocated steel by the Big Three, who directly negotiate long-
term supply contracts with the steel companies. This does not protect Tier 2 and Tier
3 suppliers in many cases. These are frequently smaller companies, especially
located in the Midwest, who must buy steel on a spot basis after they have
successfully bid on a contract. Furthermore, many of the Big Three supply contracts,
which are negotiated on a rolling basis, have expired as prices are peaking, leaving
customers to decide whether to lock in high current prices in long-term contracts.173
Table 5. Automotive Industry Supplier Location
Location
from
assembly
Product characteristics
Parts/components
Global
! High technology
! Integrated
! Low variability
circuits
! Light, compact
2,000 km
! Economy of scale
! Alternators
! Moderate variability
! Starters
! Moderate weight and
! Radiators
bulk
! Hub units
300-400 km
! Modules/system
! Heating,
assemblies for
ventilation, air
specific vehicles
conditioning
! Moderate variability
systems
! Heavy or bulky
! Fuel tanks
20-30 km
! Modules/system
! Seats
assemblies
! Alarms
! Sequenced exactly in
! Dashboards
vehicle assembly
! Painted
! Heavy or bulky
bumpers
Source: Maxton and Wormald, Time for a Model Change, pp. 151-52 and Fig. 5-15.
Maxton and Wormald contend that the motor vehicle parts and equipment
industry is moving toward internationalization and consolidation at the global level.
This may be either through supply of the global market by increased international
trade, or, as may be compelled in the automotive industry because of “just-in-time”
173 See CRS Report RL32333, Steel: Price and Availability Issues; and, Brian Becker and
Kevin Hassett, The Steel Industry: An Automotive Supplier Perspective (Washington: Motor
& Equipment Manufacturers Assn., 2005). Ford and U.S.-based auto parts manufacturers,
including Delphi, the largest such company, testified at an ITC hearing on “sunsetting”
antidumping and countervailing duties on imported hot-rolled steel from Japan, Brazil and
Russia; USITC. “Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products from Brazil,
Japan and Russia” (Investigations 701-TA-384 and 731-TA-806-808, review), public
hearing, Mar. 2, 2005.
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manufacturing, by increased direct international investment in production facilities
near assembly plants. A typology that seeks to explain supplier location, as outlined
by the two British authors, is summarized in Table 5. T his gl oba l a na l ys i s i s
interesting to compare with discussion above of the auto parts supply business by the
Chicago Federal Reserve Bank. Both approaches stress that changes in location of
parts manufacturing operations would move incrementally. But the Chicago Fed
emphasized that the key determinant would be the location of the assembly plant
itself and the associated transportation infrastructure. Maxton and Wormald
emphasize instead the size, complexity and specificity of the part, component or
system. These authors believe that, as with the vehicle manufacturers, the parts
industry will move in the direction of consolidation (following the recent trend of
deintegration from the vehicle assemblers). But, if ownership is consolidated at the
global level, the typology outlined in Table 5 may help determine to what extent
local manufacturing operations are consolidated globally or regionally.
Notwithstanding the arguments put forward for globalization, via exporting,
direct foreign greenfield investments, or mergers and acquisitions, an analysis of
Table 6 shows that the original equipment manufacturers (OEM) sales of most major
automotive parts manufacturers tend to focus on one region, with possibly a
secondary focus in one other region. Few are spread more widely, to any significant
degree.
This not surprising with respect to Delphi and Visteon, the spun-off GM and
Ford parts makers, respectively, who are the largest U.S.-based suppliers on the list.
Both make a wide range of parts for their former parents; about 50% of Delphi’s
sales in 2004 were to GM, while fully two-thirds of Visteon’s revenues came from
Ford. For Delphi, 74% of sales are in North America, 21% in Europe and only 5%
in Asia and the rest of the world. For Visteon, the concentration is slightly different,
but similar: 67% North America, 18% in Europe, and 15% elsewhere. Johnson
Controls, another top-ten, U.S.-based supplier, follows the same pattern, with 92%
of OEM sales in North America and Europe — though as an independent supplier,
the distribution between the U.S. and Europe is more equal. The other two U.S.-
based companies in the top ten, Lear and TRW Automotive, are well-established in
Europe as well as North America, but have no sales at all in Asia.
Magna, the large Canadian-based supplier, again follows the pattern: 60% of
sales in North America, 30% in Europe, 2% elsewhere. Bosch, the leading
European-based auto parts supplier, which may have overtaken Delphi as the world’s
largest in 2004, follows a similar pattern from the European perspective.174 Most of
its sales are in Europe, it is well-represented in North America and elsewhere, but has
no sales in Asia. This also applies to the next four European suppliers (Faurecia,
Valeo, ZF Friedrichshafen and the automotive unit of the German electrical
174 FT.com, “Bosch Sales Lead Delphi for the First Time” (Jan. 27, 2005). In comparison
with Delphi, Bosch’s ranking was helped by the large share of its 2004 euro-valued sales in
Europe, which also gained from exchange rate appreciation against the dollar. According
to the article, Bosch also “profited in part from heightened demand in Europe for diesel
engines [as] it is the market leader [there] for diesel injection systems.”
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engineering company, Siemens): concentration in Europe, double-digit shares of
sales in North America, only single-digit sales in Asia.
Conversely, the top two Japanese companies, Denso and Aisin Seiki, have 65%
and 80% of sales in Asia, respectively, and about 90% each there and in North
America. As was mentioned in the earlier section on trade policy issues, the U.S.
Trade Representative has long alleged that Japanese and Korean markets are closed,
or tightly restricted, for foreign auto parts manufacturers. Many European countries
also applied formal or de facto restrictions that favored local content and suppliers
for decades. While U.S. automotive policy rules have been established that
distinguished between foreign-made and locally produced parts, such rules in general
have not discouraged higher levels of direct investment in the United States by
foreign-based parts manufacturers.175
Another interesting feature of Table 6 is that after placing five suppliers in the
global top ten, the heft of U.S.-based suppliers falls off dramatically. Only four other
U.S.-based companies are in the top 25: Dana ranks fourteenth ($7.9 billion), the
automotive products sales of chemical company Du Pont place it eighteenth ($5.5
billion), Collins & Aikman is number 23 ($4 billion), and ArvinMeritor right behind
($3.9 billion). The low and falling rankings of many U.S.-based suppliers is not a
statistical artifact or illusion:
Their share of the shrinking pie is disappearing faster than the market around
them. In the past five years, U.S. factories have lost $47.4 billion in original-
equipment business to rivals in other countries ...176
Many U.S. auto parts manufacturers are medium- or smaller-sized specialist
companies. Most are concentrated in the North American market, which, as this
report has generally shown, is a mature market with limited growth potential.
Stagnant growth, especially among the Big Three, higher steel and other material
costs, and increased competition from foreign-based companies have put this
domestic industry under increased financial pressure. Two major U.S. suppliers,
Federal-Mogul (no. 37 in the global top 100) and Tower Automotive (no. 40), are
operating in bankruptcy. Oxford Automotive (no. 88) only recently left bankruptcy
by selling or closing all ten of its U.S. manufacturing plants. Others, such as Collins
& Aikman have been in financial distress, and two smaller suppliers of castings to
the industry have recently gone bankrupt.177
175 Maxton and Wormald discuss the relative rates of regional concentration market shares
held by foreign investors in Fig. 5-17, and on p. 152.
176 Lindsay Chappell, “U.S. Parts Factories Lose More Ground,” Automotive News (Feb. 28,
2005), p. 10; the quote from the article is based on “U.S. Commerce Department data
compiled by Des Rosiers Automotive Consultants Inc. of Richmond Hill, Ontario.”
177 Automotive News, “Analysts Pound Big Three Suppliers” (Sept. 6, 2004), p. 1; Bernard
Simon, “Gloom Sets in Across U.S. Motor Industry,” Financial Times (Oct. 13, 2004);
Detroit Free Press, “Auto Supplier Profits Dwindle” (AP wire story, Nov. 20, 2004);
“Tower Automotive Files for Chapter 11 Bankruptcy Aid” (Feb. 3, 2005); “Oxford
Automotive Is Out of Bankruptcy” (Mar. 25, 2005); and “S&P Cuts C&A Rating;
Bankruptcy Possible” (Mar. 31, 2005).
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Table 6. Leading Automotive Parts Suppliers
(Sales and rankings data for 2003)
Total OEM automotive parts sales and %
distribution
HQ
Company
country
$ bils.
N.Am.
Europe
Asia
R.o.W.
1) Delphi
USA
26.2
74
21
3
2
2) Robert Bosch
Germany
23.2
23
61
16
3) Denso
Japan
16.9
23
12
65
4) Visteon
USA
16.5
67
18
8
7
5) Lear
USA
15.7
60
36
4
6) Magna Intl.
Canada
15.3
68
30
1
1
7) Johnson
USA
15.2
53
39
7
1
Controls
8) Aisin Seiki
Japan
13.5
12
7
80
1
9) Faurecia
France
12.7
10
86
3
1
10) TRW Auto.
USA
11.3
41
50
9
11) Siemens VDO
Germany
9.5
18
73
7
2
12) Valeo
France
8.9
19
71
7
3
13) ZF Frhafen.
Germany
8.2
20
70
7
3
14) Dana
USA
7.9
70
19
6
5
15) Continental
Germany
7.6
30
60
5
5
16) ThyssenKrupp
Germany
7.3
50
46
1
3
17) Yazaki
Japan
5.9
38
11
43
8
18) DuPont
USA
5.5
50
35
11
4
19)
Japan
5.4
26
8
66
CalsonicKansei
20) Autoliv
Sweden
5.3
35
50
10
5
21) Michelin
France
4.7
27
44
29
22) Koyo Seiko
Japan
4.1
11
27
60
2
23) Collins &
USA
4.0
73
25
1
1
Aikman
24) ArvinMeritor
USA
3.9
50
40
7
3
25) GKN
UK
3.9
50
38
12
Source: Automotive News, “Top 100 Global Suppliers” (June 28, 2004).
The recent Ford and GM losses in market share and production have contributed
to losses for Delphi and Visteon, their former subsidiaries, and consequently for their
smaller Tier 2 and Tier 3 suppliers. Visteon, the number four global supplier, has not
made a full-year profit in its four years of existence, and has lost a total of $3.2
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billion. In terms of providing more business or other assistance, William Clay Ford,
Jr., CEO of Visteon’s former parent and leading customer, said, “We’re willing to
sit down with them and to say where we can be helpful. But we’re not Santa
Claus.”178 But Ford nevertheless reached an agreement with Visteon that provided
$390 million in anticipated savings in 2005, including payment of about one-quarter
of the employment costs of 18,000 UAW members who were technically “leased”
by Ford to Visteon as part of the original spin-off deal.179 Delphi in 2004 recorded
losses for the second straight year, and it anticipates another loss for 2005. Its
problems were compounded by accounting irregularities involving rebates from their
own suppliers. The company’s CEO and CFO have both resigned.180
Fuel Economy and Emissions Standards181
Since the 1960s and 1970s, environmental issues, including vehicle emissions,
fossil fuel consumption, and resource use, have played an increasing role in shaping
the U.S. auto industry. Environmental decisions play a key part in automotive
design, research and development of new vehicles, and marketing to consumers.
In response to increasing ground-level ozone pollution (smog), California
established the first requirements for auto emissions control technology in 1961.
With the passage of the Clean Air Act in 1970, the first federal auto emissions
standards went into effect in 1975. In response to the 1973-1974 Arab oil embargo,
the Energy Policy and Conservation Act of 1975 established Corporate Average Fuel
Economy (CAFE) standards for passenger cars in the 1977 model year (MY), and the
Department of Transportation established standards for light trucks in MY1978.
While not enacted for environmental reasons, fuel economy standards are seen by
some as a key strategy for reducing fossil fuel consumption, and, with it, greenhouse
gas emissions. Since the 1970s, federal CAFE standards, as well as federal and
California emission standards, have become increasingly stringent. For example,
from 1978 to 1990, passenger car CAFE standards rose from 18.0 miles per gallon
(mpg) to 27.5 mpg; light truck standards rose from 17.5 mpg in 1982 to 21.0 mpg in
2005. Similarly, by 2009, federal standards for nitrogen oxide emissions from
178 B. Simon, “No Santa for Troubled Visteon,” FT.com (Nov. 23, 2004); and Doron Levin,
“Car Glut Has Repercussions for Visteon and Delphi,” Bloomberg.com (Dec. 13, 2004).
179 Detroit Free Press, “Ford Deal to Save Visteon $390 Million” (Mar. 11, 2005);
Automotive News, “Downsizing Detroit,” “Once Again, Ford Has to Bail Out Visteon,” and
“Small Suppliers Hit the Hardest” (Mar. 14, 2005), pp. 1 and 54-55.
180 Detroit Free Press, “Delphi Loses; Outlook Bleak” (Jan. 21, 2005); “Accounting
Scandal Hits Delphi; Exec Ousted” (Mar. 5, 2005); “Delphi Scandal Rocks Industry” (Mar.
5, 2005); “Delphi Accounting Woes Rattle Through Industry” (Mar. 11, 2005); “Battenberg
Defends His Departure” (Mar. 15, 2005); and Automotive News, “Supply Chain ‘Rebate’
Part of Delphi Trap” (Mar. 14, 2005).
181 This section was written by Brent Yacobucci.
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passenger cars will have decreased by over 90% from 1980 levels, while allowable
hydrocarbon emissions will have been cut by roughly 80%.182
These standards have affected the U.S. auto industry in many ways. Now, auto
makers must design and build vehicles that meet environmental standards, or face
fines. These standards have promoted the use of new technologies and helped create
whole new businesses (e.g., emissions control devices, emissions testing equipment).
At the same time, these standards have had noticeable effects on the consumer auto
market.
Fuel Economy Standards183
Transportation consumes over 25% of annual U.S. energy demand, and the
majority of that energy is consumed by passenger vehicles (nearly 60%). In total,
highway vehicles (including passenger vehicles, buses, and heavy trucks) account for
over 75% of transportation energy consumption, and roughly 21% of all U.S. energy
consumption (see Figure 14). The majority of this consumption is petroleum, a
fossil fuel, and environmentalists see curbing fossil fuel use as a key component of
strategies to reduce greenhouse gas emissions.
Figure 14. U.S. Consumption of Total Energy by
End-Use Sector
quadrillion Btu
100
80
60
40
20
0
1973
1978
1983
1988
1993
1998
2003
Residential
Commercial
Industrial
Transportation
Source: U.S. Department of Energy, Energy Information Administration, Monthly Energy Review.
Because of a growing motor vehicle fleet, and increasing miles traveled per
vehicle, annual fuel consumption by passenger vehicles has increased dramatically
since 1970, despite the introduction of fuel economy standards (see Figure 15).
182 U.S. Environmental Protection Agency, Office of Mobile Sources. Milestones in Auto
Emissions Control. Ann Arbor, MI. August 1994. CRS Report RS20247, EPA’s Tier 2
Emission Standards for New Motor Vehicles: A Fact Sheet, by David Bearden.
183 For information on the history of fuel economy standards, as well as current legislative
action, see CRS Issue Brief IB90122, Automobile and Light Truck Fuel Economy: The
CAFE Standards, by Robert Bamberger.
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Much of this increase in consumption is attributed to the growth in the use of light
trucks, including minivans and SUVs, as passenger vehicles. It is expected that in
the absence of fuel economy standards, fuel consumption would have increased at an
even faster rate. According to the National Research Council:
While it is difficult to say what fuel consumption would have been had there
been no CAFE standards, it is clear that if light-duty fuel use had continued to
grow at the same rate as light-duty VMT [vehicle miles traveled], the United
States would be consuming approximately 55 billion more gallons of gasoline
each year.184
This 55 billion gallons would represent roughly a 40% increase in gasoline
consumption. While there is no guarantee that fuel consumption would have risen
this much, it is clear that the CAFE standards have been effective at reducing fuel
consumption from what it otherwise would have been.
Figure 15. Annual Passenger Vehicle Fuel
Use, 1970-2000
billion gallons
140
120
100
80
60
40
20
0
1970
1980
1990
2000
Light Trucks
Passenger Cars
Source: Stacy C. Davis, Oak Ridge National Laboratory,
Transportation Energy Data Book.
One of the most significant environmental standards faced by auto makers are
the CAFE standards.185 Although not enacted for environmental reasons, fuel
economy standards are seen by some as a key strategy for reducing fossil fuel
consumption, and thus, greenhouse gas emissions. In a given model year, the average
fuel economy of a manufacturer’s passenger car and light truck sales must meet or
exceed the CAFE standard for that year. Otherwise, manufacturers are subject to
184 National Research Council, Effectiveness and Impact of Corporate Average Fuel
Economy (CAFE) Standards. Washington, D.C. 2000. p. 19.
185 Energy Policy and Conservation Act of 1975 (P.L. 94-163).
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fines. The structure of CAFE and manufacturers’ responses to it have shaped the
evolution of the auto industry over nearly three decades.
Structure of CAFE System. For a given model year, each manufacturer’s
vehicles are divided in to three fleets: domestically-produced passenger cars, foreign-
produced passenger cars, and light trucks. Each of these fleets must meet the
applicable CAFE standard separately. For MY2005, the passenger car (both
domestic and foreign) standard is 27.5 miles per gallon (mpg), while the light truck
standard is 21.0 mpg. The specific definitions of passenger car vs. light truck and
foreign vs. domestic have had direct effects on vehicle design and plant location, as
will be discussed below.
If a manufacturer’s fleet fails to meet the average standard, the company is
assessed a fine of $5.50 per vehicle, for each 1/10th of an mpg below the standard.
For example, if a manufacturer sold 1 million light trucks in MY2005, with an
average fuel economy of 20.8 mpg (2/10 below the standard), the total fine would be
$11 million. However, if manufacturer’s fuel economy exceeds the CAFE standard
in a given year, that manufacturer may bank credits for future use (up to three years).
Likewise, a manufacturer may borrow credits from future years (up to three years)
if the manufacturer expects to exceed the standard in the future.186 Manufacturers
may also generate CAFE credits through the manufacture and sale of alternative fuel
vehicles. Credits may not be traded among manufacturers, nor may a manufacturer
trade credits among its various fleets (e.g., a manufacturer may not transfer credits
from its domestic car fleet to its light truck fleet).
Since 1983, the National Highway Traffic Safety Administration (NHTSA),
which administers the CAFE program, has assessed over $500 million in fines on
European auto manufacturers.187 To date, no American or Asian auto maker has ever
paid a CAFE fine.188 But regardless of whether a manufacturer has paid a fine, the
CAFE program has had a noticeable effect on the U.S. auto industry, as has the
specific structure of CAFE.
Light Truck and Passenger Car Fleets. The distinction between light
trucks and cars under CAFE has directly affected the U.S. industry, especially the
ways in which new vehicles are designed. A vehicle is classified as a light truck if
it has off-road capability or has significant “truck-like” features. These features
include an open bed, an enclosed loading area, or a loading area that can be made flat
through the removal of rear seats.189 Under this definition, all pickup trucks, vans,
186 To use so-called “carry-back” credits, the manufacturer must submit a plan for approval
by the National Highway Traffic Safety Administration (Department of Transportation),
which oversees the CAFE program.
187 National Highway Traffic Safety Administration, CAFE Overview.
[http://www.nhtsa.dot.gov/cars/rules/CAFE/overview.htm] Accessed January 10, 2005.
188 In some cases, this is due to significant banking of CAFE credits, including alternative
fuel vehicle credits.
189 49 CFR 523.
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and minivans qualify as light trucks as do the majority of SUVs.190 The original
justification for the separate standards is that when CAFE was enacted, light trucks
were used mainly as commercial and agricultural work vehicles and needed more
hauling capacity, and would thus be less able to meet the car standard. Further, these
vehicles were a relatively small portion of the U.S. automobile market in the
1970s.191
The distinction between cars and trucks under CAFE has drawn criticism by
some environmental groups because light trucks are used more and more as
passenger vehicles (as opposed to work vehicles), as evidenced by the fact that light
trucks claim more than half of the passenger vehicle market. Further, critics of the
auto industry are concerned that a manufacturer may be able to make minor
modifications to a passenger car to turn it into a light truck. They argue that if the
original car has a fuel economy below the passenger car standard, but above the light
truck standard, then an auto maker could improve both its CAFE averages without
improving its overall fuel economy. In fact, some vehicle models that were originally
declared passenger cars by automakers are now considered light trucks for CAFE
purposes.
The Two-Fleet Rule. In addition to the distinction between passenger cars
and light trucks, there is also a distinction between domestically-produced passenger
cars and those produced in foreign countries.192 If 75% or more of a vehicle’s parts
and labor originate in the United States or Canada (and Mexico, under NAFTA), it
is considered part of a manufacturer’s domestic fleet. Otherwise, it is considered part
of its foreign fleet. Except in some specific cases, the ownership of the manufacturer
does not affect whether the vehicle is considered foreign or domestic.
This distinction was enacted by Congress to keep U.S. manufacturers from
relocating small car production abroad and closing small car plants in the United
States.193 If a manufacturer were to do so, then the relocated production could not be
counted in the average with vehicles produced domestically. In the case of smaller
cars, which tend to have higher fuel economy, this became a major disincentive to
relocate those plants outside of the United States.
However, this two-fleet rule also created a barrier preventing foreign-owned
manufacturers from using American-made parts in their North American assembly
plants. Under the two-fleet rule, a foreign manufacturer (operating in the United
States) that produces a vehicle using 75% domestic content (parts and labor) must
190 Vehicles which are similar in design to both cars and SUVs, frequently referred to as
Crossover Utility Vehicles (CUVs), may fall into the light truck category or the passenger
car category, depending on design.
191 For more information on the differences between passenger car and light truck standards,
see CRS Report RS20298, Sport Utility Vehicles, Mini-Vans, and Light Trucks: An
Overview of Fuel Economy and Emissions Standards,by Brent Yacobucci.
192 There was a similar two-fleet rule for light trucks, but this rule was eliminated after
MY1995.
193 P.L. 94-163, Sec. 503(b).
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classify that vehicle as domestic, and the vehicle cannot be counted toward that
manufacturer’s import fleet average. If that manufacturer’s import CAFE average
is just meeting the standard, reclassifying one vehicle from import to domestic could
suddenly take that manufacturer out of compliance and make them subject to
penalties.
Soon after the enactment of the CAFE standards, Volkswagen established a
plant in the United States. However, the company chose to use foreign parts so that
the high-efficiency vehicles it was producing could be counted toward its import fleet
average. Therefore, in 1980, Congress established an exemption for foreign makers
who had established plants in the United States by the end of 1985.194 These
manufacturers may petition NHTSA to claim U.S.-produced vehicles as part of their
import average, as long as doing so would not harm U.S. auto industry
employment.195 This waiver allows foreign manufacturers to build plants in the
United States and use American-made parts without the risk of CAFE penalties.
In 2004, Nissan petitioned to include vehicles produced in a plant in Mexico as
part of its import average. As a result of NAFTA, those vehicles, which were
previously classified as imports, were reclassified as domestic. However, as these
were smaller, more efficient vehicles, the reclassification made their import fleet
noncompliant with the standard. NHTSA concluded that denying Nissan’s request
would result in the use of fewer American-made parts, which would lead to fewer
jobs in the U.S. auto industry.196
Alternative Fuel Vehicles. In addition to the credits generated by exceeding
the CAFE standard in a given year, auto makers may also generate credits through
the sale of alternative fuel vehicles — those that run on fuels other than gasoline or
diesel fuel. The Alternative Motor Fuels Act of 1988 was enacted to promote the
expanded use of alternative fuels and establish a market for alternative fuel
vehicles.197 Alternative fuel vehicles are treated as having a significantly higher fuel
economy than their conventional counterparts. However, there is a limit to the level
of CAFE increase attributable to the sale of alternative fuel vehicles — 0.9 mpg in
MY2004 and thereafter.
In 2002, the Department of Transportation (DOT) concluded that the CAFE
incentives have been “successful in stimulating a significant increase in the
availability of alternative fuel vehicles.”198 The majority of these vehicles are dual-
fuel and flex-fuel vehicles, which have the capability of fueling on alternative fuels
194 Automotive Fuel Efficiency Act of 1980 (P.L. 96-425).
195 49 U.S.C. 32904 (b)(6)(B).
196 69 Federal Register 21883, Nissan North America, Inc.; Petition for Exemption From
Two-Fleet Rule Affecting Compliance With Passenger Automobile Fuel Economy Standards.
197 P.L. 100-94.
198 U.S. Department of Transportation, U.S. Department on Energy, and U.S. Environmental
Protection Agency, Effects of the Alternative Motor Fuels Act CAFE Incentives Policy.
March 2002. p. iii.
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or gasoline.199 However, DOT also stated that the availability of alternative fuel has
not kept pace with the increase in the number of alternative fuel vehicles.200 Critics
of the incentives argue that the sale of dual-fuel natural gas/gasoline vehicles and
flex-fuel ethanol/gasoline vehicles has allowed automakers to sidestep CAFE
requirements without affecting gasoline consumption. Their argument is supported
by the findings of the Energy Information Administration, which indicate that the
majority of these vehicles are sold and used as traditional gasoline-powered
vehicles.201 Further, despite the number of vehicles on the road, alternative fuel use
for transportation is still low compared to petroleum (see Figure 16), and the
majority of alternative fuel use in the United States is as a blending component in
conventional gasoline, not as a fuel in alternative fuel vehicles.202
Figure 16. Estimated Consumption of Vehicle
Fuels, 2003
Equivalent Gasoline Gallons
132,961,000
2,232,383
39,930,170
Alternative Fuels
Gasoline
Diesel Fuel
Source: U.S. Energy Information Administration,
Alternatives to Traditional Transportation Fuels 2003.
Safety Concerns. One of the key policy concerns over CAFE has been its
effect on vehicle safety. A key criticism of the CAFE standards is that more traffic
fatalities have resulted from the enactment of the standards. CAFE critics argue that
199 Dual-fuel vehicles are capable of operating on either an alternative or conventional fuel,
depending on which mode is chosen. Flex-fuel vehicles are capable of operating on an
alternative fuel, a conventional fuel, or any mixture of the two. In the United States, most
of these vehicles are operated on gasoline.
200 Ibid. p. iii
201 U.S. Energy Information Administration, Alternatives to Traditional Transportation Fuels
2003.
202 Ibid.
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one of the cheapest and easiest ways to make vehicles compliant with CAFE is to
reduce their size and weight, thus reducing fuel consumption. They argue that as a
result of the standards, vehicle size and weight rapidly decreased from the early
1970s to the late 1970s, and that more traffic deaths have resulted.203 Opponents of
this view argue that other factors (such as size, as opposed to weight) may have
played a role in the number of fatalities, and that the effects of CAFE on safety are
more limited.204
The conclusion that traffic fatalities have increased from an earlier downsizing
or downweighting of the passenger car fleet could inform any future policy
discussion on CAFE. Such a conclusion does not necessarily mean, however, that
any future increases in CAFE would result in more traffic deaths. The National
Research Council concluded that given sufficient lead time, and with proper design,
CAFE can be improved significantly without jeopardizing overall passenger safety.
They argue that new technologies can be implemented to improve fuel economy
without changing other vehicle specifications, if manufacturers are given sufficient
lead time.205 Further, in the case of a collision between to vehicles of different
weights, passengers in the lighter vehicle are more likely to be hurt or killed. It has
been argued that if the heaviest vehicles were downweighted (larger light trucks),
while keeping the weight of smaller vehicles constant, any increased risk to
passengers in the heavier vehicles could be offset by a decreased risk to the
passengers in the smaller vehicles. Therefore, the specific structure of changes to
CAFE would likely affect the safety of the vehicle fleet.206
Effects of CAFE on the Auto Industry. It is difficult to separate the
economic effects of the CAFE standards from other factors affecting the auto
industry. However, the total effects of CAFE on industry employment and output
seem to be limited. According to the National Research Council:
Examination of the data shows little evidence of a dramatic impact of fuel
economy regulations. General economic conditions, and especially globalization
of the automobile industry, seem to have been far more important than fuel
economy regulations in determining the profitability and employment shares of
the domestic automakers and their competitors.207
However, CAFE standards have affected the ownership of U.S. manufacturing plants,
if not the total level of employment. As was stated above, the two-fleet rule has had
a noticeable impact on the parts used in foreign-owned U.S. facilities. This effect
seems to be even more likely in the future, as more and more foreign manufacturers
203 It should be noted that traffic deaths, measured as a ratio of the number of vehicles, the
number of vehicle-miles traveled, or population, have dropped significantly since the 1970s.
The area of debate is whether the number of deaths would have been even lower in the
absence of CAFE standards.
204 National Research Council, op. cit. p. 117.
205 Ibid., p. 4.
206 Ibid., p. 119.
207 Ibid., p. 22.
CRS-91
locate plants in the United States. Those manufacturers not grandfathered by the
two-fleet rule may choose to assemble vehicles using foreign parts, instead of parts
made in North America.
Further, it is likely that the CAFE standards have given a competitive advantage
to some manufacturers over others. Those auto makers with a history of building
smaller and more efficient vehicles have had less need to adjust their design and
manufacturing, as well as marketing,208 in response. If CAFE standards were
tightened, the advantage for small car producers would likely be expanded.
In addition to competitive effects of the CAFE structure, the alternative fuel
CAFE incentives have undoubtedly motivated auto makers to produce more
alternative fuel vehicles then they might have otherwise. Whether or not these
vehicles have helped reduce petroleum consumption, several automakers have
focused on producing flex-fuel and dual-fuel vehicles to increase their CAFE
averages. In some cases, the result has been the use of additional components to
make the vehicle flex fuel compatible — a capability consumers may not even know
their vehicles have, and thus never use.
Current Issues. Several issues have dominated the discussion of fuel
economy standards over the past few years. At the federal level, these include a
proposal by NHTSA to examine the structure of the CAFE system, legislative
proposals to increase CAFE standards for cars and/or light trucks, and debate over
whether to continue the CAFE alternative fuel vehicle incentives. Other relevant
issues include state actions to control greenhouse gas emissions from automobiles,
and actions by other countries to set fuel economy standards or greenhouse gas
emissions limits.
California’s Greenhouse Gas Rule. Perhaps the most significant current
issue regarding automotive fuel economy is the decision by the state of California to
require carbon dioxide emissions standards for passenger cars and light trucks.
Enacted in 2002, California’s A.B. 1498 requires the state to promulgate regulations
to achieve the maximum feasible and cost-effective reduction of greenhouse gases
from cars and trucks.209 The regulations, adopted by the California Air Resources
Board on September 24, 2004, require a reduction of greenhouse gas emissions of
30% by 2016. The regulation covers passenger vehicles, but would not affect heavier
vehicles such as commercial trucks or buses.
Under the Clean Air Act, California may petition the Environmental Protection
Agency to establish its own emissions standards for automobiles, as long as those
standards are at least as stringent as the federal standard, and as long as the standards
are enacted to meet “compelling and extraordinary conditions.”210 However, there
208 It is argued that some manufacturers subsidize the sale of their smaller vehicles in order
to improve their fleet fuel economy and avoid paying CAFE penalties.
209 Carolyn Whetzel, “California Agency Adopts Nation’s First Rule to Limit Greenhouse
Gases from Vehicles,” Daily Environment Report. September 27, 2004. p. A-1.
210 Clean Air Act, section 209. 42 U.S.C. 7543.
CRS-92
is no current federal standard for greenhouse gas emissions; federal standards focus
on designated pollutants with direct effects on air quality and health, including
ground-level ozone (smog) and carbon monoxide. Critics argue that greenhouse
gases are not designated pollutants, and that the greenhouse gas standard is a de facto
fuel economy standard, since reducing emissions of carbon dioxide — the key
greenhouse gas — requires reductions in fuel consumption. Under CAFE, states do
not have the authority to set their own mileage standards; authority remains solely
with the federal government.211
Several auto dealers and a group representing auto makers have challenged the
California auto greenhouse gas standard in court.212 Two of the plaintiffs’ main
arguments are that California is preempted from setting a fuel economy standard
under CAFE, and that greenhouse gases are not a pollutant under the Clean Air
Act.213 California officials maintain that they have the authority under the Clean Air
Act to regulate vehicle greenhouse gas emissions.
The outcome of this case will likely have major effects on the U.S. auto
industry. If the standards are upheld, New York and other states are likely to adopt
California’s standards. The state of California estimates that complying with the
standard could cost $1,000 per vehicle by 2016, while opponents argue that costs
could be as much as $3,000 per vehicle. While reducing greenhouse gas emissions
and fuel consumption, the new standards would likely increase purchase costs. Such
standards would likely have varying effects on automakers depending on the fuel
efficiency of their products.
International Fuel Economy Standards. Over the past few years, several
countries have acted to increase passenger vehicle fuel economy, generally as a
strategy to reduce greenhouse gas emissions and comply with mandated emissions
limits under the Kyoto Protocol on climate change.214 Other countries have promoted
greater fuel economy as part of a strategy to reduce energy consumption. Most
recently, automakers and the Canadian government signed a Memorandum of
Understanding (MOU) on automotive greenhouse gas emissions. All major
automotive manufacturers have agreed to reduce emissions from passenger cars and
211 49 U.S.C. 32919.
212 Central Valley Chrysler v. California Air Resources Board, E.D. Cal., No. CV-
F0466663, December 7, 2004.
213 Carolyn Whetzel, “Automakers, Dealers Challenge Regulation in California to Limit
Vehicle Carbon Dioxide,” Daily Environment Report. December 8, 2004. p. A-12.
214 The Kyoto Protocol entered into force on February 16, 2005. Developed countries must
meet country-specific emission reduction targets. However, the United States did not ratify
the treaty, and thus is not bound by its requirements. For more information on the Kyoto
Protocol, see CRS Report RL30692, Global Climate Change: The Kyoto Protocol, by Susan
R. Fletcher.
CRS-93
light trucks roughly 6% below the Canadian government’s 2010 reference case.215
If the reference case is accurate, this could mean an increase in Canadian new
passenger vehicle fuel economy of as much as 25% or more. However, if the
reference case overstates growth in fuel consumption, then the overall effect of the
agreement could be lessened. Likewise, if the reference case underestimates
consumption growth, than reducing consumption below the reference case could
require an even more drastic increase in fuel economy. In addition to Canada, the
European Union and Australia have established voluntary greenhouse gas and fuel
economy standards, respectively; Japan and China have established mandatory fuel
economy standards.216
Emissions Standards
Motor vehicles are a major source of key air pollutants. In 2001, highway
vehicles accounted for over 50% of all U.S. carbon monoxide (CO) emissions, 35%
of nitrogen oxide (NOx) emissions, and nearly 30% of volatile organic compound
(VOC) emissions (Figure 17). These pollutants either directly affect human health
through respiratory distress, or promote the formation of ground-level ozone (smog).
However, as a direct result of state and federal emissions standards for light- and
heavy-duty vehicles, total emissions from highway vehicles have dropped
significantly, largely due to tighter emissions standards (Figure 18). Between 1970
and 2002, annual carbon monoxide emissions from highway vehicles dropped 62%,
nitrogen oxide emissions dropped 42%, VOC emissions dropped 73%, and PM-10
(particulate matter of 10 microns diameter or greater) emissions dropped 58%.
California first enacted motor vehicle emissions standards in the 1960s, in
response to worsening air quality in the state, especially in the Los Angeles area. In
response to growing national concerns over air quality, as well as concerns raised by
auto makers over varying state standards, the federal government promulgated
national emissions standards (for light-duty vehicles) in the 1970s. Since that time,
emissions standards have been tightened several times, both in California and
federally. In addition, emissions standards have been enacted for heavy-duty
highway vehicles, as well as non-highway mobile sources, from all-terrain vehicles
to heavy construction equipment.
While annual emissions have dropped since the development of vehicle and
engine standards, attaining air quality standards — especially in the largest urban
areas — remains a difficult goal and a major policy issue. As was stated above,
highway vehicles are still a key emitter of pollutants. New technologies and new
strategies will need to be employed if further vehicle emission reductions are to be
achieved.
215 Memorandum of Understanding Between the Government of Canada and the Canadian
Automotive Industry Respecting Automobile Greenhouse Gas Emissions. April 5, 2005.
Windsor, Ontario.
216 Feng An and Amanda Sauer. Pew Center on Global Climate Change. Comparison of
Passenger Vehicle Fuel Economy and Greenhouse Gas Emissions Standards Around the
World. December, 2004. Arlington, VA.
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Figure 17. U.S. Transportation Emissions, 2002
million short tons
CO
NOx
62.16
7.64
4.09
25.44
24.45
9.65
VOC
PM-10
2.69
4.54
0.31
21.64
0.2
9.31
Highway Vehicles
Other Transportation
Other Sources
Figure 18. Pollutant Emissions from Highway Vehicles, 1970-
2002
million short tons
200
20
160
15
120
10
80
5
40
0
0
1970
1975
1980
1985
1990
1995
2000
CO (Y1)
NOx (Y2)
VOC (Y2)
PM (Y2)
Source for Figs. 17-18: U.S. Environmental Protection Agency, National Emission Inventory Air
Pollutant Emission Trends
[http://www.epa.gov/ttn/chief/trends/trends02/trendsreportallpollutants010505.xls].
CRS-95
New Emission Standards. In the early 2000s, the Environmental Protection
Agency (EPA) promulgated new standards for both light- and heavy-duty vehicles,
through its authority under the Clean Air Act. In February 2000, EPA promulgated
“Tier 2” regulations for passenger cars and light trucks, reducing allowable NOx
emissions by 77% to 95% by MY2009 as compared to pre-2004 standards.217
Further, for the first time, all passenger cars and light trucks will be held to the same
emissions standards.218 EPA estimates that the ultimate cost per vehicle will range
from $70 to $250, depending on the type of vehicle — cost estimates increase with
vehicle size and power.219
In addition to the light-duty Tier 2 standards, in January 2001, EPA promulgated
new standards for heavy-duty (primarily diesel) engines. Beginning in MY2007,
heavy-duty engine NOx standards will be reduced by 90% from MY2004 standards.
These standards will be fully phased in by MY2010.220 EPA estimates that the new
standards will cost $1,200 to $1,900 per vehicle, or roughly 1% of the cost of a new
truck or bus.
Effects of Emissions Standards on the Auto Industry. Over the past
four decades, auto emissions standards have directly affected the auto industry.
Before the 1960s, there was virtually no market for auto emission control devices.
The California standards of the 1960s and the federal standards of the 1970s created
a market for the catalytic converter, now a standard component in any passenger car
or light truck. An entire category of auto parts suppliers — emission control
manufacturers — has evolved since the 1960s. Further, the emissions profile has
become a key component of a new vehicle’s design, especially in terms of the
vehicle’s engine and exhaust systems.
As can be seen from Figure 18, highway vehicle emissions have dropped
significantly from the 1970s, and they can be expected to continue to decline with the
introduction of new technologies to meet the Tier 2 light-duty vehicle standards and
the 2007 heavy-duty standards. Despite concerns about costs of meeting increasingly
stringent emissions standards, in the past auto makers have succeeded in meeting the
challenge, even when the technology to meet the standard had not necessarily been
identified at the time the standards were initially promulgated. The costs of meeting
the standards have likely limited auto manufacturer’s profits, but by and large the
costs of compliance have been lower than those predicted by policy makers when the
standards were promulgated. However, whether this will be true of the new
standards remains a matter for speculation.
217 65 Federal Register 6698. For more information, see CRS Report RS20247, EPA’s Tier
2 Emission Standards for New Motor Vehicles: A Fact Sheet.
218 Before the Tier 2 standards, passenger cars and light trucks were regulated separately for
emissions, as they currently are for fuel economy.
219 U.S. Environmental Protection Agency (EPA), Clean Vehicles + Clean Fuel = Clean Air.
January 2004.
220 66 Federal Register 5002. For more information, see CRS Report RL30737, Diesel Fuel
and Engines: An Analysis of EPA’s New Regulations, by Brent Yacobucci, et al.
CRS-96
It should be noted that there are differential effects from emissions standards.
On average, smaller vehicles with smaller engines tend to emit less than larger
vehicles with larger engines. Therefore, those manufacturers that produce larger
vehicles may have more difficulty and likely need to invest more to comply with the
standards. As the Tier 2 standards eliminate the separate treatment for passenger cars
and light trucks, the effects on large vehicle producers may increase. Therefore, auto
makers that focus on small cars may be better positioned than manufacturers that
produce a larger proportion of light trucks.
In addition to the above distinctions, separate emissions standards for California
(as well as other states that adopt the California standards) could expand the
competitive advantage for small vehicle producers, as the California standards are
even more stringent than the Tier 2 standards.
Fuel Quality. Improved fuel quality is a key component in the success of any
technology to improve vehicle emissions. The elimination of lead in gasoline paved
the way for the use of catalytic converters in automobiles, in addition to eliminating
lead itself as a source of air pollution.
To meet more and more stringent vehicle emissions standards, even cleaner fuel
is necessary. To allow the use of advanced catalysts and other technologies, fuel
must be virtually sulfur-free. As part of EPA’s Tier 2 and heavy-duty engine
emissions strategies, by 2010 gasoline sulfur content will be reduced by over 90%,
while diesel sulfur content will be reduced by 97%. It is expected that these
reductions in sulfur content will improve the durability of new emission control
systems, potentially reducing the cost to the auto industry. It should be noted,
however, that these improvements have costs, and that fuel prices will likely increase
as a result. It is possible that if fuel costs increase too much, miles driven will
decrease, limiting demand for new vehicles.
Current Issues. While EPA’s management of the implementation of new
emissions regulations is a matter of Congressional oversight, there has been limited
Congressional action on auto emissions in recent years.
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Appendix Table 1. North American Vehicle Production, by
Country
(Millions of units)
United States
Canada
Mexico
% of
% of
North
% of North
North
America
America
America
Total vehicle
Year
Vehicles
total
Vehicles
total
Vehicles
total
production
1977
12.7
85.8%
1.8
12.2%
0.3
2.0%
14.8
1978
12.9
85.4%
1.8
11.9%
0.4
2.6%
15.1
1979
11.5
85.2%
1.6
11.9%
0.4
3.0%
13.5
1980
8.0
80.8%
1.4
14.1%
0.5
5.1%
9.9
1981
7.9
80.6%
1.3
13.3%
0.6
6.1%
9.8
1982
7.0
80.5%
1.2
13.8%
0.5
5.7%
8.7
1983
9.2
83.6%
1.5
13.6%
0.3
2.7%
11.0
1984
10.9
83.8%
1.8
13.8%
0.3
2.3%
13.0
1985
11.6
82.9%
1.9
13.6%
0.5
3.6%
14.0
1986
11.3
83.7%
1.9
14.1%
0.3
2.2%
13.5
1987
10.9
84.5%
1.6
12.4%
0.4
3.1%
12.9
1988
11.2
81.8%
2.0
14.6%
0.5
3.7%
13.7
1989
10.9
80.7%
2.0
14.8%
0.6
4.4%
13.5
1990
9.8
78.4%
1.9
15.2%
0.8
6.4%
12.5
1991
8.8
75.2%
1.9
16.2%
1.0
8.5%
11.7
1992
9.7
75.8%
2.0
15.6%
1.1
8.6%
12.8
1993
10.9
76.8%
2.2
15.5%
1.1
7.7%
14.2
1994
12.2
78.2%
2.3
14.7%
1.1
7.1%
15.6
1995
12.0
78.4%
2.4
15.7%
0.9
5.9%
15.3
1996
11.8
76.6%
2.4
15.6%
1.2
7.8%
15.4
1997
12.1
75.2%
2.6
16.1%
1.4
8.7%
16.1
1998
12.0
74.5%
2.6
16.1%
1.5
9.3%
16.1
1999
13.0
73.9%
3.1
17.6%
1.5
8.5%
17.6
2000
12.8
72.3%
3.0
16.9%
1.9
10.7%
17.7
2001
11.4
72.2%
2.5
15.8%
1.9
12.0%
15.8
2002
12.3
73.7%
2.6
15.6%
1.8
10.8%
16.7
2003
12.1
74.2%
2.6
16.0%
1.6
9.8%
16.3
Source: Ward’s Communications. Ward’s Automotive Yearbook 2004. p. 117.
Note: The term “production” does not mean that all components used in assembling the vehicle were
necessarily from the country of final assembly.
CRS-98
Appendix Table 2. North American Motor Vehicle Production by
Company
(Thousands of Units, Cars and Light Trucks)
A. Big Three
1979
1990
2000
2003
GM
7,057
4,977
5,631
5,301
— USA
6,270
4,127
4,223
3,890
— Canada
787
714
963
940
— Mexico
†
136†
445
471
Ford
3,601
3,410
4,613
3,725
— USA
3,069
2,723
3,759
3,119
— Canada
531
517
630
462
— Mexico
†
170†
224
144
Chrysler
1,692
1,813
2,893
2,488
Group*
— USA
1,445
1,253
1,784
1,731
— Canada
247
394
704
448
— Mexico
†
167†
405
309
Other**
22
1
40
Big 3 Totals
12,350
10,222
13,138
11,554
— USA
10,785
8,125
9,767
8,780
— Canada
1,565
1,624
2,297
1,850
— Mexico
—
473
1,074
924
Source: Automotive News Market Data Book (1980, 1991, 2004), except as noted, for both parts 2A
and 2B.
* Unit of DaimlerChrysler; Chrysler Corp. prior to 2000 data. DaimlerChrysler’s U.S. production unit
of Mercedes Benz is under transplants. Chrysler totals for 1979 include Jeep, then made by
American Motors.
** AM General specialty vehicles for government purchase, 1990; Hummer, 2000-2003.
† Mexican data for 1979 not available in source; data for 1990 from Ward’s Automotive Yearbook
1991.
CRS-99
Appendix Table 2 (Continued)
B. Foreign-
Based Mfrs.
1979
1990
2000
2003
Toyota
484
1,153
1,350
— USA
217
625
728
— NUMMI
205
344
395
(w/GM)
— Canada
61
184
227
Honda
537
1,023
1,259
— USA
433
677
845
— Canada
104
327
392
— Mexico
19
22
Nissan
371
690
814
— USA
235
377
522
— Mexico
136†
313
292
Mitsubishi
148
222
174
(US)
BMW (US)
84
166
Subaru-Isuzu
72
209
122
(US)
Mercedes
80
84
Benz (US)
Volkswagen
175
193†
426
287
(US/Mex.)***
Other‡
287
215
150
Transplant
175
2,093
4,102
4,407
Totals
— USA
175
1,493
2,726
3,120
— Canada
271
619
670
— Mexico
329
758
617
*** 1979: U.S. production only; 1990-2003: Mexican production.
† Mexican data for 1979 not available in source; data for 1990 from Ward’s Automotive Yearbook
1991.
‡ Includes Mazda-Ford AutoAlliance, GM-Suzuki CAMI, Hyundai and Volvo (Canada), Renault
(Mexico) for relevant years.
CRS-100
Appendix Table 3. U.S. Motor Vehicle Production by Company
Type
Car Production
Light Truck/SUV Production
1990
2003
1990
2003
Units
Share
Units
Share
Units
Share
Units
Share
(mils.)
(%)
(mils.)
(%)
(mils.)
(%)
(mils.)
(%)
GM
2.65
43.6
1.39
30.8
1.47
41.3
2.48
33.9
Ford
1.38
22.7
0.82
18.2
1.39
39.0
2.29
31.3
Chrysler*
0.73
12.0
0.36
8.0
0.53
14.8
1.36
18.6
Total Big
4.76
78.3
2.57
57.0
3.38
95.1
6.13
83.9
Three
Foreign-Based
1.32
21.7
1.94
43.0
0.17
4.9
1.18
16.1
Mfrs.
Total U.S.
6.08
100.0
4.51
100.0
3.55
100.0
7.31
100.0
Production
Source: Ward’s Automotive Yearbook, 2004.
* Chrysler Corp. prior to 1999, now Chrysler Group of DaimlerChrysler.
CRS-101
Appendix Table 4. U.S. Motor Vehicle Sales
(units in millions)
Total Sales
Transplants
Imports
Light
Light
Light
Year
Cars
Trucks
Total
Cars
Trucks
Total
Cars
Trucks
Total
1979
10.7
3.5
14.2
0.2
0.0
0.2
2.3
0.5
2.8
1980
9.0
2.5
11.5
0.2
0.0
0.2
2.4
0.5
2.9
1981
8.5
2.3
10.8
0.2
0.0
0.2
2.3
0.5
2.8
1982
8.0
2.6
10.6
0.1
0.0
0.1
2.2
0.4
2.6
1983
9.2
3.1
12.3
0.1
0.0
0.1
2.4
0.5
2.9
1984
10.4
4.1
14.5
0.2
0.0
0.2
2.4
0.6
3.0
1985
11.0
4.7
15.7
0.3
0.0
0.3
2.8
0.8
3.6
1986
11.5
4.9
16.4
0.4
0.1
0.5
3.2
0.9
4.1
1987
10.3
4.9
15.2
0.5
0.1
0.6
3.2
0.9
4.1
1988
10.5
5.1
15.6
0.6
0.1
0.7
3.0
0.6
3.6
1989
9.8
4.9
14.7
0.8
0.1
0.9
2.7
0.5
3.2
1990
9.3
4.8
14.1
1.1
0.2
1.3
2.4
0.6
3.0
1991
8.2
4.2
12.4
0.9
0.2
1.1
2.0
0.5
2.5
1992
8.2
4.9
13.1
1.2
0.3
1.5
1.9
0.4
2.3
1993
8.5
5.7
14.2
1.3
0.4
1.7
1.8
0.4
2.2
1994
9.0
6.4
15.4
1.5
0.5
2.0
1.7
0.4
2.1
1995
8.6
7.0
15.6
1.6
0.4
2.0
1.5
0.4
1.9
1996
8.5
7.0
15.5
1.9
0.5
2.4
1.3
0.5
1.8
1997
8.3
7.2
15.5
1.9
0.5
2.4
1.4
0.6
2.0
1998
8.2
7.8
16.0
2.1
0.6
2.7
1.4
0.7
2.1
1999
8.7
8.7
17.4
2.1
0.7
2.8
1.8
0.8
2.6
2000
8.9
9.0
17.9
2.2
0.9
3.1
1.6
0.9
2.5
2001
8.4
9.1
17.5
2.2
1.0
3.2
2.1
1.0
3.1
2002
8.1
9.0
17.1
2.1
1.0
3.1
2.2
1.1
3.3
2003
7.6
9.4
17.0
2.1
1.1
3.2
2.1
1.2
3.3
Sources: Ward’s Motor Vehicle Facts & Figures (from 2000), various years; and, American
Automobile Manufacturers’ Association. Motor Vehicle Facts & Figures (through 1999), various
years.
CRS-102
Appendix Table 5. Details of U.S. Automotive Trade
(All totals in billions of dollars)
1990
2000
2004
Trading partners
Exports
Imports
Exports
Imports
Exports
Imports
Canada — Vehicles
8.1
20.4
14.9
40.9
18.4
46.5
— Auto Parts
13.7
9.1
29.6
17.6
29.9
19.2
Mexico — Vehicles
0.3
2.9
3.8
21.0
4.1
19.1
— Auto Parts
4.3
4.5
12.6
18.2
11.3
21.4
NAFTA Totals:
8.4
23.3
18.7
61.9
22.5
65.6
— Vehicles
— Auto Parts
18.0
13.6
42.2
35.8
41.2
40.6
European Union*
1.7
9.3
2.2
22.2
6.1
31.0
— Vehicles
— Auto Parts
1.9
4.6
4.8
7.7
4.6
10.9
Japan — Vehicles
0.9
23.9
0.8
32.6
0.5
32.9
— Auto Parts
0.9
10.4
2.2
14.5
1.5
15.4
Korea — Vehicles
0.1
1.1
0.0
4.9
0.1
10.0
— Auto Parts
0.2
0.7
0.5
1.1
0.5
1.9
China — Vehicles
0.0
0.0
0.0
0.0
0.1
0.1
Auto Parts
0.0
0.1
0.2
1.6
0.6
3.8
World — Vehicles
13.6
60.6
24.7
127.0
34.6
141.8
— Auto Parts
22.9
31.7
53.7
67.0
52.6
80.4
Source: U.S. International Trade Commission. Trade Dataweb, from U.S. Harmonized Tariff
Schedule, using Department of Commerce definitions.
* Includes the 15 members of the European Union as of January 1, 1995, for all data years.