Two Factors in the Demise of the American Automobile Brands

General Motors is such a difficult position financially that their auditors have stated that they cannot see how the company cannot stay out of Chapter 11. Chrysler which is privately held and does not have to publish a financial report is believed to be headed the same way. Some experts speculate that Chrysler may be in a worse position.

The likelihood that one of the American brands will gone in five years is high (I think Chrysler will be gone). If it survives another ten years GM will likely be a shadow of its current self.

In the last three days as I have driven in the Washington DC area I have noticed the name plates on the cars around me. In doing so I have seen evidence as to why the American three automakers are in such dire straits. Excluding trucks I saw far more Toyotas, Hondas, Nissans, BMWs, Mercedes, Lexus than all the GM name plates combined. I even saw more Volvos or Porsche Boxers than Chryslers automobiles.

Less than one in six cars were North American name plates. In the mid 90s the American brands would have been about half the vehicles on the road. Sales declines are evidenced around us, but the impact of those declines on the bottom line is not as evident to the general public.

If we go back 25 years ago the automobile workforce was robust and vast. Today, a good part of those workers are retired or nearing retirement. The pool of retired automobile employees is humongous for the American brands whereas the other brands that make cars in North America have few employees. Hence the health care and retire benefits for the American brands are extremely larger than their competitors, and with declining sales of the last decade, those costs represent a growing portion of the vehicle’s sales price. This means that the potential profit margins have become slimmer for the American brands. If the American brands had the same legacy costs of their competitors, their vehicles would be selling below their foreign name plate competitors. Quality differences are not as vast as it was fifteen years ago as several American lines are now being rated amongst best of class.

Foreign name plates do not have the same legacy costs even though they too have a growing retirement pool in their home countries. In Japanese and European brands have lower legacy costs because in those countries have different retirement and health care systems that have enabled their firms to beat the American brands into submission not only by having had a quality advantage for decades but a health care and retirement advantage that allowed them to sell their vehicles more cheaply than the American brands.

In essence, two factors behind the demise of the American automobile industry are the American retirement system and the American healthcare system. The competitive field has not been a level.