COMPETITIVE SURVIVAL: PRIVATE INITIATIVES, PUBLIC POLICY, and the NORTH AMERICAN AUTOMOTIVE INDUSTRY PREPAREDFOR THE US-CANADA AUTOMOTIVE SELECT PANEL BY THE OFFICE FOR THE STUDYOF AUTOMOTIVE TRANSPORTATION(OSAT) UNIVERSITY OF MICHIGAN TRANSPORTATION RESEARCH INSTITUTE ANN ARBOR, MICHIGAN June, 1992 1 .# REPORT # 92-3 iQ,j+*r~ + The University of Michigan a ,,,, UMTRl Transportation Research Institute TABLE OF CONTENTS ACKNOWLEDGMENT ................................................................................................1 FORE WORD ................................................................................................................3 EXECUTIVE SUMMARY ....................... ..............................................................4 Why the Traditional North American Automotive Industry Is Important ..........4 Current Status of the North American Automotive Industry ..............................5 The Global Context of the Automotive Industry ................................................6 Causes of the North American Automotive Industry's Decline ..........................7 Performance Improvements by the North American Automotive Industry ........ 8 The Imperative of Global Free Trade............................. .. ....................... 9 What Lies Ahead for the Traditional North American Automotive Industry .......................................................................................................... 9 Recommended Actions for Improving the Industry's Competitiveness .............. 10 Private Initiatives ................................................................................................12 Public Initiatives ......................... ...... ........................................................15 I . INTRODUCTION ......................................................................................................22 Definition of Terms ....................................................................................... 23 North America .........................................................................................23 North American Automotive Industry ...............................................23 Traditional North American Automotive Industry .................................23 Competitiveness ....................................................................................24 Vehicle Production Source.................................................................... 25 Industry in Turmoil .......................... ........................................................25 Market Share Erosion ..........................................................................................25 Production Levels ............................ ..............................................................27 Profits ........................................................................................................28 Investment ........................................................................................................ 29 Research & Development ............................................................................... 30 Employment ......................................................................................................... 30 A Competitive Cnsis ...................................................................................... 31 Possible Future of the North American Industry .............................................. 33 Structure of Report .............................................................................................35 I1 . ECONOMIC SIGNIFICANCE OF THE AUTOMOTIVE INDUSTRY .................37 Differences Between the Traditional Industry and the New Entrants ................37 Employment and GNP .................................................................................. 39 Linkage to Other Industries-the Multiplier Effect .......................................... 40 Minority Opportunity ............................................................ ....40 Contribution to Government Revenues ...............................................................42 US Tax Payments ................................................................................ 42 Increased US Tax Payments if 1978 Market Share Were Restored ....... 43 Canadian Federal and Provincial Income Taxes .....................................44 Potential Economic Impact of Increased Vehicle Production in the US ............45 Potential Economic Impact of Increased Vehicle Production in Canada ........... 48 Summary ......................................................................................................... 49 THE GLOBAL AUTOMOTIVE INDUSTRY .............................................. 50 Global Production and Market Share ..................................................................51 The European Automotive Industry ....................................................................56 Current Status ....................................................................................... 57 European Community-Japan Auto Agreement ................................. 58 Expanding North American-European Linkages ....................................58 The Emergence of Japan's Automotive Industry ................................................59 South Korea's Automotive Industry ......................... .. ................................61 Components ..........................................................................................63 Mexico's Automotive Industry .......................................................................... 63 Successful Component Arrangements ................................................ 64 Future Motor Vehicle Sales Patterns ............................................................... 67 Summary ...........................................................................................................68 IV . COMPETITIVEASSESSMENT OF THE NORTH AMERICANINDUSTRY ......................69 Defining the Competitive Challenge ..............................................................69 Market Size and Demographics ....................................................................70 Supplier Quality ......................................................................................76 Productivity and Total Cost Reduction ............................................................78 Manufacturing Cost Studies ..................................................................78 Plant Labor Productivity .............................................................. 79 Product Development Cycles ..................................................................81 Supplier Productivity ........................................................................... 82 Labor Productivity ......................... ... ............................................82 Total Factor Productivity ........................................................................84 Summary ................................................................................................87 Pricing ............................................................................................................ 88 Parts Pricing ...................... ................................................................ 92 Capacity ..............................................................................................................93 Profit Trends ......................... ..... .................................................95 Investment Levels ...................................................................................... 98 Fuom Capital Needs ...................... ....................................................101 Human Resources ....................... .......... .................................................105 Manufacturer-Supplier Relations ........................................................................108 The Role of the Supplier .................................................................... 108 Factors in Restructuring ..........................................................................109 Vertical Integration .............................................................................. 109 Evolving Relationships .................................................................... 110 Summary ........................... .......... ........... 113 Comparison of North American and Japanese New Entrant Suppliers .............. 113 The Automotive Industry Future ........................................................................ 115 Summary .............................................................................................................117 V. PUBLIC POLICY ISSUES ........................................................................................1 1 8 Comparative Overview of Public Policies .................................................. 119 Perceptions of the Automotive Industry by Government Officials .................... 123 The Impact of Government Regulations .............................................................124 The Cost of Automotive Capital .......................................... ...........................128 The Cost of Health Care and its Impact on Competitiveness .............................136 International Comparisons ......................................................................137 System Comparisons ...............................................................................138 Health Care Costs of