Understanding the Reasons Behind the Closure of a 31-Year-Old Auto Industry

The auto industry plays a critical role in our economy. Even though its contribution represents only five percent of total GDP, its market presence can be substantial.

Consumer expenditures and their allocation to automobiles are affected, which has an impact on car sales and overall manufacturing shipments. Weak production can have ripple effects in industries like rubber, steel and glass supply chains.

What Happened?

Detroit auto companies were among the most prestigious and profitable in America during the early 20th century, thanks to Henry Ford's restless innovations - such as creating the modern assembly line and his efforts to "Americanize" immigrant workers - such as his modern assembly line and efforts to "Americanize" immigrant workers. Ford employees enjoyed middle-class lifestyles such as owning homes; saving for college educations for their children; enjoying lakeside summer cottages within communities - qualities historians would later call "embourgeoised."

By the late 1970s, however, the car industry had experienced several issues: energy crises and recession, foreign competition and quality and safety problems. Chrysler, General Motors and Ford began losing market share as consumers increasingly turned towards fuel-efficient foreign manufactured cars for transportation needs.

Few auto-related businesses survived, as production gradually decentralized. The Big Three moved their operations out to suburbs with "greenfields," then eventually into small towns with automated assembly lines; becoming one of the defining symbols for urban ills and decline. Detroit came to represent all this decline.

Celso Duque spends his days at the General Motors plant in Hamtramck attaching doors to sedan bodies at D-Ham. When hearing that it would close last fall was "a blow", Celso found himself bereft and devastated.

Duque believes one of the primary contributors to D-Ham's closure was an overall shift toward SUVs and trucks. Many employees trained to work on sedans have become less in demand; those remaining are either moving to other GM plants, retraining for new jobs, or leaving altogether.

As a result, the plant has seen its workforce fall from 1,500 to 800 in only several months, due to the pandemic and declining orders for SUVs, which are expected to continue.

Even in spite of these setbacks, many women we surveyed reported feeling encouraged to continue working in the automotive sector. Yet many respondents indicated the industry needed significant changes in its culture; more understanding must be gained regarding barriers to female representation within this industry and more leadership support is essential for diversity and inclusion initiatives.

Why Did It Happen?

Before the financial crisis hit, carmakers had enjoyed strong relations with their public. That bond began to fray during the Great Recession as sales plummeted and losses mounted. Officials balked at bailing out GM and Chrysler after just having approved unprecedented bailouts of the financial industry; public attitudes hardened against both firms.

Many critics of bailing out the Big Three focused on economic theory, contending that free markets should allow companies to fail or thrive independently. Domestic carmakers had contributed substantially to their own demise by pushing high-profit SUVs and pickup trucks at consumers despite rising gas prices; as Americans switched over to more fuel efficient vehicles and sales suffered across domestic carmakers' sales and profits.

MacDuffie notes that had the automakers not been bailed out, political backlash would have erupted against them as it did against banks which received aid. MacDuffie notes this could have hurt more survivors of car accidents than banks did.

As well as competing against high-tech firms like Tesla and others, the Big Three faced structural challenges that made selling cars increasingly difficult. Consumers increasingly used rideshare services such as Uber and Lyft rather than purchasing vehicles, opting instead for one car households rather than two; or working from home or relying on mass transit instead.

Due to these and other factors, industrial production indexes for vehicle manufacturing plummeted to its lowest point since 2009. Although production has slowly recovered since March 2021 levels, vehicle production remains below its pre-crisis peak levels.

This drop is compounded by factory shutdowns due to coronavirus pandemic and then global shortage of semiconductor chips, leaving vehicle inventory levels near record lows at dealerships across the United States and beyond. As consumer options decline when they're ready to buy vehicles, lower demand will continue having long-term repercussions for the industry, even once restrictions are lifted and production resumes.

What Can Be Done?

The dramatic turnaround in the auto industry is an alarming reminder that even when economic conditions improve, businesses dealing with expensive, capital-intensive durable goods still face substantial fluctuations. Supply chains can easily expand or contract depending on demand, while global production and distribution means individual parts' prices can move independently of each other.

Furthermore, this industry serves as the "industry of industries", in that cars comprise numerous components from semiconductors to steel and rubber that may fluctuate depending on raw material costs and logistical considerations involved in transporting them across several national borders.

MacDuffie suggests that domestic automakers had already made significant advances in terms of manufacturing capability, product development and supply-chain management prior to 2009. They were approaching global manufacturers' standards in most aspects by 2009. Yet their difficulties aren't solely a product of financial turmoil:

As well as their poor reputations for quality, the Big Three were heavily pushing sales of SUVs and pickup trucks with poor fuel economy. Although these models proved far more profitable than smaller fuel-efficient models when gasoline prices spiked and Americans stopped purchasing them, their manufacturers' profit margins immediately collapsed when gas prices skyrocketed and Americans stopped purchasing them altogether.

One reason for their failure was their miscalculation of how quickly demand would decrease after pandemic outbreak began, leading them to plan poorly and produce inventory they couldn't sell. Though government bailouts in 2009 and 2010 helped reposition them ahead of demand rebound, failure to adjust strategies beforehand would have put them at an irreparable competitive disadvantage.

GM recently announced plans to shift production towards small vehicles rather than pickups and SUVs in the future, while providing dealers with 50 days worth of inventory at any given time to reduce discounts while better manage its production process.

Long term, automotive executives should prioritize creating and fostering an environment that draws in women workers. Our survey discovered that 81% of female respondents believe the primary impediment to recruiting and retaining female automotive employees lies within perceptions that there are different standards applied differently between men and women in leadership positions.

What Can Be Done Now?

Public officials have had to make hard choices during this pandemic in terms of both safety and accessibility. Montgomery County recently made this choice after engaging in lengthy public comment period and holding hearings with experts from academia, law enforcement, transportation and industry - as well as considering various options' safety and financial impacts before reaching its decision.

Other governments have taken different approaches. For example, in the UK government offered a scrappage scheme where car owners could trade-in their existing vehicle in exchange for discounts off new models - this helped boost demand after the crisis and allow several factories to reopen.

As part of its TARP program, the United States invested $17.2 billion into the auto industry to avoid an uncontrolled liquidation of General Motors and Chrysler, which would have resulted in global financial turmoil and possibly led to hundreds of thousands of job losses. Treasury determined that failure of those companies would cause serious disruption of economy as well as massive job loss.

Domestic automakers, much like other American businesses, tend to overproduce when times are good and hold onto excess inventory during downturns, costing both manufacturers and dealers dearly. Some executives, like Ford Motor CEO Jim Farley, have pledged to decrease dealer inventories to less than 75 days' worth of vehicle models; this should lower discount consumers receive from automakers while increasing profit margins of dealers.

Other attempts at improving efficiency include decreasing chemical usage, expanding renewable energy use and transitioning toward electric vehicles (EVs). Some carmakers have begun cutting back their fossil fuel usage or are planning on doing so soon.

The new Administration also seeks to increase compliance with international regulations, including the Foreign Corrupt Practices Act and export controls, which could have significant ramifications for multinational firms operating or providing supplies into foreign markets. Such firms must continue drafting policies that ensure their suppliers respect human rights in accordance with law.