Oligopoly and the fall of the American automobile industry

GM, Ford, and Chrysler, who embodied industrial excellence and manufactured much of the equipment that defeated Japan and Germany more than sixty years ago, are reduced to begging the federal government to prevent their bankruptcy. But there is little schadenfreude in the executive suites of Stuttgart and Toyota City. The inhabitants  realize that the very success of the Big Three created the conditions for the American industry's undoing, and recognize their own vulnerability. After all, Korea and China loom as formidable competition, blessed with lower labor costs.

The Oligopoly Forms

In 1945, the men who had just pulled off the biggest and most successful industrial mobilization in the history of the world began to construct the biggest and most profitable oligopoly the world had ever seen. Economies of scale and competition on the basis of advertising, marketing, styling and other factors difficult for the small fry to match, enabled the Big Three to squeeze out their smaller rivals like Packard, Hudson, Nash, and Studebaker, excellent manufacturers all. The most acclaimed production genius of the home front was Henry Kaiser, an entrepreneur who had built Liberty Ships with mass production techniques (a Richmond, California Yard once built a ship in four days). Converting  the famous Willow Run bomber assembly line plant to automobile production, Kaiser tried to break into the business, but Kaiser Motors was driven from the American market in a mere ten years, its equipment shipped off to Brazil and Argentina.

During the 1950s and 1960s, the Big Three ruled the automotive world and made big profits, as oligopolies often are able to do.

Labor gets on board

Big three management, arguably the most powerful executives in America and the world, faced a worthy bargaining adversary in Walter P. Reuther, whose United Auto Workers Union monopolized their labor supply. Reuther was a smart, brave and honorable man. He had been beaten by company goons twice in strikes when building the union. Yet he refused to tolerate wildcat strikes during the World War II production effort, and for good measure had thrown Communists out of the American union movement in the postwar years.

Reuther took advantage of his monopoly (technically: monopsony) position by playing the three rivals off against each other. He would target one manufacturer at a time -- the one he deemed most likely to cave in. The union would go on strike against that company and drive the market share to its two competitors. Although management would put up a struggle at every stage, wages rose and rose, and benefits multiplied.

The company which caved in first knew that its rivals would have to match its concessions, so that giving in didn't mean enduring a competitive disadvantage for very long. In oligopolies, market share is particularly prized because the largest producer typically gets an even larger share of total industry profits. Size does matter when it comes to relative profitability.

Under the circumstances, the phrase "buying labor peace" made a lot of sense to management and shareholders alike. The executives who acquiesced in these policies were regarded as wise, even enlightened. They weren't stupid, though later on locking in high labor costs created a lot of trouble when the oligopoly was challenged and broken by foreign competition.

Overseas competition breaks the oligopoly

The first danger sign came with the growing success the Volkswagen Beetle enjoyed in the American automobile market. Detroit tried to compete at the small and inexpensive ("compact") end of the market, but it wasn't very easy to make money on competing with (then) lower wage foreign labor. The innovative Chevrolet Corvair ran into trouble from Ralph Nader, who alleged it was "unsafe at any speed." Because General Motors stupidly employed a prostitute to try to compromise him, Nader became a martyr, public hostility to the industry grew, and the Corvair languished and was discontinued.

To Volkswagen, Toyota, and many other auto makers struggling to catch up to Detroit in the 1950s and 60s, GM, Ford and Chrysler appeared mighty beyond compare. In the mid-1960s, government planners at Japan's Ministry of International Trade and Industry tried to force the much smaller Japanese automobile manufacturers to merge together, in order to be able to more effectively compete with GM and the other giants, as the Japanese expanded into global markets. Fortunately for the Japanese automobile industry, the bureaucrats bullied only two companies into merging -- Nissan and Prince Motors, which went on to lose significant market share to Toyota. Japan's auto industry remained fragmented and highly competitive, if not nearly as profitable as Detroit's.

Even before 1973 it was apparent that Detroit was ceding low end market segments to foreign producers, but the oil crisis gave Japanese manufacturers a huge leg up, with their ability to provide plentiful, fuel efficient, high quality small cars. The market share the Japanese won when gasoline was scarce never came back, and the new entrants from abroad moved into more upscale market segments with fatter profit margins.

If the oligopolists of OPEC had been able to maintain their cartel as effectively as Detroit maintained its oligopoly following the war, it is conceivable that Detroit might have focused more resources on the fuel efficient segment of the American market. But when oil prices went up, new producers were attracted to drilling oil, and the cartel's hold weakened. Oil prices went down.

And because Americans love driving their cars and Detroit loved producing big cars (with comparatively little foreign competition), American taxes at the pump remained far lower than in Europe and Japan, skewing the overseas markets in the direction of fuel economy. The combination of market forces and domestic politics kept gasoline cheaper in the American market than in Europe and Japan, resulting in larger scale more efficient production of fuel-sipping cars overseas.

Lost Oligopoly

The days of the automobile oligopoly are gone forever, barring the kind of protectionism that would send the world into a global depression. If GM, Ford, and Chrysler are to survive and become self-sustaining, they must adopt structures, practices and a mindset different from those of a member of an oligopoly. The size of the world automobile industry has attracted a host of new entrants, with more certain to come in the decades ahead. But GM, Ford, and Chrysler remain burdened by the obligations incurred to labor and distribution. Unless those obligations are severed in voluntary bankruptcy proceedings, the three companies will remain handicapped in their competition with foreign producers, even those manufacturing in the United States.

It is conceivable that a major company can throw off the habits and mentality of the past. Sometimes companies do renew themselves, cognizant of the evanescence of success and the threat of competitive extinction.  That is a challenging task under the best of circumstances, and success is far from certain. Sometimes the change comes via bankruptcy, and new management comes in and changes operations radically. The new boss cajoles or threatens the workforce into leaving old habits and procedures behind. The prospect that the company will fail and be dissolved, with everyone losing their jobs, is the motivation for accepting unwelcome change in these cases.

But if the federal treasury is believed to be on tap, it is much less likely that the Big Three will be able to right their ways, no matter how sincere the intentions of everyone involved. Competitiveness in the global automobile industry is a moving target. Continuous improvement (kaizen) is a way of life now for everyone. Only the lean survive.

If the Big Three pass from the scene, the American automobile industry will survive, but it will be largely based in the South, almost exclusively non-union, and owned by corporations based in foreign countries. The larger and more venerable among these "transplant" producers do engineering, design, and other high value-added functions in America, and even export their American-made products to foreign markets, employing tens of thousands of Americans. None of whom are asking for a bailout, but who would pay taxes to finance their competition if the Big Three get one.

The fruits of oligopoly can be lush, but like all fruit, they ripen and eventually spoil. Without the discipline of competition, bad habits develop, become ingrained and institutionalized, and ultimately weaken the competitor.

Full disclosure: Over the course of my consulting career I have enjoyed significant, multiyear engagements with Ford and later Toyota. All of the information in this article comes from public sources. In addition, I had earlier worked for Ralph Nader for a year, as his representative in Japan in the early 1970s.

Thomas Lifson is editor and publisher of American Thinker. He graduated from and taught at Harvard Business School before becoming a management consultant.
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