Special reportSep 4th 2004 edition

Perpetual motion


IT MAKES nearly 60m cars and trucks a year, and employs millions of people around the world. Its products are responsible for almost half the world's oil consumption, and their manufacture uses up nearly half the world's annual output of rubber, 25% of its glass and 15% of its steel. No wonder the car industry accounts for about 10% of GDP in rich countries.

But the industry that has pioneered the forms and weathered the storms of 20th-century capitalism is now over 100 years old, and it is struggling. Average profit margins have declined from 20% or more in its youth in the 1920s to around 10% in the 1960s and less than 5% now, and some volume carmakers have actually been losing money. Despite its importance to modern economies, the industry has all but vanished from equity markets. “It is becoming a sunset industry, a has-been in financial terms—a flagrant contrast with its continuing social role, its share of employment and its political influence,” write Graeme Maxton and John Wormald in a new book, “Time for a Model Change”.

A study by Deutsche Bank two years ago found that the car industry represented just 1.6% of Europe's stockmarket capitalisation, and only 0.6% of America's. Two decades earlier, the figures were 3.6% and 4% respectively. Although firms such as Ford dominate the corporate-bond market, the car companies' debt is rated as close to junk, so they have to pay dearly for this kind of finance. In Japan the picture is different because of the unusual success of the world's mightiest carmaker, Toyota, and (latterly) the recovery of Nissan under the wing of Renault.

Invented here

A century ago the car industry more or less invented modern industrial capitalism. The car started life in Germany, and early development of the industry began in France (hence automobile, originally a French word) in the 1900s, but it was in America that it came of age. Henry Ford's adaptation for carmaking of the moving assembly line he had seen in Chicago slaughterhouses marked the birth of mass production.

But Mr Ford applied those techniques to a vehicle that resembled a horse-drawn carriage, with a body laid on to a separate chassis. Modern cars have a monocoque steel body in which the strength is built into the pressed steel floor, sides and roof. It was invented by Edward Budd, taken up by Dodge and then by Citroën in Europe, and then by all volume carmakers.

Toyota may have refined the process in the 1960s by its lean-manufacturing (just-in-time) techniques, but cars are still made by stamping, welding and dipping steel, then stuffing the body with engine, trim and seats. Factories have to be large to reap the biggest economies of scale: around 250,000 units a year for assembly plants and 1m-2m units for making body panels. So Mr Budd's legacy was not only a way of making a rigid integral car body; he also laid the foundations for a whole rigid industry that some experts think is now incarcerated in its own vast plants.

Around the same time as modern car manufacturing was born in the mid-1920s, Alfred Sloan's ideas for running General Motors provided the model for the great corporations that grew up to dominate the second half of the 20th century. GM soon swept past Ford as Mr Sloan revolutionised the young car industry, and Ford has never regained the dominance it enjoyed in the infancy of mass production.

The car industry has been ahead of its time in many respects. Peter Drucker, a management writer who first made his name with a study of GM in 1945, coined the phrase “industry of industries”. The company was also the leader in “planned obsolescence”, the frequent changes in design that tempted customers to switch to a new model every year or so. It was the first to feel consumer anger, with the publication in the 1960s of Ralph Nader's attack on the safety record of the Big Three Detroit manufacturers, “Unsafe at Any Speed”. In the 1970s, as the oil price quadrupled, the industry found itself under attack from environmentalists outraged by its products' gas-guzzling habits.

It was also among the first to come under careful government scrutiny, from safety concerns to environmental issues to antitrust worries in the days when General Motors had 60% of its domestic market and could snuff out competitors with a few well-chosen price cuts. But it also received more welcome government attentions. When small, economical and reliable Japanese cars started to eat into Detroit's market share, the American government imposed restraints on those imports. Soon afterward, the industry in Europe came under similar pressures.

The car industry also found itself at the cutting edge of capitalism in another sense. As mass production techniques developed in the 1920s and 1930s, its workers increasingly pushed for unionisation. At times, it seemed as though the car factories of the Detroit area, the British Midlands or the huge plants around Paris were the main battleground of the class war. Even today, the United Auto Workers union (UAW) still dominates Detroit, even though trade union membership in America's private sector as a whole is well below 10% of the workforce.

Until last year the UAW's leadership seemed to have its head in the sand, oblivious to the competition that was hurting General Motors, Ford and the Chrysler end of DaimlerChrysler. Then it suddenly got the message, agreed to a moderate pay deal and accepted more closures. The union has seen its membership decline steeply over the past 20 years, but it can still make it hard for car companies to reduce overcapacity.

Today the motor car is the epitome of mass production, mass marketing and mass consumption, with some of the strongest brands in the world. For most households in rich countries, it is the second-biggest purchase after a house or flat. Few other consumer-goods industries depend so heavily on a thriving second-hand market for their products. And yet there are powerful forces at work that could profoundly change the industry.

One is the fragmentation of the market, leading to lower production runs. Another is dissatisfaction with the costly system of building cars for stock, not to order. A third is innovative modular construction, in which more of the car is put together by parts suppliers. And further ahead, a fourth force could be a switch to electric cars with electronic and electrical rather than mechanical controls.

A world falling apart

Right now, though, the biggest force for change is the fact that most of the volume-car industry is broke and needs fixing. The market in America, Europe and Japan, where over 80% of the world's cars and trucks are sold, has been running out of growth. In America the arrival of European, Japanese and South Korean makers has created overcapacity. Moreover, as America's own carmakers constantly improve their productivity to catch up on these new rivals, their greater efficiency itself increases capacity by about 3% a year.

In Germany and France, rigid labour laws have inhibited the closure of redundant old factories, although Renault has set a good example, and Ford Europe and GM Europe have been trying to follow it. In Japan, the close industrial partnerships known as keiretsu have proved too rigid for some manufacturers. Only Toyota and Honda remain in purely Japanese hands. The smaller Japanese producers make little or no profit at home and are struggling to get into the black in Europe. Even for the big companies America provides the best hopes for growing profits.

The rest of the world presents a mixed picture. In Asia the 1997 financial crisis dealt the South Korean car industry—always a rather artificial creation—a huge blow. Today only Hyundai survives as an independent. In South America economic collapse in Brazil and Argentina put a stop to the rapid expansion of the car industries there, leaving foreign investors such as Fiat to cut their losses.

The boom in China is getting everyone excited, but it needs to be kept in perspective. For all the huge percentage increases, the annual value of that market is equivalent to just about a month's sales in the rest of the world.

All the car companies think that if only they try harder, they can somehow regain growth at the expense of rivals. But in reality they are like Scott Fitzgerald's “boats against the current, borne back ceaselessly into the past”. Add the growing pension and health-care bills of traditional producers such as America's Big Three and the Europeans, and it is easy to see why the industry is feeling under siege.

This article appeared in the Special report section of the print edition under the headline "Perpetual motion"

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