Introduction to the Motor Vehicle Industry
The production of motor vehicles is one of the world’s largest industrial sectors. Four of the world’s five largest manufacturing corporations are carmakers. Annual sales of motor vehicles amount to roughly $2 billion worldwide. More than 1 billion vehicles are in use around the world, and more than 80 million have been produced and sold annually beginning in 2012.
Motor vehicles are the principal means by which people and goods are transported within and between most communities in the world. Most other business sectors depend on motor vehicles to receive their required inputs, to deliver their products and services, and to be accessible to their customers, clients, and employees. The motor vehicle industry is intimately intertwined with the fate of other major industrial sectors, such as energy and steel, as well as retailing and other service sectors.
The importance of the motor vehicle industry transcends even its central role in the global economy. The industry was responsible for many of the fundamental innovations of 20th-century production—such as corporate organization, manufacturing processes, and labor relations—as well as sales innovations—such as product branding and consumer financing. In the 21st century, the motor vehicle industry has been a leader in adopting new production strategies and expanding into new markets.
This book describes the principal elements in the production and sale of motor vehicles, and explains the factors underlying historical and contemporary production and sales patterns. Information is drawn from around the world, with emphasis on North America, especially historical material.
Although this book focuses on the practical business components of motor vehicle production and sales, it is important to note at the outset that motor vehicles play a more central role in modern society than contributing to the conduct of business. People around the world have what has often been described, for a lack of a better phrase, a love affair with motor vehicles. Motor vehicles play a central role in popular culture as well as personal recreation and entertainment. The specific vehicle that a consumer chooses to purchase displays personal preferences, emotions, and values. Vehicles may differ only in relatively minor details of styling and performance, yet these minor variations reflect the individual’s social status and taste.
The United States has more registered motor vehicles than licensed drivers. Given that an individual can drive only one vehicle at a time, if a motor vehicle was no more than a practical conveyance, demand for vehicles would not logically exceed the supply of licensed drivers. Meanwhile, owning a motor vehicle is arguably the single most important aspiration among people living in developing countries—most notably Chinese—as was the case with North Americans and Europeans in previous generations.
The motor vehicle industry includes corporations that design, develop, and manufacture cars and trucks. These carmakers, such as Ford and Toyota, are among the world’s most-familiar corporate brands. The motor vehicle industry also encompasses less well-known businesses, including thousands of parts makers, which fabricate the thousands of vehicle parts at thousands of factories. At the other end of the carmakers’ production lines are tens of thousands of retailers and specialized lending agencies. Motor vehicle production is also considered to have an extremely high multiplier effect on local service industries. A vehicle factory employing several thousand direct production workers generates demand for services such as food, cleaning, materials, and supplies.
Some Terminology
Vehicles are classified as light, medium, or heavy. This book focuses on light vehicles, which are defined as weighing less than 10,000 pounds. Light vehicles account for 95% of total vehicle sales worldwide. The light vehicle market is divided between passenger cars and light trucks (known outside North America as light commercial vehicles). Medium- and heavy-duty vehicles, which include large trucks and buses, are included in some production data, but the volume is not large enough to significantly affect global patterns and trends.
The North American Industrial Classification System (NAICS) has two four-digit codes that cover a large share of the motor vehicle industry. NAICS 3361 is motor vehicle manufacturing (essentially assembly plants) and NAICS 3363 is motor vehicle parts manufacturing. Within NAICS 3361 and 3363, specific types of assembly and parts operations are broken down into six- and eight-digit code levels. However, a number of key vehicle parts are not included in NAICS 3363, including bodies, paint, glass, and tires. NAICS 3363 also does not provide an accurate picture of motor vehicle production because it includes parts for both new vehicles and for replacement in older vehicles.
Light vehicles are manufactured by corporations that are referred to here as carmakers even though they produce light trucks as well as passenger cars. In North America, three carmakers—Chrysler Group, Ford Motor Company, and General Motors Company (GM)—are known as the “Detroit Three,” and other companies are referred to as international or foreign carmakers. Ford and GM, founded in the first decade of the 20th century, were the two best-selling North American carmakers in 1910, and remained so in most years since. Chrysler, organized in the 1920s, quickly joined Ford and GM as sales leaders. With most of the smaller U.S. carmakers forced out of business in the 1930s during the Great Depression, Chrysler, Ford, and GM became known as the Big Three. At their peak in the 1950s, the Big Three sold 95% of the vehicles in North America.
Japanese-owned companies rapidly gained market share in North America during the late 20th century, especially by offering energy-efficient vehicles in the wake of the 1970s petroleum shortages and price rises. During the first decade of the 21st century, as their combined market share dipped below 50%, and Chrysler’s sales fell below first Toyota’s and then Honda’s, the term Big Three became obsolete. The term Detroit Three replaced Big Three because Chrysler, Ford, and GM have headquarters in the Detroit metropolitan area—GM in the Renaissance Center in downtown Detroit, Ford in the suburb of Dearborn, and Chrysler 20 kilometers north of Detroit in Auburn Hills.
A carmaker markets a vehicle under a brand name, which the motor vehicle industry refers to as a “make.” All of the major carmakers sell more than one make. Confusingly, each major carmaker, with the exception of GM, offers a make that is identical to the corporate name and others that are not. Hence, one of Toyota Motor Company’s makes is Toyota, and one of Ford Motor Company’s makes is Ford. However, Toyota Motor Company also sells a make named Lexus, and Ford Motor Company also sells a make named Lincoln. GM does not market a make that shares its corporate name but, like the other carmakers, has several makes that use other names such as Chevrolet and Cadillac.
Carmakers divide their makes into what are known in the United States as models or nameplates. The Ford Motor Company’s Ford make, for example, has a Focus model and a Fusion model. The Fusion is much larger than the Focus, and the two are not built in the same factories. In British English, a model is sometimes referred to as a “marque,” which is the French term. Rather than “model,” the German carmaker BMW prefers the term “series,” as in 3 Series, 5 Series, and 7 Series. Daimler-Benz prefers “class,” as in the C Class, E Class, and S Class models.
Models may differ from one another substantially, but not always. For example, Ford has models called C-Max and Escape, which look very different from the Focus but are closely related mechanically. Carmakers also market virtually identical models under different names in different parts of the world. For example, the model that Ford markets as Fusion in North America is sold with the Mondeo nameplate in the rest of the world. Carmakers also sell very similar vehicles under different makes. For example, Ford Motor Company’s Ford make includes a Fusion model, and its Lincoln make has an MKZ model that differs modestly from the Fusion. Ultimately, a carmaker must choose which makes more sense financially—to market two vehicles as a single model or to incur the heavy costs of advertising them as two distinct models. Two different model names may increase marketing costs, but the carmaker may profit by selling a lot more with two model names rather than one because it can attract very different cohorts of customers to the two distinct models.
Vehicles are also organized by platform, which is the architectural underpinnings of the vehicle, primarily the frame, axles, and other chassis parts. For example, the Ford Fusion shares a platform with the Mondeo, Edge, S-Max, and Galaxy. The Edge, a low-slung sport utility vehicle reminiscent of a station wagon, is sold in North America. The S-Max and Galaxy, tall multipurpose vehicles reminiscent of a North American minivan, are sold in Europe. In order to recoup the billions of dollars in research and development expenses, carmakers try to design a single platform that can be utilized to manufacture numerous models that are clearly differentiated and aimed at very different groups of consumers.
Within each model, carmakers distinguish trim levels. A trim level is a distinctive package of comfort and performance features. Ford’s Fusion model, for example, includes an S trim level and an SE trim level. Features that appear on the SE trim but not the S trim include power seat adjusters, keyless entry, satellite radio, and heated exterior mirrors.
In 1913, one-half of the vehicles in the world were a single make and a single model, the Ford Model T. In 2013, the French magazine Auto Moto identified 86 makes and 3,000 models available around the world. The models ranged from a 3-meter long Tata Nano with a 2-cylinder 0.6 liter engine costing $3,000, to a 6-meter long Rolls Royce Phantom with a 12-cylinder 6.8 liter engine costing $400,000. With so many models, the average production volume per model of less than 30,000 per year was far below the level needed to profitably operate a factory or amortize the high costs of development of a new model. However, carmakers figure that if a variety of models can be designed so that they can be manufactured on a single platform, the combined output will be profitable.
Organization of the Book
Chapter 2 discusses the operations and history of the motor vehicle industry. Carmakers undertake three principal operations: assembly of vehicles, research and development of new and revised models, and marketing. Other actors actually sell the vehicles and produce most of the parts.
The first practical motor vehicles were built in Europe during the late 19th century. Key vehicle components, such as the internal combustion engine and the rubber tire, were also developed in Europe. U.S. companies dominated global production and sales of motor vehicles beginning in the early 20th century. Key pioneers included Ransom E. Olds, Henry Ford, and William C. Durant. Large-volume production of motor vehicles diffused to other economically developed regions, notably Europe and Japan, during the middle of the 20th century and to developing regions, especially Asia and Latin America, during the late 20th century and into the 21st century.
Chapters 3 and 4 summarize the organization of the motor vehicle industry, with production of vehicles discussed in Chapter 3 and vehicle sales in Chapter 4. The production of vehicles is concentrated in the hands of a few carmakers. Ten carmakers are responsible for three-fourths of the world’s motor vehicle production. Two are based in the United States (Ford and General Motors), four in Asia (Toyota, Hyundai, Honda, and Suzuki), and four in Europe (Volkswagen, Renault, PSA Peugeot Citroën, and Fiat). Because Renault has a controlling interest in Asia-based Nissan, data for Nissan are included with Renault in this book. Similarly, data for U.S.-based Chrysler are included here with Fiat, which controls it. These companies all produce and sell vehicles in more than one region of the world. Very high capital costs are a strong barrier to entry for new large-scale producers.
Globally, nearly 95% of motor vehicles are produced in three regions: Asia, Europe, and North America. Asia, including China, Japan, India, and South Korea, is responsible for 44% of the world total, and China is by far the world’s largest vehicle producer. Within these three regions, most vehicle production is highly clustered. Within North America, most production is clustered in a north–south corridor known as auto alley that extends from southwestern Ontario and Michigan to northern Alabama and Mississippi. Within Europe, most production is on an east-west axis between England and Russia and centered on Germany.
Unionization has been an important element in the development of the motor vehicle industries in Europe and North America. Over many decades, unionized auto workers have negotiated contracts with relatively high wages and benefits. Asia-based carmakers have no distinctive work rules, which has facilitated more flexible production methods. In recent years, competitors based in North America and Europe have introduced Asia-inspired flexible work rules into union environments.
Chapter 4 focuses on the sales of motor vehicles. Most vehicles are assembled in the same region in which they are sold. International trade of vehicles consists primarily of shipments from East Asia, especially Japan and South Korea, to other regions. Underlying the geographic footprint are economies of scale, which are obtained at roughly 200,000 annual capacity for assembly plants.
For most consumers, a motor vehicle is the most expensive product they purchase, with the exception of a house. Carmakers do not sell directly to consumers. Instead, vehicles are sold through independently owned dealers, who have purchased franchises to sell a carmaker’s vehicles in a specific market area. Independently owned dealers also sell used vehicles. Most consumers borrow money to purchase new vehicles, and carmakers have established credit companies to facilitate consumer loans.
The light vehicle market is divided between passenger cars and light trucks. More than 80% of light vehicle sales are passenger cars worldwide, but in North America light trucks account for nearly half of sales. Passenger cars are further divided into market segments commonly designated by letters of the alphabet. The smallest vehicles are designated “A.” The most popular segments are “C” and “D” in North America and “B” and “C” in the rest of the world. Carmakers typically sell particular models for several years; research and development for new models are expensive, multiyear undertakings.
Chapter 5 examines outside forces affecting the production of motor vehicles. Of most consequence for carmakers is the fact that the suppliers of parts are responsible for more than 70% of the value added of a motor vehicle. Parts suppliers are organized in tiers. Supplying a carmaker typically are several hundred tier one parts manufacturers, most of which make large complex modules such as seats and instrument panels. Tier two parts makers supply tier one parts makers, and tier three parts makers in turn supply tier two parts makers. Most parts are produced in the same regional clusters as the final assembly plants. Some parts, especially those made by lower tier suppliers, are produced in low-wage countries and shipped to plants operated by tier one parts makers near the final assembly plants.
Carmakers are also major purchasers of raw materials and commodities, discussed in detail in other books in this series. Steel is the principal raw material in motor vehicles, roughly one-half by weight, although the proportion is decreasing. Plastic, aluminum, rubber, fluids, and glass are other important raw materials. The motor vehicle industry is also a major user of high-value trace elements such as platinum and zinc. Motor vehicle producers and parts makers contract with steelmakers and suppliers of other raw materials. Negotiations are inevitably challenging, with carmakers seeking to minimize price and source globally whereas raw materials suppliers seek higher prices.
Historically, motor vehicle industry was one of the world’s most vertically integrated industrial sectors. Ford and GM, in particular, were known for controlling all elements of the production process from raw materials through finished vehicles. The level of vertical integration has declined sharply, yet it is still relatively high compared to most industrial sectors. Parts makers have taken on more responsibility in the production process. Parts makers produce large modules and deliver them to the final assembly plant on a just-in-time basis, only moments before needed. Carmakers traditionally awarded contracts to the lowest bidder on an annual basis. Now, carmakers offer parts makers multiyear contracts and select them on the basis of highest quality rather than lowest price.
Chapter 6 reviews the regulatory framework within which the motor vehicle industry operates. Government mandates address primarily three areas of concern: safety, emissions, and fuel efficiency. The earliest government regulations, such as licensing drivers and traffic controls, were aimed at making driving safer. Beginning in the 1960s, carmakers were required to equip vehicles with such safety features as seatbelts and impact-absorbing bumpers. During the same period, vehicles were required to have devices to control noxious emissions. In response to Middle East oil shocks beginning in the 1970s, vehicles have been required to meet minimum fuel efficiency standards.
Carmakers have been subject to government management and even direct ownership in some cases. Governments own significant stakes of carmakers in China. Several of the major carmakers based in Europe were majority government owned in the past, and government stakes continue in some. Developing countries have viewed investment in the auto industry to be a major component of economic development strategies. In North America, GM and Chrysler went into and out of government-managed bankruptcy protection in 2009.
Chapter 7 discusses challenges and opportunities facing the motor vehicle industry. On the supply side, the principal challenge is to produce alternative-fuel vehicles. Several alternative sources of power to the gasoline-powered internal combustion engine are being actively pursued. Vehicles powered by electricity have become widely available for the first time in more than a century. Hybrid gas-electric vehicles may capture a large share of the market in the years ahead. Other possible power sources include biofuel, hydrogen, and natural gas. Carmakers are challenged to find the mix of fuel types that best meets market demand and fuel efficiency standards. The amount and distribution of reserves of scarce metals and other resources, in addition to petroleum, continue to challenge carmakers.
On the supply side, vehicle sales are increasing rapidly in developing countries, especially in Asia. Carmakers are challenged to enter or expand production in emerging markets. At the same time, demand is stagnant in developed countries. Whether this stagnation reflects a cyclical pattern—that is, a function of the lingering effects of a severe recession—or structural change—reduced interest by younger people in owning vehicles—is debated by industry analysts.
Electronics play an increasing role in the performance of vehicle engines and in providing increased safety. Carmakers and regulators are struggling to offer appropriate electronic convenience features, such as access to social media, Internet, and e-mail. In the long run, driverless vehicles may become common. Technological capabilities are already in place. Consumer behavior and regulatory issues are the principal constraints to the diffusion of self-driving vehicles.