The automotive industry is a major industrial and economic force worldwide. It makes 60 million cars and trucks a year, and they are responsible for almost half the world's consumption of oil. The industry employs 4 million people directly, and many more indirectly.

Despite the fact that many large companies have problems with overcapacity and low profitability, the automotive industry retains very strong influence and importance. The industry also provides well-paying jobs with good benefits, has heavy linkages with supplier industries (which gives it an oversized role in economic development), and has a strong political influence.

The power of linkages is given by the following real but anonymous example of forecasted economic impacts of a proposed automotive assembly plant:

  Direct, Indirect And Induced Impacts
  2006 2007 2008 2009 2010 2011
Employment 189 3,583 7,800 10,611 12,240 12,242
Personal Income* 7,114 141,912 368,820 561,168 684,180 735,696
Revenue, State Government* 1,032 20,585 53,498 81,399 99,242 106,714
Sales* 16,620 318,492 1,405,080 3,024,000 3,792,960 3,864,240

(*000 of 2002 dollars)
Source: CHLG Study
Assumptions: Plant employment-2,000; Investment-$845 million

The table below illustrates the extent to which states and regions will compete against each other in incentives bidding wars to land a large automotive assembly plant.

Representative Project/Location Year Announced Reported Value Of Incentives Per Job
Toyota, Georgetown, Ky. 1985 $71,333
Toyota, Princeton, Ind.
Incentives for expansion
1992
2001
$44,091
$21,538
BMW, Greer, S.C. 1992 $81,479
Mercedes Benz, Vance, Ala. 1993 $167,667
Honda, Lincoln, Ala. 1999 $110,290
Nissan, Canton, Miss. 2000 $80,208
Hyundai, Montgomery, Ala. 2002 $126,400
DaimlerChrysler, Pooler, Ga. 2002 $80,000
Toyota, San Antonio, Texas 2003 $200,000

History And State Of The Industry

The industry is more than 100 years old. It started in Germany and France, and came of age in the U.S. in the era of mass production. Vehicle volumes, efficiency, safety, features and choice have grown steadily throughout the industry's history. It is so synonymous with 20th century industrial development, and so intertwined with its twin marvels, mass production and mass consumption, that it has been called the "industry of industries."

However, all is not well in the automotive world. Worldwide, average margins have fallen from 20% in the 1920s to 5% now, with many companies losing money. This poor profitability performance is reflected in the industry's market capitalization: despite its huge revenues and employment, the automotive industry accounts for only 1.6% of the stock market in Europe, and 0.6% in the U.S. There is a big contrast between the industry's lackluster financial success and its oversized social role, share of employment and political influence.

These facts mask a wide range of operational and financial performance. Toyota, the most successful large auto company, has a market value 15 times larger than General Motors.

Top Automotive Assembly Companies

  Vehicle Sales Per Year (Millions) Revenues ($US Billions)
General Motors 9.17 192.6
Toyota 7.97 182.9
Ford 6.82 177.1
Volkswagen 5.24 119.1
DaimlerChrysler 3.85 187.5
Nissan 3.51 82.0
PSA/Peugeot Citroen 3.39 70.4
Hyundai Automotive 3.28 38.5
Honda 3.24 80.5
Renault 2.53 51.7

Source: Annual reports

The overall performance of the industry can be traced to overcapacity and mature markets in developed countries. In the U.S., Europe and Japan, which account for 80% of world sales, growth has been stalling for many years. The natural response to slowing growth and increasing productivity is to reduce capacity. However, existing plants are very painful to scrap: mass production confers a strong cost advantage, which has traditionally encouraged very large and expensive plants. The result is excess capacity worldwide. Even continuing consolidation in the industry is not resulting in capacity reduction.

Focusing on the U.S., the "Big 3" automakers have been losing market share for three decades, and new plants by non-U.S.-based companies have increased capacity and competition. The two largest domestic U.S. companies are losing money as well as market share. Clearly, this is not a sustainable situation, and the industry is in for very big changes.