WBCSD background - Economist article on industry challenges: # 1
- Dear Friends,
This is a part of a small set of current background articles taken from
recent editions of The Economist which I share with you today as part of
the run-up to our final views and recommendations in the month or so
ahead stemming from our joint consideration of the ill-fated (my term,
but really above all ill-titled) WBCSD report on "Mobility 2030: Meeting
the Challenges to Sustainability".
The objective of this "data dump" is to make sure that we have a firm
handle on who they are and what preoccupies them as we grind into this
new and challenging for everybody century. I have always found The
Economist an interesting and generally pretty honest source of
information and perspective on these matters of technology and economy
(and society). Much of the content of what follow will be well known to
most of you, but perhaps it will be useful as a reminder in our present
After all, the sponsors of the report are, they must be part of the
solution. And for that they need a bit of help. So perhaps our
ambitious assignment is to use our considerable joint reputations and
capacities for education and persuasion to give them a better idea of
how they can become part of the solution - and perhaps deal with some of
their most pressing problems and priorities in the process.
Cause if we don't do it, who will? Eh?
From The Economist, Sep 2nd 2004
For much of the 20th century, carmaking was the "industry of
industries". Now it has to reinvent itself, says Iain Carson
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
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
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 Citroen in Europe, and then by all
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
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
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
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