Tuesday, April 24, 2007

Is the US Auto Industry Sick?

Really, it was only a matter of time before we woke up to this story:
Toyota quarterly global sales surpass GM

For the first time ever, Toyota sold more vehicles globally in a quarter than General Motors, preliminary January-March figures show, the clearest sign yet that the Japanese company is on track to overtake its U.S. rival as the world's top automaker.

Toyota Motor Corp.'s success is fueled by robust demand for its reliable, fuel-efficient models, including the Camry, Corolla, Yaris and gas-electric hybrid Prius.

It also comes at a time when General Motors Corp., which lost US$2 billion last year, has been forced to scale back production and cut costs in a bid to revive its sliding fortunes, even as it leads in China's booming market.

...Analysts say Toyota is building on its lead by investing in ecological technology, opening plants around the world, developing new models and wooing drivers with solid marketing that drives home its brand power.

Those are precisely areas that GM has fallen behind Toyota, and will be hard pressed to play catch-up, making it more likely than not that Toyota will outstrip GM for the full year, they say.
GM hasn't been contracting as fast as The Incredible Shrinking Car Company, but the writing has been on the wall for some time that Toyota was inevitably going to sell more cars than GM. Toyota is already bigger in terms of market capitalization and profits, and has been growing steadily in sales and market share while GM has stagnated, so there's nothing remotely surprising about this... but it's a milestone nonetheless.

So does this mean that the US auto industry is sick? There's a good case to be made that GM's problems are not the US auto industry's problems. Toyota, which makes around 2 million cars per year in the US in several different assembly plants, is simply taking over and replacing GM's sales and production, bit by bit. Imports are not flooding the US market; in fact, net imports of motor vehicles by the US have hovered at about 20% of total motor vehicle sales in the US for nearly a decade, and have shown virtually no growth at all in real terms over the past seven years.

But on second thought, I'm less sanguine. Take a look at the following picture, which shows a few measures of the health of the US auto industry.

Sources: Production in millions of units from the Fed's Industrial Production index; other series from the NIPA.

Purchases of motor vehicles by consumers have been stagnant for about five years. In the final quarter of 2006, production in terms of the value of motor vehicles produced in the US was almost 10% below its peak two years ago. And in terms of the actual number of units produced, US production has trailed off sharply in recent months, and has now fallen all the way to levels last seen 14 years ago.

No, I don't mourn the passing of GM as the world's biggest car company; in general, Toyota makes better cars at better prices than GM. But this news has made me take a look at the aggregate data on the health of the US auto industry, and what I see worries me. Let's hope that it's not the canary in the coal mine.

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