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The first foreign producers to gain a significant share of the US automotive market were the Japanese in the 1970s, led by Toyota, Honda, and Nissan (or Datsun, as it was known). Offering fuel-efficient models that were better adapted to the high oil prices of the time, the Japanese helped to build a new market niche in a country where low fuel prices had always been taken for granted. The American car-makers, led by the ‘Big 3’ (General Motors, Ford, and Chrysler), reacted to this competition in their home market by lobbying Washington to put restrictions on Japanese imports. This seemed a cheaper option than redesigning their product ranges away from the big gas-guzzlers that American consumers had traditionally favoured (Freyssenet 2009).

The sharp fall in oil prices from 1986 onwards seemed to justify the Big 3’s decision not to worry too much about fuel efficiency, at which point they decided to invest massively in the light truck segment, promoting household purchases of minivans, 4×4s, pick-ups, and sport utility vehicles. These vehicles were anything but fuel-efficient and, despite enormous technological progress between the 1980s and the 2000s, fuel consumption averages actually rose in the USA during this period. At the same time, strong sales in the light truck segment, which by 2008 accounted for around half of all new vehicle purchases in the USA vs. one-fifth in the 1980s, helped to temporarily restore the Big 3’s profitability (Sitkin and Bowen 2010).

This strategic decision came with a heavy cost, however, since it lulled US auto executives into believing that they still did not have to incorporate long-term global trends into their planning. The energy crisis of 2006–2007 shook up the global economic environment, with oil prices hitting new records, stimulating US consumers’ interest in fuel-efficient cars. This was a great opportunity for Toyota, whose entire strategy was focused on saving energy, partially reflecting Japan’s relative lack of natural resources. The Japanese car-maker had used the period since the 1980s to develop a hybrid model (the Prius) that consumed less fuel and emitted less carbon dioxide (a key contributor to global warming). This positioning gave Toyota a tremendous edge when oil prices spiked in the mid-2000s and revealed serious flaws in the Big 3’s strategic outlook. The financial crisis of 2008, which caused a collapse in new car model sales worldwide, added to the pressure on the American car-makers. Not only were the Big 3 car-makers unable to count on export markets to offset falling domestic demand, but the recession meant that it had become harder for them, even at home, to sell the big, expensive vehicles in which they specialized.

This positioning was especially unfortunate given the likelihood that much future growth in the global automotive markets will occur in emerging economies, where most households can only afford modest-sized vehicles, like the small cars being developed by companies such as Romania’s Dacia or India’s Tata. With hindsight, the decision by America’s Big 3 car-makers during the 1980s and 1990s to focus on domestic market conditions and consumer preferences was very damaging to their chances of long-term survival in what became an increasingly globalized business.

By summer 2009 General Motors (GM) had declared bankruptcy and Italian car-maker Fiat had taken over Chrysler. At that point, the US government was looking at the loss of an estimated 1 million jobs, many concentrated in the Midwest states (including Michigan and Ohio) where some of the Big 3’s domestic suppliers were located. Newly elected President Barack Obama had to decide whether to provide government support or watch the US automotive industry continue its decline. It could be argued that it is important for governments not to interfere in the marketplace, especially where this has the effect of distorting international competition by protecting inefficient domestic producers.

A number of leading economists advised the President to ‘fight the protectionist virus’ (Bhagwati 2009), in part because any measures supporting American industry might be taken as a signal by countries across the world to do the same with their own producers, thereby restricting US exporters’ access to foreign markets. Furthermore, an argument was made that bailing out Detroit auto executives would only allow them to continue their failed policies and essentially mean throwing good money after bad. In this view, it was acceptable to ‘let Detroit go bankrupt’ (Romney 2008).

President Obama chose to provide the Big 3 with financial resources, allowing them to restructure their finances but even more importantly their product lines, specifically by developing new fuel-efficient models matching the standards set by rivals in markets across the world. The turnaround was remarkable. Within three years, GM had regained its lost status as the world’s largest car-maker and was generating the highest profits in its century-old history (UPI 2012). In total, from early 2009 through year-end 2011, the whole of the US auto industry added 200,000 jobs. Most significantly, GM was able to reimburse the bailout funds that had allowed it to survive.

International business economists will be analysing these events for years to come. A more sceptical view would be that GM’s recovery can also be explained by advantageous conditions that it negotiated in terms of paying workers’ pension liabilities or supplier contracts. Others have highlighted numerous examples where government bailouts did not prevent non-competitive industries from ultimately going bankrupt and simply added to the overall economic cost. Yet there is no question that the recent events in Detroit indicate the possibility of at least some role for governments in the conduct of international business. They also support the idea that in many sectors of activity, global trends tend to have a greater impact than domestic ones.


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