Retrospective

Shifting to Small Cars?

By The D&S Collective

The oil shortage has worked wonders for the oil companies’ profits, but not for the auto companies. With many customers scared away from Detroit’s latest gas–guzzlers, GM’s sales for the first ten weeks of 1974 were down 36% from last year; Ford and Chrysler are selling about 20% less than a year ago. At GM alone, 120,000 workers have been laid off or put on “temporary furlough”; the total layoffs in the auto companies and in their dealers and suppliers are probably over 300,000. Auto industry profits, of course, are collapsing, but don’t the major corporations work together in their common interests? If so, why did the oil companies do this to the auto companies?

Part of the answer is that the energy crisis was not simply a conspiracy. Rather, it was the result of normal corporate planning in the oil industry. Seeing actual or threatened decreases in their profits, the oil companies cut back on investment and production—just what any capitalist does when profits are going down. In the crisis atmosphere created by the shortages, the oil companies have been able to scare the country in to allowing them higher prices, higher profits ($10 billion in 1973, up 45% over 1972; it will be more in 1974), and freedom from interference. This restores their “incentives” to produce, and so the oil starts to flow again.

As neat as the process sounds, it is subject to a good deal of uncertainty. In any corporate planning, there is room for disagreement over timing and degree of impact. Moreover, while the energy crisis has shown that the oil companies are enormously powerful, they are not all–powerful. They cannot control all effects of their actions on the rest of the economy. Their goal is to maximize their own long run profits, whatever they may do to other industries’ profits.

But the auto industry has plenty of its own long–range planners. Were they blind to what was happening? Why didn’t the auto industry see the energy crisis coming and switch to small cars?

Actually, all the auto companies did foresee a major shift to small car production within the 1970’s. They differed in their predictions about how soon the change should come, and in their strategies for making the change. GM’s strategy was by far the worst, and it lost the most due to the energy crisis. At the opposite extreme, American Motors, which could never afford to compete in the big–car market, has benefited from the recent shift to small cars: its sales are up 18% over last year. (American Motors is a small company only by comparison with other auto companies. “Little” American Motors is one of the 100 largest industrial corporations in the U.S.) Ford and Chrysler fell between these two extremes, suffering serious losses, but not nearly as bad as GM’s.

The Coming of Small Cars

It has been clear for several years that small cars are the wave of the future. Small, low–priced imports are winning a growing share of the market away from American cars. Five sixths of all U.S. households already have one car, and most of the growth in the auto business since at least 1960 has been in second and third cars; very few families buy large second cars.

The auto companies watch these trends very closely. Ford and Chrysler responded by shifting a large part of their capacity into small car production. General Motors knew about the growing demand for small cars and introduced the Vega to keep a foot in that market.

But large cars are where the profits have been. In 1973 a Cadillac de Ville cost $300 more than a Chevy Caprice to produce, but sold for $2700 more, leaving $2400 more profit per car. Similarly, each Oldsmobile brought in $1200 more profit than a Chevrolet.

GM, the undisputed leader in large car production, found it harder than the other companies to accept the new trend toward less profitable small cars. After a struggle over this issue within GM’s top management, the leading advocate of small car production resigned in early 1973. The company decided to hang on to its large car superprofits for as long as possible.

They hung on too long. In the 1975 model year, Ford will have seven small car models, and a larger volume of small cars than GM. Chrysler will have 60% of its capacity in small cars. GM will have only 40% of its production in small cars—an increase from 25% a year earlier, but still well behind the rest of the industry.

With the rise of small cars, GM’s share of the U.S. auto market drifted down from 52% in 1962 to 44% in 1973, then fell to 38% in the beginning of 1974. Its competitors talk about taking another 5% away from GM in the next two years.

Ford and Chrysler were not the only companies that saw the writing on the wall more clearly than GM. First prize for foresight goes to Hertz. The entire rent–a–car industry, a major purchaser of Detroit’s products, became aware early in 1973 that a gasoline shortage and a collapse in large–car prices were on the way. Hertz switched quickly into purchases of smaller cars, signed up long–term contracts with fuel suppliers (as one of the country’s largest fuel customers, it wasn’t that hard), and hired a former Gulf executive to manage its fuel problems. Hertz even succeeded in selling most of its used 1973 large cars a few months before the prices started falling. And Avis and National were not far behind: all three big rent–a–car agencies bought lots of small cars, well before gas prices started rising.

Sloanism

The difference in strategies between GM and the other car companies is not a new development. It is a continuation of a pattern which began at least 50 years ago. In 1921 Ford had 60% of the auto market, and GM only 12%. Ford produced one cheap standard car, the Model T, available in “any color as long as it’s black”. GM’s counterattack was based on “Sloanism”, named for GM president Alfred P. Sloan: bigger is better; sell as many optional luxury features as possible; offer a variety of styles and prices, and advertise them constantly to create distinctive brand images. By 1927 Sloanism had defeated the unchanging Model T. Ford closed down for most of the year and converted to the fancier Model A.

Since the early 1930’s Ford and Chrysler as well as GM have followed Sloanism, usually imitating GM’s styles and matching its prices. The other companies could never catch up to GM’s level of large car production. Perhaps that is why they were more ready to move back to small cars and, consequently, less hurt by the energy crisis. But all three companies always made their highest profits on their largest cars.

The new shift to smaller cars does not mean a defeat of Sloanism, only a compromise. The companies hope to regain some of their large–car profits by selling luxury compacts. Ford will have two luxury compacts out in the fall, and within a year GM will introduce the compact Cadillac. Those new little cars will probably get bigger each year, too—the fate of previous “compacts”.

The Limited Impact

However serious the energy crisis has been for the auto industry, the impact has not spread. Under normal circumstances such a dramatic increase in the demand for small cars could have wreaked havoc on the U.S. economy. There would have been a boom in sales of imports, and the slump in U.S. auto production could have led to a widespread recession. The present international economic situation, however, makes both of these results unlikely.

Imported cars are not doing well because they have risen in price. U.S. price controls have held down the prices of domestic small cars, while the prices of imported cars have been pushed up by the dollar devaluation, rapid inflation abroad, and increasing militancy and high wage demands from auto workers in West Germany and Japan. VWs, Toyotas, and Datsuns, all formerly $400 cheaper than Vegas and Pintos, are now $200 more expensive than their U.S. competitors. So the booming demand for small cars has primarily benefited U.S. producers. Many customers will doubtless wait for next year’s increased output of domestic small cars, rather than buying higher–priced imports.

Ordinarily a cutback in the auto industry would rapidly spread to other industries. Less car production means less demand for steel, glass, rubber, etc., and less employment in those industries; less people working in auto and related industries means less demand for other consumer goods, etc. But this pattern is broken today by the worldwide shortages of many basic materials. The steel industry, for instance, normally sells 20% of its output to the auto industry; an auto cutback usually has an immediate impact on steel. But with the present worldwide steel shortage, American steel producers are selling as much as they can produce, and are still unable to fill all their orders, despite the reduction in sales to the auto industry. Specialized auto parts suppliers may be hurt by the auto cutbacks, as are auto dealers; but the basic materials–supplying industries have been unharmed.

The people who have been hurt the most, of course, are the workers who have been laid off. Many of them will eventually be rehired, as the auto companies finish retooling for expanded small–car production. Meanwhile, however, the workers are once again paying for their employers mistakes.

Oil and Auto: Common Interests

The energy crisis has created real problems for the auto industry, especially for GM. But it doesn’t show any long–term divergence of interests between the oil and auto companies. The foundation of the profits of both industries is the structure of our entire society which requires almost every adult to own and drive a car. Remember: the alternatives to big Detroit cars which most people will be buying are—little Detroit cars. The bonanza which GM enjoyed in recent years has ended, a few years sooner than it expected. In the last ten years, GM’s profits were between a 17% and 28% return on investment every year except 1970, when there was a strike (the average for all manufacturing is around 10%). They won’t soon return to that level, but they will still be the world’s largest industrial corporation, still making a profit from our dependence on their mode of transportation.

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