03 February 2007

The Auto Industry and its shortcomings

As you can see, I've been wandering about Youtube exploring videos. Normally I post about telecommunications/information technology (TCIT), but this is mainly because of my job. I'm obligated to be an expert in computer technology, but in a way, that's not the most interesting field of analysis. Computer technology is actually fairly boring because it advances through greater capacity; genuine innovation is rare.

The technology, or here, the failure to apply technology that exists, is the subject of this video. It's from 1991, another dire year for the US auto industry. Ten years later, Taken for a Ride (Jack Doyle) was published, outlining in lurid detail the numerous ways in which the gigantic US automakers battled tooth and nail against any accountability to the public. It's understandable that this industry, so large and multifarious it could be likened to a medium-sized nation, would resist outside compulsion, but it's more disappointing how it has resisted any other form of pressure to introduce technology long familiar to its overseas competitors.

In the 1980's, Japanese automakers responded to the pressures of the rising yen by transferring much of their production to the USA. The Japanese automakers might possibly have been responding to exaggerated fears of a backlash in the USA,* but the fact is that the Japanese economy faced a superabundance of investment capital, a trade surplus with the US, and massive net reserves of US dollars that had to be unloaded in a way that inflicted minimum damage to their portfolio; the Japanese population was getting older fast, which meant a dearth of industrial workers, and a steady deterioration in the relative value of the US dollar.

Japanese firms operating in the USA were to perform far better than their US counterparts, responding creatively to the peculiar challenges of the US industrial milieu. The video above does a surprisingly poor job of making its case; it compares American autos in production with a Japanese concept car, which never entered production. This might be called "comparison overreach"; Japanese firms are indeed vastly superior to their US rivals in implementing meaningful technology, and this superiority is depressingly consistent. But to compare the gas mileage of luxury cars to that of a never-built concept car is patently unfair. And why exactly do Japanese automakers excel in implementing technology of this kind?

My view is that Japanese manufacturers face a very different production-optimization function from that faced by American firms. The production-optimization function is roughly analogous to the "indifference curve" found in microeconomics, except that here, the tradeoff is between producing for different objectives: quality versus quantity.** In the case of the auto industry, quantity may take the form of features and styling changes, while quality takes the form of superior design, technology, and craftsmanship. American automakers essentially are internally optimized for making a lot of car, rather like a Soviet industrial combine, while Japanese firms traditionally have been focused on penetrating a market by achieving adequate levels of quality. Both nations' firms enjoyed lengthy periods of protected home markets from which they made forays abroad, but in the case of the US auto industry, the main objective was to promote auto use and acquistion by a public with no prior experience with cars. After the abrupt conquest of the market by Ford and GM, there was a need to differentiate products by price, while using essentially the same industrial methods for the entire lineup. Hence, instead of Cadillac offering better engineering and craftsmanship than Buick (since both were divisions of GMC), Cadillac simply heaped on features.

Here's another post on this concept.
* In early editions of Japan, Inc. (Shotaro Ishinomori, 1988), there is a conspiratorial theme in which American CEOs of tottering industrial giants gleefully exploit mobs of seething American autoworkers. In fact, there never was much of a backlash; Americans were largely exasperated at the management of major US firms, but had no widely-shared opinion as to how to fix this shortcoming. My basis for this contention is that 1988 and 1992 were both campaign seasons dominated by trade issues and unemployment concerns; in both, the candidates with strong anti-Japanese rhetoric (viz., Richard Gephardt—'88; Sen. Bob Kerrey & Sen. Tom Harkins—'92) were trounced early in the New Hampshire primaries.

** For an introduction to the indifference curve, here's a pretty good intro. While I tend to be fiercely critical of a lot of economic inferences , I think the concept of rational utility holds up surprisingly well. However, the indifference curve is used as a snapshot of a tradeoff that people make at a moment in time. The management of a firm has a similar tradeoff between rival mixes of output (say, between "quality" and "quantity") and between rival productive outlays (say, betwen "labor" and "capital"). Here's the same website as the one I linked for "indifference curve," this time explaining the closely-related idea of a production function.

A series of economists addressing the effects of personal choices (save versus consume) over an extended period of time developed something called the Ramsey-Cass-Koopmans model (PDF). This could likewise be applied to a firm making decisions over long periods of time. Even if the person making the choice is not especially far-sighted, the effects of the decision will lead to permanently changed long-term trends.

Labels: ,


Post a Comment

<< Home