» :« .i 7 ;1'%.,!"a Wm:a%v%aTTa9s*4'r3n iE:?r>iv€%rQ§%fw Archived Issue Brief MISSOURI STATE LIBRARY FEB 16 1981 DOCUMENTS DIVISION CONGRESSIONAL RESEARCH SERVICE T Efa{;é}§i LIBRARY OF CONGRESS HIIHTI TIII°uiM“Ii1‘ 010-10393 SSOUH T T‘ 0 I THE AUTO INDUSTRY: THE U.S. SITUATION IR 1980 (AR CHIV ED—-O8/0 ts/80) MINI BRIEF NUMBER MB80208 ‘AUTHOR: Bass, Gwenell iEconomics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEM DATE ORIGINATED Qggggggg DATE UPDATED Qggggggg FOR ADDITIONAL INFORMATION CALL 287-5700 0919 CRS- 7 P1380293 UPDATE-O8/011/80 l§§Q§_2EE£§l2lQE In 1979, the United States automotive industry experienced its worst year since 1975. Ford and Chrysler rolled up a combined deficit of more than $2 billion in just 12 months. New auto sales in the U.S. of both domestic and foreign models, in 1979, comprised 10.6 million cars and 3.5 million trucks, which represented a 8.8 percentage drop in sales from 1978. In early May 1980, domestic auto sales declined 42% from the previous year. In the spring of 1980, sales were at their lowest rate in 22 years. Imports are steadily increasing their share of the domestic automotive market. Last year, the imports‘ market share of passenger cars rose to a record high of 21.8%. In Feb. 1980, imported car sales continued to increase and they reached 27.1%; March import sales dropped to 25%. UAW President Douglas Fraser attributed the March slowdown to a lack in availability, and not to a lack of consumer interest. Imports were back up to 27.2% in April, 28.4% in May, and 27.3% in June. EAQEQBQQEQ- For the first time since 1975, auto makers failed to build two million cars by the end of the 1st quarter. The industry's 1st—quarter output was 26% below a year ago. As a matter of fact, the auto industry's Harch 1980 omestic car production schedule was at its lowest level since the big sales slump of 1975. As of may 1, 1980 in an effort to reduce production, auto manufacturers have closed 13 of 00 domestic plants and laid off 280,000 workers. Besides plants closing to reduce inventories, a total of 21 plants will be closed as of July 30, 1980, for modification and new model changeover. In early July sales were down only 19% from the same period last year. This was the first reporting period since March that sales showed a decline of less than 20% compared with a similar period in 1979. Q:§;-§E§Q-§QEE§EX-§§§EiB9§ The three major auto producers suffered substantial declines in earnings in 1979. The Nation's largest auto producer, General Motors (GM), experienced a 58% decline in earnings for the 4th quarter of 1979. This was the worst quarterly decline since the nth quarter of 1970 when the company was involved in a strike. For the year as a whole, GM reported that its profits were down by 18%, despite a 5% gain in revenue. GH net profit for the year was $3.5 billion. General notors incurred its first operating loss in 9 years in the 3rd quarter of 1979. During this quarter, GM was about $99 million in the red on an operating basis and was able to report a $21.u million profit only because sf tax credits. In the 1st quarter of 1930,- General motors reported an 87% drop in earnings to $155 million or 52 cents a share. Its sales declined 12% from $17.9 billion in the 1st quarter last year to $15.7 billion for the 1st quarter of 1980. ‘b80208 UPDAT -08/00/80 m CBS‘ 2 E- GM experienced record losses in the 2nd quarter of 1980. It was the ;ompany's 1st quarterly loss in almost a decade and the largest quarterly loss in the history of the firm. The company reported a net loss of $012 million. Ford Motor Company, the second largest domestic auto producer has been steadily losing its market share in the United States for years. It posted a 4th quarter net loss of $41 million and an earnings plunge of more than 26% for all of 1979. The loss is the first red entry recorded by the Nation's third largest corporation since the 1974-75 recession. The number 2 domestic auto maker had a deficit of $163.6 million in the 1st quarter 1980. Sales in the 1st quarter fell nearly 24% to $9.61 billion, from $12.58 billion in 1979. Ford lost $468 million in the 2nd quarter. Chrysler, the smallest of the Nation's big three auto producers, sought and obtained Federal assistance in the form of loan guarantees of up to $1.5 billion to prevent bankruptcy. In 1979, the financially ailing firm rolled up a net loss of $1.1 billion. This amount is believed to be the largest yearly loss by a single firm in American corporate history. The company, which has not earned a profit since 1977, is expected to continue experiencing losses throughout the remainder of 1980. Chrysler now estimates its 1980 losses at between $550 million and $650 million. However, it reported 1st quarter losses of $uu9 million and 2nd quarter losses of $536.1 million. The financially ailing Chrysler Corporation hopes to turn itself around with the final approval that it received on June 25, 1980 from the Chrysler Loan Guarantee Board to sell $500 million in notes of Federally guaranteed securities. Approval was granted for an additional $250 million. Th Board also authorized an additional $50 million in loan guarantees above the $250 million figure, provided that Chrysler obtains an equal amount of aid from private sources. _ » In 1979, American Motors Corporation, the smallest domestic automobile producer, had its best year in a long time by recording a net profit of $83.9 million up from $36.7 million in 1978. However, AMC said its net income for the 1st quarter of 1980 fell 96% to $1.3 million or H cents a share, from $32 million, or $1.06 a share, a year earlier. First quarter sales rose 2% to $789.3 million from $773.0 million. However, in the 2nd quarter it reported a $80.9 million deficit ~-- its largest quarterly loss ever. §a§h_§s2ats§ In an effort to turn their bleak sales picture around, U.S. auto producers have offered cash rebates on certain models. For the first time since 1975 all Big Three auto companies are simultaneously offering factory rebates. During the 1975 auto slump, Chrysler was the first auto maker to initiate a rebate program and it was quickly joined by its competitors. However, it soon became apparent that the rebate program was very expensive “ud after a few months the impact on consumer purchasing patterns began to ecline. Ironically, during the 1975 slump, auto producers were offering rebates on their small cars while today's rebates were designed to encourage purchases of less fuel efficient large cars and some slower-selling smaller cars. CRS- 3 fiB80208 UPDATE-08/OH/80 Not only has Chrysler been offering rebates of $200 to $700 to buyers on ,ome of its leftover 1979 models, but it has also launched a unique sales program. This four-part program includes a 30 day or 1,000 mile money back guarantee on new cars or trucks purchased; a $50 test drive offer to people who buy either a Chrysler or a directly competitive make; no charge scheduled maintenance service for two years or 24,000 miles on domestic and 12 months or 12,000 miles on imported vehicles; and a 2-year gift certificate membership in the AHOC0 Motor Club. ézitshes_fr9m_§i9-:9_§mell.§er§ Despite Detroit's promotion effort, activity in the U.S. car and truck market dipped to a 5-year low late in 1979. The gasoline crisis in the spring of 1979 seriously disrupted domestic car and truck sales by increasing the cost of owning and operating American made autos. This gas crisis also resulted in increased demand for more fuel efficient foreign cars, which continued to increase their share of the total motor vehicle market. nany consumers also switched their demand from big cars to small ones. The auto industry experienced this same change in demand after the Arab oil embargo in 1973. While the 1973 switch in demand was only temporary, the auto industry believes this most recent change in demand to be permanent and has been "downsizing" many of its models accordingly; The auto industry has attempted to respond to consumers‘ change in demand from big cars to small autos. General Motors began downsizing its cars with ts 1977 models. Ford and Chrysler launched the first of their downsized entries in the 1979 model year. In 1970, the only subcompact produced by domestic auto makers was the Gremlin. In that year, An produced 25,300 of these autos. In 1971, subcompacts comprised less than 1% of domestic auto production. However, in 1979 subcompacts increased their share to 15% of domestic auto production. How effectively U.S. auto producers can meet the potential demand for small/fuel efficient cars will be crucial to its future growth. a The change in demand provides cause for a pessimistic outlook for 1980 since auto producers are locked into their 1980 production line-ups and can do little to adjust to the new market conditions, except to adjust production schedules. As a result, the Big Three entered 1980 with 129,000 workers on indefinite layoff from plants that build large cars, vans, and trucks. Meanwhile, small car plants are running near capacity. But these plants cannot meet full market demand because of a shortage of facilities producing fuel efficient four cyclinder engines. And as May 1980, auto manufacturers have closed 13 of #0 plants and laid off 28u,0O0 workers. I!B9£E§ one theory holds that consumers are assumed to be switching to foreign build cars largely because they believe them to be more fuel efficient than American made autos. Interestingly enough the Environmental Protection “fiency (EPA) data on the fuel economy performance of 1979 model imported and Jmestic cars appear to refute this belief. The EPA divides passenger cars into 10 weight classes. For 6 of the 7 weight classes in which both domestic and imported cars are produced, U.S. cars average higher fuel economy than the imports. In the one class led by imports, the average is only marginally higher, 28.3 to 28.1 miles per gallon. U.S. cars were found to be more fuel efficient on a pound for pound basis. However, two-thirds of 1979 import CRS- fi fiB80208 UPDATE-08/On/80 sales were in the 3 lightest classes, versus 6 to 7% for domestic cars. As the demand for small cars increases, so will the demand for foreign made autos. In 1979, imports of passenger cars rose to a record year-average of 21.8%. This share of the domestic auto market is expected by many to rise as much as 30% in 1980 from 15.3% just 10 years ago. February, the latest month available, shows import sales at a record high of 27.1%. March 1980 import sales declined to 25% but in may they increased to a record high of 28.fl%. Japanese auto imports have been steadily increasing. In 1979, Japanese cars accounted for 76.1% of the total sales of imported cars. Sales of automobiles from Japan increased 30.5% between 1978 and 1979. Total imports for the first half of 1980 increased only 4.2% from the same period in 1979. During those same six months, Japanese imports rose 9.6% and increased their market share from 16.3% in 1979 to 21.7% in 1980. As the number of auto imports has increased, there has been a move to place some limits on foreign imports. Several bills have been introduced in the 96th Congress to either limit imports of foreign-made autos or spur sales of U.S. cars. For example, H.R. 6492 would limit imports of foreign autos to 10% of the domestic auto market. Another bill, H.R. 7332, proposes a $500 tax credit applicable for the remainder of 1980 to purchasers of new cars whose overall fuel economy has increased by 20% since 197$. Since U.S. made cars qualify to a greater degree than imports for this tax credit, the bill 'ould essentially/appeal to most buyers of domestic autos. The United Automobile Workers (UAW) is also threatening to push for a law that would force foreign producers that sold more than 200,000 cars a year in the United States to build plants here. Originally, Ford Motor Company was the only one of the Big Three to publicly announce support for the protective legislation. However, Lee Iacocca, Chairman of Chrysler, has also announced support of legislation to limit the number of imported cars sold in this country and to force Japanese car makers to increase greatly purchases of U.S. parts used in those vehicles. The bill would hurt the sales of domestic producers‘ captive imports. (Captive imports are foreign built automobiles sold under American nameplates: for example, Ford Fiesta, Dodge Colt, and Plymouth Arrow.) General Motors has strongly indicated that they are against any protective legislation. However, atwa recent stockholders‘ forum in Washington, D.C., Thomas Murphy, Chairman of General Motors, surprised the audience by stating that he was in favor of requiring Japanese auto producers to build plants in the United States. The auto industry is a multibillion dollar industry. In 1979, its value of shipments equaled $78.3 billion and accounted for 3.3% of total GNP. The 3.3% is down from the 3.8% that the auto industry contributed to GNP in 1978. The auto industry employes more workers than any other industry. Based on figures compiled by the Motor Vehicle Manufacturers Association, employees in motor vehicles and related industries represented 22.5% of total domestic Jrkers. Thus the slump that it is experiencing also has a negative impact on the economy as a whole. On Hay 6, 1979, Senators from all parts of the country affected by the auto industry met in Washington, D.C. with U.A.W. President Douglas Fraser and top auto executives to discuss the industry problems and possible solutions. A tr! CBS» 5 fi 80“O8 UPDhTE-O8/On/80 On May 1Q, 1380 President Carter met with top auto officials to discuss ;he industry's problems. The President promised to specifically review problems created by Government regulations and credit policies. President Carter announced his auto aid plan to the Nation on July 9, 1980. The plan includes the President's decision to ask the International Trade Commission to expedite its investigation of auto imports. The aid package also included deferral of auto emissions standards, financial assistance to communities affected by auto worker layoffs, guaranteed loans for auto dealers, tax breaks for auto manufacturers, and creation of a permanent auto tripartite committee. LIBRARY OF VVASHINGTON % UNIVERSITY 31'. Lougs - MO.