The United States has become the most desirable location in the world to build cars. Despite the revival of the Big Three, new entries continually appear, with two European makers, BMW and Mercedes-Benz, setting up plants in the United States. At the same time, cracks are apparent in the vaunted Japanese manufacturing system. Exports to Japan are growing, albeit from a small base, and imports from Japan continue to plummet, having fallen in volume terms every year since 1986.1 Chrysler and Honda produce right-hand steering vehicles in the United States for export; Ford, Saturn, and Toyota have announced plans to do the same. Among parts producers, eighty American parts firms have representation in Japan, and there are more than two hundred U.S.-based, Japanese-run plants that are also potential exporters. Driving this reversal are two fundamental shifts in our relative competitiveness: a reformation of American manufacturing management and the tripling of Japanese labor costs in U.S. dollar terms. These changes, of course, extend beyond the U.S auto industry into many sectors of manufacturing and affect our position relative to the European Community (EC) as well.
Evidence of Reversal
In 1981, Japanese automakers raised car prices in the United States by as much as 25 percent. The Big Three responded by raising prices too. Market shares shifted rapidly, as imports made inroads on the Big Three. The Japanese earned high profits; indeed, Toyota earned the moniker “Toyota Bank” from the horde of cash it accumulated. The Big Three automakers were at best able to stem their hemorrhage of red ink.
In 1992 and 1993, Japanese car companies again raised prices in the United States, with increases averaging 12 percent to 13 percent. The Big Three followed suit but with hikes only half as large. Market shares again shifted rapidly. This time around, however, the Japanese are trying to staunch the flow of red ink, while the Big Three — particularly Chrysler — are pulling in profits. Likewise, American producers are eating into Japanese market share, which dropped from 36.1 percent of the car market in 1991 to 32.3 percent in the first half of 1993.
Why the change? One reason is that this time it is Japan that is in the grips of a steep recession, rather than the United States. Sales within Japan began falling in 1991 and were still declining in June 1993. Recovery is likely to be slow.