Friday, December 19, 2008

Economics: Time Scale of Market Forces

PLACERVILLE, CALIFORNIA - As a "life-line" or whatever it should be called proceeds for the North American auto industry, there is one aspect of how the industry came to be in such a precarious position that I feel has not gotten enough attention. While there is plenty of blame to go around, the short-term nature of the US economy shares some of it, and until it is addressed, it will likely continue to cause problems not just for the auto industry, but for United States business in general.

Whenever I hear that the US automakers did not provide products that met the marketplace and should be allowed to go bankrupt, I wonder what the people making these statements were doing from the mid-1990's until the past few years. The American people were demanding large vehicles. Whether it was to haul large families, for status, or just because oil prices were artificially low during that era, these vehicles were popular. Even those that didn't really want a full-size SUV often were in the market for them as a defensive measure for safety reasons in case they got in a collision; they wanted to survive if they were hit by a SUV. Furthermore, customers were willing to pay ridiculous amounts of money for them, leading to significant profits for the automakers who were able to produce such vehicles. Japanese automakers were trying to figure out how to go beyond the small pickup market where they had made significant inroads and break into the highly profitable truck and SUV sector. Nobody was saying that American automakers weren't paying attention to the market during that era.

Of course, now the situation looks very different. When gas prices hit $4.00 a gallon, fuel efficiency suddenly became a desirable thing and survivability in a collision didn't seem so important. The market demanded "green" cars, and everyone suddenly wanted a Toyota Prius. When the market changed, it was the foreign automakers that were prepared for it with a product to meet the new market.

So why were Honda and Toyota prepared? Part of it was simply because they weren't as successful in the big SUV era and were looking for other niches in which to gain sales and some of it was the pressure of their domestic Japanese market where fuel economy was always a plus, but a significant factor was the fact that Japanese companies are willing to invest for the long term. They are not under the same degree of pressure from investors to show quarterly returns, so they can choose to try to anticipate where the market is going and invest there. American companies needed to show short-term profits and focused on shorter-term development.

This explanation does not absolve the management of the domestic "Big Three" automakers from blame for not trying to overcome those forces and move their companies ahead. They made plenty of mistakes for which they will likely be paying for years to come. The point is that there were forces working against them, and until something is done to change those forces, the automobile industry will likely not be the last to not take a long-term perspective and not be prepared for a change in a market. If the United States doesn't want to be perpetually bailing out industries, it will need to make some changes in how its financial system operates.

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