The failure of individual automakers is invariably grounded in an inability to maintain adequate economies of scale. However, debates about what is the ideal shape of the American auto industry are heavily informed by competing assumptions about the scale needed to be financially sustainable.
Arguments in favor of auto industry consolidation — as few as six global firms — have been grounded in the assumption that large scale is essential to covering the high costs of running an automaker. Even so, over the years the “Get Big or Get Out” school of thought has been questioned both by independent studies as well as the success of some smaller and upstart automakers.
The Get Big perspective is perhaps most heavily inspired by General Motors. Key elements of that automaker’s strategy have historically included an aggressive international expansion effort and a broad product line which draws heavily on shared platforms and other major components in order to maximize economies of scale (see GM envy for further discussion).
It’s understandable why GM has been so widely copied — the automaker was remarkably successful for many years. However, smaller automakers have had a decidedly mixed record of mimicking GM. A key mistake has been to vainly try to match GM model for model rather than coming up with a strategy realistically scaled to their size.
Mimicking GM has been fraught with peril
In general, the smaller the automaker, the more likely that its long-term success has depended on finding ways to maximize its economies of scale that diverge from GM’s approach. Unfortunately, a groupthink has dominated the U.S. auto industry to the point where deviation from the norm — the GM way — has been relatively rare.
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A case in point was the Chrysler Corporation. The smallest of the Big Three was arguably the least stable since World War II. One could at least partly blame Chrysler’s boom-and-bust cycles on execution errors such as styling and quality-control lapses. However, even without those problems, Chrysler may still have been shaky because it usually overextended itself by trying to match GM almost model for model. Even the much-larger Ford Motor Company was not successful in doing so.
In the early-60s GM and Ford increased the size of their large cars and introduced compact and mid-sized platforms. By mid-decade Chrysler followed suit even though the automaker was arguably too small to copy such an expensive approach.
Ironically, Chrysler’s widely criticized downsizing of its big Plymouth and Dodge in 1962 could have led to more sustainable economies of scale if the automaker had ultimately put all of its full-sized and mid-sized cars on one shared platform (go here and here for further discussion).
Studebaker overextended itself with too many bodies
Achieving adequate economies of scale was even more important for independent automakers. An under-appreciated reason why Studebaker collapsed in the mid-50s was that it overextended itself by introducing two distinct bodies for its redesigned 1953 models. A low-slung two-door coupe and hardtop shared fewer body components with the automaker’s taller family cars than did GM’s Chevrolet and Pontiac brands.
Studebaker’s volume was not high enough to cover the costs of keeping both bodies competitive through refreshed styling. That led the automaker to focus on keeping current its higher-volume family cars. The coupes received little attention and sales slowed to a trickle.
Studebaker essentially invented the personal coupe, but it took a much larger automaker — the Ford Motor Company — to fully exploit this market with the highly successful four-seater Thunderbird.
AMC under Romney found the sweet spot
American Motors under the leadership of George Romney went in the opposite direction from Studebaker — and most other independents. During the early-50s Nash, Hudson and Kaiser all launched compact models intended to supplement sales of their big cars. This saddled low-volume automakers with the high costs of maintaining two distinct platforms.
Romney recognized that this was not financially sustainable. Once Nash and Hudson merged and Romney became its CEO, the automaker’s full-sized cars were discontinued in favor of the compact Rambler. This represented the most egregious violation of Detroit groupthink an American automaker could commit in the mid-1950s. However, the Rambler was so successful that in 1961 it became the third best-selling brand (go here for further discussion).
Saab wasn’t far-sighted enough to stay competitive
An independent automaker can be so small that it has very little room for error. Saab is a particularly good example of this because the Swedish automaker’s annual volume was so low that it could not achieve adequate economies of scale without keeping its passenger cars in production for exceptionally long time periods.
That, in turn, meant that Saab’s new designs needed to be much more advanced than competitors so they would sell well through their entire production cycle.
GM places too much emphasis on component sharing
The above examples are all of automakers that did not achieve adequate economies of scale. The opposite problem has also occurred. General Motors is among the domestic automakers that learned the hard way that too much component sharing — which in its extreme is called badge engineering — can undercut the viability of their brands (see brand management).
An example of that is GM’s premium-priced brands. Their sales had historically been the key to the automaker’s domination of the U.S. market. In 1962 GM produced more than half of domestic passenger cars partly because it garnered a whopping 76 percent of the premium-priced, full-sized market.
GM began to slowly kill the golden goose by chipping away at the autonomy of its divisions. Over the course of the next two decades its brands lost much of their distinctiveness in engineering as well as styling. This undercut the whole rationale for fielding such a large number of brands. Eventually GM needed to radically purge the number that they offered — and one could argue that the automaker still has too many.
Platform sharing still important to economies of scale
How platforms are defined has evolved along with technological change, but economies of scale can still be heavily informed by the level of component sharing.
As a case in point, when unveiling its new electric truck and sport-utility vehicle in the fall of 2018, Rivian announced that all four of the products it intends to offer in the next few years will be built upon the same platform.
This suggests that Rivian may achieve better economies of scale than Tesla because the latter currently has two platforms . . . and may offer more if it follows through on talk of expanding into the truck market.
‘Get Big’ school of thought has been questioned
Over the years automotive experts have argued that the costs of competing internationally were becoming so great that the global auto industry could shrink to as few as six giant transnational firms. For example, automotive journalist Brock Yates (1983) put forth this scenario more than three decades ago.
Some industry observers have raised questions about this “Get Big or Get Out” school of thought. For example, a number of post-war researchers found that an independent automaker with one assembly plant could be profitable producing between 100,000 and 200,000 units per year (Ebert, 2013).
An MIT study in the 1980s showed that technological advancements had significantly reduced the minimum efficient manufacturing scale. “This means that medium-line and specialist firms need not suffer production-cost penalties if they work out purchase or co-production arrangements for components still requiring high volume” (Anderson, 1984; p. 182).
Industry consolidation predictions don’t pan out
Of course, one could argue that the auto industry has become even more capital-intensive since the 1980s due to the elephant stampede to autonomous vehicles . . . and a grudging embrace of electrification. However, these trends have not yet unleashed a large wave of industry consolidation. Indeed, the opposite has by and large occurred. This has partly reflected booming automotive markets in South Korea and China, but has also been spurred by growing interest in electric cars in the U.S. that was not fulfilled by existing automakers.
In addition, smaller firms such as Subaru and Mazda have survived by carving out distinct niches and developing partnerships to secure needed technology. One could argue that Subaru was so successful in the 2010s precisely because its smaller size allowed it to adapt to market changes more quickly than larger automakers.
It remains to be seen whether U.S. startups such as Tesla and Rivian will survive once established automakers move into the electric vehicle market. The legacy automakers’ superior economies of scale could plausibly wipe out the upstarts in much the same way that the Big Three decimated the independents in the mid-1950s.
Has nimbleness become a crucial advantage?
One other scenario is also plausible. The above-mentioned MIT study suggested that large automakers such as Ford and Toyota may find it difficult to create distinctive products because of the centralized structure of their organizations (Anderson, 1984). As GM found out with its now-defunct Saturn, Oldsmobile and Pontiac brands, economies of scale can be a double-edged sword.
The Ford Motor Company’s investment in Rivian illustrates how being new and small can become an advantage in an industry dominated by behemoths.
Fortune magazine noted that in addition to Rivian’s advanced technology, “the nimble aspects of a young company has value to Ford, a legacy automaker striving to prove to investors it can adapt to a changing business landscape” (Warren, 2019).
RE:SOURCES
- Anderson, Martin and Alan Altshuler, Daniel Jones, Daniel Ross and James Womak; 1986. The Future of the Automobile: The Report of MIT’s international Automobile Program. The MIT Press, Cambridge, MA.
- Ebert, Robert R.; 2013. Champion of the Lark: Harold Churchill and the Presidency of Studebaker-Packard, 1956-1961. McFarland & Company, London.
- Warren, Tamara; 2019. “Ford Is Making Its Own Electric Truck, So Why Is It Investing In Rivian?” Fortune. Posted April 25.
- Yates, Brock; 1983. The Decline and Fall of the American Automobile Industry. Empire Books, New York, NY.
This is an updated version of a story originally posted April 1, 2019.
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