When Sales Go Cold, Competition Fires Up

The auto industry's lack of significant sales growth in recent years is one reason the market is so brutally competitive, says William Strauss, senior economist for the Federal Reserve Bank in Chicago.

“There has been no real growth,” Strauss says of U.S. light-vehicle sales that some forecasters say will drop below 16 million units in 2008.

“In such a market, if one auto company is selling more, someone else is selling less,” he says at the 2007 Auto Finance Summit in Las Vegas. “So it becomes a very competitive marketplace.”

Red indicators for the auto industry in 2008 include rising gasoline prices and a distressed housing market, he says. Green indicators include high employment levels and growing income.

Since the late 1990s, domestic auto makers' market share has dropped from about 70% to 50%, Strauss notes. “So some people will say, ‘Well, there goes U.S. auto manufacturing.’

“But half the foreign brands' vehicles are produced here, which still brings us up to 75%,” he says. “It's just that it is no longer done by three companies; now it's 10. It means the market is less oligarchic, which is not bad for consumers.”

Moreover, Strauss says many vehicles with foreign nameplates contain more domestic content than vehicles with domestic nameplates.

For instance, he says, the '07 Ford Mustang contains 70% parts made in the U.S. and Canada, while the '07 Toyota Sienna contains 85% parts made in those two countries.

“There are dozens of examples like that,” Strauss says.

His advice to prospective vehicle importers, such as Chinese companies, that want to enter the U.S. market:

“It's a very demanding market, so you better make sure you meet the demands of even the lower end, which are pretty high. You don't want to be seen as another Yugo.”