Economist on Car Industry

The Economist has a survey on the world’s automobile industry, one which “makes nearly 60m cars and trucks a year, and employs millions of people around the world. Its products are responsible for almost half the world’s oil consumption, and their manufacture uses up nearly half the world’s annual output of rubber, 25% of its glass and 15% of its steel. No wonder the car industry accounts for about 10% of GDP in rich countries.” But it is an industry which is undergoing change. From an editorial in the same issue:

The car business is ripe for revolution. As our survey of the industry in this issue describes, it has chronic problems. Once it epitomised 20th-century capitalism, but today it looks poorly equipped to thrive in the 21st century, or even to survive in its present form. Many of the world’s biggest car firms are destroying wealth rather than creating it. About half of the industry is regularly incapable of earning a decent return on its invested capital. Although it still accounts for about a tenth of economic activity in rich countries, it has been virtually shut out of stockmarkets for the past 20 years, accounting for a mere 1% of total market capitalisation.

There are plenty of ideas knocking around for how the industry might transform its fortunes. Ambitious mergers are no longer regarded as the answer, especially after the disastrous acquisition of Chrysler by Daimler-Benz in 1998. Instead, the focus is on ways to adapt the mass production system invented by Henry Ford to the realities of today’s markets. All car firms have learned from Toyota how to use just-in-time, lean production to make cars much more efficiently. A continuous flow of parts arrives from the other side of the world (increasingly from China) just when they are needed. But, oddly, the finished cars then sit in parking lots for up to 90 days before they are sold, usually at a discount because they are not the colour or do not have the optional extras that the buyer wants. The whole industry is straining to find ways of making cars to order rather than producing them for inventory.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.