The major players in the U.S. automotive industry have had to revisit their policies, strategies and manufacturing practices amid challenges resulting from today’s business environment. Traditionally Klier and Rubenstein (2009) noted that the industry players like Ford and General Motors once produced many of the intermediate parts in-house. Today, the situation is strikingly different as the auto-manufacturers import most of the materials needed from foreign counterparts. This paper explores the causes and effects of the latter state-of-affairs. The U.S. automotive manufacturing industry has resorted to importing most of its materials from foreign manufacturers mainly due to the competition brought by low-cost foreign manufacturers, the emerging trend of globalization, high-cost structures and deteriorated financial positions that collectively leave them at a disadvantage, and the trend has far reaching negative effects to the citizens and the economy at large that include higher trade deficits, unemployment and constrained per capita income.
High costs of production in the U.S. automotive manufacturing have spearheaded the trend towards importation of most materials. Baily (2011) observed that individual companies’ profitability in the industry heavily depends on a company’s ability to strike a balance of the all-important dimensions of manufacturing efficiency, product quality and effective marketing. A major limitation to effecting this balance with regard to U.S. automotive manufacturers has been associated with the cost of materials. Foreign players command about half of the local market thanks to their low-cost production (U.S. Department of Commerce, 2008). This has posed a major challenge to the local companies. Rivals like Toyota, Honda and Nissan have been able to exploit the cheaply available factors of production in Asia, thus delivering high-quality products at relatively low prices. In-house production of these materials in the U.S. has become less attractive considering the cost opportunities elsewhere. Consequently, U.S. automotive manufacturers are forced to import the cheaply available materials from foreign players in order to remain competitive. This is indicated by the curve in figure 1 below representing motor vehicle parts imports, which has been contrasted with the falling light vehicle production curve for the period running from 1996 to 2008 (Klier & Rubenstein, 2009).
The advent of globalization has had a significant impact on the competitiveness of the local automotive manufacturing industry. Globalization has enhanced the ability of manufacturers to outsource materials from remote areas across the globe. The need to import materials for the U.S. automotive manufacturing industry may have been triggered by globalization, which has brought about multiple opportunities that manufacturers seeking to remain competitive find it difficult to avoid. These opportunities include cheaply available raw materials. By use of elaborate supply chains, automotive manufacturers are able to exploit such opportunities (Baily, 2011). This is argument is important as to why the U.S. automotive manufacturers are importing most of the materials.
Other causes of the stated automotive manufacturing industry in the U.S. include high-cost structures instituted by various policies and deteriorated a financial position. A report published by the U.S. Department of Commerce found that U.S manufacturers face considerably higher compliance costs than do many foreign trading partners (2004, p. 24). The position of emerging markets like China is underscored by its place in global business. In its report, the Department of commerce observed that whereas policy protection against economies like China instead of protecting innovation may have been instituted to enhance the position of local manufacturers, the underlying costs are disastrous and may hurt the local manufacturers (Depart of Commerce, 2004). Such policies may strengthen foreign players, stepping up competition that may as well have driven local manufacturers into importing materials. Elsewhere, the financial position of local manufacturers has deteriorated. In the competitive environment that prevails in the industry, foreign imports remain a viable solution to addressing the manufacturers’ drop in financial position.
The import of manufacturing materials by local manufacturers has serious effects U.S economy. First, as these manufacturers import more and more of the materials, the problem of trade deficit is worsened. Bailey (2011) argued that rising imports from China, Japanese, and Europe without an offsetting corresponding export to foreign markets has brought about the hotly contested concern over trade deficits. The gap continues to increase as a result of the high parts import as shown in figure 2 below (U.S. Depart of Commerce, 2008). From the figure, it is clear that the parts trade is not in favor of the U.S.
The second effect on the economy regards the rate of unemployment. The failure to produce the materials locally implies a drop in employment rates in the country. The Department of Commerce (2008) found that in in 2007, the automotive parts manufacturing industry accounted for about 5% of total manufacturing employment in the country. This figure indicates the importance of the industry to employment. Therefore a shift towards importing materials may be unhealthy to the economy in terms of employment. Third, a trade deficit has a negative impact on a country’s GDP, which is widely used as a measure of economic growth.
Similarly, the practice has serious implications for the citizens. First, people working for the automotive manufacturers may lose jobs. When the companies find it cheaper to import materials rather that have employees produce them in-house, they may decide to lay off the workers. Second, Americans’ purchasing power is reduced as a consequence of a lower per capita income. Trade deficits imply lower GDP and ultimately, a lower income per capita. Third, the cost of living may go up for individuals. A dependent on imports, as stated above, implies an outflow of resources which compromises the ultimate resources available for distribution to individuals. This may be viewer in terms of pay cuts and consequently, higher costs of living for the people (U.S. Department of Commerce, 2008).
The manufacturers in the U.S. automotive industry are importing most of the materials used from foreign manufacturers. This paper identified the intensified competition brought about presence of low-cost manufacturers in the local and global industry as the major cause of the trend. Another leading cause is the advent of globalization, which has enabled global manufacturing practices that see manufacturing entities use materials and parts from multiple sources all over the globe. Other causes include the high-cost structure of the local manufacturing industry and the deterioration in the financial position of local automotive manufacturers. The consequences of the trend to the economy include the issue of trade deficits, higher unemployment rates and low economic growth rate. Effects of the trend to people include loss of jobs, lower purchasing power and high costs of living. Although the practice may have positive outcomes for the manufacturing entities in terms of reduced costs, this paper concludes that the overall effects of importing materials for automotive manufacturing are far reaching and costly to the economy and individuals.
Baily, N., M. (2011) Adjusting to china: A Challenge to the U.S. Manufacturing Sector. Brookings Policy Brief Series, 179(186). Retrieved from http://www.brookings.edu/research/papers/2011/01/china-challenge-baily
Klier, H. T. & Rubenstein, M. J. (2009) Imports of Intermediate Parts in the Auto Industry-A Case Study. Washington D.C.: Conference on Measurement Issues Arising from the Growth of Globalization, November 6-7, 2009. Retrieved from http://www.trade.gov/mas/manufacturing/oaai/build/groups/public/@tg_oaai/documents/webcontent/tg_oaai_003660.pdf
U.S. Department of Commerce. (2008) U.S. Automotive Parts Industry Annual Assessment. International Trade Administration. Office of Aerospace and Automotive Industries. Depart of Defense, 2008. Retrieved from http://www.ita.doc.gov/static/auto_reports_parts_assessment.pdf
U.S. Department of Commerce. (2004). Manufacturing in America: A Comprehensive Strategy to Address the Challenge to U.S. Manufacturers. ISBN 0-16-068028-X.