BPEA | 1991: Microeconomics

Brand Loyalty and the Decline of American Automobile Firms

Discussants: Zvi Griliches and
Zvi Griliches Harvard University and National Bureau of Economic Research
Richard L. Schmalensee

Microeconomics 1991

DESPITE RECORD profits in 1988, the American automobile industry is in serious decline and could face a financial crisis during the 1990s. Much of General Motors’ and Ford’s recent profits have come from European operations that in some cases are protected from competition with Japanese automobile manufacturers by import barriers-a luxury that will end soon because the Japanese are building plants in Europe. Independently, Europe may lower its barriers. Japanese production capacity also continues to grow in America. By the mid- 1990s Japanese transplants will be capable of producing 3.5 million cars and light trucks a year, nearly 25 percent of all current U.S. sales. While the Japanese are building plants, American companies are closing them-eight in the past three years. The Japanese product line is also growing, with cars produced in all size classes, including luxury and midsize, the traditional strongholds of U. S. producers. American companies must also confront the end of the long U. S. economic expansion.