A:

Global competition resulted in less market share for U.S. car manufacturers and threatened company profits as more foreign brands entered the U.S. market. The total market share of General Motors fell from 28.2% in 2000 to 17.6% by 2014. The other two of the Big Three car manufacturers also lost U.S. market share during this same period. Ford fell from 24.1% to 14.7%. Fiat-owned Chrysler now holds only 12.7% after having 15.7% of the market in 2000.

High labor costs, product lines that emphasized large vehicles with significant gasoline use and a looming global recession caused a crash in U.S. automaker profitability in 2008. American car manufacturers were struggling to compete against better, more efficiently manufactured products from overseas companies. As of 2015, Toyota earns more than GM, Ford and Chevrolet combined.

Lower per-car costs have allowed foreign manufacturers to gain larger portions of the U.S. market. Decades of market control by U.S. manufacturers caused the major automakers to invest heavily in meeting labor union demands. U.S. auto workers saw higher wages and better benefits, while the profitability of U.S. companies remained largely unfazed by high labor costs.

Demand for American cars remained strong. Sales of American cars were around 16.5 million in 2007. A global recession brought this figure down to 10 million in 2009 and significantly reduced Big Three profitability.

U.S. automakers took drastic measures to cut operating costs. They reduced their workforce by more than 40%, eliminated brands such as Saturn and restructured employee compensation to create more efficient operations. Many U.S.-based factories were closed or moved to states with lower labor costs.

After restructuring during the 2008 recession, U.S. automakers improved profitability and became healthier companies. They began creating more advanced cars, hiring more employees in the United States and abroad, and began to provide returns to investors once again. Increasing foreign competition continues to push U.S. automakers to look for supply chain improvements and market more heavily to American consumers. Company budgets increasingly fund advertising campaigns aimed at U.S. consumers, and automakers continue to develop more advanced product features. Profits per car often remain lower for U.S. automakers, even as costs are cut.

Foreign automakers benefit from favorable currency valuations that create lower sticker prices for consumers than U.S. cars offer. This added incentive may draw U.S. consumer spending away from American cars when the U.S. economy is strong, as the value of the U.S. dollar increases in relation to foreign currencies. Some foreign governments may decide to encourage U.S. purchases of their exports by using currency manipulation strategies. U.S. car manufacturers have gradually become profitable again, but they must continue to lower their operational costs and increase profits to remain competitive in the U.S. market.

RELATED FAQS
  1. How much of an automaker's revenue is derived from service?

    Learn more about what sector of the automotive industry profits from the service and maintenance performed on cars, and how ... Read Answer >>
  2. What warning signs should an investor look for when reading an automaker's sales ...

    Discover the warning signs that investors need to pay attention to in sales reports for automakers. Monthly sales, deliveries ... Read Answer >>
  3. What is the long-term outlook of the automotive sector?

    Find out about the long-term outlook for the automotive sector and the impact of technologies such as self-driving cars and ... Read Answer >>
  4. Why should an investor add exposure to the automotive sector to his or her portfolio?

    Learn more about what automotive manufacturers offer investors. Explore possible investments in automakers, auto parts manufacturers ... Read Answer >>
  5. What other sectors are most highly correlated with the automotive sector?

    Learn more about industries that are closely related to the automotive industry. Explore investment opportunities and industries ... Read Answer >>
  6. What are the primary risks to understand when investing in the automotive sector?

    Learn more about the automotive industry and the risks presented to investors. Find out how the auto industry has changed ... Read Answer >>
Related Articles
  1. Personal Finance

    How The U.S. Automobile Industry Has Changed

    We give a brief history lesson on the rise and fall of the American auto industry.
  2. Investing

    Is the Used Car Industry in Trouble?

    Usually, if new car sales go down, it's good news for used cars. Not this time.
  3. Insights

    Automakers Ask New EPA Chief for Leniency (GM, F)

    Automakers seek to capitalize on President Trump’s indifference to fuel efficiency by asking the EPA’s new chief to overturn current emission rules.
  4. Insights

    6 Countries That Produce the Most Cars

    With over 90 million cars manufactured in 2015, the automobile industry is a massive global market led by six countries.
  5. Personal Finance

    How Risky Are Long-Term Car Loans?

    A look under the hood of long-term car loans.
  6. Personal Finance

    Financial Advice for When You're Buying a Car

    When you buy a new car, make sure you are getting the best deal possible with these tips.
  7. Personal Finance

    7 Mistakes to Avoid When Buying a Used Car

    Understand the benefits of buying a used car. Learn about seven mistakes to avoid before making a used car purchase.
  8. Insights

    Now Is a Great Time to Buy a New Car

    Auto dealers have too much inventory right now and are offering buyers great incentives to purchase a new set of wheels.
  9. Personal Finance

    The Complete Guide to Buying a Used Car

    Everything you need to know to buy a reliable used car for a good price.
RELATED TERMS
  1. Auto Sales

    The major producers of domestic automobiles report sales monthly. ...
  2. Cash For Clunkers

    A program that allows car owners to trade in their old, less ...
  3. Tying

    An often illegal arrangement where, in order to buy one product, ...
  4. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  5. Applied Cost

    A term used in cost accounting to denote the cost assigned to ...
  6. Cost Of Goods Sold - COGS

    Cost of goods sold (COGS) are the direct costs attributable to ...
Hot Definitions
  1. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  2. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  5. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
Trading Center