The Evolution of the Auto Parts Industry

Educational

Nov 26th, 2018

The Evolution of the Auto Parts Industry

The auto parts industry impacts domestic economies, especially in the US. Yearly car sales numbers are an indicator of how healthy a nation’s economy is. During the recession of 2007/2008, there was a drastic decline in auto parts sales, which was a reflection of the fall in consumer expenditure.

Intervention by the State

Despite Ford having a hedge in the form of billions of dollars in reserve, the likes of General Motors, as well Chrysler was struck. On the verge of being declared bankrupt, the US government initiated a program to provide bailout money to troubled firms. 

By 2012, economic reports showed that the auto parts industry was once again recovering and that some automotive firms had paid their debts back to the US government as profits were growing.

Origins and Growth

The introduction of automobiles and their mass production by Henry Ford helped contributed to the prosperity of the economy in the US. Many new jobs were created in the industry, which needed workers for its assembly lines. 

This had a positive impact on the steel industry, as well as manufacturers of machine tools, as the demand for auto parts grew. Many new businesses were established to cater to the automotive industry’s growing needs. There was a massive ripple effect as other sectors of the economy benefited from more customers purchasing automobiles as a means of transportation or for commercial purposes. Insurance companies raked in millions as cars need to be insured. Advertising agencies, as well as print media and broadcasting, profited from nationwide campaigns for automobiles. Car maintenance workshops popped up everywhere as their services rose in demand. The petroleum industry was also a winner as the increase in car sales triggered a rise in the sale of gasoline.

World War II

With the start of World War II, the industry began to explore military production. The Willys Company built the Jeep as a very manoeuvrable overland vehicle. It was produced in large quantities for the military. Chrysler constructed tanks. 

With the end of World War II, a backlog of demands once again gave the auto parts industry a boost. Then came networking of highways built around the nation in the 1950s by the Eisenhower-led administration, which ensured that drivers could get from NYC to LA with no red lights in the way. 

With an increase in mobility, a lot of people migrated to the evolving suburbs beyond the country’s big cities metro limits. There was a boom in the local housing sector to accommodate families that were leaving jam-packed areas for more spacious ranches on large portions of land. Returning veterans also joined the suburban fever as they were encouraged to buy homes via government-insured loans. The economic boom also triggered the need for furnishings, appliances and more household items required by new homes. More goods were being transported by trucks, which led to the trucking sector enjoying sustained economic growth via a piggyback system where trains were used to move large trucks to important destinations.

Industry Competitors

Overall, the impact of the growth of the auto parts economy was enormous. The automotive industry and the US economy at large were booming. The world market was dominated by car companies from the US who sold as much as 10 million cars. As is inevitable in all industries, the auto parts industry became complacent, which led to the rise of foreign competition from Japan and Germany. 

The emergence of new competitors led to the loss of the market share of American automobiles as these new brands offered enhanced gas mileage, were affordable, and had great aesthetics. With the help of the government, however, the auto parts industry in the US soon regained its dominance by 2012.

The Early Years

In the late 19th century, the US had only four registered cars, but by 1916 this figure had increased to 3,376,889. Numerous entrepreneurs, including inventors, delved into the auto parts business to match the demands for vehicles which rendered horse carriages obsolete. Some of the automobile manufacturers at the time were General Motors, Ford, Cadillac, Stanley Steamer and Chevrolet. The majority of these companies were situated in Detroit. One standout firm was Ford. Despite the 2007/2008 recession, Ford is still very much in business and is doing very well. 

While most people believe that Henry Ford invented the automobile, it appears that he did not. However, he was an outstanding innovator and had a goal of making cars affordable to as many people as possible. He did this by consciously lowering the profit margins of his business to achieve higher unit sales. For example, it cost about $825 to buy a Ford in 1909. That year, about 10,000 Ford cars were sold. The car started to become a need rather than a luxury, as was seen in marketing and ads. 

By 1914, Ford workers earned $5 per day, which was double the average wage rate. Their work hours were also reduced. The innovations in Ford assembly lines and management strategies saw the production time of the Ford Model T decrease from 12 hrs and 8 minutes to one car produced every 24 secs. Within 18 years, Ford had successfully built over 15 million vehicles. 

The Great Depression

In 1929, even though there were record sales for automobiles, the stock market crashed late in the year, which led to the Great Depression. The economy suffered, and the automotive industry seemed to be the most hard hit. Workers lost their jobs not only in the industry but also in other sectors linked to the automobile industry. Despite this setback, the industry kept offering innovative designs. Cars from Chrysler and DeSoto came with aerodynamic streamlining. At this time, about 54% of families in America owned cars.

In 1935, the Auto Workers Union began to offer its members increased wages plus additional benefits. By embarking on several strikes in the coming years, they were able to get more benefits for members from the automotive companies. Some benefits, which included pensions, created so much financial burden for the firms to the point of bankruptcy. In 1938, GM launched cars that used a semi-automatic gear. About two years later, cars with fully automatic transmissions were launched by Oldsmobile and Cadillac, while Packard launched the first car with air-conditioning in 1949.

Beyond World War II

America turned all its major resources and production capacity toward the military sector due to the war. The prominent automobile manufacturers began to focus on producing war machines, such as tanks and trucks, as well as jeeps and armoured vehicles to the point that only 139 cars for civilians were built-in 1943.

With the end of the war, the demand for passenger cars had built up so much that it created a car industry boom with increased profits. The 100 millionth car in the US was made by 1948, and Dynaflow auto-transmissions were introduced by Buick followed by more innovations such as power steering and power windows. 

Foreign Industry Players & Their Impact

However, in 1958, automobiles made in Japan such as Toyota and Darian were imported and began to push American automotive companies from the market as they were better engineered, affordable and far more economical. 

As the year rolled by, these imported cars continued to dominate the market, even after the oil embargo in 1973 and the Arab vs Israeli war, which led to a hike in the prices of gas. 

Honda established a factory in the United States, Toyota launched the Lexus, General Motors introduced Saturn, while some American companies purchased stakes in these foreign firms to take advantage of the expanding markets overseas. The US retained its status as the leading auto parts maker in the world, but soon it suffered a massive setback with the emergence of the recession.

A study of how the auto parts sector contributed to the economy of the United States showed that about 9.8% of all jobs in the US were in one way or the other linked to the auto parts industry which represented approximately 5.6% of the compensation of workers. In the GDP, auto manufacture represented about 3.3%.

Ford held its 100th anniversary in celebration of the Model T in the year 2008, but the likes of GM had nothing to celebrate as it had recorded an annual loss worth around $39 billion in 2007, which is the highest any automotive company has ever recorded in losses. This is a pointer to how badly the US economy had slumped and how the foreign brands had gained most of the market share, mainly Toyota. 

Chrysler also suffered its fair share of losses just like GM, and they both were declared bankrupt and given bailout funds by the US government via the TARP program, which was set up to assist the critical business to recover from the blow of the recession. Since Ford already had a reserve fund, it did not need to request for the bailout funds. It is not exactly known how much money was given to GM and Chrysler in the form of bailout funds as different amounts have been reported by various sources. 

To assist the automotive industry, in 2007, the Union of Autoworkers accepted wage concessions, givebacks, and other health benefits. As of 2012, the US economy began to recover with a fall in unemployment to about 8.3%.

Present Trends 

In 2012, the US auto parts industry began to recover from its crisis as the likes of GM released its highest ever net profit worth $7.6 billion. Chrysler’s profit was much lower at $183 million, which is the first time it reporting a net profit ever since it went bankrupt. It seems that the bailout funds provided by the United States government to help the auto industry proved useful. By then, Chrysler and GM had repaid the loans that they took from the Government with Chrysler paying only a part while GM paid in full. 

Today, the number of passenger cars, trucks and SUVs currently plying the roads of America is in the hundreds of millions. It is estimated that it would require some 25 years to see them all replaced with a shallow rate of annual automobile sales. While the American automotive industry has been very profitable since 2012 to date, a lot of potential exists as to what the future holds for the auto parts industry. 

In China, the sales of US automobiles has increased significantly, but there is room for improvement in the European market. 

Conclusion

The US economy has recovered quite well and is still recovering. If it continues at this rate, then auto part sales will improve too. American citizens love their automobiles and need them for many reasons, and that is why the auto parts industry will prosper as the United State’s economy prospers too.