Blowback: Patriotic American Automobile Consumers

One of the major themes you’ll find in many of the blog posts on this site is how dishonest action meant to solve a problem creates blowback (unintended consequences) that create an even more serious problem.  Blowback occurs everyday and at every scale: between individuals, within the marketplace and on the international stage.  Today, I’m interested in the blowback that resulted from American car consumers purchasing inferior American automobiles.

Many Americans feel like it is their patriotic duty to purchase American cars (I don’t know why they don’t feel the same about clothing or appliances).  They are, in fact, being dishonest with themselves and the marketplace by purchasing inferior products.  By engaging in dishonest activity, they’re creating blowback pressure: pressure that contributed to the destruction of the automobile industry.

The market is very good at indicating product inferiority.  If your product sucks, demand goes down and your firm makes less money.  The Big Three had an advantage over their foreign competition: something I’ll call a ‘patriotism subsidy.’  This subsidy is equal to the amount Americans would pay to feel ‘patriotic’ about their automobile purchase.  In the past, the subsidy increased demand so that the Big Three didn’t receive the market signals that would have motivated them to invest more in their products.  Indeed, the market indicated to US auto executives that they were doing things right because their cars kept selling.  On the flip side, foreign manufactures, having to compete against US competition ‘benefiting’ from the patriotism subsidy, had to build better products at even lower prices.    This subsidy created an ever increasing gap in product quality between US and foreign manufactures and by the mid 1990s, the quality gap became larger than the patriotism subsidy and US automobile sales fell off a cliff.  Draping their products in the American flag no longer produced the results it once had.

In 2008 it became abundantly clear that the Big Three couldn’t survive any longer without assistance from the US tax payers.  Indeed, it appears ‘patriotic’ consumers have gotten what they wanted: now all Americans have to ‘support’ the Big Three US automobile manufactures, whether they like it or not.

6 thoughts on “Blowback: Patriotic American Automobile Consumers”

  1. I believe that two blows crippled the auto industry.
    1)SUVS were the cash cow for the big three U.S. automakers. In fact, the profit margin on cars was insignificant for these three. The automakers, I believe, had a large comparative advantage in SUV production over the other foreign car manufactures, which led to other car manufactures producing sedans and cars instead of trucks. However, when oil rose to extreme prices, people realized that buying an SUV for 50,000 at a fixed cost was not the true cost of buying an SUV. There were hidden costs, i.e. the high volatile price of oil, which could accrue to thousands of dollars. This lead to a decline in consumer demand. This impacted the Big Three much more than foreign carmakers.
    2) When the credit crisis hit, all automobile companies were hit hard, but the BIG 3 harder than others. Few was buying cars or trucks, and of those few they were purchasin cars. NO ONE was buying SUVs.

  2. Simple, you’re only half right. Ford did not accept a bailout per se because the company has remaining funds from a 2006 credit facility of $23.5 billion. So, yes, no bailout funds, but it’s not as if the money they have is generated from cash flows. You’re half wrong, however, in that Ford did ask they government for a $9 billion loan. They may not expect to use it (i.e., it would be set up as an account from with the firm could draw down), but if they don’t need it, why ask for it? Maybe they won’t use it, but don’t praise them just yet.

    To No Butta’s points I’d also like to add the fact that the Big 3 have built up considerable goodwill in America (and I mean that in the financial, P&L sense as well). That, in part, is why we’re even having this discussion over “buying American.” The short of it is the Big 3 did not always produce inferior cars; for a while, they were the best. And that “while” was not that long ago. A lot of people, particularly people who NEED trucks and SUV’s (not everyone lives in a city after all), were loyal to American car makers (and still are–the Ford F-150 is still the highest rated pick-up). So, Walther’s right as is No Butta, but it’s also important to realize that we are on the back end of a much longer term (and not completely irrational) trend.

  3. That ‘longer trend’ is the suburbanization of America. When the Model T came dropped in 1908, less than 12% of Americans lived in the suburbs. When the Mustang came out in 1965 it was 30%. By 2000, the year the Ford Focus was released in the US, more than 50% of Americans lived in the ‘burbs.
    Suburbanites do not need off road capability or pick up truck carrying capacity: they need to move people and purchased goods. They need a midsize car. The Toyota and Honda have dominated this segment for well over a decade. The Europeans and Japanese have also been dominating the more urban small car market for two or three decades. Detroit might still be able to build a decent truck, but when only 25% of the population lives in rural areas where trucks are useful, focusing on that demo doesn’t seem like a smart move.

    The fact of the matter is, and I described this more in this [] article, that Toyota developed the next generation production system called TDS in the 1960s and the products they created from this system, which was basically as revolutionary as Henry Ford’s industrial system, were simply superior. It was faster, better and cheaper. Detroit (and nearly every heavy industry manufacturer) now uses a variation on TDS. My thesis in this article is that patriotic American consumers distorted market signals and thus, delayed Big Three adoption of TDS and other much needed innovations.

  4. I won’t argue with the “suburbanization of America” for the simple fact that it’s absolutely true. A few things to the rest of the response though.

    First, it is completely unfair to flippantly dismiss the 25% of people who populate rural areas. I’d hate to think how you would react if you got a 25% pay cut–no big deal, it’s only a quarter of my salary. The point being that 25% of data is not “noise” distorting “market signals”; 25% of a data set is a substantial signal in its own right. This does not negate your point about the TPS, but it is an important corrective.

    Second, and more theoretical, is that you can’t have it both ways. “Patriotic American consumers” may have distorted “market signals,” but that presupposes a free market. Your thesis is not incorrect in its bare bones, but it assumes equal access to information among all market participants. Marketing, goodwill, etc. temper the information that is filtered to the consumer. If your argument is that the market should decide, then that is fine, but it is also impossible. In fact, one could advance the argument that, given the prolonged success of their inferior models, American car companies were better adapted businesses than foreign car manufacturers.

    In the final analysis, your thesis needs to be questioned on the basis that information exists and is not created by the producers of goods (via marketing). I don’t think that you would refute this point, and it would seem to undercut the underlying premise of your argument–i.e., that market principles can work.

  5. No one is ‘flippantly dismissing’ 25% of people. What I must not have articulated properly is this: the Big Three chose to focus on SUVs and trucks development over car development over the last 10-15 years, which is a stupid move when 75% of the marketplace needs the functionality of a car. That need becomes quite clear when gas prices go up and/or the economy pressures people to become more price conscious.

    I think you’re mixing rural consumers with patriotic consumers: rural consumers aren’t creating noise (your word) in the marketplace- they’re rationally demanding a certain set of goods.

    You’ve lost me on the second half of your comment. First, it’s very true that many Americans have less access to foreign cars than domestic ones: fewer dealerships and a smaller maintenance network. However, consumers do have amazing access to information. There are a dozen different (and extremely popular) car magazines and websites out there providing trustworthy info.
    As for you saying that ‘it is impossible’ for the market to decide… what’re you talking about? Different factors can distort a free (I prefer the term ‘perfect’) market but the market (consisting of individuals, both rational and irrational) decides which cars are superior everyday. They keep choosing Toyota and Honda over GM and Chrysler.

    Last paragraph: the producers of goods DO create information. I think that’s what you meant to say. I don’t know how that undercut the functioning of the market.

    Bottom line: Patriotic consumers thought they were being pro-American when they purchased inferior products from the Big Three but their action ultimately hurt the industry.

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