Automotive Industry and Free Trade Agreement

Stratsim Stratsim simulation: Marketing Strategy and Implementing Summary More than one million Americans are employed in manufacturing motor vehicles, equipment and parts. But the industry has changed dramatically since the U.S. “Big Three” motor vehicle corporations (General Motors, Ford and Chrysler) produced the overwhelming majority of cars and light trucks sold in the United States, and directly employed more than that many people themselves. By 2003, most passenger cars sold in the U.S. market were either imported or manufactured by foreign-based producers at new North American plants (so-called “transplant” facilities).

The Big Three now dominate only in light trucks, and are being challenged there by the foreign brands. The Big Three have shed about 600,000 U.S. jobs since 1980, while about one-quarter of Americans employed in automotive manufacturing (nearly 300,000) work for foreign-owned companies — and that excludes Chrysler, which was acquired by Daimler Benz of Germany in 1998. These changes have had major effects on the structure and location of the U.S. motor vehicle industry. Michigan has been the state most directly and adversely affected, losing about 100,000 auto industry jobs since the late 1970s.

Most other Midwest auto belt states have either held steady or posted gains in total industry employment, even if they have lost Big Three jobs. Some southern states, notably Kentucky and Tennessee, have been the largest net gainers of jobs in the industry. The transplant vehicle manufacturers virtually all began and have remained non- union; the United Auto Workers (UAW) union has lost more than half its members since 1979 — from 1.5 million to less than 700,000. Big Three representatives state that they are now burdened with health care and pension costs of as much as $1,500 per vehicle in competing with foreign-based companies and have sought tax relief from Congress to alleviate this disadvantage.

The global industry also has changed. In North America, there has been regional consolidation, enabled by trade policy changes leading to the North American Free Trade Agreement of 1994. Congress approved a federal bailout of Chrysler in 1979 and forced the Reagan Administration to negotiate quotas on imports from Japan in the 1980s. Nevertheless, the overall U.S. deficit in automotive trade widened from $9 billion in 1979 to more than $100 billion annually since 2000.

Acting under World Trade Organization rules, the United States has pressed Japan, Korea and China, among others, to reduce their automotive trade and investment barriers. Fuel economy and environmental issues in the automotive industry have also been subjects of major concern in Congress, and these issues have had important effects on the motor vehicle market. Currently, the manufacturers are suing California to prevent its regulation of emissions of carbon dioxide and other greenhouse gases, which they claim is preempted by federal statute. This report will be updated as warranted by developments.

Contents Introduction and Key Findings........................................1 Developments in the U.S. Domestic Automotive Industry ..............2 The Automotive Industry in the International Context .................4 Impact of Fuel Economy and Emissions Standards....................6 Automotive Industry Outlook and Policy Issues ..........................7 Recent Legislation .............................................8 Policy Issues for the 109th Congress ...............................9 Pension and Health Care Issues ...............................9 Currency Exchange Rates ...................................9 Labor Representation......................................10

Fuel Economy and Emission Standards........................10 Pickup Trucks in U.S.-Thailand Free Trade Agreement (FTA) .....11 Broader Issues of Automotive Trade Policy ....................11 Situation Analysis After starting out in the lead, our firm fell to second place in both earnings and share price (the main measures success for the simulation). We also lost some market share in a few of our product lines. We operated in that standing for the remainder of the game. That was interesting, however: it challenged us to work even harder and to be creative.

When we left on Thursday evening, we were in second place. The simulation was designed to advance for two more periods automatically—so the game would run as w/the last decisions made and w/the business model as is. Much to my delight, we learned that next morning (after an anticipation-filled 45 minutes of class) that we finished first in our industry! Overnight, we advanced our standing and finished first in both cumulative net income and share price. Apparently, our decisions and our strategy paid off!

The simulation was a rewarding experience. It was great to see all of the elements of our program come together over the course of that day and a half. I have a new appreciation for the magnitude of the decisions senior managers have to make—especially decisions that could cost the firm hundreds of millions of dollars. Possessing a true general management perspective of an organization is clearly invaluable.

The experience helped to underscore the importance of the broad skill-set we are developing here. A wise second year once said to me "if you want to be a technician, Darden is not for you. If you want to be a leader, Darden is where you want to be." StratSim gave a small taste of that reality.