Why are American Companies no Longer Manufacturing Cars?
American car companies are pursuing a very unique strategy to increase growth and profitability. Generally, when companies talk about increasing growth and profitability, they talk about exploring new markets and launching newer products. However, the American automotive industry is planning to do the exact opposite.
Executives from Ford Motor Company have announced that within a couple of years, they are going to stop the production of every hatchback and sedan barring two models. General Motors is also not far behind. The iconic American car company has already exited key growth markets like India and Europe. It is also looking to trim its product line in order to become more profitable.
In this article, we will have a closer look at this unconventional strategy which is being followed by American car companies.
The Way Forward
The Ford Motor Co. ended up spooking many observers when it announced that it will rapidly scale down the production of hatchbacks and sedans. All these steps are aimed towards cutting costs and making the company profitable once again.
Ford Motor Company has set up an aggressive cost-cutting target of $14 billion per annum. Cutting down the production of sedans and hatchbacks is likely to help achieve about one-third of this target. Executives from Detroit have made it clear that they will not hesitate to use any option as long as it is beneficial for the company in the long run.
Competition from Foreign Imports
The biggest reason that American companies are no longer manufacturing sedans and hatchbacks is the fact that they face competition from Japanese and Korean manufacturers. Sedans manufactured by Toyota are still the highest selling vehicles in the United States. Other companies such as Kia, Nissan, and Suzuki have also been gaining market share steadily. The fact of the matter is that these companies have an unassailable cost advantage when it comes to manufacturing smaller cars. This is the reason that they have constantly been taking away market share from American manufacturers.
American car companies have learned a painful lesson in the past decade. They now realize that it makes no sense to hold on to past glory. Instead, the market realities must be understood, and a new strategy needs to be prepared accordingly. This is the reason why they have decided to vacate the lower segments, i.e. the hatchbacks and the sedans for their Asian competitors.
Even though American companies are no longer manufacturing smaller cars, the segment will still be alive! Smaller cars are expected to retain their market share which is almost 25% as of now. This segment is not expected to see any significant growth in the next decade.
Focusing on High-Value Products
American car companies have now decided to play to their strengths. This is the reason why they are focusing on selling more SUVs, pick-up trucks and crossover. The quality of the engine and the vehicle is more important in these segments than it is in the lower value segments. Also, these segments are pricier and hence have a higher profit margin.
Earlier, when customers purchased an SUV, they had to compromise on the fuel efficiency of the car. However, this is no longer the case. Modern SUVs are light-weight and still have an extremely sturdy frame. This is the reason why these cars can now provide fuel efficiency which is comparable to regular vehicles.
Also, the price of gas has come down drastically in America. Earlier, fuel used to be sold at $4 per gallon. This rate has seen a 40% reduction and the current price is now $2.5 per gallon. Hence the difference between the operating costs of sedans and SUVs has been lowered. These lower operating costs are attracting many customers towards these bigger vehicles.
American car companies are trying to focus their efforts on a few types of models whose sales are expected to increase rapidly. This standardization is expected to lower costs which are in line with the corporate objectives of these companies. These efforts will also result in an increase in earnings. According to experts, American companies had spread themselves too thin by unnecessarily competing in markets where they did not have any significant competitive advantage.
The decisions made by American car companies is in line with Donald Trumps latest policies as well. The Trump government has lowered the threshold for nationwide fuel efficiency. According to them, companies are giving too much priority to fuel efficiency and hence not enough energy is spent on making the cars safer. Many experts believe the real reason behind these changes is that Donald Trump wants to undercut the environment-friendly policies which were introduced by President Obama. This is why Trump is also making moves to dismantle state-level legislation in certain states like California. Although Trump is facing stiff opposition at the state level, his policies have been implemented at the national level.
To sum it up, American car companies like Ford and General Motors are trying to pull off something unconventional. They are trying to win the race by giving up certain segments of the market. It will be interesting to see whether they will be able to achieve their goal.
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