by Robert Kleine, Vice President and Senior Economist, and Alec Rodney, Economist

This Advisor examines some of the trends that are likely to affect the U.S. and Michigan auto industry through the end of the century.


The motor vehicle industry remains an integral part of Michigan’s economy, employing nearly half of the state’s manufacturing work force. In good economic times, the Metro Detroit – based Big Three auto makers enhance state growth through high profits, increased employment, and new investments in technical development. While these actions assure the auto industry will maintain a strong state presence in years to come, they also assure that the state economy will remain vulnerable to cyclical declines in auto sales.

The U.S. automobile industry has enjoyed a healthy recovery since 1992. Sales and production are up sharply from their 1991 lows, and the Big Three auto makers — General Motors, Ford, and Chrysler — are posting record profits in 1994. While plant closings and layoffs were headlines in the late 1980s and early 1990s, this year employment is up and many plants are running near full capacity. In fact, production and sales would have been even stronger in the first half of 1994 if General Motors had not encountered numerous problems in starting up production of redesigned car models.

All these factors spell good news for Michigan. Michigan factories pumped out 32 percent of the cars and 22 percent of the trucks produced in the United States in 1993. With continued strong demand for both cars and trucks, by May of this year the Big Three had taken all but 200 workers off layoff status and suspended indefinitely plans to close any more Michigan plants.

The Michigan auto sector remains healthy for other reasons, too. In 1992 Chrysler, Ford, and GM pumped $11.3 billion dollars into worldwide research and development. These expenditures represented a 48 percent increase over 1987 levels and have accounted for an increasing percentage of sales revenue. With all three companies’ world headquarters and technical development facilities based in Michigan, it is likely that many of these dollars were spent here.

Finally, the Big Three have been aided by an increasing price advantage over import auto makers in Japan and Germany, who have had to boost prices in light of appreciating home currencies. Commerce Department figures show that in 1993 the average domestic car had nearly a $4,800 price advantage over the average import car. Japanese companies have successfully defended their U.S. market share only by offering heavily discounted leasing terms.

Today’s successes, however, must be put in perspective. Sales of total light vehicles are down from the levels achieved in the mid‐​1980s. More important, the dynamics of the market are changing.

  • Quality and buyer satisfaction are up, but buyers are holding on to their cars longer. In 1992 the average age of all cars and trucks in use in the United States was 8.1 years and 8.4 years, respectively — both 40‐​year highs.
  • Leasing is accounting for a growing number of sales while at the same time cutting into manufacturer’s future profits by forcing them to artificially inflate trade‐​in prices or subsidize interest rates.
  • The shift toward foreign name plates continues: Between 1988 and 1993 Japanese auto makers doubled the number of U.S. assembled cars sold in the U.S. market. As this trend toward transplant1 production continues, Japanese auto makers will be less affected by exchange rate fluctuations and will regain the ability to compete with the Big Three on price.

Below we discuss all these factors and provide some conclusions about Michigan’s automotive future.

U.S. Vehicle Sales

Exhibit 1 shows total car and light truck sales in the United States from 1980 to 1994. Strong sales growth following the recession of the early 1980s led to record car and total vehicle sales in 1986. Between 1986 and 1991 total sales declined more than 23 percent, while car sales declined almost 29 percent. Truck sales rose every year from 1982 to 1988 and then fell 15 percent between 1988 and 1991. Between 1991 and 1993 car sales increased only 4.2 percent compared to a 29.8 percent increase in truck sales.

Truck Share Increasing

From just over 2 million units sold and 20 percent of the market in 1980, truck sales have grown to account for nearly 40 percent of the U.S. market. The record for truck sales, set in 1993, will be surpassed in 1994. The category includes lightweight pickup trucks as well as minivans and sport utility vehicles, which have replaced station wagons (cars) as the primary mode of family transport. Exhibit 2 shows that U.S.-built trucks comprised only 80 percent of the market in 1980 but nearly 93 percent in 1993. The Big Three share increased from 80 percent in 1980 to about 86 percent in 1993. Hence, the decline in import share was only partially offset by a corresponding rise in transplant share.

The Transplant Boom

The most significant trend in production and sales in the past ten years has been the move by foreign auto makers to build their vehicles on U.S. soil. In 1980 Volkswagon was the only major foreign company building cars here. In 1983 Honda opened its first U.S. plant in Ohio, followed by Nissan in 1985, and Toyota in 1986. Transplant car sales grew from 180,000 units in 1980 — 2 percent of total sales — to 1.27 million units in 1993 and will likely exceed 1.4 million units — 15 percent of total sales — in 1994. (See exhibits 1 and 3.)

For the first eight months of 1994 transplants accounted for nearly 56 percent of Honda, Nissan, and Toyota’s combined U.S. car sales. The numbers for trucks are equally dramatic. Thus far in 1994 transplants represent 58 percent of the U.S. sales of Japan’s four largest truck makers — Toyota, Nissan, Isuzu, and Mazda.

Michigan Share of Car and Truck Production

Exhibit 4 indicates that national production trends have mirrored sales trends except that the fall in car production began in 1984 not 1986. Michigan car production — and total vehicle production — peaked in 1986. At that time Michigan factories put out 32.6 percent of all cars built in the United States. Between 1986 and 1993 state and national car production both declined about 25 percent, meaning Michigan’s market share dropped only 0.2 percent, to 32.4 percent, in 1993.

In truck production Michigan has fallen behind national trends. Between 1986 and 1993 U.S. truck production was up 28 percent compared to a 25 percent rise here. Michigan is not adding truck‐​building capacity as fast as the nation on average. While the truck share of total state vehicle production jumped 6 percentage points between 1992 and 1993, Michigan’s current truck share of 34 percent is well below the national share of 43 percent.

Auto Prices

The average outlay for a domestic car is currently $3,000 – 4,000 below the average outlay for an import. Exhibit 5 shows that the average price difference has grown steadily since 1982 when import prices first passed domestic prices. Two factors drive the current domestic price advantage: Luxury cars have captured a growing share of the import market, and exchange rate fluctuations have caused Japanese and German auto makers to raise prices to keep yen‐ and Deustchmark‐​denominated profit margins up. Exchange rate vulnerability is one of the major reasons that Japanese transplant output has been expanding rapidly in the past five years.

The average purchase price for an automobile has risen sharply since 1980. Exhibit 6 shows that the average cost of a new car increased about 6.2 percent per year between 1980 and 1994 — a total increase of more than $11,000 per vehicle. During the same period median family income increased only 3.9 percent per year. This discrepancy in growth rates meant that in 1994 the median family spent 26.2 weeks’ wages to buy a new car compared with 19 weeks’ wages in 1980. The average down payment and the average cost, including loan interest, have also outpaced the increase in median income.

When making cross‐​year comparisons of weeks’ pay required for purchase, the reader should remember that the higher cost of today’s vehicles includes better safety and emissions equipment as well as more standard features. In a recent New York Times article an auto company economist estimated that emissions and safety regulations accounted for 4.8 of the 25.9 weeks of median pay needed to purchase the average vehicle in 1992, and demand‐​driven options like air‐​conditioning, stereos, and automatic transmission contributed another 8.7 weeks to the total. Other analysts question whether all today’s options are demand‐​driven or whether the auto makers are offering only an upscale, profit‐​driven product line.

Michigan’s Reliance on Motor Vehicle Employment

Motor vehicle – related employment in Michigan has been on a roller coaster since the late 1970s, but generally the trend has been downward. (See Exhibit 7.) In 1978 employment peaked at 647,200 (only slightly below the all‐​time high in 1969). From 1978 to 1982 motor vehicle employment fell a disastrous 32.5 percent as the industry was buffeted by a deep national recession and increasing foreign competition. Employment increased 19.2 percent from 1982 to 1985, largely in response to a strong national economic recovery. From 1985 to 1993 motor vehicle – related employment declined every year except 1989 and 1992 for an overall decline of 16.3 percent. This decline was caused by industry downsizing in response to competition from Japanese auto makers and the recession that afflicted Michigan and the nation from 1989 to 1992. (The recession officially lasted from July 1990 to March 1991, but economic growth was very slow from 1989 to mid‐1992.)

In 1994 motor vehicle employment has turned up again as the combination of a national economic recovery, pent‐​up demand, lower interest rates (until recently), and a large relative price advantage over the Japanese have resulted in sharp increases in auto sales. Motor vehicle – related employment in June 1994 was 6.4 percent above the 1993 level. Even if employment remains flat for the remainder of the year, the 1994 increase will be the largest since 1984.

Motor vehicle employment has declined faster than total and manufacturing employment. In 1978 motor vehicle – related employment was about 55 percent of manufacturing employment and 18 percent of total wage and salary employment. These shares have steadily declined, except for a brief uptick in the mid‐​1980s, and in 1993 motor vehicle employment was only 48 percent of manufacturing employment and 11 percent of wage and salary employment.

Employment at the Big 3 auto makers (plus Mazda) is down even more than total motor vehicle – related employment. As shown in Exhibit 8, employment in 1993 was about 50 percent below the 1979 level. All three major manufacturers have reduced employment sharply, but the timing varied. Ford and Chrysler took the sharpest cuts in the early 1980s, while GM downsized more in the last half of the 1980s. Employment at Ford has been stable since 1985. In 1993 employment increased modestly at all of the auto makers except GM.

The decline in motor vehicle – related employment has both positive and negative consequences. On the positive side, less reliance on the motor vehicle sector makes the Michigan economy less volatile and moderates the effects of downturns in the economy. On the negative side, the loss of high‐​paying auto jobs, which in 1990 paid 35 percent more than the average manufacturing job, has slowed income growth and made Michigan a poor state relative to others. In the late 1970s Michigan per capita income was 6 to 8 percent above the national average; in 1993 it was about one percent below the national average.

Key Trends


In recent years leases have become an important part of auto dealers sales strategy. In 1990 only 6 percent of Ford’s retail deliveries were leases; today about 16 percent of their volume is leased. Leasing at Chevrolet is currently at 6 percent, with a goal of 20 percent. Leasing is attractive to the industry because it results in more frequent trades, increased owner loyalty, and improved customer satisfaction. These advantages lead to more sales over the long run. One drawback is that a glut of motor vehicles coming off lease can depress used car prices and reduce the ability of consumers to lease or buy a new car at a reasonable price.

A major advantage of leasing is that consumers are able to lease more expensive vehicles than they could afford to buy because auto makers subsidize leases by discounting money factors and by raising estimated trade‐​in values at the end of the lease. This practice often replaces cash rebates on purchases, which means lower monthly payments, less cash up front, and a chance to upgrade sooner. Leases are particularly popular for luxury cars. For example, leases as a percentage of retail deliveries are 71 percent for Mercedes, 66 percent for BMW, and 68 percent for Infiniti (January 1994 data).

In 1993 an estimated 24 percent of retail car and truck deliveries in the United States, or 2.5 million units, were lease transactions. According to CNW Marketing/​Research, a consulting firm in Brandon, Oregon, retail leasing could reach 34 percent of the market by 1994.Leasing also appears to be attracting buyers who would not be in the new car market at all.

In their 1993 Leasing Market Study J.D. Power and Associates found that 20 percent of those leasing new cars would not have acquired a vehicle at all if leasing were not available.Applying the CNW and J.D. Power estimates to the 1994 sales forecast of 15.2 million units implies that leasing could be adding as many as one million vehicle sales this year.


Throughout the 1980s the Big Three lost market share as buyers fled to higher quality foreign name plates. U.S. companies were perceived as being especially weak in the small car segment. By 1993 the Big Three had made significant advances in quality. When measured by the J.D. Power and Associates annual consumer survey of new car buyers, the Big Three’s combined quality rating increased from 94 in 1986 to 132 in 1993. The Japanese proved to be a moving target, however, as their average quality rating increased from 119 to 141 over the same period; the 1993 average was 119.

In the most recent J.D. Power surveys, many new car owners find fewer than one defect per car, so quality differences between U.S. and Japanese cars are often inconsequential. Each of the Big Three also has introduced a competitive small car entry — Escort, Saturn, and Neon by Ford, GM, and Chrysler, respectively.

From the car makers perspective, one downside to high quality is that some owners feel they can hold on to their cars longer without incurring major repair expenses. Leasing has become an effective tool to offset this trend. In fact, leasing high‐​quality vehicles appears to be an effective way to build brand loyalty.

Buyer Demographics

The changing age demographics of new car buyers is illustrated in Exhibit 9.4 In 1983 more new car buyers were under the age of 35 than over 55. In 1993, 27 percent of all new cars were purchased by the younger cohort and 33 percent were purchased by the older cohort. These trends confirm the growing elderly population in this country, many of whom are able to afford new car purchases. The most senior buyers (age 65 and older) remain the most loyal domestic car buyers, but their loyalty is waning. In 1983 domestic name plates accounted for 90 percent of the new cars purchased by this cohort; in 1993 domestic cars accounted for 82 percent of their purchases.

In fact, when comparing the 1983 and 1993 numbers it appears that as various older cohorts age they are staying loyal to import brands and picking up converts along the way. For instance, 30 percent of 35‐​to‐​44‐​year‐​olds in 1983 bought imports compared to 19 percent of 45‐to‐54‐year‐olds.

In 1993 as the first cohort aged and became the new 45‐​to‐​54‐​year‐​olds, 39 percent bought imports. Similar analyses can be done for those aged 45 – 54 and 55 – 64 in 1983; however, the trend does not hold for those aged 25 – 34 in 1983.


Automobile sales are likely to slow again after 1995 for two major reasons: (1) Since World War II, vehicle sales have never expanded for more than four consecutive years, and 1995 will mark the fourth year of the current expansion, and (2) a record number of previously leased vehicles will come onto the used car market in 1995 and 1996, providing an attractively priced alternative for potential new car buyers. In light of the trends described above, Michigan will be stung especially hard by the downturn.

The transplant boom will continue. Japanese and German companies find in the United States a highly skilled work force at a lower price than they would have to pay at home. Transplants, however, have for the most part hired nonunion labor, which has allowed them to keep benefit costs for current workers below Big Three levels and will shield them in the future from having to make substantial outlays for retiree health care and pension benefits.

Michigan’s heavily unionized auto sector is not a likely candidate for new transplant factories. In fact, the increased pressure for efficiency brought about by transplant competition could lead to future job losses in Michigan because General Motors, the leading employer in Michigan, still lags behind other producers in plant efficiency.

Michigan’s production mix is too heavily weighted toward cars partly because GM’s sales mix is weighted toward cars. If the next downturn in sales again falls disproportionately on cars, neither GM nor Michigan will fare well.

The dynamics of leasing and the quality race, however, should play to the Big Three’s favor. Japanese auto makers cannot continue to inflate trade‐​in prices if previously leased cars flood the used car market in the coming years. If the yen remains strong against the dollar, the Japanese will not easily overcome the price disadvantage. With Big Three products being perceived as virtually equal in quality to Japanese brands, they should attract more value‐​minded buyers.

Unfortunately, the Big Three appear to be raising prices substantially this year, just as they did in the early 1980s as Japanese car prices rose sharply in response to voluntary export quotas imposed by the Japanese government. The price hikes today are producing the same result as they did back then — diminished market share. We believe the U.S. auto makers should take a longer view toward profitability: Keep prices down, continually improve quality, and draw back buyers and market share.

1Transplants are vehicles built in the United States but sold under a foreign makers nameplate, for example, a Honda Accord built in Ohio. The Big Three counterpart to the transplant is the captive import.This is a car built in a foreign country but sold as a Big Three model, for example, a Dodge Colt built in Japan.
2Automotive News, March 28, 1994.
3Automotive News, August 22, 1994.
4No comparable studies could be located for new truck buyers.