For decades, through the boom and bust years of the 20th century, the American automotive industry had an immense impact on the domestic economy. The number of new cars sold annually was a reliable indicator of the nation's economic strength.
But when the recession hit in 2007-2008, new car sales declined precipitously, reflecting the overall decrease in consumer spending.
Financial Hardship
Although Ford had a cash reserve of billions as a hedge against hard times, other automakers like General Motors (GM) and Chrysler faced bankruptcy and the United States government stepped in with bailout money from the Troubled Asset Relief Program (TARP) to rescue the sinking firms.
In early February 2012, however, news reports showed the multi-billion dollar U.S. automotive industry was enjoying a brisk recovery, and both GM and Chrysler have paid back the government bailout loans. Big profits were posted again. GM, Ford and Chrysler, Detroit's so-called "Big Three," the classic OEM manufacturers, were flourishing. American auto making companies reigned worldwide in 2012 as the biggest and most profitable. Few could have foreseen the industry colossus which rose from its inauspicious origins more than a century earlier.
Industry Growth
With the invention of the automobile and the mass production techniques of Henry Ford, which made the machine affordable, the American economy has been transformed by this key element in its prosperity.
Tens of thousands of jobs were created as the industry grew. Workers were required for the assembly lines on which they were constructed. Part by part, Ford's Model Ts became the first most popular, affordable, mass-produced cars.
The steel industry and machine tool makers also flourished as the automotive industry required ever-increasing supplies and components for the engines, chassis, and other metal fixtures of the cars. Beyond these basics, every car needed a battery, headlights, interior upholstery, and paint. Entirely new businesses, or subsidiaries of existing businesses, were created to meet the needs of the automobile industry as it grew incrementally year after year.
Other unexpected economic effects rippled outward into numerous additional industries as more people bought and operated automobiles which eventually became an essential mode of transportation and commerce.
Insurance and Interstate Highways
Cars required insurance coverage, which accounted for hundreds of millions in revenue for insurance companies. Nationwide advertising campaigns for cars added millions to ad agencies and print and broadcast media. The maintenance and repair of cars became a major business. One of the biggest winners of all was the petroleum industry which sold gasoline for the ever-expanding number of cars on the road.
When World War II began, the automotive industry geared up for military production. The Jeep, a highly maneuverable, overland vehicle first built by the Willys Company, was manufactured in large numbers for military use. Chrysler retooled to build tanks.
In the immediate years after World War II, pent-up demand for new cars gave the industry a boost in profits. Under the Eisenhower administration in the early 1950s, a national network of interstate highways was built. When the system was completed, a driver could cross the country on the four-lane roads from New York to Los Angeles without encountering a single red light.
Suburbia
As Americans became more mobile, millions moved into the developing and evolving suburbs just beyond the metropolitan limits of the country's large cities. Suburban housing construction boomed to serve the lodging requirements of families leaving cramped cities for relatively spacious ranch homes on a sizable plot of land. Countless returning veterans were among the new suburbanites, encouraged and enabled to purchase homes by the generous terms of government-insured loans for people who had served in the military.
Further adding to the economic boom were the furnishings, household appliances, and hundreds of additional incidental items needed for each new home.
The trucking industry also enjoyed a sustained period of economic growth, beginning in the Interstate Highway era, as more goods were shipped via truck, and through a so-called "piggy-back" system through which trucks were transported by train to key locations and then unloaded from the railroads and sent to their destinations via roads.
The impact on the American economy of these industries and their commercial enterprises and accomplishments was immense. The U.S. economy was booming especially the automobile industry. In some years, 10 million new cars were sold. For many years afterward, American auto manufacturers dominated the world market. But after a period of complacency, major auto makers encountered formidable competition from foreign auto makers, principally the Japanese, and Germans.
Market share was lost by American cars to these new foreign brands, which provided better gas mileage, affordability, and attractive design features. But the U.S. auto industry, with the help of government loans, recaptured its dominance and by 2012 once more reigned supreme as the world's largest and most profitable.
The Early Years
In 1895 there were only four cars officially registered in the U.S. Little more than 20 years later in 1916, 3,376,889 were registered. Numerous entrepreneurs and inventors went into the auto-making business to meet an ever-growing demand for the vehicle once derisively called a "horseless carriage," which made the horse and buggy all but obsolete.
The names of these early automakers—some of which survived for many decades, and a few are still operating today—are near-legendary: GM, Ford, Olds Motor Company, Cadillac, Chevrolet, Pierce Arrow, Oakland Motor Car, and the Stanley Steamer, to cite just a few. Many of these firms were located in the Detroit area, and there the Big Three remain to this day.
Among the more notable early automakers was The Ford Motor Company, which is still in business and flourishing again in 2012 after the difficult recession of 2007-2008.
Although Henry Ford is often mistakenly thought to be the inventor of the automobile—he was not—he was nevertheless a great innovator. His goal, as he was quoted as saying, was to "...build a motor car for the great multitude." To achieve this end, he deliberately reduced his company's profit margins to achieve greater unit sales. In 1909, a Ford cost $825 and the company sold 10,000 of them that first year. Soon, the automobile became a necessity rather than a luxury item, as it was first positioned in industry marketing and advertising.
In 1914, Ford raised his workers' pay to an unprecedented-at-the-time $5 a day, doubling the average salary, and cut work hours from 9 hours to 8 hours. Ford's assembly line innovations and management techniques cut production time for the Model T from 12 hours and eight minutes in 1913 to one car every 24 seconds in 1927 when the last of the Model Ts were manufactured. In less than 20 years, from 1909 to 1927, Ford built more than 15 million cars.
The Depression Years
Although a record number of cars were sold in 1929 -- the year of the stock market crash in October which ushered in the Great Depression -- car sales decreased substantially during those years. The U.S. economy, suffering in general, was especially hard hit by the decline in the automobile industry. Jobs were lost in the industry itself and in many of the ancillary businesses associated with automotive manufacturing.
Nevertheless, the automotive industry continued to offer innovative features and designs. Chrysler and DeSoto made cars with new, aerodynamic streamlining. By 1934, despite hard economic times, some 40% of American families owned cars.
The United Auto Workers Union was organized in 1935, providing union members in the auto industry with an increase in wages and other benefits. The union went on strike several times in later years, extracting more benefits from the companies for which they worked. Some economists claimed that union benefits including pensions, became financially burdensome for the companies which provided them, creating nearly insurmountable financial problems and leading to bankruptcies.
In 1938, GM launched a line of cars with Hydra-Matic, a partially automatic gear-shifting feature. Two years later,Oldsmobile and Cadillac made cars with the first fully automatic transmissions. In 1941, Packard became the first brand to offer air conditioning.
Post World War II
America's mighty economic resources and manufacturing capacity were turned to the great military challenges confronting it. The major automakers converted their production facilities to war-time vehicles – Jeeps, tanks, trucks, and armored cars. During the war, only 139 passenger vehicles for civilian use were made in the U.S.
When the war ended in 1945, pent-up consumer demand for new cars created a new boom in the industry and profits hit new highs. By 1948, the American auto industry rolled out its 100 millionth car, and Buick introduced its Dynaflow automatic transmission. More innovations followed, including power steering, disk breaking, and power windows.
But in 1958, Toyotas and Datsuns -- Japanese-made automobiles -- were imported into the U.S. for the first time, and American auto makers began losing market shares to the well-engineered, gas-saving, and affordable foreign vehicles.
Foreign-made, fuel-efficient cars gained a stronger foothold in the American market during and after the 1973 oil embargo and a corresponding rise in gas prices in the wake of the Arab-Israeli war. American firms Ford, GM, and Chrysler responded by manufacturing new lines of smaller, more fuel-efficient cars.
In the ensuing years, Honda opened a U.S. factory, Toyota introduced the luxury Lexus and GM launched Saturn, a new brand, and some American firms bought stakes in foreign companies to exploit the growing overseas markets.
By the turn of the century, the U.S. was still the world's top automaker, but in less than a decade it would suffer a major decline as a devastating recession set in.
A comprehensive study of the automotive industry's contribution to the U.S. economy, the most recent compilation of complete data, was commissioned in the fall of 2003 and was prepared for the Alliance of Automobile Manufacturers. Some 9.8% of U.S. jobs were directly or indirectly related to the automobile industry, representing 5.6% of worker compensation. Auto production represented 3.3% of gross domestic product.
Although Ford celebrated the 100th anniversary of its Model T in 2008, there was no cause for GM to celebrate. The auto-making giant posted an annual loss of $39 billion for 2007, the biggest loss ever for any automaker. This colossal failure reflected the slump in the U.S. economy, and the ceding of market share to foreign brands, mainly the Japanese Toyota.
Chrysler was also hit with losses, and along with GM, both of which declared bankruptcy, received a total of $63.5 billion in "bailout" money in loans from TARP, an appropriation of funds to help various major businesses which suffered losses due to the recession. Ford, however, did not ask for bailout funds because it had set aside a reserve fund of nearly $25 billion which helped it through the difficult period.
The United Auto Workers Union, in an effort in 2007 to help the struggling industry, agreed in contract negotiations, to concessions and give-backs on wages and health benefits.
In early 2012, the U.S. economy showed signs of a modest recovery. Unemployment figures declined to 8.3%, according to the government's Bureau of Labor Statistics.
Miraculously, also in 2012, like a phoenix rising from its own ashes, the U.S. automobile industry seemed to be recovering from its financial woes. GM posted a net profit of $7.6 billion, the most ever reported by the firm. Crysler announced a profit of $18.3 million, its first net profit since its bankruptcy. Apparently, the U.S. government's bailout of the auto industry was effective. Chrysler had paid back $11.2 billion in government loans, along with GM, which also repaid the government in full, with interest and years ahead of the due date.
The Bottom Line
There were almost 250 million cars, trucks and SUVs on American roads in 2012. About 25 years would be required to replace all of them, given the current rate of yearly automobile sales. So, even though the American auto industry is the world's most profitable in 2012, some analysts were still only moderately optimistic about its future.
While U.S. auto sales increased substantially in China, the European market for U.S. cars is struggling. Despite its huge profits, GM announced major cost-cutting initiatives.
If the U.S. economy continues it's apparent, although slow and as yet not too vigorous recovery, auto sales are likely to improve as well. Americans love and need their motor vehicles -- for work, business and pleasure -- and the American auto-making industry will prosper as the nation prospers. But it may take a while.
