Krugman: US Auto Industry Doomed (UPDATED)

Paul Krugman says the death of the American auto industry is inevitable.

Nobel economics prize winner Paul Krugman said Sunday that the beleaguered U.S. auto industry will likely disappear. “It will do so because of the geographical forces that me and my colleagues have discussed,” the Princeton University professor and New York Times columnist told reporters in Stockholm. “It is no longer sustained by the current economy.”

Krugman won the 10 million kronor (US$1.4 million) Nobel Memorial Prize in economics for his work on international trade patterns. Some of his research on economic geography seeks to explain why production resources are concentrated in certain locations.

Presuming he’s talking about the Big 3 continuing to make cars in Detroit, he’s almost certainly right.  Presumably, Ford and GM will continue to make profitable cars overseas and Chrysler’s Jeep brand (all that’s left of the old American Motors) will survive in some fashion.   Nor is there any reason that the highly profitable “foreign” firms manufacturing cars in the American South will fail any time soon.

I do think we’ll soon see the day when Western firms get out of the economy car business, ceding it to China, India, and Korea.  We’re simply not going to be able to compete on the basis of cheap.  I think we’ll see the end of cars as we know them before we see the demise of luxury and sports cars being made by Western, including American, firms.

UPDATEKrugman says he was misquoted: “What I actually said was that the concentration of the industry around Detroit would disappear.”  Me figured.

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. odograph says:

    If I recall correctly, his “geography” argument is about why some places develop specific expertise.

    Here is Krugman on the NY financial industry:

    In the real world not only agglomeration in general, but any particular example of agglomeration, typically reflects all items on the menu. Why is the financial services industry concentrated in New York? Partly because the sheer size of New York makes it an attractive place to do business, and the concentration of the financial industry means that many clients and many ancillary services are located there. But a thick market for those with special skills, such as securities lawyers, and the general importance of being in the midst of the buzz are also important. Why doesn’t all financial business concentrate in New York? Partly because many clients are not there, partly because renting office space in New York is expensive, and partly because dealing with the city’s traffic, crime, and so on is such a nuisance.

    From The Role of Geography in Development (pdf)

    For a long cars did come from Detroit (and big 3 plants around the country). Once they have the industry it tends to perpetuate. For a long time there was not another Detroit, until there was … first via Asian imports and then the Southern, mostly non-union, plants.

    It’s quite sad that Detroit is bound to certain business models, certain labor models, and certain auto models … but that too tends to perpetuate … as long as it can.

  2. odograph says:

    I do think we’ll soon see the day when Western firms get out of the economy car business, ceding it to China, India, and Korea. We’re simply not going to be able to compete on the basis of cheap. I think we’ll see the end of cars as we know them before we see the demise of luxury and sports cars being made by Western, including American, firms.

    One argument I’ve heard is that unions “won’t let” the big 3 use (enough) robots. To the extent that cars have irreducible labor hours, your argument for low-cost nations holds. To the extent that automation is possible … maybe not.

    (Ford’s highly automated Brazilian plant.)

    (Of course, if “cheap nations” stay cheap by polluting themselves, the advantage might stay unequal.)

  3. Dave Schuler says:

    I think that something that needs to be kept in mind is that from a worldwide standpoint there’s enormously too much auto production capacity already. Add to that China and India’s expanding their production capacity and something’s got to give.

    BTW I think that a good explanation of Tata Motors’s purchase of Jaguar and Land Rover operations was that they felt it was worth $2 billion to purchase the dealer affiliations in the U. S. thereby gaining a foothold in the U. S. car market.

  4. just me says:

    I actually can see the US companies going the route of more niche market cars and trucks-I think part of the problem though is they are tied to a business model that no longer exists and some of the things they used to do very well, the Japanese and other foreign companies have started to do well too. I know for a while mini vans were pretty much an American thing, but then Toyota and Honda started making them and made them better.

    One reason I think bailing out the US auto makers is a mistake is because I am not sure they can restructure or even want to restructure in a way to become profitable and even then will anyone want what they are selling?

  5. Drew says:

    Some interesting themes, and parallels to my former industry. (steel)

    1. An industry with geographical roots.
    2. Managements that won’t give up on making a full portfolio of products, not pairing back to what they do best.
    3. Chronic and significant overcapacity.
    4. Hidebound management attitude and union intransigence. And so on.

    The steel industry suffered all the same maladies. What were the major reasons behind permanenet and positive change?? First, shape produts (as opposed to steel sheet) gradually moved over to minimills. Using scrap metal for raw material, they were not tied to the coal and iron ore of the upper midwest. So they were able to located in non-union evironments (with new management teams as well). The rest is history. The major integrateds were forced to downsize into sheet for auto and appliance, and only the most exotic of shapes.

    And what finally caused the chronic overcapacity issue to be resolved? Two people with guts and vision, Wilbur Ross and The Mittal Group, who finally bought up and consolidated the global industry.

    A healthy industry emerged, but it took decades for this difficult transformation to occur.

    What would be the similar catalyst causing a painful but necessary restructuring of the auto industry? Knowing how difficult it was for steel to finally get it right, I can only imagine the answer is bankrupcy.

  6. Floyd says:

    Krugman is quite simply wrong, political prizes not withstanding.
    Wrong in terms of observation and in terms of conclusions drawn.
    Source proximity is no longer as much of a factor as logistics,political climate, etc. Infrastructure produces an ever changing world in which geography is of descending importance.
    Domestic auto production is widely dispersed already, and has been for generations.

  7. Moonbat Boy says:

    The big 3 won’t survive becuz their products suck.

  8. odograph says:

    Floyd, I don’t think it’s “source proximity.” Consider why Silicon Valley became what it is … they don’t have the Silicon.

  9. Floyd says:

    Moonbat boy;
    I have owned a dozen new Ford products in the last thirty years,each with zero unscheduled maintenance in the first hundred thousand miles.
    Not one has been returned for a warranty defect, and I have not yet spent over $16K for a purchase price. That’s indisputable value.
    If any one of these companies fails, it will be due to management incompetence, not product inferiority, Even GM builds as good a product as any oriental brand.

  10. skylights says:

    Krugman says he was misquoted, and offers his actual quote:

    http://krugman.blogs.nytimes.com/2008/12/08/me-misreported/

  11. Rick Almeida says:

    I have owned a dozen new Ford products in the last thirty years,each with zero unscheduled maintenance in the first hundred thousand miles.

    Do you own a fleet of automobiles for business? Otherwise, the math gets hinky. Also, I’d be glad to know the models & years to compare with Consumer Reports.

  12. tom p says:

    Do you own a fleet of automobiles for business? Otherwise, the math gets hinky.

    The math isn’t really “hinky” Rick. I know of people who have had 30 vehicles in 30 yrs (always had to have the latest)

    I have probably had the same # over the years (all used, all US)(A couple of those vehicles got totalled in accidents)and was perfectly happy with all but 2, most I got with somewhere between 50 and 150K on them and then put another 150 to 250K on them. I have blown 3 transmissions (I have a habit of abusing my trucks) replaced them and got many more years out of each, and blown 2 engines, replaced those and got many more years out of them.(one I still see from time to time, I figure it has close to 500K on it)