, x: . . ‘. 17393 ’ :74} u‘. ‘.-.... . V ' '7‘." ‘21": v 3, .3- 1‘ “in“; M “- {WV-,3 (L’s r max", scum»- t. rnm; 5"" .cv . . 5:." l “5):; "=" "'> I, I —-d4v h" ’1 ,. 1“,...“ M . ' 4 ‘ 7‘ ~ ' “J .1 ,. “my”; . L _ ' "Na... .......«..mi~ .m— 0.. .. ... . .M m w . .. mu.- '- ‘flzrnxgy V w- .‘ . 1; m x," quarrqm" ¢ ' z .n '- ' ' m in :4 H 4 may: ..,...,-. This is to certify that the thesis entitled 7’ '4 "AN ANALYSIS OF FACTORS UNDERLYING THE RECENT DECLINE OF AMERICAN AUTOMOBILE EXPORTS“ TO SELECTED LATlN AMERICAN MARKETS" presented by Naser Georges Bodiya has been accepted towards fulfillment of the requirements for _.Eh_.D__ degree in_Bu.sin.ess Administration, in the Department of Marketing and Transportation Administration J /‘ ”’ / %/72/é’// aXfi/éfi/A ’rIfl/Llf’JI/ ohn L. Hazard /" Major professor DatefiQtemherthJflfiL 0-169 LIBRARY Michigan State _ University WM ABSTRACT AN ANALYSIS OF FACTORS UNDERLYING THE RECENT DECLINE OF AMERICAN AUTOMOBILE EXPORTS TO SELECTED LATIN AMERICAN MARKETS by Naser Georges Bodiya World markets for automobiles, in the last decade, have grown pro— portionately more than the United States domestic market. Despite this growth, our exports have declined both in share of the world automobile market and in absolute terms. In fact, the United States has shifted from the foremost exporter to a net importer in the past decade. There are several complex forces responsible for the changes in the export pattern of the major automobile producing countries. Manufacturers themselves disagree about the reasons for the decline in United States car exports. This thesis attempts to identify and evaluate the reasons for the diminution, and to suggest corrective courses of action. Though the case is specific and localized, the implications are of importance for other durable and capital goods export industries. Moreover, this subject is of immediate import to Michigan, since automobile production is the central sector of its economy. Since Latin America is the most important market for American car exports, the largest Latin American markets, Argentina, Brazil, and Venezuela, have been selected as a case study for detailed analysis. In the course of the analysis, the data relevant to the decline of American automobile exports are Naser Georges Bodiya examined and interrelationships are identified. Finally, inferences are drawn and underlying reasons for the decline are suggested. Data were collected from both primary and secondary sources. The primary sources included published and non-published material from automo— bile manufacturers, trade associations, and specialized research entities such as the London Economist Intelligence Unit, Ward's and McGraw- Hill Interna- tional, as well as published reports from various agencies of the United States and the foreign governments concerned. In many instances oral interviews were the only means of penetrating the security barriers of the automobile industry. The research and analysis led to three conclusions. First, the decline in the overseas markets for American automobiles has been primarily the result of foreign import restrictions, enhanced competition of foreign car producers, and the failure of the American automobile industry to adjust design and models to foreign market requirements. Second, certain secondary factors, mostly deficiencies in particularization of marketing policies and practices of American automobile manufacturers, also contributed to the decline. Third, to persist in foreign markets, the American automotive industry must in the future pursue some or all of the following alternatives: strengthen pressure for reciprocal treatment of automotive exports and removal of unwarranted specific barriers; expand overseas subsidiaries and branches, both marketing and manufacturing and in combination with foreign automotive manufacturers where specific criteria are met. W»... a. . fierlflcflafizeflon pf markélfing ' nfis‘hflzfiéis’pecifi'c at ‘ CHM/71‘ P. I" I I. IS OF FACTORS UNDERLYING THE RECENT DECLINE OF AMERICAN AUTOMOBILE EXPORTS TO SELECTED LATIN AMERICAN MARKETS BY Naser Georges Bodiya A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation Administration Graduate School of Business Administration 1961 "12-531" 1 .‘I-_ -' .. lll|.lIllIl I p I. In. Copyright by Naser Georges Bodiya 1961 ACKNOWLEDGMENTS A study of this kind would be virtually impossible without the help and assistance of many people. I am indebted to the many governmental and pri- vate officials who took time from their duties to provide the information. I wish to express my sincere gratitude and appreciation to the mem- bers of my committee: Professors John L. Hazard (Chairman), Harry G. Brainard, and Hendrik Zwarensteyn. Their counsel, guidance, and comments have been a great source of inspiration and have done much to provide a greater understanding of the proper approach to learning. Nor am I insensitive to the valuable suggestions which Professor Donald A. Taylor gave me on Chapter IV. I am deeply indebted to Dr. Anne C. Garrison for her editing; to Mrs. Esther A. Marlatt goes my appreciation for the final typing of the thesis. Without the appointment to the Bureau of Business and Economic Re- search it would have been financially difficult for me to pursue my program. My sincere gratitude goes to the Bureau's director, Dr. Eli P. Cox, and to its professional and clerical staff, for the generous attitude which prompted the offer of many helpful suggestions, and the carrying out of many tedious chores. And then, of course, I must not forget my wife, Alda, who provided the moral support while weathering domestic hardships in seeing me through the Ph. D. program. I am especially indebted to her and to my children, Dale, Aida, Henry, and Paul, who have cheerfully accepted inconvenience and ii Naser G. Bodiya -Eaat Lansing, Michigan September 11, 1961 TABLE OF CONTENTS ACKNOWLEDGEMENTS .......................... LIST OF TABLES .............................. INTRODUCTION ......... . .................... Chapte r I. 11. PROFILE OF THE WORLD MARKET IN 1938 AND THE POSTWAR YEARS ......................... Automobiles in Use ........................ Western Hemisphere ..................... Trends in World Production ................... United States and Canada’s automobile manufacturing. . West Germany's automobile manufacturing ......... British automobile manufacturing .............. French automobile manufacturing .............. Swedish automobile manufacturing .............. World Trade in Automobiles ................... Shares of the major producing countries ........... United States exports to world market ............ West Germany‘s exports to the world market ........ France and Italy's world exports ........ THE SHIFT IN THE PATTERN OF AUTOMOBILE TRADE FROM AMERICAN EXPORTATION TO LOCAL MANUFACTURING ABROAD .................... , .......... Automobile Production for the Market Outside the United States. Restrictions of world automobile market ........... Is America losing to automobile manufacturing abroad? . . Expansion of American facilities abroad to circumvent restrictions ....................... Production by individual companies ............. Trends toward concentration ................. Conflict between production and marketing ......... Realistic perspective ..................... iv 37 37 37 43 44 50 54 61 62 Table of Contents (continued) Chapter ‘ Page III. LATIN AMERICA-A REGIONAL CASE STUDY ........... 63 PART I. LATIN AMERICA—~THE LARGEST EXPORT MARKET FOR U. S. AUTOMOBILES Latin American car registration ............... 63 Sources of automobile supply to Latin America ....... 65 PART II. FRAMEWORK OF MARKET STRUCTURE IN THE SELECTED LATIN AMERICAN COUNTRIES Argentina ............................. 71 The Argentine automobile market .............. 71 The Argentine economy ........ . .......... 73 National objectives ......... . . . ....... 77 Argentine balance of payments position ........... 77 The Argentine automobile industry ........... . . 85 Implementation of national policy .............. 86 Development of the automobile industry ........... 91 Brazil ...................... . . ....... 98 The Brazilian automobile market ............. . 98 The Brazilian economy .................... 100 Brazil's external trading position .............. 103 National objectives ...................... 107 Brazil's balance of payments ................. 109 Brazil's foreign trade regulations. ............. 113 Brazil's automobile industry ................. 116 Implementation of national policy .............. 117 Trend of automotive development .............. 121 Venezuela ............................. 129 The Venezuelan automobile market ............. 129 The Venezuelan economy ................... 131 Foreign trade‘ ......................... 134 National objectives ...................... 138 Highway network ....................... 140 Implementation of national policy .............. 141 Conclusion .......................... 146 IV. SECONDARY FACTORS PERTAINING TO THE DECLINE OF UNITED STATES AUTOMOBILE EXPORTS ............ 147 Pricing ............................... 148 Revitalized' competition. . . ................ 155 42:33:... -—.,.=-t.r::-.'-i rat-mu m-a.1‘--1—.11;ls:.-.n.-. arm: -""71-‘-“ iii-E lizft'l’vfu".' 5‘ .'.' qiu' Table of Contents (continued) Chapter Page Market and Product Development ................. 158 Product design trends .................... 160 Marketing and promotion methods .............. 164 . Dealership Pattern ......................... 164 \\Advertising and Sales Promotion ................. 165 Service and Spare Parts Availability ............... 168 Credit and Installment Practices ................. 169 \Latin American Consumer Buying Habits and Motives ...... 173 Evolution of Trade in American Automobiles- -A Practical Strategy ............................ 175 American automobile manufacturers: awakening awareness of foreign markets .............. 175 V. SUMMARY AND CONCLUSIONS ................... 184 Primary Reasons for the Decline ................. 184 Import restrictions ...................... 185 Local manufacturers of automobiles ............. 186 Size and price of American automobiles ........... 188 Alternatives before American Automobile Producers ...... 191 Obtaining of trade concessions ................ 192 Adjusting design and price .................. 194 Expanding manufacturing and marketing facilities abroad. . 195 BIBLIOGRAPHY ............................... 198 v1 _ _ . _ _ ._ I. _ ia.-;§1.v’.‘¢v.'e.m :éubm‘l ‘ . . 55i":.=1"'.‘h.':3ll"n-'l . yr.- ‘gt “-1.1% ' . . - al “‘ . .3 . J-‘l .' v Table 10. ll. 12. 13. LIST OF TABLES United States Merchandise and Automobile Exports .......... World Automobile Registrations, by Areas .............. Number of Persons per Automobile .................. World Automobile Production, by Country of Origin. . ....... Automobile Production in France ................... Automobile Imports by Areas ..................... Percentage Shares of World Exports by Automobile Manufacturers. United States and World Automobile Exports ............. Automobile Exports to the World, by Major Producing Countries and their Market Shares ...................... Automobile Exports to Europe, by Major Producing Countries and their Market Shares ...................... Automobile Exports to the Western Hemisphere, by Major Producing Countries and their Market Shares ........... Automobile Production and Exports by Engine Capacity Groups. . . Automobile Exports to Major European "Neutral" Markets. . . Automobile Output by Makes ..................... New Automobile Registrations in the United States ......... Automobile Production and Exports by Major Producing Countries. Automobile Exports and Proportion of Production by Major Automobile Producing Countries .................. vii Page 2 14 16 18 20 21 23 30 32 33 34 38 4O I 21.! I we'r '10" “flu List of Tables (continued) Table Page 18. Automobile Market of Major Producing Countries, 1955-58 ..... 42 19. Overseas Automobile Production by Major Producing Countries and North American Exports for World Markets ......... 48 20. Automobile Production outside U. S. and Canada in thousands, and Percentage Share of Leading Makes in each Major Producing Country .............................. 51 21. Automobile Expo rts' Proportion of Production of United Kingdom and West Germany and of Ford and General Motors ....... 60 22. Automobile Population, and Number of Persons per Automobile in Latin America and its Largest Countries ........... 64 23. U. S. Automobile Exports to Latin America and its Largest Countries ............................. 66 24. Automobile Exports to Largest Latin American Markets by Major Producing Countries .................... 67 25. Automobile Assembly Operations, by Latin American Countries. . 68 26. Argentina: Automobile Population and Number of Persons to a Car. 71 27. Argentine Automobile Imports, Market Share, by Country of Origin. 72 28. Age Distribution of Automobiles in Argentina ............. 74 29. Argentina: Adjusted National Income, per Capita Income and their Indexes ............................. 75 30. Argentina: Indexes of Volume of Exports, Export Prices, Terms of Trade and Volume of Imports ................... 78 31. Argentina: Value of Exports, Total, and by Principal Categories. . 79 32. Argentina's Foreign Trade, Total, and with North America and Europe ............................... 81 33. Argentina: Gold and Foreign Exchange Reserve ........... 82 1.": '.- '_._... -—.-.."' ' 1;": l‘ I 1 '.'."v .. ‘ -. _. ..- - ._- 15;", . ..‘r‘l- ,_ .. I. d F?- I" (“if-iram 3‘1iu. In.“ .. v. .I: . ' .ibl-ijc . _ . .'_ a , . .. J‘f-lfil'l-‘I‘Vi "CIT-ll. I I 9‘ I .- "I. “i'.' ”A -.-.. e.'.-..-:'.-:.‘l _' l' éT'I ."lI 'V1’l‘g'.-v Table 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. List of Tables (continued) Argentina: Ratio of Gold and Foreign Exchange Reserves to Imports ............................. Argentine Imports of Automobiles from United Kingdom, by Engine Capacity (c.c. group) ................... Total Argentine Automobile Imports, by weight, 1959 ....... Argentina: Representative Used Vehicle Prices in May 1960. . Argentina: Presumed Production of Automobiles in 1960 ...... Brazil: Automobile Population and Number of Persons to a Car. . . Brazil's Automobile Imports Market Share, by Country of Origin. . Brazil: Adjusted National Income, Per Capita Income and their Indexes ............................... Brazil's Foreign Trade: Value of Trade, Volume of Exports and Imports, and Terms of Trade ................. Brazil: Value of Exports, by Principal Categories .......... Brazil: Value of Trade with North America ............. Brazil: Percentage Distribution of Trade by Areas ......... Brazil: Imports and Capacity to Import ............... Brazil: Ratio of Gold and Foreign Exchange Reserves to Imports. Brazil: Total Exchange Auctioned and Quotation for the Dollar. . . Automobile Registration in Brazil, by Make ............. Planned Automobile Output for 1960 ................. Venezuela: Automobile Population and Number of Persons to a Car .............................. Venezuela's Automobile Imports Market Shares, by Country of Origin .............................. ix Page 84 88 89 91 95 98 100 102 104 106 107 108 111 112 115 120 125 129 131 M Babb-mi [Jr-1, "'4': m! 1:“ A, : reek-ii? axis-“shag a}: Isa-1‘1 mam-it! to "'_I I.- .i,..--._.."‘ List of Tables (continued) Table Page 53. Venezuela: Adjusted National Income, Pet Capita Income and their Indexes .......................... 132 54. Venezuela’s Foreign Trade ...................... 135 55. Venezuela: Percentage Distribution of Trade by Areas ....... 136 56. Venezuela: Gold and Foreign Exchange Reserves and Ratio of Reserves to Imports ........................ 137 57. Venezuela: Ratio of Export to National Income ........... 139 58. Venezuela: Import Customs Duties on Automobiles ......... 142 59. Venezuela: Annual Taxes on Automobiles .............. 144 60. Venezuela: Tax on First Registration of Automobiles. . . . . . . 145 61. A Comparison of American and European Automobiles by Selected Specifications ...................... 149 62. Brazil: Contrasting Price Data for American and European Automobiles ....... . ................... 151 63. Argentina: Contrasting Price Data for American and European Automobiles ............................ 152 64. Venezuela: Contrasting Price Data for American and European Automobiles ............................ 153 65. Price Discount for Automobiles in the Swedish Market by Engine Capacity Group ......... . ................ 154 66. United States Automobile Exports and their Composition by Area of Destination ........................... 159 67. Trends of U. S. Automobiles by Weight and Power ......... 161 68. Motor Vehicle Fuel Outlets in Argentina, Brazil, Venezuela. . . . 169 x «rate a! angel)- 9'5 Jaw-m lama!!! amuse alumni-V J. ‘ “Lao-J}! '- “*7 Pm: INTRODU CT ION The world market for automobiles has been undergoing significant changes affecting the major automobile producing countries. 'There are several complex forces responsible for these changes: foreign exchange difficulties, national objectives for economic development and the desire for industrializa- tion, tariffs and other trade barriers, and the marked contrast between the popular automobile in the United States and that in other parts of the world. There are, in addition, secondary forces such as changed methods of mar- ' keting, and the response to consumer buying habits and motives. These and other variables have been put forward by manufacturers as reasons for the big setback in United States automobile exports. In all of these factors there is undoubtedly an element of truth, but the enigma of disagree- ment over the decline of United States automobile exports still remains and warrants a serious examination. In addition, the subject is of state-wide, as well as industry-wide importance, due to the peculiar nature of Michigan's economic structure. Furthermore, this sensitive industry has implications for other durable and capital goods industries. During the past decade overseas markets for automobiles have grown proportionately more than American domestic markets. Despite this growth, American automobile exports have been dwindling both in share of the world automobile market and in absolute terms. At the same time, United States - l _ ‘36 ll. -".t-f'.'i' r71, -2- merchandise exports have shown a continuous rise in recent years (except in 1958), while the automobile share of export values has been falling, as is clearly indicated in Table 1. TABLE 1 UNITED STATES MERCHANDISE AND AUTOMOBILE EXPORTS Millions of dollars Automobiles as a percent Merchandise Automobiles of merchandise 1955 14,280 380 2. 6 1956 17,321 331 1. 91 1957 19, 390 299 1.55 1958 16, 263 258 1.59 1959 16,225 220 1.36 Calculated from: U. S. Department of Commerce, Survey of Current Business (June and September, 1959); and Balance of Payments Statistical Supplement (1958), pp. 12, 13; U. S., Bureau of the Census, United States Exports of Domestic and Foreign Merchandise, Schedule B, Report No. FT 410, Part 11 (1952-1959). One of the biggest questions in United States automobile exports is what factors underlie the recent decline. This thesis attempts to identify the primary reasons for the decline, to assess the degree of its seriousness, and to suggest possible courses of action to correct it. Finally, the study ventures on some speculation about the outlook of these markets. The method of analysis which will be followed in arriving at the above objective will center around the following procedure: examining data relevant to the decline of American automobile export; identifying the interrelationships; drawing inferences; and suggesting underlying reasons for the decline. The ‘w. . .. .. 5W1" I“. C ,3 ' I ' ' I . ‘ .L uHe'I‘ a! {artificial-Hunts}: -3- subject matter of this thesis will be general in character; it is based on a systematic study of available printed information, the cooperation of American automobile manufacturers, the United States Bureau of Foreign Commerce, Foreign Service Dispatches, and the Office of- Economic Counselors for selected Latin American countries. Of the selected Latin American markets, only Argentina, Brazil, and Venezuela will be analyzed in detail. In order to recognize the context of the American automobile manufacturers' position in the world market, it is worth while to examine the overall growth in world trade, the competitive strength of the major automobile producing countries, and their relative trading position in the various sectors of the world. Special emphasis, however, will be given to the United States position in this changing pattern of automobile trade. With this purpose in view, Chapter I will be devoted to the profile of world market in 1938 and the postwar years up to and including 1958. Chapter II will deal with the shift in the pattern of automobile trade from American exportation to local manufacture abroad. The framework of market structure in the selected Latin American countries will be discussed in Chapter III, together with the problems that the United States has been encountering in automobile export. Chapter IV will deal with the secondary factors pertaining to the decline of United States automobile exports. By identifying the inter- relationships in a few Latin American markets, inferences can be drawn on which variables should be evaluated critically; hence Chapter V will be con- cerned with evaluation of critical variables. CHAPTER I PROFILE OF THE WORLD MARKET IN 1938 AND THE POSTWAR YEARS Automobiles in Use The number of automobiles in use throughout the world has increased from 43 million in 1948 to 86 million in 1958, thus doubling in an eleven~year period. This rate of increase was five times as great as the increase in world population, resulting in one car to every thirty persons in 1958 as compared to one car for every fifty persons in 1948. Tables 2 and 3 show the world automo- bile registrations and also the varying density of car population in different areas. The variation in the rate of increase is brought about, among other factors, by the changes in the purchasing power, the area's external trading position, density of car population, desire for mobility, and living conditions. (The terms automobile and car will be used interchangeably.) Western Hemisphere During the period 1948-58, almost 27 million more automobiles were registered in the Western Hemisphere. Approximately 80 percent of this increase has occurred in the United States. With a total of 57 million auto- mobiles in use, the United States has one automobile to every 3 persons, the highest ratio in the world. The rate of increase of American automobiles, -4- -5- TAB LE 2 WORLD AUTOMOBILE REGISTRATIONS, BY AREAS (Thousands of units) a Western United World total Africa Asia Europe Oceania Hemisphere States 1938 34,956 512 408 6,414 814 26,803 25,151 1948 42, 843 560 305 5, 270 984 35, 723 33, 398 1949 47, 582 738 377 6, 404 1, 063 39, 000 36, 434 1950 53, 027 847 480 7, 130 1,247 43, 322 40, 315 1951 56, 001 848 602 7,165 1, 399 45, 987 42,683 1952 58, 347 933 674 7, 783 I, 522 47,436 43,811 1953 62,501 983 718 8,722 1,618 50,461 46,460 1954 66, 643 1,075 794 10,275 1,689 52,811 48, 499 1955 73,065 1,275 866 12,203 1,965 56,755 52,173 1956 78, 433 1, 343 1, 015 14,416 2,185 59,475 54, 332 1957 82, 664 1, 436 1,114 16,564 2, 237 61, 314 55, 906 1958 86,140 1,580 1, 302 18,189 2, 419 62, 649 56, 870 Guam, New Caledonia, New Guinea——Papua, Fiji Islands, Cook Islands, a . Details may not add exactly to total because of rounding. bUntil 1958, Oceania included Australia, New Zealand, Hawaii, Samoa, and Trust Territories. CThe Western Hemisphere includes, North. Central, and South America. Manufacturers Association, 1939, 1949—1960). Compiled from: Automobile Facts and Figures (Detroit: Automobile about 5 percent a year on the average, can be explained by certain factors: the industrial boom, the high per capita income; the wide acceptance of installment credit in automobile buying; the suburban development; and the high purchasing power of the Unided States domestic market. Since the United States had a high car ownership ratio prior to the Second World War and even in the immediate -5- -6- TABLE 3 NUMBER OF PERSONS PER AUTOMOBILE United United World total Africa Asia Europe Oceania Hemisphere States 1938 59.8 5.2 1948 52.9 314.1 3,858.6 112 4 14.0 8. 2 4.4 1949 48.7 242. 4 3, 282. 2 89. 6 12.0 8.1 4.1 1950 43.9 211. 4 2,601.6 78.4 9. 9 7.4 3.7 1951 42.2 211.4 2,110.2 78.8 8.9 7. 3 3.6 1952 40.7 202. 8 1,887.7 72.6 8.8 7.1 3.6 1953 38.5 211.2 1,747. 9 67.5 8. 6 6.8 3. 4 1954 38.5 191.7 1,742. 4 59.5 8.0 6.6 3. 3 1955 36.0 163.4 1,645.8 51.0 7.1 6. 3 3.2 1956 33.9 159.6 1,433.9 42.0 6.8 6.1 3.1 1957 32.3 152.0 1,305.3 37.0 6.2 6.1 3.1 1958 31.3 122.6 1,148.1 35.2 6.2 6.1 3.1 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949—1960). postwar period, the percentage increase appears to be relatively low. In actual numbers, however, the magnitude of growth accounts for more than half of the world's automobile population between 1948 and 1958. Nonetheless the rate of increase has subsided in the most recent years under study. It is not unnatural to expect this levelling of growth, since over 70 percent of American families own automobiles and about 13. 5 percent of all American families own . 1 . . . more than one automobile. If anything, the increase such as it has been, can lAutomobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1959-60), 33, 35, quoting Survey of Consumer Finances, Federal Reserve Board, and "National Automobile and Tire Survey, 1959, " conducted by Alfred Politz Research, Inc. for Look magazine during April and May, 1959. I . — . l- , . - . " . - . .- . _ ., r I - . ‘_ II-..-.. .. .5..... ..'..,.. ..-...,, .5. g...- -__.,.___ .1 _._ .. .. - . rr. —.'._.— ---— - ---¢n—‘ ..— u--- -b-.-I.s 5. I I . ' 'r" . n I" _ ‘5' . =..' - " t..i.--.--9 ..1 . - ; .-_-:..\ fat. hhn'fl -7- be attributed to the increasing percentage of families owning more than one car. World automobiles in use doubled between 1948 and 1958. Some areas exceeded the world norm while others fell short. Those which had low automotive density to begin with generally experienced a higher rate of increase than the advanced industrial economies, but there were significant departures. Asia, for instance, which had the lowest auto-population ratio to begin with (1 car to 3, 859 population) increased the most rapidly, quadrupling during 1948-58. Yet Africa, which started with only one automobile for every 314 persons (the second low) did not increase as rapidly as Europe. Oceania and the Western Hemisphere, which had a high density of car population in 1948 experienced a lower rate of increase. Trends in World Production World automobile production almost doubled between 1948 and 1958, increasing from 4. 6 million to 8. 7 million units. Between 1955 and 1958 there was a decline of 21 percent. The decline during this period resulted primarily from the sharp drop (over 46 percent in automobile production in the United States) which could be explained by an ”over- sold"2 market, and the buoyant general economic conditions of 1955. Table 4 demonstrates this situation. Outside of the United States, automobile production in 1958 was the highest ever recorded in a single year, with a volume of output exceeding 1955 by 43 2 . Despite the fact that the years subsequent to 1955 experienced higher level of national income, this year remains the all—time record in auto- mobile sales. I. -. -~ "' wilt-”urine {PM AO0sH-sssH .omoH .noflfloomm4mHoHBoflsam2 2305854 Bahamas mowswwm pad 30mm oiQoEoEas ”EOHH “6333030 .noflmozdsp 656m 839: :3, :38 pious 65 mat 55:58 .8598 E 82689 >265? Ho >3me 6.83 £6.33 EQEommm “commune Sac nofiospoud monflnsoo 688 Home s.ws 0w0.w 0s0 HwH.H ~00.H 00 000 sms mam ssm.s wmsa 0.H0 «ms.o wws oso.s H0w N0 0mm mas osm oma.0 smss N.s0 00o.s was "as was an swm ss0 ssm 0am.0 00s. s.ss sHo.Hs emu ~05 wow mm msm mmm mam ems.» 00oz w.s0 s0s.» ass ~00 s0» om awa ems new 000.0 smsa w.ms s0o.w as man 0mm as msa Ham 00m BHH.0 mmsz a. . s.~s 0mm.0 0s Hon ass as sas ohm swm Hmm.s mmss w.ss wmw.0 mm s0~ 0ss as ass ssm Jam sm0.m Hmsa 0.sw sss.w wsa saw «N0 ea Hod smm mam 000.0 omsz s.mm 0ms.0 0m so“ was 0 as sea sea sHH.0 sssa s.sw so0.s HN on 000 m ss cod s0a sos.m wsss s.00 N0o.m as sum Hsm N am osa sms omo.m wmsa :30”. Ho HEGOH mm mm Hana? mHm£HO KAGNEH 00 Eomeg Gmflmzwm LAHMHH oommH m wfimch mmumum .m As “was ewes: 002s: ASE: Ho mpnmwsofiv 7:020 m0 VMEZDOO km w.ZOE.UDQOMm mdmOEOHDas 9.353 .v M1232“. -9- percent. The increase was achieved mainly by France, West Germany and Italy. Between 1948 and 1958 the American share of world production declined from 85 percent to a low of 49 percent, with wide fluctuations during the period. In 1958, for the fir-st time since the end of World War II, the total automobile output outside the United States surpassed American automobile production. In order to understand the changes in the level of automobile output, the pattern of production of each of the major automobile producing countries will be discussed separately. United States and Canada's automobile manufacturing While in 1950 the United States produced over four-fifths of the world's automobiles and over two-thirds during the past decade, its share has been declining persistently, particularly after 1955. Nonetheless the United States has still by far the largest automobile industry in the world. In fact it has the largest and most important durable goods industry. The "Big Three, " General Motors, Ford, and Chrysler, dominate the automobile output; together they account for some 95 percent of the total automobile production; however, American Motors has recently been making inroads into the total automobile output in the United States. Unlike the United States, Canada's share of world automobile output has been maintained somewhat the same throughout the period under study. The Big Three have of course their manufacturing facilities in Canada, selling not only to the Canadians but also outside the Northern Hemisphere, particu- larly to areas in which Canada enjoys the preferential tariffs. ‘ .- -'. If .5 = =. all it": I' "'4... tr. .-, ,:.t-:'-.- _: tam fifi'dr 565311: 6"; mm! 'r-e- " .::._l_’ .'_:'.l-: . - 1.. ._ .t 9: «animal: flfii': --'rt-.~- “'i‘.‘ -.-~-u'_. t':~ '56 «mi in at! .. 10- Since American and Canadian automobile production serve primarily their home markets, the level of output is subject to conditions of their do- mestic economic activities than to the state of their foreign markets. West Germany's auto- mobile manufacturing In 1938, Germany had an output of over 1/4 million automobiles, of which one-fourth were exported. During World War II a great bulk of the industry's plant and equipment was destroyed or seriously damaged. Recovery was slow; and West Germany's automobile output in 1948 barely reached 30 thousand units. In the succeeding years automobile output rose substantially. The prewar level was not reached, however, until 1951; by 1956 West Germany replaced Britain as the second largest auto producer in the world, and has retained its position ever since. In 1958, West Germany produced 1.2 million units, more than five times its 1950 output. The great expansion in activity in the automobile in- dustry has of course been a part of the industrial boom in West Germany. While income has risen rapidly, prices in general have risen only moderately and, consequently, the real purchasing power of the population has been rising year after year. 3 This fact, together with the somewhat stable prices of auto- mobiles and comparatively low car ownership, influenced the rapid growth of automobile production in Germany. 3"The German Motor Industry, " Motor Business (London), N0. 15, September, 1957, pp. 11—12. _ 1 1 _ British automobile manufacturing Like the United States, the United Kingdom was able to resume its automobile production immediately after the war, and by 1948 it almost matched its prewar production level. Thereafter there has been a continuous increase, except for 1950-51 and 1956-57. In the immediate postwar period the United Kingdom and the United States were virtually the only countries with the ability to produce automobiles in large volume, and to cope with demand. Traditionally, British automobile output is divided equally between domestic and export markets. However, as the other European manufacturers reemerged around 1951, the English share of total automobile production fell steadily. Nevertheless, the United Kingdom's output by 1958 was three times its prewar level. French automobile manufacturing France has expanded its car manufacturing considerably since the war. In 1958 its automobile output passed 900 thousand units, about four times the 1950 output. The growth of the industry has been largely reflected by the substantial success of the small automobile, both in the domestic as well as in the foreign markets, particularly since 1955. It is clear from the accompanying Table 5 that the proportion of small automobile production under 6 horsepOWer, French rating, has increased from 43 percent in 1955 to 56 percent in 1958, and perhaps increased even more in later years. There have been several factors, influencing the concentration ' upon small automobile production: ' batritfit Basia *lfl-ffl'fihlt ,.-' f 'oifir WM rte-mm JAM Minute- .‘I'Jn'... 'il- ,‘. -t f-'_-" .3 ' i ‘I_'-.-, . r Ml,h,’l1‘|-IIf"'tu“|." "r't-‘Lui'I-al gr: -12- TABLE 5 AUTOMOBILE PRODUCTION IN FRANCE (Percentage distribution by horsepower group) Horsepower 1955 1956 1957 1958 Under 6 42.8 47.8 55.0 56.1 6- 8 35.7 35.9 36.7 33.7 9- 12 13.7 9.5 5.8 7.0 Over '12 7.8 6.8 2.5 3.2 100 0 100 0 100 0 100 0 Compiled from: "The French Motor Industry, " Motor Business, No. . 22, April, 1960, p. 17. ‘ ii 3. 4. The extension of automobile ownership to the lower income groups throughout the world market, The high cost of gasoline, The introduction of progressive tax based on horsepower rating, 4 Shortage of parking space and road congestion. All these have encouraged the use of smaller, economical cars. In fact the demand for small automobiles, especially in the most recent years under study, has been expanding rapidly not only in Western Europe, but also in other markets. Italian automobile manufacturing The Italian automobile industry varies from its European counter— 4 "The French Motor Industry, " Motor Business, No. 22, April, 1960, p. 17. _—m- n w~.-~--‘- “—— .-qu-—¢-—--—--..-~—._ “—— -""W'.‘|'] ___n I '1‘ I. -13- parts. The domestic market is fairly small, and exports relatively a small proportion of output. In 1938, Italy produced some 60 thousand automobiles, a figure which was surpassed by 1949. In the subsequent years it continued to increase its output, except when it experienced a slight decline in 1952 and recovered thereafter. By 1958, Italy's automobile output reached about 370 thousand units which was more than six times its 1938 level. Rapid increases in output came between 1953 and 1958. The pattern of growth did not vary from that of the other European producers except that the growth was steadier in Italy than elsewhere. Swedish automobile manufacturing Prior to the Second World War, Swedish automobiles were hardly known to any country other than the Scandinavian region. The relatively small size of its domestic market has made it necessary for Swedish manu- facturers to seek foreign markets for their automobiles. The development of automobile exports was of great interest to the Swedish economy, since with market diversification they expected to offSet the seasonal fluctuations in the sale of their automobiles to their home market. The increase in automobile output has been substantial since 1953; by 1958 the Swedish automobile output was 7 times the level of 1950. World Trade in Automobiles World trade in automobiles in the postwar period has risen rapidly. Table 6 shows that between 1938 and 1948 the volume of automobile exports rose from 375 thousand to 543 thousand, an increase of 45 percent; by 1958, ..iLV‘z-eiT-ve—«m . "- -14- TABLE 6 AUTOMOBILE IMPORTS BY AREAS (Thousands of unitS) World Western World total excl. Total Africa Asia Europe Oceania Hemisphere U. S. imports 1938 375 53 30 135 86 65 n. a. 1948 543 117 58 126 83 153 515 1949 521 86 46 155 111 122 5'13 1950 720 82 42 234 164 197 699 1951 837 114 77 249 170 227 813 1952 703 101 60 252 104 186 670 1953 746 104 56 309 92 184 717 1954 943 112 59 441 149 180 909 1955 1,162 163 85 516 166 229 1,105 1956 1, 175 155 83 525 111 297 1, 068 1957 1,433 204 72 571 109 471 1,174 1958 1, 763 231 74 649 116 685 1, 296 Market Shares 1938 100 14. 4 8.1 36.6 23.3 17. 6 n. a. 1948 100 21.8 10.8 23.5 15.5 28.5 95.9 1949 100 16.5 8.8 29.8 21.3 23.5 98.7 1950 100 11.4 5.8 32.5 22.8 27.4 97.2 1951 100 13.6 9.2 29.7 20.3 27.1 97.1 1952 100 14.4 8.5 35.8 14.8 26.5 95.3 1953 100 14.0 7.5 41.5 12.3 24.7 96.2 1954 100 11.9 6.3 46.9 15.8 19.1 96.6 1955 100 14.1 7.3 44.5 14.3 19.8 95.3 1956 100 13.2 7.1 44.8 9.5 25.4 91.2 1957 100 14.3 5.0 40.0 7.6 33.0 82.3 1958 100 13.2 4.2 37.0 6.6 39.0 73.8 a . Details may not add exactly to total because of rounding. Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1956-1959). - 15- automobile exports rose to 1, 755 thousand units, more than three times the 1948 figure. This is a remarkably high and sustained rate of increase. How- ever, there have been some fluctuations in the rate of export growth in each area. Destination for exports have shifted appreciably in the postwar period. Traditionally Europe has been the largest export market. As Table 6 shows, this sector maintained that position until 1958 when it was exceeded by the Western Hemisphere. After the Western Hemisphere and Europe, which account for more than 3/4 of world automobile imports come Africa and Oceania with 13 percent and 7 percent respectively, and finally Asia with 4 percent. Africa and Europe have been able to maintain prewar positions in their share of automobiles imported from various sources of supply. However Asia's share dropped by one-half between 1938 and 1958; Oceania had one- third of its 1938 share, while during the same period the Western Hemisphere increased its share from 18 percent to about 40 percent, primarily attribut- able to the substantial imports of automobiles into the United States. Shares of the major producing countries Within the overall growth of exports, there have been significant changes in the shares of the major producing countries. Three phases in the struggle for world automobile markets since the war have to be distinguished. The changes in the first phase are not of a fundamental or significant nature since in the immediate postwar period only the American and English manu- -l6- facturers were able to expand productive capacity rapidly and to sell virtually unopposed in a car hungry world market. In the second phase, which started after 1951, France, Italy, West Germany, and Sweden entered the scene; and as their productive capacity increased the shares held by the United States and the United Kingdom declined. This may have been inevitable, for the large American and British shares were not the result of a free expression of con- sumer choice. In 1956 the market entered a third phase of more intense com- petition, as indicated by more serious downward trend in American and Canadian shares. Since 1938, however, there has been a fundamental change in the relative shares of the main producing countries. Table 7 clearly shows the TABLE 7 PERCENTAGE SHARES OF WORLD EXPORTS BY AUTOMOBILE MANUFACTURERS Shares distribution 1938 1948 1958 Ratio 1958/1938 United States 43 40 7 O. 2 Canada 11 5 l 0. 1 France 5 10 18 3. 6 Italy 5 2 9 1.8 Sweden 1 -- 2 2.0 United Kingdom 18 41 27 1.5 West Germany 17 1 36 2. 1 Totala W W F0 8Totals may not add to 100 percent due to rounding. Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1956-1959). -17- expanding shares of some major producing countries and the reduced shares of the United States and Canada. It is interesting to note that France has gained rnost throughout the period, relatively speaking, having 3. 6 times her 1938 share, followed by West Germany and Sweden, which have doubled their shares. United States exports to world market Before World War II, the United States was easily the largest exporter of automobiles, accounting for over 40 percent of the automobiles entering international trade (see Table 8). As a proportion of total American automo- bile production, however, exports have accounted for only 8 percent. Immediately after the war, the United States automobile industry qI—Iickly converted to civilian production; by 1948, the United States automobile expo rts surpassed its prewar level. In subsequent years, however, the United States automobile exports have declined both in volume and as a share of total “’0 I‘ld exports. In fact the 1948 volume of automobile exports was a record, all‘rlost equalled in 1951 and 1955, yet its share of total world exports declined C(3‘1-'1tinuously after 1954. The American share of world automobile exports has dropped from 43 percent in 1938 to approximately 7 percent in 1958. During the same period United States automobile exports as a percent of its production fel 1 from 8 percent to 3 percent and to 2 percent in 1959. American car ex- DC r138 in 1958 dropped to a postwar low of 122 thousand from 212 thousand as rec:ently as in 1955, with fewer than 100 thousand for 1959. Table 8 also reveals the dramatic decline of the United States share in the . . World automobile exports, Wthh has been the most striking feature in the -18- TABLE 8 UNITED STATES AND WORLD AUTOMOBILE EXPORTS Total world exportsa United States exports Thousands Thousands Percent of total Percent of total of units of units world exports U. S. production 1 938 375 162 43 8.0 1 948 543 218 40 5.6 1 949 521 140 27 2. 7 1 950 720 120 17 l. 8 1 95 1 837 217 26 4. 1 1 952 703 141 20 3. 3 l 953 746 154 21 2. 5 1 954 943 173 18 3. l 1955 1,162 212 18 2.7 1956 1,175 175 15 3.0 1 9 57 1,433 142 10 2. 3 1958 1,763 122 7 2.9 1959 2,247 104 5 1.9 aTotal world exports include major producing countries (United States, Canada, France, Italy, Sweden, United Kingdom and West Germany). Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949-1961); and The Motor Industry of S3 reat Britain (London: The Society of Motor Manufacturers and Traders, Li united, 1956—1959). hi Story of market shares in automobile exports. This was accompanied by the e1'171ergence of mass-produced European automobiles. The rapid expansion in production of European automobile manufac- turers in 1950—51 was stimulated by the rising export sales. In 1950 automo— bile manufacturers of Europe supplied approximately 80 percent of the 720 thousand automobiles exported by the major producing countries. In 1958 they -19- raised their export shares to over 90 percent of a much larger (1 3/ 4 million) automobile market. Table 9 portrays the shrinking shares of the United States and Britain in a world market they once controlled. West Germany's exports to the world market We have noticed earlier that West Germany has experienced a rapid growth in its automobile production. However, exports rose even faster. West Germany has, as can be seen from Table 9, steadily increased its share of automobile exports. This rapid and pronounced increase has been almost entirely at the expense of the United States and Canada and to some degree Britain. It was only by 1950, when West Germany's automobile exports re— sumed its prewar level, that the picture really began to change. During that year it had only a 10 percent share of total world exports; by 1956 West Ge 1' many had replaced the United Kingdom as the largest automobile exporter in the world. West Germany’s penetration of the market has been worldwide. In 1958 Europe received approximately 50 percent of West Germany's automobile expo I‘ts. This is a market where trade and income have been rapidly and Steaclily rising. and where trade has been liberalized to a great extent. Europe, of course, has been West Germany‘s traditional market for auto- mobiles since before the war. In 1938, over one-third of Europe‘s automo- bile imports were from West Germany, the proportion of which was not reached until 1953, though the prewar volume was easuy surpassed by 1950 (See Table 10). In the following year, both West Germany and Britain had T_————_ -20- TABLE 9 AUTOMOBILE EXPORTS TO THE WORLD, BY MAJOR PRODUCING COUNTRIES AND THEIR MARKET SHARES (Thousands of units) United United West States Canada France Italy Sweden Kingdom Germany Totala 1938 162 40 19 18 2 68 65 374 1948 218 27 55 12 1 224 6 543 1949 140 17 76 15 -- 257 14 519 1950 120 24 89 20 1 398 69 721 1951 217 37 93 29 2 368 91 837 1952 141 42 83 25 1 309 103 704 1953 154 28 81 30 1 307 143 744 1954 173 7 101 41 2 372 247 943 1955 212 12 133 69 3 389 344 1,162 1956 175 14 151 78 8 335 413 1,174 1957 142 16 319 111 19 424 502 1,433 1958 122 13 320 161 32 484 631 1,763 Market Shares 1938 43.1 10.8 5.2 4.9 0.5 18.2 17 4 100.0 1948 40.1 5.0 10.1 2.1 0.1 41.3 1 1 100.0 1949 26.9 3.4 14.7 2.9 0.1 49.4 2 7 100.0 1950 16.7 3.3 12.3 2.7 0.1 55.2 9.6 100.0 1951 25.9 4.4 11.1 3.5 0.2 44.0 10 9 100.0 1952 20.1 5.9 11.8 3.6 0.2 43.9 14 6 100.0 1953 20.7 3.8 10.9 4.0 0.2 41.2 19.2 100.0 1954 18.4 0.8 10.7 4.3 0.3 39.4 26.1 100.0 355 18.2 1.0 11.4 6.0 0.3 33.4 29.6 100.0 19:6 14.9 1.2 12.9 6.7 0.7 28.5 35.2 100.0 1957 9.9 1.1 15.3 7.7 1.3 29.6 35 0 100.0 8 6.9 0.8 18.2 9.1 1.8 27.5 35 8 100.0 a . Details may not add to totals due to rounding. S o _ Calculated from: The Motor Industry of Great Britain (London: The (new of Motor Manufacturers and Traders, Limited, 1956-1959). -21- TABLE 10 AUTOMOBILE EXPORTS TO EUROPE, BY MAJOR PRODUCING COUNTRIES AND THEIR MARKET SHARES (Thousands of units) United United West a States Canada France Italy Sweden Kingdom Germany Total 1938 46 1 9 12 - 15 50 135 1948 43 - 26 7 - 49 -- 126 1949 37 1 42 10 - 51 14 155 1950 33 1 46 14 - 79 61 234 1951 45 4 39 18 1 71 71 249 1952 27 6 37 20 1 78 82 252 1953 32 8 40 24 1 89 115 309 1954 46 1 49 30 2 122 191 441 1955 52 - 69 50 3 104 237 516 1956 34 1 79 58 4 92 257 525 1957 23 1 95 78 7 100 268 571 1958 18 1 105 104 10 90 321 649 Market Shares 1938 34.5 1.1 7.0 8.9 11.3 37.0 100.0 1948 34.3 0.3 20.3 5.7 0.4 39.1 100.0 1949 24.0 0.8 27.0 6.2 0.1 32.9 8.9 100.0 1950 14.0 0.3 19.8 5.9 0.2 33.7 26.1 100.0 1951 18.2 1.6 15.9 7.3 0.3 28.4 28.4 100.0 1952 10.9 2.4 14.8 8.0 0.4 31.1 32.4 100.0 1953 10.4 2.7 12.9 7.8 0.4 28.7 37.2 100.0 113:4 10.5 0.1 11.0 6.8 0.5 27.8 43.3 100.0 1955 10.2 0.1 13.3 9.7 0. 5 20.2 46.0 100.0 195: 6.5 0.2 15.1 11.1 0.7 17.5 49.0 100.0 1958 4.1 0.2 16.6 13.6 1.2 17.5 46.9 100.0 2.7 0.1 16.2 16.0 1.6 13.8 49.4 100.0 alDetails may not add to totals due to rounding. Soc- Calculated from: The Motor Industry of Great Britain (London: The 16W of Motor Manufacturers and Traders, Limited, 1956-1959). J- 1"":' A -' “'1... ._.Ir' -' . g = :1 4,; 9+" . 78445: 1.. '11:! 3r? j , learns MI. -~ -*i . r1. . -.'."- ' - ..-}."-.I.' -"l .1 -22- equal shares of the car exports to Europe, with 28 percent each. Since then West Germany continued increasing its share, and in 1958 supplied half of the European market, selling over 300 thousand automobiles, or more than six fold the prewar figure. Though the United States and the United Kingdom controlled three-fourths of the European imports after the war, they held only '17 percent in 1958, with the more dramatic loss to the United States. The rapid expansion of German automobile exports, however, has not been confined to its traditional European market. Exports of German automo- biles to the other areas have also increased substantially, though the share is not dominant. Although it remains true that Germany and other major pro- ducers sell their cars in different markets, there has been a significant switch in the world market share. A comparison between West Germany’s manufacturers and others Selling in different markets may be revealing. Germany has been concen— trating her sales effort in Europe, particularly in Belgium, Luxembourg, the Netherlands, Sweden, and Switzerland, and by the mid-50's in the United State S , Where all the major automobile manufacturers have been doing well. By C"Ontrast, Britain's most important markets have been in the Common- wealth. Incidentally, these are the preferential markets in which British Shares have fallen sharply in recent years--from a high of 91 percent in 1953 to a 10W of 70 percent in 1958. The United States has been concentrating on the VVe stern Hemisphere supplying over half of the area's antomobile imports in the postwar period compared to 80 percent in the prewar period (see Table 1 l)‘ Although this high proportion has not been maintained since the war, we 55.-”s5. . ~:, ..'-I -.__.I I,' , l"-.- _ '75:! ilflt': $0"? . ..- - '_'.‘.-' It]! i .' l' I . :--' .- .-: minnquL'us 9.111. 411-8.: 1311.“ rsvn nun...“ , I.‘ " -- -' .- ".-.--.":- “"5 await! amen-Jun -23- TABLE 11 AUTOMOBILE EXPORTS TO THE WESTERN HEMISPHERE BY MAJOR PRODUCING COUNTRIES AND THEIR MARKET SHARES (Thousands of units) Total, United United West a excl. U. S. States Canada France Italy Sweden Kingdom Germany Total imports 1938 54 2 1 1 - 2 6 65 1948 89 1 9 1 - 54 - 153 125 1949 60 1 5 1 - 54 - 122 115 1950 67 1 8 1 - 117 3 197 176 1951 130 6 9 1 1 70 9 227 203 1952 88 11 5 1 - 72 8 186 153 1953 93 6 4 1 - 68 13 184 154 1954 93 - 5 3 - 55 . 25 181 146 1955 108 1 8 4 -' 50 58 229 172 1956 100 2 15 5 4 75 96 297 189 1957 85 3 54 19 12 144 154 470 211 1958 78 2 122 40 20 221 201 685 254 Market Shares 1938 83.2 2.3 1.4 1.1 3.0 9.0 100.0 1948 58.2 0.4 5.8 0.4 0.1 35.2 100.0 71.2 1949 49.3 0.7 4.4 0.9 0.1 44.5 100.0 52.5 1950 34.0 0.5 4.1 0.5 0.1 59.4 1.4 100.0 38.1 1951 57.4 2. 7 4.0 0.7 0. 3 31.0 3.9 100.0 64.1 1952 47.4 6.0 2.6 0.4 0.1 38.9 4.5 100.0 57.8 1953 50.3 3.4 2.0 0.5 36.8 6.9 100.0 59.9 $54 51.4 0.1 2.5 1.5 30.6 13.9 100.0 63.6 19:5 47.3 0.3 3.6 1.7 21.7 25.3 100.0 63.0 1956 33.8 0.8 5.0 1.7 1.2 25.1 32.3 100.0 53.0 1957 18.1 0.6 11.6 4.0 2. 5 30. 5 32.7 100.0 40.2 8 11.3 0.3 17.9 5.9 3.0 32.3 29.4 100.0 30.6 a . Details may not add to totals due to rounding. So . Calculated from: The Motor Industry of Great Britain (London: The Clety of Motor Manufacturers and Traders. Limited, 1956-1959). -24- can see from the table that the United States has been holding a strong position in this sector anyway. However the table further reveals the serious decline, from 47 percent in 1955 to 11 percent in 1958, which has been captured largely by West Germany and Britain and, to some extent, by France and Italy. This dramatic decline is magnified by the substantial increase in the imports of foreign cars into the United States. By eliminating the United States from total exports to the American continent, the United States share would have fallen only to 31 percent in 1958, instead of to 11 percent. At any rate, comparing 1948 and 1958, the United States penetration in the area has been halved, although it is still considered its best market. The choice of markets by the United States and Britain has perhaps, to some degree, been caused by the greater ease of exporting to countries Where there are strong trade relations or tariff advantages. The latter is true of the United Kingdom's preferential tariffs. Unfortunately these terri— tories have been precisely the markets where demand for automobiles has been growing the least rapidly. Virtually all countries within these territories gene rate their income principally from agricultural and mining industries, which exchange their products for manufactured goods, so vulnerable to sharp eCOrl‘OI‘tiic fluctuations. Furthermore some of the Commonwealth countries (Australia and India) and some Latin American countries have already begun to manufacture cars themselves. Finally Britain's, and to some extent the United States', leading markets either already have a relatively higher car population or are markets with a poor per capita income where it will be many Ye . . . ars before motorization can take place on any important scale. 1.51.1... . -25- France and Italy's world exports France and Italy seriously entered the scene of automobile exports much later than other major manufacturers, although they began producing immediately after the war. The export market has, in the past, been of relatively less importance to the French and Italian industries than to their counterparts (particularly the European ones); a relatively large and pro- tected domestic market, and a high level of production costs, have to some extent militated against French and Italian exports. In the early postwar period, the French automobile industry depended on the rapid growth of its starved domestic markets for cars. The first seri— ous attempt to develop overseas markets came in 1956 when the Suez crisis halted the rapid growth in the domestic market. Alarmed by this incident, there was a growing realization among French manufacturers that too much reliance on the domestic market would make them vulnerable if a sudden d‘WVI‘lturn in local demand occurred. As a result, the automobile manufac- turers concentrated on developing the export markets. The success is to be measured by the increase of automobile exports to the extent that they more than doubled between 1956 and 1958, raising their share of world automobile eXpo rts from about 13 percent in 1956 to slightly more than 18 percent in 1958 (See Table 9). This development is of considerable importance to the world automobile market even though the increase has been a moderate one com- pared With that exhibited by West Germany. It is important because it has come abOLIt at a time when competition in overseas markets was increasing and when th e Dre ssure of demand on the French domestic market was still above normal. -26- An interesting feature of the French auto industry is not that its share has risen, for this share is relatively small compared to those of its major competitors (United Kingdom, United States and West Germany), but that its share has remained roughly at the same level for such a long period, as is exhibited in Table 9. Although it is not easy to find the explanation for this steady share of the market, a number of reasons could be set forth. One . 5 . . mlght assume that the French zone, to WhICh France exports her automoblles, has been the backbone of its export market. However, exports to this zone increased moderately from 41 thousand units in 1956 to only 69 thousand units in 1958, and the proportion of total automobile exports to this area declined from about 27 percent to approximately 22 percent during the same period. 6 This steady growth is all the more significant when one considers that the expansion has taken place in exports to countries outside the French Zone. The most important market for French automobiles in the postwar period as a whole has been Africa and Europe. The size of the African share 18 dLle to dominance in the market especially in the case of Algeria and MO rocco which are among the first five important markets. France's share 1 . . . . n Africa has increased from 14 percent in the prewar and immediate postwar De r1 ()d to approximately one—third of the total African imports. In Europe, "The French Motor Industry, " Motor Business, No. 22, April, 1960, p‘ 2 2. French Zone comprises all the French overseas territories and 1:erectorates, and includes Morocco and Tunisia for the present purpose. As a em from Ibid., No. 9, December, 1956, p. 15. fi -27- Belgium (the location for a number of French assembly plants) has been the largest market for France, and lately West Germany has become the second In Europe, France occupies the second place after West important market. Germany, although she was in the fifth place among the auto manufacturers in the prewar period. In the most recent years under study, France has been able to make some inroads in the Western Hemisphere, particularly in the United States. Table 11 clearly shows that the 15 thousand units exported to this area in 1956 rose to 54 thousand in 1957 and to 122 thousand in the subsequent year. As a result of this increase, France's export share in the Western Hemisphere rose from 5 percent in 1956 to 18 percent in 1958. Although the French automobile industry was perhaps a little later than its European rivals in exploring the tremendous upsurge in United States demand for the small car, it has cer~ tainly succeeded in the last few years in gaining quite a large share of Ame rica' s imported cars. The development of the small automobile in France has been a major factor. Possibly the French share of the world automobile market would have de C11Iied through the inflationary costs of production referred to earlier. But Such a decline has been avoided by the manufacturers' decisions to enter the Sha-1 1 automobile market in which they can compete favorably. France, Italy, and Germany have taken part in the large expansion of the European small autolTiobile market; Fiat, Volkswagen, Renault and Citroen have led the world in - th 1 5 development. The extension of car ownership to the lower income group, together l -28- with the existence of high taxation and expensive gasoline have stimulated the development of the small car in Germany, France and Italy. Italy's perfor- mance in the export market has been moderately increasing its share of the world export market. A relatively more rapid increase occurred since 1955 and continued rising thereafter, reaching 9 percent of the world market in 1958. In comparison to its prewar position Italy moved up from the fifth to the fourth position at the expense of the United States. Italy's strength lies in the European market, where the growth has been the greatest. West Germany is an important market to Italy and to some degree Belgium is also. This may seem unexpected at first, though this im- portance is linked with the fact that Fiat assembles cars in Germany. Italy has been able to increase its market share steadily but moderately, and in 1958 Italy and France each had the same share of the European market (see Table 10). In the Western Hemisphere, particularly in the United States,, Italy has gained for the same reasons as other European car producing countries. Italy's export penetration has been small throughout the world, and has been primarily achieved through the small car, in particular Fiat. Broadly speaking, the United States manufacturers have been concen» trating mainly on large and medium automobiles; the United Kingdom on medium and large cars; West Germany on medium and France and Italy on small cars. In recent years there has been a shift toward the small car under 7 1 litre, or at least under the 1 1/2 litre. This pronounced trend has been 7 ' In the absence of detailed figures on sales by models, the choice of engine capacity groups is dictated solely by the availability of statistics. -29- mainly at the expense of the 1 1/2 to 2 litres class. Table 12 shows the trend in production and exports of European automobiles by engine capacity group. This trend is clearly reflected in the exports of this type of automobile, though the proportions of production and exports are different. Table 12 reveals the wide acceptance of European small automobiles throughout the world market. This table shows that the greatest concentration of automobile production is in the medium (1.0 — 1. 5 litre group), followed by the small (up to 1.0 litre group). A case in point is that in 1950, 70 percent of European manufacturers had their automobiles in the lowest two ranges; this proportion increased to 80 percent by 1956, attributable solely to the lowest group, at the expense of the two upper groups. A similar trend has been followed in the exports, except that the percentage increase appeared in each of the IOWer two groups only at the expense of the 1. 5 — 2. 0 litre group. Similar tables for the European automobile manufacturers have been examined and there are, of course, differences in the proportion of output and exports between the various groups in the different European countries. However the . . . . . 8 direction of the trend lS Virtually the same for all the countries con31dered. Though there are drawbacks to the use of this crude measure, nevertheless it Still reveals some interesting facts about the type of automobiles demanded. The engine capacity of an automobile cannot be satisfactorily measured by its power output, although in practice there is a fairly close correlation between the two. However, bearing in mind such a. limitation, engine capacity does offer an indication of the general qualities of a car, and this is sufficient for the present purpose. 8"The Present Pattern of Production and Trade in Motor Vehicles, " _l\_/l_o_tor Business, No. 11, June, 1957, pp. 33—35. -30- TABLE 12 AUTOMOBILE PRODUCTION AND EXPORTS BY ENGINE CAPACITY GROUPS (France, Germany, Italy, Sweden and United Kingdom) Distribution of Production in’Litres up to 1.0 1.0 - 1.5 1.5 - 2.0 2.0 and over Total 1950 20. 1 50.8 17.2 11.9 100.0 1951 23.4 49.2 15.9 11.5 100.0 1952 23.9 49.5 14.0 12.6 100.0 1953 25.8 47.4 15.0 11.8 100.0 1954 28.2 47.6 11.3 12.9 100.0 1955 29.6 48.7 9.1 12.6 100.0 1956 32. l 47. 9 9.0 11.0 100.0 Distribution of Exports in Litres 1950 14.2 57.6 17.7 10.5 100.0 1951 15.1 58.6 15.6 10.7 100.0 1952 13.4 59 4 12.1 15.1 100.0 1953 17.6 54.8 11.1 16.5 100.0 1954 16.5 56.5 8.5 18.5 100.0 1955 18.7 59.7 5.1 16.5 100.0 19563 a Not available. Compiled from: "The Present Pattern of Production and Trade in Motor Vehicles, " Motor Business, No. 11, June, 1957, p. 33. These statistics, by engine capacity grouping, do not represent free market choices in the real sense, 9 because the picture is distorted by extrane- ous factors. For instance the special taxation levied on the size of horsepower; the quota restrictions by value levied by importing countries do encourage 9Expressing freedom of choice without being influenced by availability of models or taxes, etc. “—4 -31- maximizing the number of automobiles imported within their respective value quotas, thus importing the cheaper and smaller models of cars. These factors, together with the large number of small automobiles being produced for the American growing market, distort the picture for production figures. This can clearly be seen from the comparison of production and exports by engine capacity groups, both for the total and for the individual automobile producing countries. The United Kingdom has been consistently producing about two-thirds of the lower engine capacity group and one-third of the upper, although it has exported a higher proportion of its upper group; while West Germany retained about the same proportion of production and export between 1950-1956. France and Italy have in general been concentrating on the lowest range, up to 1. 0 litre or at least less than 1. 5 litre, however they differ in the sense that France has maintained almost the same proportion of production and export, while Italy has been exporting a much larger proportion of its output in the 1.0 - 1. 5 litre group. In contrast, Sweden has been concentrating on the l. 0 - l. 5 litre, constituting 80 percent in each of production and export. 11 The fact that all these countries have been more successful in exporting in the two lower groups suggests that demand in the overseas market is pulling in different directions from demend in the local markets of the producing countries. However to avoid this distortion, an export pattern to 'neutral' 10"The Medium—Size Car in Western Europe, " Motor Business, No. 15, June, 1958, p. 15. 11Ibid. .-:'»_1'!‘ Lint-n." a :_h'-'-‘:.'r:I-j.?=".'-'Elam. 'r-- . In. : . . ‘F : :‘LF .. W. «In. .; is i -.-r-_- . '.-3 :mA -.-.-!.: 3m -32- markets of Europe, where consumers' scale of preference has not been greatly influenced by extraneous factors, has been examined. Table 13 shows the exports of the major European manufacturers to eight principal European markets for 1953-1957 (latest available by c. c. group). It can readily be seen from this table that the export concentration has been in the c. c. group under 1, 600 c. c. , with increasing proportion in the first and third ranges and the second range holding itself. As can be seen, the increase has been at the loss of the largest c. c. groups in excess of 1, 600 c. c. There are fairly wide variations between the patterns in the different countries selected, though in every one of them except Switzerland (where the pattern is TABLE 13 AUTOMOBILE EXPORTS TO MAJOR EUROPEAN "NEUTRAL" MARKETSa (Percentage distribution by engine capacity, c. c. groups) c.c. group 1953 1954 1955 1956 1957 up to 600 1.9 3.2 5.8 6.1 6.8 601 — 1200 37.5 41.8 39.1 38.6 38.2 1201 — .1600 31.7 28.7 32.9 32.6 36.9 1601 — 2200 3.7 4.8 3.6 6.1 5.9 2201 - 2800 7.7 11.6 9.0 9.4 6.7 2801 and over 12. 6 9. 9 8. 9 6. l 5. 0 unclassified 4. 9 —-~ 0. 7 1.0 0. 6 Total 100. 0 100. 0 100. 0 100. 0 E63 aExports by major European automobile producers. 'Neutral' markets are: Austria, Belgium, Denmark, Holland, Norway, Portugal, Sweden, Switzerland. Types of cars purchased in "neutral" markets show almost free exercise of choice. Compiled from: "The Medium-Size Car in Western Europe, " Motor Business, No. 15, June, 1958, p. 24. -33- relatively stable) the trend is in the same direction. With the extension of motoring to wider sections of the population, as mentioned earlier, one would expect to see a tendency for exports in the three lower groups to expand most rapidly. The small automobile has a special regional significance, for it is particularly in Europe that the automobile manufacturers produce, sell and operate this type of car. In 1958 total production of the Volkswagen, Renault, Citroen, and Fiat--the four leading makes of small automobiles in Europe--was l. 3 million units, or 54 percent of the combined output of automobiles in 1‘ France, Germany, and Italy (see Table 14). This proportion has been main- tained since 1955 for which production by makes are available. The small automobile has gained popularity not only in Europe but throughout the world market; and recently it has been obtaining growing acceptance in the American market. TABLE 1 4 AUTOMOBILE OUTPUT BY MAKES (Thousand units) 1955 1956 1957 1958 France, Germany, and Italy 1, 489 l, 777 2,001 2, 474 Volkswagen, Renault, Citroen and Fiat 807 953 l, 102 l, 325 Above makes as percent of the 3 countries 54.2 53. 6 55. l 53. 6 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, Special Release); and Global Automotive Market Survey and World Motor Census, 1955—1959 (New York: McGraw-Hill Interna- tional Corporation). -34- It can be seen from Table 15 thatUnited States imports in recent years have increased at a rate much faster than the total market. The increase in volume imports have been especially rapid since 1955, during which period there has been a slackening in the American economy. European-built automo- biles seem to compete with American—built automobiles as a whole. Not only { has the United States been losing its percentage share of the world market through its exports, but its increasing volume of imports has reflected on the relative increase in the share of the European automobile exporters. As a 1 result of this, Staff Report on Employment, Growth, and Price Levels esti— , mated that developments such as these have cost the United States over $400 million of its export surplus in 1958. 12 TABLE 15 NEW AUTOMOBILE REGISTRATIONS IN THE UNITED STATES Imported Total Imports as a (Thousands of units) percent of total l 950 21 6,326 0.3 1955 57 7,170 0.8 1956 108 5,955 1.6 1 9S7 259 5,982 4.3 1 958 431 4,650 9.3 M Calculated from: Automobile Facts and Figures (Detroit: Automobile anufacturers Association, 1949-1960). 12U. S., Congress. Joint Economic Committee, Employment, Growth, 61 W; 86th Cong, lst Sess., December 24, 1959, p. 482. ¥ LL- -35- Of the total car imports into the United States, 90 percent are estimated to fall in the lower grouping of up to l, 200 c. c. 13 The smaller foreign auto— mobile is cheaper to buy and to run; it is easier to use in cities and much easier to park; and finally it satisfies the urge to be different. The vast majority of the American automobiles exported fall into the range of the over 2, 800 c. c. group, 14 which has been declining among all the c. c. groups classified, as has been analyzed in the eight ’neutral" markets. The major sources of the United States automobile exports have been, of course, the Big Three, Chrysler, Ford, and General Motors. In combi- nation, these have accounted for the major part of the total United States exports during the postwar period. Among the three manufacturers there seems to be little variation in the export proportions of their total automobile production. In general the tendency for the manufacturers with the highest share of domestic market have been exporting relatively less than average proportion. In terms of volume, exports of all three manufacturers have exper1enced a continuous decline, with the exception of 1951 and 1955, when export volumes were about the same. being the highest ever recorded. 15 Decision by the Big Three to enter the compact car market in late 1958, concomitant with the rapid increase in automobiles imported into the 13"The Market in the U. S. for European Cars, " Motor Business, No. 13: December, 1957, p. 29. 141"The Medium-Size Car in Western Europe, " op. cit. , p. 24. 15”The United States Passenger Car Industry, " Motor Business, No. 21, December, 1959, p. 33. -36- United States, suggests that the automobile industry does not stand still but is subject to changes; indeed, it is influenced by competitive conditions not only at home but abroad. 16 ' In recognition of the effects of the European competition upon exports of automobiles from the United States, both Ford and General Motors, and more recently Chrysler, have been making heavy investments for modernization and expansion of facilities in their overseas subsidiaries. The American sub- sidiaries abroad have had an obvious advantage in the United States market in that they have been distributing their products through their already established local outlets. Consequently the loss to the American producers has been reduced. The shift in the pattern of automobile trade from American exporta- tion to local manufacture abroad will be treated in the following chapter. 16Ward's Automotive Yearbook (Detroit: Ward's Automotive, 1959), p. 45. CHAPTER II THE SHIFT IN THE PATTERN OF AUTOMOBILE TRADE FROM AMERICAN EXPORTATION TO LOCAL MANUFACTURE ABROAD Automobile Production for the, Market Outside the United States As was noted in the previous chapter the role of American automobile manufacturers in the world market has become of decreasing importance as the automobile production and export of other countries expanded. Automobile production by the major producing countries, 1 other than the United States and Canada, passed the 3. 5 million mark for the first time in 1958. This figure represented 44 percent of the total units produced by the major auto producing countries, and was approximately 92 percent of all automobiles (including U. S. and Canadian exports) sold outside of the country of origin in that year (see Table 16). In 1958 Europe had a ratio of one car to every 35 persons. The relatively high ratio has been attributable to the high standard of living of the major automobile producing countries, which has enabled them to be good COnsumers of automobiles. These auto manufacturing countries, consisting lMajor producing countries include United States, Canada, France, Italy, Sweden, United Kingdom, and West Germany. In addition to these there are other auto producing countries. Since the latter constitute only a small p.r(31:)ortion of the total output, their exclusion from this analysis is not Slgnificant. -37- -38— TABLE 16 AUTOMOBILE PRODUCTION AND EXPORTS BY MAJOR PRODUCING COUNTRIESa (Thousands of units) Production Export U. S. 81 Europe as U. S. 8: Europe as Total Canada Europe % of total Total Canada "' Europe % of total 1938 3,013 2,144 869 28.8 374 202 172 56.0 1948 4,588 4,076 512 11.2 547 245 298 54.9 1949 6,101 5,313 788 12.9 519 157 362 69.7 1950 8,056 6,951 1,105 13.7 721 144 577 80.0 1951 6,805 '5,618 1,187 17.4 837 254 583 69.7 1952 5,849 4,605 1,244 21.3 704 183 521 74.0 1953 7,998 6,482 1,516 19.0 744 182 562 75.5 1954 7,823 5,846 1,977 25.3 943 180 763 80.9 1955 10,784 8,295 2,489 23.1 1,162 224 938 80.7 1956 8,885 6,190 2,695 30.3 1,174 189 985 83.9 1957 9,464 6,460 3,004 31.7 1,433 158 1,275 89.0 1958 8,140 4,545 3,595 44.2 1,763 135 1,628 92.3 3“United States, Canada and Europe (France, Italy, Sweden, United Kingdom and West Germany). Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949-1960); and The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1956-1959). about one-third of European population, had over three-fourths of the automo- biles in use in Europe in 1958, giving them a ratio of one car to every 14 2 persons. Europe has been the area where trade and income levels have been rapidly and steadily increasing; consequently in this continent the 2 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1959-1960), p. 25. -39- automobile manufacturing countries in particular Offered a market with an enormous potential. The home market together with increased demand for imports elsewhere, has been a strong influence on the marked increase in production during the period under review. During the postwar period (1948-57) the principal auto manufacturers in Europe increased their production from 11 to 32 percent of the total output by all major auto producers in Europe and North America. By 1958, however, their proportion of total output reached a high of 44 percent, a year of low American car output attributed in part to recession and in part to the rapidly increasing American imports of European small cars. In export markets, the combined export share of the major auto-producing countries in Europe in- creased from 55 percent in 1948 to over 92 percent in 1958. This remarkable growth in the exports of European auto manufac— turers was achieved by applying restraints such as tight credit and installment payments on the domestic demand, thereby developing the mass distribution system outside their countries. In the Harvard Business Review, Mr. H. P. Whidden said this: . . The opinion of numerous businessmen and economists in West Germany in regard to this question is typical. They feel that German export achievements would have been impos- sible if a real mass market had begun to develop in Germany during the past few years. These very same people admit that the lack of a mass-distribution system would put the German economy in real danger of collapse should export orders fall off drastically. 3Howard P. Whidden, "Birth of a Mass Market--Western Europe, " Harvard Business Review, XXX, 3 (May-June, 1955), 106. 53:17.11..L . -40_ Exports are especially important for the United Kingdom and West Germany and to some extent to France, as these countries have a stake in rebuilding and expanding their auto export trade that is several times larger than- the United States. Furthermore the home market of these manufacturing coun- tries is too small to consume readily as large a volume of one of their major industries as is regularly consumed by the United States. Table 17 shows the proportion of exports to production by major auto producing countries. It can TABLE 17 AUTOMOBILE EXPORTS AND PROPORTION OF PRODUCTION 1; BY MAJOR AUTOMOBILE PRODUCING COUNTRIES ‘ 9'13 United United West States Canada France Italy Sweden Kingdom Germanya 1938 8.0 32.6 10. 2 31. 0 82.0 20.0 22.0 1948 5.6 16.4 58.7 30.8 22.9 67.8 20.3 1949 2.7 9.0 41.6 21.3 6.0 62.6 12.7 1950 1.8 8.5 34.8 19.4 7.7 76. 2 32.2 1951 4.1 13.2 29.7 24.2 14.6 77.5 34.1 1952 3.3 14.7 21.8 22.0 12.0 69.2 33.4 1953 2.5 7.7 22.2 18.5 7.4 50.8 37.0 1954 3. 1 6.6 24.1 22.6 8. 3 47.6 43. 9 1955 2.7 3.2 24.0 28.6 9.2 41.6 45.2 1956 3.0 3.8 23.4 27.7 20.3 44.9 45.4 1957 2.3 4.8 30.2 34.3 35.9 49.5 48.3 1958 2.9 4.5 34.6 44.0 45.9 46.3 53.4 3Germany in 1938. Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949-1960); and The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 19564959). -41- be seen from this table that the United States and Canada had by far the smallest proportion of exports to production, in fact showing a declining rate. On the other hand, the major European auto manufacturers have been exporting an in- creasing share of their output. The United Kingdom, however, showed a decline that may have been due to the relaxation of restraints on its home market in the latter years of the 50's and the reemergence of its European rivals. Unlike European auto manufacturers, American car producers are not so largely dependent upon foreign markets. Automobile export is comparatively less important to the United States because the country is relatively more self- contained, with a home production absorbed by its immensely large domestic market . Restrictions of world automobile market It has been noted that 1n recent years American automobile manufac» turers, espec1ally the Big Three. have been on the defensive in their export trade. The system of quotas, tariffs, and assembly plants in other countries has been responsible for the American setback. The world automobile market may be divided between major auto producing countries and other countries. Table 18 clearly shows that the producing countries have a virtual monopoly in their domestic markets, except for Sweden, where automobile output supplies about one—fourth of the total domestic market. In addition to these major producers there are other auto manufacturers who have been expanding their production facilities. Assembly operations by the major car makers have also been carried on in -42- TABLE 18 AUTOMOBILE MARKET OF MAJOR PRODUCING COUNTRIES, 1955-58 (Thousands of units) United West France Italy Swede n Kingdom Germany Domestic Marketa 1955 430 176 120 520 435 1956 508 n. a. 121 380 518 1957 530 220 137 446 565 1958 613 213 156 579 636est. Imports b 1955 10 2 90 11 17 1956 10 n. a. 91 7 20 1957 24 5 104 9 27C 1958 9 5 119 11 86est. Imports as percent of Domestic Market 1955 2 3 1.1 75.0 2.1 3.9 1956 2 0 n.a. 75.2 1. 8 3. 9 1957 4 5 2.3 75.9 2.0 4.8 1958 1 5 2.3 76.3 1.9 13.5est. a . . . . . ”Market" here is defined as product1on for domestic market (the dif- ference between total production and exports) and imports. b . . . Includes transshipments to French overseas territories. c Includes buses. Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, annual); and The Motor Industry of Great Britain (London: Society Of Motor Manufacturers and Traders, Limited, 1956-1959). several countries throughout the world, reaching some 400 thousand automo— 4 biles in 1957. Indeed, in some Of the countries assembly has become a very 4Estimated from: Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation), 1957, p. 73; 1958, p. 54. 143. big industry, comprising over 50 percent of automobile weight or value, with increasing percentages in subsequent years. The countries in which these auto manufacturers and assemblers operate have been levying tariffs and other restrictions in encouragement of their industrialization scheme, particularly in the automobile industry. One automobile representative remarked that while it is true that a number of countries have removed quantitative controls on imports of United States automobiles, other restrictive measures such as taxes, licensing, restriction fees, etc. effectively exclude American automo- biles from these markets. 5 As a result of these discriminatory measures against the United States, foreign production of automobiles, once a fraction v?!) of United States output. took the lead for the first time in 1958, by producing more than half of the world's total output. Is America losing to automobile manufacturers abroad? Long before the Second World War, American automobile manufac~ turers recognized the trend toward industrialization in many overseas countries. Special efforts have been especially directed by some countries to produce automobiles locally. Realizing the consequences of such a trend, both Ford and General Motors acquired production facilities abroad, beginning in prewar years. In response to the decline in American automobile exports and their decreasing share of the market abroad, Ford, General Motors, and 5U. S. Department of Commerce, Business and Defense Services Administration, Special Conference with Motor Vehicle Producers on Export Trade Promotion (Washington 25, D. C.: April 5, 1960), p. 6. L -44.. to some degree Chrysler, through their subsidiaries abroad have been able to participate in the growing market for European-built automobiles, thereby increasing their total business. Prior to and especially after World War 11, international and/ or overseas operations were formed by American automobile manufacturers to handle exports of cars produced in plants in United States and Canada, their subsidiaries and foreign branches in various export markets, principally Europe, Latin America, and the Middle East. Expansion of American facilities abroad to circumvent restrictions The expanding world economy, particularly in the free countries of Europe, has generated a phenomenal growth in the automobile markets abroad. Economic growth, combined with the limited or insufficient dollar exchange and other government restrictions together with the IOWer production costs abroad, has made it imperative for American automobile manufacturers to expand their facilities abroad, in order to supply these rapidly growing markets. As a result, the American automobile producers embarked on an expansion and development program abroad. This undertaking has of course strengthened their competitive positions by adapting operations to consumer demands of particular markets as well as to currency dislocations, quota restrictions, and other trade barriers peculiar to foreign markets. In short, the interest in investing large sums of money in foreign operations stems from many motives, among which are the following: 1. In a general recession, foreign markets act as a counter— -45- balance against declining sales at home. 2. Growing industrialization abroad, sometimes sponsored by governments eager to conserve foreign exchange reserves, forces exporters to consider manufacturing and assembling overseas. For instance, Australia and some Latin American countries have been requiring an increasing proportion of local automobile content. Such an attitude confronted the American automobile manu- facturers with the alternative of manufacturing there or getting out of some important markets altogether. 3‘ 3. Some American car manufacturers interested in export markets have considered production operations overseas in order to meet increasing competition from their American rivals and European firms that are already manufacturing abroad. 4. Relatively lower cost of smaller automobile production abroad has been an incentive for Americans to manufacture outside the United States. 6 In anticipation of the above effects upon imports of automobiles from North America, Ford‘s and General Motors‘ annual reports indicated heavy 6Charles H. Lee, "Getting Your Share of Overseas Markets-~New Patterns in Foreign Operations, " Dun's Review and Modern Industry, November, 1956, p. 116; and Ernest R. Breech, A New Challenge from the Old World, an address delivered at the annual Pittsburgh Chamber of Commerce Dinner, in the Penn—Sheraton Hotel, Pittsburgh, December 1, 1958, pp. 4-5. ~46- investments for modernization and expansion of foreign facilities. 7 Ford Motor Company has manufacturing subsidiaries in Canada, England, and West Germany, producing cars, trucks and tractors; however our concern here is automobiles only. According to public announcements Ford spent $168 million in the 1950's on Ford of England, stressing primarily the expansion of foundry, stamping, machining, and assembly facilities, to- gether with the development of new models. In embarking on an integration and expansion program, an expenditure of $60 million was made for Ford- Werke of Germany with the idea of doubling its 1953 capacity by 1958. The :‘3 company’s investment has also resulted in increasing its ownership of 64.6 5&3 percent in 1954 to 99 percent in 1958. Ford had also acquired in mid 1950’s 15.2 percent equity in Simca which was sold to Chrysler in late 1958. Some $10 million was allocated by Ford to assembly operations and sales distribution subsidiaries throughout the world, particularly in Europe, Latin America and the Middle East, to form a vital link in Ford's overall program. Manufactured vehicles from all these sources are assembled in various countries. General Motors, in its long- range planning to meet the needs of world expanding economy, also launched its program of further expansion and devel- opment of its overseas facilities. In 1954 an expenditure of about $200 million to fulfill its four to five year program was disclosed by the corporation’s president. General Motors‘ manufacturing facilities are its non-consolidated 7Much of the discussion in the following few pages is based on Chrysler's, Ford's and General Motors' Annual Reports. 8Later developments are discussed in Chapter IV, R, - -47- subsidiaries of Vauxhall Motors Ltd. , in England; Adam Opel A. G. in West Germany; and Holden's Ltd. , in Australia. Furthermore, this undertaking called for expanding their Belgian, Swiss, Swedish and Danish assembly facilities, which assemble Vauxhall and Opel vehicles as well as General Motor's American- source automobiles. Chrysler Corporation's move in its manufacturing and marketing expansion and development did not come until late 1958, when the corporation acquired a 25 percent interest in Simca (including the 15. 2 percent held by Ford). Realizing the growing demand for European—type automobiles, Chrysler International formed a separate overseas company, with headquarters in Geneva, Switzerland as a center of distribution for Chrysler products and its newly acquired assembly operations. These large investments by both Ford and General Motors and to some degree Chrysler were not geared solely to automobile expansion; though a larger proportion was allocated to cars, other vehicles such as trucks and tractors and nonuautomotive products have benefited from this plan. Sources Of these finances have been primarily retained earnings of local plants and perhaps partly local borrowings and/or companies' headquarters in the United States_ The continuing expansion of American manufacturing and assembly Operations abroad has provided the American automobile manufacturers with Significant sources of supply upon which they are able to draw for those mar- kets in which North American automobile exports are restricted. The accompanying Table 19 illustrates this fact. -48- TABLE 19 OVERSEAS AUTOMOBILE PRODUCTION BY MAJOR PRODUCING COUNTRIESa AND NORTH AMERICAN EXPORTS FOR WORLD MARKETS (Thousands of units) North American U. S. overseas Total American Foreign Total exports plants overseas sales production market 1948 261 112b 373 512 773 1949 189 161b 350 788 977 1950 167 222b 389 1,105 1, 272 1951 262 212b 474 1,187 1, 449 1952 202 233 435 1, 244 1. 446 1953 201 340 541 1, 516 1, 717 1954 204 451 655 1, 977 2,181 1955 244 515 759 2, 489 2, 733 1956 , 183 514 697 2, 695 2. 873 1957 170 578 748 3, 004 3,174 1958 133 790b 923 3, 595 3, 728 SHARES OF TOTAL AMERICAN OVERSEAS SALES AND OF MAJOR PRODUCERS ABROAD Total American overseas American ‘ ‘ inq subsidiaries sale»: as percent Percent of total Percent of of total market American overseas sales foreign production 1948 48.3 30.0 21 9 1949 35.8 46.0 20 4 1950 30.6 57.1 20 1 1951 32.7 44.7 17 9 1952 30.1 53.6 18 7 1953 31.5 62 8 22 4 1954 30.0 68 9 22 8 1955 27.8 67 9 20 7 1956 24.2 73 7 19 1 1957 23.6 77 3 19 2 1958 24.8 85 6 22 O atIncludes North America, France, West Germany. Italy, Sweden, and United Kingdom. bPartly estimated. Calculated from: Ann:_al Reports (Detroit: Ford Motor Company and General Motors Corpora- tion); The Motor Lndustry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, annual); L'Argus de L'Automobile et des Locomotions (Paris, France); Tatsachen und Zahlen aus der Kraftverkeflswirtschaft (Frankfurt am Main, Germany: Verband der Automobil mdustrie E.V.); Automobile in Cifre 1959(‘1‘orino, Italy: Associazione Nationale Fra Industrie Automobilistiche e Affini); and Sveriges Automobilindustriforening (Stockholm, Sweden) as reported in a special release, Producrion of Motor Vehicles in Foreign Countries (Detroit: Automobile Manufacturers Association, August 20, 1959 . -49- In 1948, the first postwar year under review, American automobile exports from plants in United States and Canada surpassed the prewar figure. These exports were supplemented by the products of their European manufac- turing subsidiaries, which amounted to 112 thousand units or 30 percent of their total operations. Table 19 also shows that up until 1951 North American (U. S. and Canada)manufacturers' exportation of automobiles constituted a higher proportion than that of their European subsidiaries' output with the exception of 1950, a year affected by the Korean War. By the end of 1952, however, 54 percent of the American overseas operations from all sources were carried on by their European subsidiaries. In 1953 about two-thirds of international operations originated in American manufacturing plants abroad. As the overseas program of expansion and development of manufac- turing and assembly operations gradually materialized, American sales abroad from all sources were continuously increasing, except for 1956. The decline in this year over the previous one may have been the result of credit restrictions in manufacturers' domestic markets as well as import restrictions in overseas markets, aggravated by gasoline rationing caused by the Suez crisis. The increase of overseas sales of American-made autos came solely from the American manufacturing subsidiaries since exports from United States and Canada were declining. This reversal trend resulted in having a larger and larger proportion of automobiles supplied by American manufacturing plants abroad. In 1958, 86 percent of automobiles sold by American inter- national activities were from their overseas manufacturing operations, and only 14 percent represented exports from United States and Canadian plants. ..g__,.__ _ -50- This trend has in effect reflected on the American operations abroad as its percentage share from the total foreign market declined from about 48 percent in 1948 to 25 percent in 1958. The decline, as exhibited by Table 19, was chiefly responsible for American- source exports, because the share of American manufacturing subsidiaries as a percent of total foreign output remained relatively constant, ranging from a low of 18 percent in 1951 to a high of 23 percent in 1954 and standing at 22 percent in 1958. Production by individual companies As was noted in Table 19, about one-fifth of major European automo- bile output is represented by American manufacturing operations in that area. A comparison of the combined output of Ford and General Motors with their English and German rivals during the postwar period for which production data by makes are available affords important insights. The combined output of the "Big Five”: the British Motor Corporation (chiefly Austin and Morris), Ford, Hillman of the Rootes Group, Standard, and Vauxhall accounts for about 90 percent of the total automobiles produced in the United Kingdom. While the British Motor Corporation has been the leader in Great Britain's automobile output, Ford has been the second largest automobile manufacturer, producing from less than one—fifth to approximately one-third of the total automobile out— put in this nation (see Table 20). Vauxhall of General Motors has been ranging from a low of 8 percent to a high of over 11 percent during the period under review. Although the table shows Vauxhall in the third place in terms of units produced, it was actually in the fourth, exceeded by the Rootes Group if we ””55“,. . :mm;; TABLE 20 -51- AUTOMOBILE PRODUCTION OUTSIDE U. S. AND CANADA IN THOUSANDS, AND PERCENTAGE SHARE OF LEADING MAKES IN EACH MAJOR PRODUCING COUNTRY 1948 1949 1950 1951 1952 1953 1957 1958 France 100 188 257 314 370 368 724 924 Citroen 34.1 26.3 25.2 24.9 23.9 27.7 19.3 19.4 Peugeot 19.1 16.3 18.7 18.3 17.4 18.4 17.5 15.7 Renault 29.9 34.1 32.3 31.2 32.7 32.7 36.7 39.4 Simca 9.3 11.4 11.3 13.1 18.7 13.8 20.9 20.5 Italy 44 65 101 119 114 143 318 369 Fiat n.a n.a. n.a. n.a. 89.5 91.6 92.8 79.4 Sweden 3 5 13 ll 19 52 69 Volvo 99.7 99.9 88.9 84.6 72.7 84.2 78.8 76.8 United Kingdom 335 412 523 476 448 595 861 1, 052 Austin n.a n.a. n.a. n.a 21.2 18.0 19.2 16.6 (Morris n.a. .5. n.a. .a. n.a. 15.6 17.5 13.3 Fordb 13.4a 13.2a 13.0a 16.3a 22.3 27.0 27.9 28.5 Hillman n.a. n.a n.a. n.a. n.a. 9.8 8.7 9.5 Standardb n.a. n. n.a. n.a. n.a. 7.2 6.3 5.3 Vauxhall 12.2a 10.4a 9.2a 9.0a 8.0 10.3 10.6 11.4 West Germany 30 104 216 267 301 369 959 1, 181 Daimler Benz 15.4 16.5 15.7 15.8 12.2 9.5 8.4 8.4 Ford Taunusb 0.6 10.7 11.3 10.1 10.2 9.2 6.2 8.8a Lloyd n..a n.a. 0.7 1.8 2.0 5.2 5.4 4.2 Opelb 20.1 26.9 27.8 23.2 22.2 22.7 19.4 22.98 Volkswagen 63.9 44.8 38.7 36.2 39 9 42.5 41.9 39.8a a . Estimated or factory sales. bAutomobiles of American ownership . n.a.: not available Calculated from: Annual aux: der Kraftverkehrswirt A'aggrmailginfiifre 1:5.- Affini); S‘v eilge‘. AV I'mmo Production of Mptor Veh Augur‘: 20, 1959): and "7 Reports (Detroit: Ford Motor Company and General Motors Corpora- tion); The Motor Industry 0:” Gear Britain (iordon: The Society of Motor Manufacturers and Traders, :chaft (Frankfurt am Main, :ermany: Verband der Automobil L'tdustrie E.V.); _(‘1‘orino, Italy: Associazione Nationale Fra Industrie Automobilistiche e ilind'1"tr"f0r€rviug (Stockholm, Sweden) as reported in a special release, cles in Foreign Courtries (Dettoit: Automobile Manufacturers Association. -52- include its other models with Hillman. In short, the American operators’ com- bined share of British output has increased from 30 percent in 1952 (earliest published data available) to 40 percent in 1958. In West Germany five automobile manufacturers, Daimler Benz, Ford, Lloyd (of the Borgward group), Opel, and Volkswagen, constitute some 85 per- cent of the total German output. Volkswagen is by far the largest producer, and with its one basic model has gained and retained about four-tenths of car pro- duction in this country. Like Ford of England, Opel of General Motors occupied the second position in West Germany, producing from one-fifth to one-fourth of the total output. Daimler Benz has been the third largest in terms of car output, however, its share has been declining from 15 and 16 percent in the early 50's down to 8 percent in the latter period under study. This company produces only large cars whose demand has declined appreciably in overseas markets. Ford’s Taunus. though holding the fourth position throughout the postwar period, run“ ning between 6 and 11 percent as exhibited by Table 20, has retained the fifth position. considering the inclusion of other Borgward makes along with Lloyd. At any rate, the combined share of Opel and Taunus has been ranging from one-third to one—fourth of the total German output. Table 20 further reveals that while Ford and General Motors have increased their share in the United Kingdom, their combined share in Wesr Germany has declined during the postwar period though in both countries their absolute volumes have increased considerably. The decline in the combined share of Ford and Opel of Germany has probably been brought about by their concentration on a small number of models; at no time has either Ford or ~53- _‘ General Motors produced more than two types of car. As a result of Ford's acquisition of a 15 percent interest in Simca, a noticeable increase in French production was apparent in 1955. Simca is the second largest producer, exceeded only by Renault, a government-owned auto- motive manufacturer. In the fourth quarter of 1958, Chrysler Corporation acquired a 25 percent interest in Simca, including Ford's interest in the company. Chrysler and Simca have been closely associated, providing tech- nical assistance to each other as well as sales outlets in certain overseas markets. In France the combined automobile output for the "'Big 4, " Citroen, Peugeot, Renault, and Simca accounted for over 90 percent during 1948-1958. The leading manufacturer is Renault, with one-third of total output, largely due to the success of its Dauphine model and its highly integrated operation. Simca is the second largest in terms of units of automobiles produced, con- centrating on medium-sized high performance cars. Citroen, which produces small and medium-sized cars, has held the third position in the last four years after losing its second place in the early period under review. Peugeot, which produces motorcycles, bicycles, engines and machine tools, in addition to cars, has retained a relatively constant share thus holding the fourth place in the latter 1950's. In Italy, Fiat dominates the market with over 90 percent of the total automobile output; this dominance goes back long before the Second World War. Fiat has since then pioneered a great many technical advances in the automobile industry; it seems that the firm is almost self- sufficient, for it makes all its -54- components except tires and ball bearings. Fiat's output of automobiles has increased in the postwar period, but its share of Italian car output declined markedly by 1958. The increase in Lancia's and Alfa Romeo's output is solely reSponsible for the drop of Fiat's share of automobile output to 80 percent. Volvo is by far the largest automobile producer in Sweden, manufac- turing some 80 percent of total output. The decline in its share of Swedish automobile output was due to the entry of Saab into the auto industry. Saab is primarily an aeroplane producer, and its car production, which began in 1949- 50 is only a secondary activity. Trends toward concentration The phenomenal increase of automobile output in the five major pro- ducing countries in Europe was achieved in varying degrees by the gradual expansion of plant capacities owned by the leading manufacturers of these countries. In a rapidly expanding market the amount of capital, and the ease with which it may be acquired, are paramount. As a result we find that cer- tain firms have been able to expand, integrate, and compete vigorously while other firms have been losing their relative shares. The automobile industry is, of course, highly competitive, with definite advantages being associated with large-scale production. In view of this, The Economist (London) has this to say: In a highly competitive business, where costs fall sharply as volume increases, to accept any decline in one's share usually means an increase in one's costs relative to those of other makers, tending to weaken a manufacturer's -55- position still further. 9 Any manufacturer desirous of increasing his market share has to plan to do so well in advance. This is partly the result of conCentration. It is not unusual to find in each of these countries just two or three 'firms dominating the market; in the case of Italy and Sweden only one firm is dominant. In most countries and throughout the history of the automobile industry there has been a tendency for the number of firms in the industry to diminish. This trend is illustrated by the comparison between the present and the early twenties: in 1922 some 90 firms in United Kingdom turned out 55,000 cars, while in 1957 the output of 25 firms was about 800, 000 cars. 10 The trend toward concentra- tion continues. Lack of similarly classified cost data for producing firms makes it impossible to measure precisely the relative production costs of such a com— plex entity as the automobile industry. Nonetheless, a few generalizations will help us to understand the advantages realized by the economies of large scale production. Sometimes industries which grow up on the foundation of large scale production economies are obliged to dissipate these economies almost com- pletely to meet variations in demand. Variations in Europe have been wide, and so consumers have been getting a wide choice of styles and. types of automobile. 9 p. 361. 10"The British Motor Industry in Perspective, " Motor Business, No. 12, September, 1957, p. 3. ' "How Many Cars in the Sixties?" The Economist, October 22, 1960, ~56— It has often been said that the British automobile industry makes an excessive number of models, thereby denying itself the possible economies of scale, that is, of decreasing costs up to a point. These economies do not arise, however, solely in the manufacture of automobiles themselves. There is a considerable variation between manufacturing firms in the degree to which components are purchased. On the average some 60 percent of the value of . . . 11 . automobiles 1s accounted for by out31de purchases. The complemty of vehicle design, particularly in recent years, has led to an increasing propor- tion of purchased parts. To say the least, certain advantages are obvious in that the producer of a component part standardizes his items, spreading his I; overhead over a larger sales volume and thus minimizing his unit cost. The following statement by The Economist (London) clearly supports this contention. Collaboration between the motor car manufacturer and the component manufacturer has gone a very long way to make sure that variations in the needs of different models interfere very little with the achievement of minimum manufacturing costs. Because of the standardized component parts produced by English manufac- turers, there are relatively more small automobile firms in England than on the European continent. The outstanding feature of the economies of large scale production is the fact that as output expands fixed costs per unit fall rapidly. The small manufacturer whose operation does not lend itself to large scale production either because of small volume or the large range of 11"Too Many Models, " The Economist, October 19, 1957, p. 9. 12933., p. 10. -571 model specifications selected by the customers, has found himself in difficulty in maintaining a competitive position with his counterparts. The only way to bring costs down would seem for the manufacturers to concentrate on as limited a number of basic models as possible and to keep these models in production over a relatively long period of time. The automobile manufacturers on the European continent are some- times charged with having intentionally restricted the number of different . . . . . 13 models produced while keeping available a Wide range of different types. Certainly, concentration on a few models proved to be of significance as competition in the automobile industry increased. A classic example of such concentration is Volkswagen, with its one basic model, accounting for two- fifths of total German automobile output. In West Germany, limiting the . 14 number of car models produced seems to have been a matter of policy. Together with Volkswagen, three other firms produce six basic models. They are Auto Union (Daimler-Benz and Auto-Union merger) with one basic model, . . 15 . Opel, With two models, and Ford, With three models. These baSic models of the four companies accounted for about three-fourths of all automobile output in West Germany (see Table 20). France also has a high concentration in that its four leading companies produce a limited number of basic models with large volumes, thus benefiting 13"The German Motor Industry, " Motor Business, No. 12, September, 1957, p. 26. 1415141., p. 19. 15The third Ford model is the new 17 M. -58- from the economies of scale. Italian and Swedish automobile manufacturers have followed this same policy with considerable success over a period of time as is exhibited in Table 20 by Fiat and Volvo. Although the automobile manufacturers in continental Europe benefit from the internal economies of scale, there are certain external diseconomies, i. e. , costs which are beyond their‘control. One aspect that is worth noting is the greater degree of integration in this area than in the United Kingdom. A turnover tax, which is levied at various stages of production, adds an artificial cost factor to component parts purchased by the automobile manufacturers. For instance, an ad valorem tax is applied on each sale made; i. e. , on the sale of the raw material to the parts manufacturers, and on the sale of the parts to the automobile producer. This, of course, encourages the auto manufacturers to make rather than to buy, even for those items which might be made with real economies of scale by subcontractors or suppliers. While all the major automobile producers are affected by this taxation, Italy's ex— ports are hampered due to the fact that turnover tax rates apply equally to all automobiles, whether produced for export or for home market. 16 Fiat has integrated vertically with its suppliers and horizontally with its competitors to expand its car output. In short Fiat has been forced to produce almost everything it requires for its automobile manufactures. By the very nature of the economies of scale it is conceivable that Fiat's costs stand higher than its European rivals, which are serviced by low cost 16"The Italian Motor Industry. " Motor Business, No. 13, December, 1957, p. 16. -59- component firms that are able to spread their costs over a large number of automobile manufacturers. The automobile manufacturers of Western Europe are more dependent upon foreign markets than the United States manufacturers are. The relative smallness of most European countries' domestic markets has made it necessary for the auto manufacturer to increase its exports as a means of attaining the economies of scale. In consequence, unit costs have been reduced; thus the individual producer was able to compete with his rivals. Furthermore, re- strictive measures imposed by local governments of the manufacturing coun- tries have been causing fluctuations in the production of automobiles. As a way of offsetting such fluctuations in their home markets, auto manufacturers developed and retained their export levels to a high degree. The proportion of exports to production in each of the major producing countries has been referred to earlier. It suffices here to examine exports of the American subsidiaries and their proportions of total factory sales in both the United Kingdom and West Germany. Economic prosperity, especially in the major automobile producing countries, has seen a steady growth in demand for automobiles, especially of the foreign type. This is reflected in the increasing share of Ford's and General Motors' sales volume outside United States and Canadian exports. Notwithstanding their increased domestic sales in Britain and West Germany, both Ford and General Motors exported some 50 percent of their foreign subsidiaries' combined output during those years of the 1950's for which data are available. Table 21 indicates that while Ford's proportion of exports to its .mh- .4. ~60~ TABLE 21 AUTOMOBILE EXPORTS“ PROPORTION OF PRODUCTION OF UNITED KINGDOM AND WEST GERMANY AND OF FORD AND GENERAL MOTORS (1950, 1953-58) United Kingdom We st Germany Total Ford Vauxhall Total Ford Opel % % '70 % % % 1950 76 81 74 32 32 41 1953 51 45 65 37 41 47 1954 48 52 56 44 53 55 1955 42 47 57 45 46 53 1956 45 46 49 45 40 65 1957 50 54 62 48 4O 51 1958 46 51 64 53 48 55 Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, 1951, 1958~l959); and 19.221952 und Zahlen aus der Draftverkehrswirtschaft (Frankfurt am Main, Germany: Verband der Automobil lndustrie E. V. , annual). total output ranged from a high of 81 percent in 1950 to a low of 45 percent in 1953 in Britain; Vauxhall of General Motors ranged from a low of 49 percent in 1956 to a high of 74 percent in 1958 in the same country. Together they exported more than half of their total output, a proportion which was slightly above the United Kingdom's export share. Automobiles produced in England by American manufacturers are sold primarily in Europe and the British Commonwealth countries. In West Germany, on the other hand, Ford's proportion of exports to its total output ranged from a low of 32 percent in 1950 to a high of 53 percent in 1954, while Opel of General Motors ranged from a low of 41 percent in 1950 to a high of 65 percent in 1956. Combined percent-- -61- age exports of the two American manufacturers in West Germany were in general lower than those of the United Kingdom, with no particular pattern. However Opel's proportion of exports was continuously higher than West Germany's percentage of exports as a whole. Besides selling their automo- biles locally to West Germany, Ford and General Motors exported to other European destinations; furthermore their automobiles have been also enjoying noticeable acceptance in Latin American countries. 17 In addition to European subsidiaries, General Motors has expanded its production facilities of Holden in Australia. Combined production of cars and commercial vehicles in 1958 passed the 100 thousand mark per year contem- plated in their recent expansion move. This level of output is five times the 1950 level. Unfortunately there is no breakdown for cars to be incorporated in this analysis. Nonetheless it is estimated that more than half of the total output is in automobiles. Conflict between pro- duction and marketing The ultimate aim of economic activity is to satisfy consumer needs as precisely as possible and at the same time to minimize cost. Costs in car manufacture depend more than anything on the scale of production achieved; this in turn depends upon the success of individual models on the market. 18 Actually, the existence of a large volume of business under a single firm does 17Ford Motor Company, Annual Report, 1956, p. 15. 1 8"Free Trade in Motors, " Th_e_E_cgnomist, October 19, 1957, p. 2. -62— not in itself result in economies, it merely provides an opportunity to achieve them. Businessmen have too often assumed that if they could break into a specified volume range, costs would decline and profits increase. This cheerful outlook, says Wroe Alderson, overlooks the fact that the achievement of economies of scale in production phases may often be accompanied by large marketing expenditures to attain the necessary volume. 19 Decisions must be made concerning the extent to which economies achieved through mass pro- duction can be utilized in reducing prices and the extent to which these savings must be used in advertising and selling as an alternative method of increasing volume. In short the success of individual automobile manufacturers depends only in part upon relative production costs; it also rests upon certain variables such as the appropriateness of their design policy and the effort and ability they put into selling automobiles. Mstic perspective As indicated in this chapter, the decline in the total foreign business of American automobile producers has not been so severe as the percentage decrease in the exports of American automobiles may imply. A mitigating factor has been an appreciable shift of activity from American based manu- facture and exports to foreign manufacture and distribution. 1 9Wroe Alder son, Marketing Behav1or and Executive Action (Home- wood, Illinois: Richard D. Irwin, Inc., 1957), pp. 451-52. CHAPTER III LATIN AMERICA - A REGIONAL CASE STUDY Part I Latin America~-The Largest Export Market for U. S. Automobiles Our economic ties with Latin America, through trade and investment, are stronger than those with most other parts of the underdeveloped world. This region is the most important automobile market for the United States, although its relative significance is on the decline. Because of our intimate relationship with Latin America and our predominant trade position in auto— mobiles, the Latin American region is chosen as a case study for examining the underlying reasons for the decline in American automobile exports. Latin American car registration In order to prepare the way for discussion of the United States' largest export market for its automobiles, it is helpful to examine the extent to which car registration has changed in this area. While in 1938 Latin America had only about half a million cars in use, in 1948 it registered 850 thousand units. With an increasing standard of living in this region, Latin America registered 2. 2 million automobiles by 1958, a figure more than four times its prewar level, and more than two and a half times the 1948 registration (see Table 22). -63- —64- TAB LE 22 AUTOMOBILE POPULATION, AND NUMBER OF PERSONS PER AUTOMOBILE IN LATIN AMERICA AND ITS LARGEST COUNTRIESa Automobile population Number of persons (Thousand units) per automobile Total Largest countries Total Largest countries 1938 496 434 n. a. 200 1948 851 619 158 156 1949 915 689 170 143 1950 1, 117 804 141 124 1951 1, 211 847 136 125 1952 1, 300 923 126 116 1953 1, 475 1, 051 114 105 1954 1, 630 1, 141 106 99 1955 1, 664 1, 153 106 101 1956 1, 892 l, 293 96 92 1957 2,040 1,426 91 86 1958 2, 204 1, 533 88 84 n. a. : not available a . ,, . . . . ”Largest countries, here defined as havmg the largest registrations and imports combined are: Argentina, Brazil, Cuba, Mexico, and Venezuela. Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949—1960); and The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1958), pp. 115-18. Although the rate of increase in car population in this region is much less than the expansion of automobile registration in Europe, it is considerably above the rate of increase in world car population, as was shown in Chapter 1. Increased car registration, stimulated by higher income, meant one car for every 88 persons in 1958 as compared to one car for every 158 persons in 1948, as —65- shown in Table 22. Five Latin American countries (Argentina, Brazil, Cuba, Mexico, and Venezuela) accounted for 70 percent of the total Latin American automobile registration in 1958. Table 22 also serves to show that the rate of increase in per capita car population in the five countries was even higher than in the region as a whole. In 1948 the five countries combined had one car to every 156 persons as compared to one car for every 84 persons in 1958. Sources of automobile supply to Latin America Long before World War II Latin America was the largest market for United States automobile exports. During the postwar period under consider- ation, Latin America absorbed over one-third to more than one-half of total United States automobile exports (see Table 23). The accompanying table also shows that the largest countries referred to earlier have accounted for some three—fourths of total Latin American imports from the United States during the postwar period as a whole. Exports to Latin America and particularly to its five largest markets have been shared by other automobile manufacturers. The major auto producing countries of Europe (France, Italy, the United Kingdom and West Germany) have been gaining ground in the area in recent years. Table 24 shows that until 1955 four-fifths of total automobiles imported by the five largest Latin American markets Were from the United States and Canada. The American export share declined to about 50 percent by 1958, while the European countries penetrated the market. West Germany, in partic- ular, increased its share from 3 percent in 1950 to over 28 percent in 1958; —66— TABLE 23 U. S. AUTOMOBILE EXPORTS TO LATIN AMERICA AND ITS LARGEST COUNTRIESa Latin America Five Largest Countries Thousand Percent of total Thousand Percent of exports units U. S. exports units to Latin America 1948 86 39 64 74 1949 56 40 42 75 1950 63 53 47 74 1951 117 54 94 81 1952 74 53 57 77 1953 69 45 47 67 1954 75 43 53 70 1955 81 38 59 73 1956 62 35 47 76 1957 69 48 54 79 1958 60 50 51 84 aas defined in Table 22. Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1949-1959); and Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949—1960). this nation was followed by France and Italy, with the United Kingdom's share fluctuating. In absolute terms of course, in recent years automobile exports to these five markets have been increasing, reaching the highest record in 1958. Despite the rise in automobile exports, the United States has been losing its export volume as well as its percentage share in these markets. However, as of January 1, 1959, the United States still had the largest share of automo— -67— TABLE 24 AUTOMOBILE EXPORTS TO LARGEST LATIN AMERICAN MARKETSa BY MAJOR PRODUCING COUNTRIES Total Percentage shareb thousand U. S. 81 United West units Canada France Italy Kingdom Germany 1938 40 85.1 1.4 1.8 1.1 10.5 1948 77 82.6 5.2 0.4 11.7 -—-- 1949 55 77.2 4.9 1.3 16.5 ---— 1950 61 77.4 2.8 1.0 15.7 3.1 1951 124 80.5 3. 3 0. 9 10.0 5. 4 1952 85 79.7 2.7 0. 5 11.4 5.6 1953 63 82. 7 1. 9 0. 9 4.5 10.0 1954 64 81.9 1. 5 3.0 3.0 10.6 1955 73 81.8 2.3 3.9 3.0 9.0 1956 69 69.0 3. 8 4. 4 5. 6 17. 2 1957 82 67. 8 5.0 5.4 5.4 16. 5 1958 105 49. 4 7.8 6.0 8. 3 28. 5 a . . . "Markets" here are defined as exports to Argentina, BraZil, Cuba, Mexico, and Venezuela. bDetails may not add to 100 percent due to rounding. CGermany for 1938. Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1949-1959). biles in use in these countries: Argentina (78 percent), Brazil (58 percent), Cuba (94 percent), Mexico (87 percent), and Venezuela (80 percent). 1 In addition to the foreign sources of automobile supply, Latin American 1 Global Automobile Market Survey and World Motor Census (New York: McGraw~Hill International Corporation, 1959), pp. 13, 17, 23, 31, 39. -68- countries have their own assembly operations or manufacturing facilities, though only on a limited scale. Complete statistical data for automobile assem— bly and production are not available; only fragmentary information for recent years under review was obtainable. Assembly operations have been carried on by Latin American countries which have relatively a large local automobile market: these are Argentina, Brazil, Mexico, and Venezuela. The accom- panying Table 25 shows the number of units assembled by each of the above countries in the years for which data are available. TABLE 25 .R AUTOMOBILE ASSEMBLY OPERATIONS, BY LATIN AMERICAN COUNTRIES (Number of units) Argentina Brazil Mexico Venezuela Total 1954 n.a. 6,774 11,750 9,750a 28,274 1955 n.a. 2,203 13,500 10,535 26,238 1956 2, 501 940 15, 075 9, 604 28,120 1957 n.a. 1,478 18,860 8,860 29, 198 aEstimated. Calculated from: Global Automotive Market Survey and World Motor Censustew York: McGraw-Hill International Corporation), 1955—58. Automobiles were assembled by importing "completely knocked down" units such as engines and chassis, from various automobile manufacturers but primarily from the United States. This was especially true of Mexico and Venezuela. In subsequent years countries engaged in assembly operations decreed a gradual increase of the local material content of the automobiles to -69— be assembled, thereby attaining a higher proportion of local value added. A close review of statistics and literature reveals that in Latin America only Argentina, Brazil, and Mexico have been manufacturing automo- biles in recent years. During the period under review, Industrias Kaiser and DINFIA (a State enterprise) were the only automobile manufacturers of im- portance in Argentina. Total automobile output in 1958 (the only year for which automobile figures are available) for the two establishments was 3, 700 units, of which 2, 500 were produced by Kaiser and the remaining 1, 200 by DINFIA. 2 In Brazil, Vemag (a former Studebaker-Packard selling organiza- tion) was another motor vehicle manufacturer which produced 2, 200 cars in 1958. 3 Mexico's production volume for automobiles in 1958 was 23, 583. 4 It is believed, hOWever, that this figure represents in part assemblies from components produced in other countries rather than production per se, since no definite criterion has been established for the "manufacture" of automobiles. The move towards the establishment of a local automobile industry in Latin America has been to a large extent the result of expansion in assembly operations. This move has been particularly true of Brazil. This aspect will be developed in Part II of this chapter, in discussing the framework of the region's market Structure. .Aa—r. . 2Global Automobile Market Survey and World Motor Census (New York: McGraw—l—Iill International Corporation, 1959), p. 73. 3Ibid. 4 World Motor Vehicle Production, 1958, special release, Automobile Manufacturers Association and U. S. , Commerce, Business and Defense Ser- Vices Administration~"Automotive and Transportation Equipment Division, August 20, 1959. Part II Framework of Market Structure in the Selected Latin American Countries In order to understand the framework of market structure in the selected Latin American countries, it is imperative to assess each country separately. For this purpose three countries--Argentina, Brazil, and Venezuela--have been selected as representative. The choice is by no means an arbitrary one. It is based on a combination of factors: the availability of pertinent information, the large automobile population and, finally, the dis- parate economies of the selected countries. Each of these countries will be discussed in terms of the following aspects: The relationship between income and demand for automobile imports will be examined by simple correlation analysis of the two variables. If the relationship is lacking, then the national policies instituted to protect foreign exchange reserves will be studied. At the same time, the balance of payments position will be taken into account. Furthermore, national objectives of Argentina, Brazil, and Venezuela with regard to foreign exchange, industrialization, inflation, and social legis- lation will be examined. In addition, implementation of national policy through specific restrictions will be considered. Other factors of concern will be to establish the amount and the nature of tariffs, surcharges, and tax levies on automobile imports as well as their differential effects. A close examination will also be directed toward any degree of discrimination that may exist in the exchange rate. -701 «(ma-re .. a -71- Argentina is considered one of the more highly developed countries both agriculturally and industrially, in Latin America, and is numbered among the fifteen trading nations in the world. In recent years, however, Brazil and . . 5 Venezuela have exceeded it in trade. The Argentine automobile market Prior to World War 11, Argentina was the leading Latin American j automobile market, with some 200 thousand units registered in 1938. As other Latin American countries imported more automobiles, Argentina's position deteriorated relatively. By 1951 Brazil led in automobiles in use. In 1958 ‘ ‘ Argentina's car population had reached 350 thousand units, an increase of only 75 percent over 1938 (see Table 26). TABLE 26 ARGENTINA: AUTOMOBILE POPULATION AND NUMBER OF PERSONS TO A CAR 1938 1948 1949 1950 1951 19521953 19541955 1956 1957 1958 Car population (inthousands) 206 224 220 275 221 222 257 296 314 334 330 358 Number of persons per car 61 72 74 59 77 79 70 62 60 57 59 59 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 1949-1960). 5U. S. , Bureau of Foreign Commerce, World Trade Information Ser— vice (WTIS), Basic Data on the Economy of Argentina, Part I, No. 58-73, 1957, pp. 8~9. -72- Argentina was a unique case. Its car density rose from a ratio of one car to 61 persons in 1938 to one car for every 59 persons in 1958. Although this ratio is higher than in Latin America as a whole, Argentina's proportionate increase in car OWnership has been relatively much lower. In some years there was a decline in the density of car ownership. The decline reflected a decrease in automobile imports. Between 1948 and 1958, Argentina's total car imports from the major producing countries amounted to 80 thousand units, of which Canada and the United States supplied slightly over 40 percent (see Table 27). The combined TABLE 27 ARGENTINE AUTOMOBILE IMPORTS, MARKET SHARE, BY COUNTRY OF ORIGIN IJ.S. and LHUted VVest 'Total Canada France Italy Kingdom Germanya number 1938 82.5 1.8 3.2 1.9 10.7 22,704 1948 89.7 0.8 0.4 9.1 -«~- 11,306 1949 66.7 5.8 13.2 14.3 --~w 1,956 1950 44.7 5.0 10.8 6.0 33.6 1,822 1951 68.9 3.9 3.9 6.9 16.4 15,492 1952 17.8 1.7 0.2 11.4 68.9 3,050 1953 25.9 0.7 3.7 0.9 68.7 5,012 1954 14.9 1.5 22.6 0.9 60.0 5,239 1955 28.9 11.5 20.1 0.6 38.9 6,114 1956 18.0 15.8 10.4 11.5 67.5 7,845 1957 38.1 9.6 11.4 4.9 35.9 8,993 1958 9.4 12.9 10.8 3.5 63.5 13,902 a'Ge rmany in 1938 . Calculated from: The Society of Motor Manufacturers and Traders, Limited (The Motor Industry of Great Britain, 19494959). -73.. share of the United States and Canada has declined from about 90 percent in 1948 to about 9 percent in 1958. This shift came primarily after 1952 when West Germany began penetrating the automobile market. Nonetheless, it has been noted that in 1958, 78 percent of automobiles in use in Argentina were of North American origin. The automobile population in Argentina is influenced chiefly by changes in purchasing power, by the country's external trading position, which deter- mines its ability to pay for imports, and by age and propensity to replace existing cars. The automobile population in Argentina is large for a Latin American country; therefore, imports serve a large replacement market as well as the market for new cars. The decline of automobile imports has had a striking effect on the age of Argentine automobiles (see Table 28). In 1958 some 160 thousand units, or 41 percent, of the total were over 20 years old, up from 29 percent in the same age group in 1953. The question confronting us is what underlying reasons are reSponsible for the decline in automobile imports of American origin? In seeking an answer, it IS important to get to the heart of the matter by evaluating the Argentine economy. The Argentine economy . . 6 . . . A recent United Nations study indicates that Argentina's gross 6'United Nations, Department of Economic and Social Affairs, Eco- nomic Commission for Latin America, Economic Survey of Latin America, 1% (New York, 1957), pp. 8—9. -74- TABLE 28 AGE DISTRIBUTION OF AUTOMOBILES IN ARGENTINA Number of units Percentage distribution Years 1953 1958 1953 1958 Under 5 25, 743 101,436 7. 5 25. 8 5 - 10 45,083 25,743 13.2 6.5 10 - 15 58,295 45,083 17.1 11.5 15 - 20 113, 165 58, 295 33.2 14. 8 ‘ 20 - 25 98,917 113,165 29.0 28.8 3 over 25 - 43,219 - (12 6) 5 not classified — 6, 500 - ( ' ) Totala 341, 203 393, 441 Tom 100. o aTotals differ from the earlier registration figures of Table 26 due to different sources. Compiled from: "The Argentine Motor Industry, " Motor Business, No. 23, July, 1960, pp. 29, 30. national product in U. S. dollars represented some 22 percent of the gross national product of all of Latin America in 1956, and is exceeded only by Brazil. Argentina's economic growth as measured by its gross national prod- uct indicates a fourfold increase from about 62 billion pesos in 1950 to 317 billion pesos in 1958; national income has increased from 52 to 268 million pesos for the same years. 7 These values, being unadjusted by the substantial rise in prices and fall in the value of the peso suggest an unrealistic growth 7 International Financial Statistics, Washington, D. C.: International Monetary Fund, XIII, No. 9 (1960), 48. -75.. during this period. To assess the real magnitude of the increase and its im- portance for recent development of the country‘s economy, changes in purchasing power of the currency must be taken into account. Argentine national income, at 1953 prices, rose from approximately 102 billion pesos in 1950 to about 124 billion pesos in 1958, a modest increase in real terms (see Table 29). If demographic growth is taken into account, per capita income in 1958 actually stood lower than in the two previous years. TABLE 29 ARGENTINA: ADJUSTEDa NATIONAL INCOME, PER CAPITA INCOME AND THEIR INDEXES National income Per capita Index (1953 = 100) (Billions of pesos) in pesos National income Per capita income 1938 58. 3 4643 60 87 1948 121.8 7562 129 148 1949 111.2 6823 118 130 1950 101. 8 6322 108 122 1951 104. 8 6125 110 117 1952 86. 3 4890 92 94 1953 94. 6 5239 100 100 1954 102. 2 5562 108 106 1955 107. 3 5727 114 109 1956 114.3 5983 121 114 1957 114.3 5872 121 112 1958 123.7 5868 131 112 aIncome deflated by Argentina's cost of living index (1953 = 100). 1938 1948 1949 1950 1951 1952 1953 1954 1_9_5_5_ 1956 1957 1958 15 ‘31 40 51‘ ‘69 96 100 104 117 132 165 217 Calculated from: International Financial Statistics, Washington, DC: International Monetary Fund (several volumes); and United Nations, Unitfl Nations Statistical Yearbook (New York, 1958), p. 422. -76_ In order to see this trend clearly, a comparison between national income and per capita income indexes is given in Table 29. These indexes show the impact of a rate of population increase greater than that of national income. While Argentina's population increased by more than 20 percent in the 11 year period, 8 the country's real national income increased by only 2 percent between 1948 and 1958. It may seem at first sight that the low level of income has influenced the decline in automobile imports; however, correlation analysis (between per capita income and automobile imports) for the years under study suggests a low correlation coefficient of only 0.2026. 9 The indeterminancy of relation- ship between income and automobile imports is partly ascribable to the trend behavior of the two correlated variables, and partly by the long period of car shortage already discussed. These results were to be expected in View of the fact that only in the absence of balance of payments difficulties and other obstacles could there be a closer correlation between income and car imports. 8Calculated from U. S. , Bureau of Foreign Commerce, op. cit. , p. 3. 9The equation for correlation analysis for Argentina is: NEXY ° (EX) (EV) V [NEXZ - (Ex)? ElEyz — (By)? Where r = correlation coefficient; x = per capita income (adjusted);y = automo— bile imports; N = number of years covered 11 (192,675) — (1, 264) (1,651) I‘ = = O, 2026 V El (147,414) — (1,264)?! El (346,183) - (1,651)? -77- National objectives For many years, Argentina has been an important producer of agri- cultural and livestock products entering into international trade. Shortage of essential commodities during World War 11 led Argentina to diversify its economy to such a degree that the industrial sector has been surpassing agricultural activities since 1954. 10 Nonetheless Argentina is basically de- pendent on its agricultural products, which provide the funds for the indisPen- sable imports demanded by its expanding economy. The internal instability of the Argentine economy has already been mentioned. The cost of living index (Footnote, Table 29) showed a rapid up- ward trend, especially since 1956, and constituted the most Visible manifesta- '1.) tion of the instability in question. As will be seen later in this part, the inadequate capacity to import and the lagging development of the basic sectors, principally transport and electric energy, influenced the inflationary cycle. Argentine balance of payments position 11 A United Nations survey of 1955 shows that since 1948 Argentina for the most part experienced an unfavorable balance of payments, fluctuating from a deficit of over 2 billion pesos (in 1950 prices) in 1948 to a small surplus in 10U. S. , Bureau of Foreign Commerce, 9p. cit., p. 4, quoting Banco Central de la Republica Argentina, Boletin Estadistico, No. 1, January, 1958. 11Table 12 "Argentina: Capacity for payments and capacity to import 1945~55, " as shown in United Nations, Department of Economic and Social Affairs, Economic Commission for Latin America, Economic Survey of Latin America,_125_5_(New York, 1956), p. 11. ~78~ 1953. Another survey12 by the United Nations also shows an unfavorable bal- ance of payments of 226 and 217 million dollars, respectively, for 1957 and 1958. This state of affairs still continues. These fluctuations in the balance of payments result primarily from Argentina's reliance on primary agricultural products for its export income. The prices of these products, as showu in 1 Table 30, are very unstable, and by their effect on Argentina's foreign pay- ments position and on the level of purchasing power, they introduce an element of instability into the Argentine market. l TAB LE 30 ' ARGENTINA: INDEXES OF VOLUME OF EXPORTS, EXPORT PRICES, TERMS OF TRADE AND VOLUME OF IMPORTS (1953 = 100) 1951 1952 1953 1954 1955 1956 1957 1958 Volume of exports 88 59 100 108 94 103 111 120 Export prices 120 105 100 90 87 78 76 73 "I“ Terms of trade 111 88 100 97 93 80 74 81 Volume of imports 175 128 100 135 161 148 166 175 Compiled from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). 12Table 76 "Argentina: Balance of Payments in 1957 and 1958, " as exhibited in United Nations, Department of Economic and Social Affairs, Economic Commission for Latin America, Economic Survey of Latin America, 1958 (New York, March, 1959), p. 94. -79- If the movement of prices on the world market is taken into account, the capacity to import is seen to have depended and still to depend upon exports of agricultural products. Argentina's exports accounted for 10 percent of its national income in the postwar period under review. Some 70 percent of the value of all the country's export is attributable to wheat, corn, meat, wool, hides, linseed, and quebracho extract (see Table 31). Since 1951 (the earliest TAB LE 3 1 j ARGENTINA: VALUE OF EXPORTS, TOTAL, AND BY PRINCIPAL CATEGORIES (In millions of U. S. dollars) 1951 1952 1953 1954 1955 1956 1957 1958 Wheat 200.6 5.9 243.6 205.3 245.9 154.9 158.9 126. 1 Corn 28.4 67.0 75.2 117.3 23.3 63.3 44.6 81.5 Meat 154.5 121.8 154.7 155.6 205.6 241.0 256.6 295.4 W001 176.4 119.7 187.0 121.2 124.0 123.8 117.4 99.1 Hides 109.6 82.4 74.6 62.3 55.0 65.8 59.8 59.0 Linseed 126.7 17.8 26.4 42.8 29.0 19.0 32.6 38.8 Quebracho extract 40.7 36.6 38.7 30. 1 27.3 26. 3 24.8 19.0 "7‘ Sub total 836. 9 451. 2 800.2 734. 6 710. 1 694.1 694. 7 718.9 Total 1, 169.4 687.8 1,125.1 1,026.6 928.6 943.8 974.8 993.9 Compiled from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). year for which comparable data are available), the value of exports of these commodities has shown a decline in line with the value of total exports. The shrinking value of exports is attributable to the fall in their relative prices, since the volume of exports has been rising (see Table 30). Since 1953, export -80- prices have been falling steadily, leading to a considerable reduction in Argentina’s export earnings, This situation has been intensified by the fact that, despite the weakening terms of-trade as shown in Table 30, Argentina's volume of imports has been, at the same time, increasing considerably, thus intensifying the external disequilibrium. These opposing forces have been in continuous conflict in the 1950's, causing a shortage of foreign exchange which has made it necessary for Argentina to curtail imports. Argentine imports have usually exceeded exports, especially in trade with the United States, which has been supplying the country with one-tenth to one-fourth of the value of imports in some years. On the other hand, in trade with Europe Argentina's exports have normally exceeded imports (see Table 32). In the dollar area, where Argentina had to import a considerable propor- tion of its required fuel and capital goods, it could not find a market large enough for its agricultural products. It is very difficult for Argentina to balance its trade with the United States as almost all the products which Argentina exports are already available in the United States. Since surpluses obtained through trade with European countries could not be transferred to fi— nance its deficit with the United States, Argentina has been experiencing a dollar shortage. The result of this difficulty has been intensified especially in 1958; its effect can be clearly seen from the gold and foreign exchange reserves (see Table 33). It seems that Argentina did not take advantage of the accumulated exchange reserves during the war. Available resources were partly spent on imported goods which ranked low on the list of priorities and partly utilized to —81- TABLE 32 ARGENTINA' S FOREIGN TRADE, TOTAL lgND WITH NORTH AMERICAa AND EUROPE (In millions of U. S. dollars) Total World North America Europe Net Net Net Export Import Balance Export Import Balance Export Import Balance 1938 461 491 - 30 48 127 - 79 250 230 20 1948 1627 1590 37 177 745 -568 721 412 309 1949 975 1080 -105 101 134 - 33 473 453 20 1950 1168 1045 123 216 154 62 528 308 220 1951 1223 1230 - 7 233 241 - 8 562 387 175 1952 691 848 ~157 163 156 7 322 213 109 1953 1109 726 383 190 112 78 462 198 264 1954 1056 844 212 106 129 - 23 467 236 231 1955 929 1173 ~244 129 219 - 90 363 300 63 1956 944 1128 ~184 128 320 -192 474 280 194 1957 975 1310 ~335 125 394 —269 468 322 146 1958 994 1233 ~239 140 279 ~139 430 348 82 a . United States and Canada. b . . Major European automooile manufacturers. Calculated from: Direction of International Trade, New York: Joint Publication, United Nations, International Monetary Flmd, International Bank for Reconstruction and Development, Annual Issue, Series T (several volumes). nationalize foreign investment, thus producing a far lower economic yield than 13 others might have offered. Lack of industries manufacturing capital goods, 13After World War II, Argentina acquired the railroad system and several utility properties which were formerly a British capital investment, leaving British holdings at only £68. 5 million by 1949, a fall from the peak of «1:453 million in 1934, quoting U. S. , Commerce, Bureau of Foreign Commerce, op._c~i;t. , p. 12; and United Nations, Department of Economic and Social Affairs, Economic Commission for Latin America. Econgmic Bulletin for Latin America. IV, No. 1 (New York, 1959), 16. - - _- ..-.---- ..-——__—.__.- u. ,_ —....—--__a.. a. -82- inadequacy of transport and energy in the postwar period have caused bottle~ necks in the Argentine economy. TABLE 33 ARGENTINA: GOLD AND FOREIGN EXCHANGE RESERVEa (In millions of U. S. dollars) 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 426 809 n.a. 655 520 420 532 524 457 382 286 129 a . . . . . Figures in this table refer to gross assets in gold and foreign ex- change and exclude liabilities, which are difficult to calculate and in many countries are negligible. Compiled from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). In addition, the growth of consumption which absorbed a larger volume of production, has drained exportable surpluses. This together with exchange policy14 in favor of promoting internal redistribution of productive resources at the expense of agriculture in general and of agricultural exports in particular, 15 has intensified the external disequilibrium. 14The result of exchange rate and price policy applied to agricultural production and exports was as follows: an excessive external overvaluation of the peso caused an obvious disparity between its purchasing power on the home market and abroad. Under this system it meant that domestic prices fixed for the producer were far from encouraging as compared to those of exports. Quoting United Nations, Department of Economic and Social Affairs, Economic Commission for Latin America, Economic Survey of Latin America, 1955 (New York, 1956), p. 11. 1 5The purchase for export of crops from the farmer by the state trading agency, IAPI (Instituto Argentine para Promocion del Intercambio), ‘83- By late 1955 new measures for strengthening the exchange rate and agricultural prices were necessitated by the need to revive the agricultural activity and the capacity to import. Hence devaluation of the Argentine cur- rency (from 5. 00 and 7. 50 pesos to the dollar to 18 pesos), 16 which took place in 1955, somewhat levelled down its external to its internal purchasing power. Prior to 1959, resort also was had to the multiple rate device. As a conse- quence of the devaluation of the peso, however, and the incentive offered to the . . . . 17 producer, there was, according to the Economic Survey of Latin America, a rise in the cost of living when it affected prices of consumer goods and an 31 indirect one, through the rise in production costs, when it influenced prices of raw materials and capital goods. This increase in the cost of living was aggravated by wage increases which gave impetus to the acceleration of the inflationary process. It must be noted, however, that all these measures intended to reduce the balance of payments disequilibrium were not sufficient. In fact this adverse balance of payments had become so serious by 1956 that trading countries were reluctant to extend further credit. As a result of the international payments agreement by the so~called Paris Club, the member nations were forced to at prices considerably below market prices was a. factor which undoubtedly influenced the successive reduction in crop cultivation. Quoting U. S. , Bureau of Foreign Commerce, op. cit. , p. 7. 1 6International Financial Statistics, op. cit., XII, No. 12 (1956), 11. 17 United Nations, Department of Economic and Social Affairs, Eco- nomic Commission for Latin America, Economic Survey of Latin America, 1958 (New York, 1959), p. 99. -84- . . 18 exchange an orderly retirement of Argentina's commerCial indebtedness. The aggravation of the adverse balance of payments which reached a high point during the three year period of 1956-58 compelled the Central Bank of Argentina to sell gold out of its reserves in these years as well as on other occasions. The seriousness of gold and foreign exchange reserves level, which indicate the capacity for a country to import, can also be shown by introducing the ratio of these reserves to imports. From a ratio of 96 in 1938, Argentina's position in reserves dropped to about 11 percent by 1958 (see Table 34). TABLE 34 ARGENTINA: RATIO OF GOLD AND FOREIGN EXCHANGE RESERVES TO IMPORTS 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 96.1 54.2 n.a. 55.2 35.1 35.6 66.9 53.5 39.0 33.9 21.8 10.7 Calculated from: International Financial Statistics, Washington, D. C. : International Monetary Fund (several volumes). The worsening of Argentina's balance of payments position in the recent years under review made necessary a considerable tightening of import 18It was this situation that brought about the Paris Club, participated in by Argentina and 11 European creditor countries (Austria, Belgium— Luxembourg, Denmark, Finland, France, West Germany, Italy, the Nether— lands, Norway, Sweden, Switzerland and the United Kingdom; Finland became the 12th member of the Club on April 25, 1958). The Club set up a plan by which the various currencies of the participating countries have free converti- bility among themselves, and annual payments by Argentina at fixed interest rates have been scheduled. Quoting U. S. , Bureau of Foreign Commerce, op. cit. , pp. 16—17. -85- restrictions in the latter part of 1958. Although import restrictions have helped to check Argentina's foreign exchange deficit, its position is still not wholly satisfactory. Fluctuating import restrictions are likely to continue to be imposed as we shall see in our discussion of the Argentine automobile industry. The Argentine automobile industry Automobile assembly plants of American companies were established in Argentina in the 1920's and for many years supplied Virtually all the cars sold in that country. Since 1947, however, the plants have been almost closed down owing to the quantitative controls in the form of foreign exchange restric- tions on the importation of component parts required for assembly. Nonethe- less, the Big Three have been looking for more favorable conditions in Argentina in order to resume their activities in that country. 19 During World War II, continental Europe ceased to be a source of Argentine imports, and the United States and the United Kingdom could not supply its requirements. With this experience in mind, the government policy under Juan Peron's regime was to industrialize the country. The government undertook the manufacture of light cars and trucks in the plant of the Air Ministry in Cordoba. Also in Cordoba, in 1955, Kaiser constructed a factory to produce jeeps and later, automobiles. Europeans as well as Americans have shown interest in the production of automotive parts and equipment, especially 19"The Argentine Motor Industry, " Motor Business, No. 23, July, 1960, p. 27. -86_ for trucks. These manufacturers have grown in size and in number as a result of the establishment of the automobile industry. 20 With the end of the Peron regime in late 1955, the desire for free enterprise economy was encouraged by the government, although controlling measures to safeguard the excessive outflow of foreign exchange were retained in foreign trade. Argentina recognized the deficiencies in its electric power and fuel and in the transportation complex together with its obsolescent capital equipment and periodic shortages of raw materials. These deficiencies could be met only by imports. Consequently, the country reestablished a foreign exchange market in 1956 to liberalize import restrictions, hoping to remove the obstacles to economic growth. Through a $100 million loan from the Export-Import Bank in 1956, the country was able to start rehabilitation of the state-owned railroads while calling for construction and expansion of fuel facilities. 21 Implementation of national policy Under the liberalization of import restrictions automobiles were im— ported at the free market rate of exchange, which was then between 40 and 45 pesos to the dollar as compared to the official rate of .18 pesos to the dollar. Although no exchange permit was required, the automobile producers were protected, for automobile imports were (and still are) subject to the provision 2 , 0U. S. , Bureau of Foreign Commerce, op. cit., pp. 10~11. 211213., p. 11. -87- of the following schedule of surcharges, according to the U. S. Department of Commerce: 22 1956 Surcharges f.o. b. Value (Pesos) Tariff No. 625 Automobiles up to 1, 000 kilograms in weight and not exceeding U. S. $1, 600 80, 000 Tariff No. 626 Automobiles up to 1, 000 kilograms in weight and exceeding U. S. $1, 600 225, 000 Tariff No. 627 Automobiles between 1, 000 and 1, 600 and 628 kilograms in weight and not exceeding U. S. $2, 000 275, 000 Automobiles over 1, 500 kilograms in weight and exceeding U. S. $2, 000 is prohibited It is true that Argentina has no overt discrimination, but since virtually all American standard automobiles fall in the highest tariff class of 275,000 pesos, price and weight restraints, as shown above, adversely affect our traditional position in the Argentine market. The effect of this is to reduce drastically the availability of new American cars to the Argentine middle class market, and encourage the ownership of smaller European cars instead (see Table 27). The increasing acceptance of the small and medium car (under 1, 600 c. c. and under 2, 800 c. c. respectively) is exhibited in Table 35. Although no complete data are available for Argentina's total imports by engine capacity, a glance at this table gives us an idea as to the popularity of the small car. However, total Argentine automobile imports by weight is 22Compiled from a communication between U. S. Department of Commerce, Bureau of Foreign Commerce, and its Detroit Field Office, March 7, 1956. -88- TABLE 35 ARGENTINE IMPORTS OF AUTOMOBILES FROM UNITED KINGDOM, BY ENGINE CAPACITY (c. c. group) a Percentage Share Total unitsUnder 1000- 1600 2200— 2800- over Station wagons Actual 1000 1600 2200 2800 3500 3500 and estate cars 1948 l, 033 38 43 8 7 1 3 - 1949 277 - 20 29 24 - 27 - 1950 109 10 46 18 8 l3 5 - 1951 1, 070 ~ 52 1 47 - - - 1952 348 - 18 62 16 1 - - 1953 45 2 16 13 58 9 2 - 1954 47 - 15 49 28 9 - - 1955 36 - 22 — 69 8 - - 1956 705 13 70 1 2 - - 14 1957 444 - 65 2 2 1 - 30 1958 484 - 87 l 4 - 7 aTotals may not add exactly to 100 percent due to rounding. Compiled from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1949-1959). available only for 1959. The nature of Argentina's imports of automobiles from all sources in 1959 seem to reinforce the previous fact, since more than half of the imports fall into the small car group, most of the larger luxury cars come from the United States. Of the small cars (up to 1, 000 kilograms) 3, 556 were from West Germany (see Table 36). Surcharges scheduled in 1956, as shown in preceding pages, were to be reduced by 5 percent for each year of the age of the automobile, but auto- mobiles over three years of age were not to be imported. Furthermore, in -89- TABLE 36 TOTAL ARGENTINE AUTOMOBILE IMPORTS, BY WEIGHT, 1959 Weight in kilogramsa Total imports From U. S. Up to 1,000 3,773 3 1, 000 - 1, 500 463 454 1, 500 — 1, 900 107 106 over 1, 900 112 89 Luxury cars up to 1, 900 3, 035 2, 508 Chassis up to 1, 000 100 0 Chassis over 1, 000 H __ Total 77596 3, 160 aOne kilogram equals 2. 205 pounds. Compiled from: United States Foreign Service Dispatch No. 1784, Buenos Aires to the Department of State, Washington, D. C.: June 15, 1960. the same year a discount of 30 percent of the duty was allowed on a totally unassembled automobile, and 15 percent on semi=assembled imports. Much of Argentina’s increased imports of used automobiles could probably be attributed to this provision. In addition to the 5 percent allowance, the lowest surcharge would be applicable on the used cars relative to their low prices. Imports of used automobiles from the United States showed a sub— stantial increase during 1956 and particularly in the subsequent years; an increase from 121 and 439 units in 1955 and 1956 respectively to over 2, 000 and 2, 800 respectively in 1957 and 1958. 23 Unfortunately there are no figures 23U. S. , Bureau of Foreign Commerce, United States Exports of Domestic and Foreign Merchandise, Schedule B, Report No. FT 410, Part II (1952—1959). ..90- available for used automobiles imported by Argentina from sources other than the United States, but it is probable that there are also imports of used cars from European sources. With regard to unassembled automobiles, it may be reasonably assumed that their weights as well as prices are relatively less than those of assembled cars; consequently they would benefit by the application of surcharges in the lowest price class and also in weight. Further benefits accrue by the allowable discount for unassembled cars. As a result of this measure more assembly operations were undertaken in Argentina, followed by manufacturing of automotive parts and equipment. Argentine policy seems to have aimed at encouraging local assembly with a View to eventual domestic manufacture. This was implicit in a larger discount on completely ldiocked down cars than on the semi-assembled im- ports. In addition, quotas and heavy duties have been instituted intermitantly with a weakening of Argentina's foreign exchange position. For instance the heavy drain of scarce foreign exchange in the latter part of 1957 resulted in a total ban on motor vehicle imports for several months. 24 Under the aforementioned restraints the Argentine demand for auto~ mobiles intensified and was reflected in prices. Used cars (40 percent were over 20 years old) sold at remarkably high prices (see Table 37). Though Argentine demand for automobiles is high and likely to in- crease, there is little prospect of filling it by imports. Import: restrictions will probably tighten and the countryls market will be supplied from local 24 Global Automotive Market Survey and World Motor Census (New York: McGraw—Hill International Corporation, 1958), p. 8. ..I -91- TABLE 37 ARGENTINA: REPRESENTATIVE USED VEHICLE PRICES IN MAY 1960 (Prices in U. S. dollars by model year)3 Model year 1935 1948 1953 1959 Chevrolet 1, 582 4, 200 6, 328 10, 948 Ford 2, 128 4, 256 5, 600 10, 349 Fiat (600) b 913 1, 826 2, 920 -- Morris (8 h. p.) 792 1, 268 -- 3, 164 Vauxhall (10 h.p. )C 1,036 -- -- 5, 480 aGiven in English pounds and was converted into U. S. dollars at the rate of $2. 80 to a pound. bMorris sold in 1959 represents 1956 Minor. CVauxhall in 1959 was Victor model. Compiled from: "The Argentine Motor Industry, " Motor Business, No. 23, July, 1960, p. 31. sources as regards assembly operations as well as manufacturing. This prospect is reinforced by recent industrial development efforts of the Frondizi administration. Development of the automobile industry The success of the Argentine motor industry clearly depends upon its ability to attract capital and domesticate it. By the end of 1958 Argentina had . _ 26 . . enacted a Foreign Capital Investment Law, guaranteeing the same rights as 25"The Argentine Motor Industry, " Motor Business, op. cit. , p. 30. 26Much of this discussion in the following few pages is taken from Ibid., Pp. 24~32. _92_ are accorded to capital of national origin. By the spring of 1959 a vehicle decree required manufacturers to produce evidence of five years' financial and technical capacity, and to avoid importation of machinery and equipment that are available in Argentina. To domesticate the automobile industry a formula was set up for the gradual buildup of local content. In case of lack of compliance, a small sur- charge on CKD (completely knocked down) automobiles was imposed in the first five years, rising to 300 percent thereafter. The automobile producers were yet more strongly favored, for automobile imports still were subjected to special surcharge on a weight basis. According to Argentine Embassy corre- spondence27 surcharges on automobile imports (new or used, assembled or unassembled), under Decrees No. 9969/58, 5439/59 and 14823/59, are as follows: 1958 Surcharges f. o. b. Values (Argentine pesos per kilogram) a) Automobiles up to 1, 000 kilograms in weight and not exceeding U. S. $1, 600 500 b) Automobiles up to 1, 000 kilograms in weight and not exceeding U. S. $2, 000 750 c) Automobiles over 1, 000 and not exceeding 1, 500 kilograms in weight and not exceeding U. S. $2, 000 900 In the same correspondence and under Decree No. 9969/58 it is stated that in no instance can surcharges be less than 240, 000 Argentine pesos. With such a protection it is virtually impossible for the United States 27Personal letter from the Embassy of the Argentine Republic, Office of Economic Counselors, Washington, D. C. , DM No. 760/60, October 19, 1960. -93- to compete with the European smaller weight and lower priced automobiles. Considering the applicable surcharges and the encouragement of the Argentine government to develop the motor vehicle industry, more than twenty companies have already submitted proposals for manufacture in Argentina. However, only half of the proposals submitted by various companies, including the Big Three of the United States, have been approved since 1959. While most of the manufacturers are combining the production of automobile and trucks, Chrysler's, Ford's and General Motors' (Bedford of England) manufacturing is confined to trucks. Since the present study deals only with automobiles, the discussion will be limited to them. As noted before in this chapter, Kaiser, Fiat, and DINFIA are already producing vehicles in Argentina. Industria Kaiser, the largest producer of automobiles in Argentina, has recently attempted product diversification by acquiring the body tools of the defunct Alfa Romeo, and adding its own engine and transmission to market a new "Bergantin. " Furthermore, in 1960 Kaiser signed a license agreement with Renault to produce the Dauphine. Since 1955 Kaiser has been enjoying a virtual monopoly in local production of cars and jeeps in the Argentine market, a position taken over from Mercedes Benz after Peron's fall. DINFIA (the state-owned vehicle company) has been producing a car, the Graciela, which is powered by the imported East German Warthurg engine. Production of this car for 1959 was estimated about 700 units. Recently, DINFIA and Borgward Company of West Germany announced a joint venture to produce trucks, and it is hoped that the Isabella car will be produced eventually. -94- Fiat, which had its vehicle manufacturing limited to tractors, intends to include in its range of production Fiat car models 600 and 1100. In 1960 Austin of British Motors Corporation (BMC) planned under a license agreement with Siam di Tella of Argentina to produce an automobile made up of parts of the English firm's Riley, Oxford and A55 cars. In addition to these major manufacturers, Citroen of France in 1960 seems to have intended to produce its ZCV model through Staudt, a local company; Peugeot to produce its model 403 through I.A. F .A. ; and the Metal- mecanica company of Argentina is programming production of two German B. M. W. cars. It is believed that a number of companies, among them Studebaker-Packard, Volvo, Auto Union and Scania Vabis, also submitted investment plans in 1959. Following the Argentine decree of investment and import norms for the automobile industry in early 1959, a dozen new entrants rushed in with their manufacturing proposals hoping to profit quickly from the deferred demand. One might reasonably expect a substantial increase in automobile production to have eventuated. A compilation by La Prensa28 shows that the manufacturers' production schedule was expected to reach almost 70 thousand automobiles. The production schedules for various companies, as reported by 28United States Foreign Service Dispatch No. 896, Buenos Aires to the Department of State, Washington, D. C., December 15, 1959 stated: "The Buenos Aires daily, La Prensa, in its issue of December 12, 1959 carried an article on the outlook for vehicle manufactures in Argentina in 1960. Based upon schedules submitted by the companies themselves, La Prensa compiled the presumed production" for 1960. “95. La Prensa, are shown in Table 38. La Prensa‘indicates that the production schedule of the various companies tends to be optimistic forecasts; within the industry circles no one anticipates that anything near that volume could be achieved. And if it were there is some doubt that the market could absorb the planned volume of output. Production and income in real terms are now in— creasing with industrialization and price stabilization, but it will be some years before Argentina can be regarded as a large automobile market. TABLE 38 .i: ARGENTINA‘: PRESUMED PRODUCTION OF AUTOMOBILES IN 19603‘ ' 3: , Company Number of automobiles IKA (Kaiser) 31, 330 DINF IA 2, 000 DINBORG (DINFIA—BORGWARD) 500 Fiat 4, 500 Siam di Tella (Riley and AuStin) 7, 200 Staudt y Cia (Citroen) 2, 500 IAFA (Peugeot) 4, 000 Others 17, 420 Total 35357)" aMost companies listed have plans to double their output. b _ . . . COHSist of small organizations, which for the most part are planning ['0 produce midget automobiles classified as "beetle" or "bubble" cars. Compiled from: U. S. Foreign Service Dispatch No. 896, Buenos Ai res to the Department of State, Washington, D. C. , December 15, 1959 citing the Buenos Aires daily, La Prensa, December 12, 1959. Kaiser's output throughout 1960—64 is scheduled to remain the same at —96— 31 thousand automobiles, while the total output is to double by 1964. This will leave Kaiser with only one-fourth of the total units of output in 1964 as compared . 29 to three—sevenths in 1960. For Argentina to be able to absorb in 1964 twice the planned automobile output of 1960, its national income will have to expand at a very rapid rate, credit will have to be eased, and/or the consumers will be forced to buy less of other things. To be certain, the need for controlling domestic consumption to maintain a balanced economy, may militate against substantial increase in the demand for automobiles. 30 Apart from the automobile market potential in Argentina, it is unlikely that the manufacturers' plans for automobile production would be realized in its early years of operation: Motor Business also asserts that the problem of in~ adequate local sources of supply is considerable, and the quality is rather poor by North American and European standards. However, encouraged by the demanding standards of automobile manufacturers, local quality is improving and becoming more standardized. Argentina intends to expand its motor industry as rapidly as its eco- nomic conditions permit. 31 The considerable backlog of replacement demand fOr automobiles and the potential growth for new purchases should enable 29Ibid. /' 3 0"The Argentine Motor Industry, " Motor Business, No. 23, July, 1960, p. 31. 3 lIbid., pp. 31-32. v rs: demand is not bverly bright. Importing is hindered by heavy surcharges which are unlikely to be reduced at a time when an automobile industry is being developed in Argentina. -98- Brazil is the largest country in South America. It includes about one—half of the land mass of the continent, although much ‘of its interior is unexplored and uninhabited. This country has over 60 million inhabitants, which is about half the total population of Latin America. The Brazilian automobile market Brazil is today the largest market for cars in Latin America. The postwar development of the Brazilian market has been rapid indeed. Between 1948 and 1958 automobile registrations in Brazil rose by more than two and one-half times, from 163 thousand to 437 thousand units, or more than four times its prewar level (see Table 39). Despite its rapidly increasing population (from 52 million in 1950 to TABLE 39 BRAZIL: AUTOMOBILE POPULATION AND NUMBER OF PERSONS TO A CAR 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 Car population a a (in thousands) 108 163 189 238 277 300 338 368 303 306 396 437 Number or" persons per car 442 292 257 207 190 176 162 152 189 191 154 144 aThese registrations originated in a different publication (as noted in source) and hence are nor: strictly comparable. It is also probable that some cars were "de-registered" during these years and brought back into use in later years. Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 19401960). -99_ 3 63 million in 1958) 2 Brazil has been able to improve its ratio of cars to the number of persons, from one car to 292 persons in 1948 to one car for every 144 persons in 1958. However, Brazil's car ownership still remains below the Latin American average, though comparatively better than in the postwar years. Heretofore Brazil's market demand for replacements as well as new ownerships had to depend on imports. During the period 1948-58, car im- ports from the major automobile producing countries totalled 188 thousand units, over half from United States and Canada (see Table 40). It is clear from this table that about three-fourths of total automobile imports were accounted for in the first five years of the postwar period under review, and only one—fourth for the remaining period. In conjunction with the decline in the total automobile imports during the period 1953—58 inclusive, it is inter" esting to note the significant changes in the share of each major automobile producing country in the Brazilian automobile market. While North America had virtually dominated this market in 1938, its share declined considerably by 1958, with some fluctuations in the course of this period. West Germany has Similarly, in recent years, penetrated the Brazilian market as it did that of Argentina. Restrictive measures on the importation of automobiles may have limited the increase in the car population in the latter part of the period. To obtain a clearer picture of" the decline in automobile imports and the shrinking share of the United States in the Brazilian market, the previous 32 U. S. , Bureau of Foreign Commerce, WTIS, Basic Data on the conom‘; of Brazil, Part I, No. 58-87, December, 1958, p. 3. ~100- TABLE 40 BRAZIL'S AUTOMOBILE IMPORTS MARKET SHARE, BY COUNTRY OF ORIGIN U. S. & United West Canada France Italy Kingdom Germany Total (percent) (percent) (percent) (percent) (percent) number 1938 80.6 1.9 n.a. 0.2 17.3 8,095 1948 60.1 13. 4 0. 9 25.7 -— 27, 683 1949 42.6 11. 3 2.1 44.0 -_ 17, 977 1950 38.0 6.6 2.3 46. 5 6.6 16,384 1951 67.6 5.5 0. 9 18.9 7. 2 48,879 1952 59.3 5. 9 0. 3 26.7 7. 9 29,110 1953 59. 9 6. 3 -- 9. 4 24.3 8,636 1954 54. 9 7. 0 O. 8 0. 4 36. 9 4, 937 1955 45.5 5. 0 O. 3 1.1 18.3 3,368 1956 74. 8 3. 9 3. 2 l. 3 16. 8 3,219 1957 33. 6 4.1 0. 8 0. 8 60. 7 6,122 1958 42.9 2. 8 0. 4 1. 2 52.7 13, 463 1959 21.9 10. 8 0.1 0. 1 67.2 27,627 3Germany in 1938 . Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1949-59). For 1959, United States Foreign Service Dispatch, No. 375, Sao Paulo, to the-Department of State, Washington, D. C. , April 13, 1900. pattern of analysis will be followed, in discussing the market situation Within the context of the general economic structure of the country. The Brazilian economy Brazil's gross national product rose substantially from 189 billion cr'uzeiros in 1948 to 883 billion in 1956 and to l, 289 billion in 1958. 33 This 33 . . . International Financ1a1 Statistics, Washington, D. C.: International Monetary Fund (several volumes). ~101~ phenomenal increase in current cruzeiros requires adjustment, however, to take into account the sharp increases in prices. Calculated on the basis of 1948 prices, the increase from 1948 to 1956 was 49 percent or, on a per capita basis, 23 percent. 34 National income in current cruzeiros rose from 158 billion in 1948 to 1, 030 billion in 1958, an increase of five times and a half. Allowing for changes in the value of cruzeiro, however, the Brazilian national income, at 1953 prices, rose only 61 percent from 1948 to 1958 (see Table 41). This table also serves to show the per capita income during the same period, increasing by 22 percent. The percentage increase is even less than that of the national income, owing to a parallel increase of one million in the Brazilian population per annum. No distribution of income statistics is available for Brazil. It might be helpful, however, to examine the regional distribution of national income of the various sections of the country as given by the U. S. Department of Com- merce. 35 The most important state in Brazil, from the economic standpoint, is Sao Paulo. Being the largest industrial center in all South America, this state accounted for 32 pe rcent of the national income in 1956. The Federal District combined with the States of Rio de Janeiro and Minas Gerais accounted for 31 percent; the combined states of Rio Grande do Sul, Parana, and Santa Catarina accounted for another 18 percent. Although the above mentioned 34 U. S. , Bureau of Foreign Commerce, op. cit. , p. 4, as calculated in a study prepared by a Joint Working Group of the Brazil National Economic Development Bank and the Economic Commission for Latin America. ”an. ‘102~ TABLE 41 BRAZIL: ADJUSTEDa NATIONAL INCOME, PER CAPITA INCOME AND THEIR INDEXES ~ Per capita Index (1953 = 100) National income income National Per capita (Billions of cruzeiros) (cruzeiros) income income 1948 267.1 5,617 75 86 ‘ 1949 310.2 6, 402 86 98 1950 332.2 6, 731 94. 103 1951 377.5 7, 173 106 110 1952 356. 8 6, .782 100 104 1953 356. 7 6, 526 100 100 1954 382.5 6, 858 108 105 1955 406. 6 7,105 114 109 1956 421.6 7,212 118 110 1957 420.0 6, 886 118 105 1958 432. 6 6. 856 121 105 6LDeflated by the cost of living index in Brazil (1953 = 100) 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 59 58 7)? 67 -82 100 118 141 m‘ 206 238 Calculated from: International Financial Statistics, Washington, D. C.: International Monetary Fund. (several Volumes). states comprised only 17 percent of the land area and 57 percent of the popu- lation in 1956, they accounted for 81 percent of the national income. The economic status of these states is reflected in the number of their automobiles in use. About 88 percent of the Brazilian automobile population in 1957 were registered in the above~named states, with Sao Paulo having over 140 thousand units or onewthird of the car population. 36 36 . Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation, 1958)., p. 9. ~103— It would appear that the states with high income have the capacity to absorb more cars. The fact remains, however, that correlation analysis of adjusted per capita income and car imports indicates a negative coefficient of 0. 1619. 37 Assuming a positive correlation between income and automobile imports, such a result is indicative of the existence of some barriers to the free patterns of expenditure. Approximately three-fourths of automobile imports to Brazil took place in the first five years of the postwar period under review. The potential market for automobiles should in some way be related to income. Since 1952, however. there has been a considerable decline in automobile imports, though ' per capita income has been holding its own. With a relatively large car popu- lation in Brazil and a relatively high purchasing power of the people, it should be expected to have a higher level of car imports. Here too automobile im- ports are sharply influenced by the country’s external trading position and its national objectives. BraZil”s external trading position During World War II, overseas demand for Brazil’s exports was 7 3' The equation for correlation analysis in Brazil is: NEXV ~ (Ex) (By) VB-EXZ-«EXE [ma-663 Where r = correlation coefficient; x = per capita income (adjusted); y = automo- bile imports; N = number of years covered 11 <213,009) ~ (1.135) (2,082) r = ‘ = -O. 1619 VEi (117.581) _, (1,135)? E1 (661,846) — (108224] ~104~ strong and at favorable prices; imports, on the other hand, were limited because foreign suppliers were geared to war production. In the postwar period Brazilian imports rose considerably because of pent-up demand and of new requirements for industrial expansion. However, balance was main- tained during the early part of the period under review as a result of the favorable terms of trade (see Table 42). The trade balance has nevertheless TABLE 42 BRAZIL'S FOREIGN TRADE: VALUE OF TRADE, VOLUME OF EXPORTS AND IMPORTS, AND TERMS OF TRADE Total (in millions of U. S. dollars) Index (1953 = 100) f. o. b. c. i. f. Net Volume of Terms Export Import Balance Exports Imports of trade 1938 289 295 6 n. a. n. a. n. a. 1948 1,173 l, 134 39 135 61 55 1949 l, 089 1, 116 H 27 n. a. n. a. n. a. 1950 l 346 1,098 248 104 85 113 1951 1,757 2, 010 —253 109 105 112 1952 l. 409 2. 009 —600 85 96 97 1953 l, 539 l. 319 220 100 100 100 1954 1, 562 1.633 '- 71 100 126 136 1955 1, 4.23 1,307 116 109 123 106 1956 1, 483 1234 249 111 102 99 1957 1,, 391 1.489 _ 98 103 96 96 1958 1, 243 l, 353 -110 99 87 93 n. a. ; not available. Calculated from: Direction of International Trade, New York: Joint Publication by United Nations, International Monetary Fund, and International Bank for Reconstruction and Development. Annual issue, Series T (several volumes); and International Financial Statistics, Washington, D. C.: Inter" national Monetary Fund (several volumes). -105- been negative in half of the postwar years. Several reasons underlie the unfavorable balance of trade, among them are the following: heavy imports in the early postwar period, excessive imports caused by the fear of a spread of the Korean War, and in recent years, the fact that imports were somewhat relaxed in unrealized anticipation of higher receipts from coffee exports. 38 Foremost among import commodities have been fuel (most important category), industrial raw materials, machinery and transportation equipment. Official statistics suggest that only 5 to 6 percent of the total value of imports in recent years under study are in the less essential commodity group. 39 Brazil's export concentration lies in these commodities, coffee, cotton and cocoa beans, together representing 62 to 84 percent of the total value of exports in 1948-58. Coffee alone accounted for over 60 percent (over 70 percent in some years) of its total shipments abroad in the same period (see Table 43). For the period under consideration, the decline in coffee exports has been reflected in the total value of exports. Since 1956, the decline has been espeCially noticeable due in part to the deterioration of the terms of trade, in addition to the decline in the export volume in subsequent years. The United States has been by far the biggest customer for Brazil's principal export, coffee. For that matter the United States has been by far the largest market for Brazil“s exports as a whole, accounting for 40 to 50 percent 38U. S. , Bureau of Foreign Commerce, op. cit. , p. 16. 39Ibid. ‘106— TABLE 43 BRAZIL: VALUE OF EXPORTS, BY PRINCIPAL CATEGORIES (In millions of U. S. dollars) Total Coffee Cotton Cocoa categories 1948 488 183 58 729 1949 628 108 52 788 1950 860 105 78 1, 043 1951 l, 051 207 69 l, 327 1952 1., 051 34 41 1, 126 1953 1,088 102 75 1,. 265 1954 948 223 135 1, 306 1955 844 131 91 1,066 1956 1, 030 86 67 l, 183 1957 846 44 70 960 1958 688 25 89 802 Compiled from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). of the total value for most of the years 195068. The total value of trade between Brazil and North America is given in the accompanying Table 44.. In short. Brazil’s foreign exchange. and its dollar position in particular, depend primarily on coffee exports. It. can be seen from Table 44 that Brazil normally has a trade surplus With the United States. A large proportion of dollar receipts from exports has been utilized for nontrade invisibles and petroleum products imported from Venezuela. either directly or indirectly from the 4 refineries in the Netherlands AntilIes. 0 Argentina was the chief supplier of 40w: p. 17. ~107— TABLE 44 BRAZIL: VALUE OF TRADE WITH NORTH AMERICAEl (In millions of U. S. dollars) 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 Exports(f.o.b.) 100 524 566 752 882 749 770 594 617 753 678 548 Imports(c.i.f.) 75 606 488 391 875 886 407 581 321 365 572 501 Netbalance 25 —82 723—35‘7437 ‘55 13 296 388 106 47 aUniied States and Canada. Calculated from: Direction of International Trade, New York: Joint Publication by United Nations, International Monetary Fund, and International Bank for Reconstruction and Development. annual issue, Series T (several volumes); and International Financial Statistics, Washington, D. C.: Inter- national Monetary Fund (several volumes). wheat , followed lay Canada. Japan and West Germany at various times pur~ chased a consideranle volume of cotton from Brazil. BraZil's trading position can be seen from Table 45, which displays the l950~58 percentage distribution of trade by areas for which comparable data are available. Natalia: objecana Brazil is traditionally associated with coffee; it is the cornerstone of its economy. This country is the world‘s leading coffee producer and exporter. accounting for over one~half of world production in 195768. Coffee growing is a feast or famine industry. It takes five years for a coffee tree to produce the first crop. Once in production. it W111 continue to bear fruit for fifteen years or more. As a result. both a shortage of supply and overproduction may last for a long time. For instance. the decline in the coffee market and its low - 108~ TABLE 45 BRAZIL: PERCENTAGE DISTRIBUTION OF TRADE BY AREAS Exports 1950 1951 1952 1953 1954 1955 1956 1957 1958 U. S. and Canada 56 50 53 50 38 43 51 49 44 Latin America 8 9 9 7 9 10 7 10 12 Continental Europe 22 24 28 31 35 28 26 24 28 Sterling area 10 13 4 6 6 6 5 6 6 Rest of world 4 4 6 6 ll 13 11 ll 10 Imports E l U. S. and Canada 36 44 44 31 36 25 30 38 37 Latin America 14 11 9 23 14 22 l9 16 18 Continental Europe 34 32 35 38 38 36 27 3O 30 Sterling area 15 12 ll 5 2 4 7 7 7 Rest of world 1 1 2 3 10 13 15 9 8 Compiled from: International Financial Statistics, Washington. D. C. :: International Monetary Fund (several volumes). price during the thirties and early forties resulted in the abandonment of many Brazilian plantations. However, the number of coffee trees has increased from 2. 4 billion in 1952 to 3 billion in 1957. Coffee is subject not only to Violent price fluctuations on consumer markets, but also to the hazards of Weather conditions. For example in 1956~57_. as a result of frost damage. Brazilis coffee crop totalled 18 million bags as compared to 23. 5 million bags in 1955~56 and 24 million bags in 1957e58. 41 “an p0 5- «109‘ With these factors in mind, government and farmers alike have been trying to diversify agricultural production, thus lessening the dependence on coffee. Furthermore, industrial development received a new impetus during World War II when foreign supplies were cut off. Industry, which is the second important economic activity, generating about one-fourth of the national in- come, is showing a tendency to grow. Nevertheless Brazil is still an agricul~ tural country, farming Still accounting for approximately 30 percent of its national income. 42 Brazil's industrial development started, however, in the field of consumer goods such as textiles and in the food processing industry, both of which are based on indigenous agricultural produce. 43 Turning to capital goods, industry has made large strides in recent years, particularly in iron and steel, chemicals, cement, communication equipment, and rubber goods. After the Second World War, industry had the benefit of strong government support, either through import controls or through a foreign exchange system which made it cheap to import raw materials or equipment for industry but expensive to import competitive products. (This wilI be explained in more detail later. ) Brazil's balance of payments During the early years of the fifties, the persistent improvement in 4. 2United Nations, op. cit., 1959, p. 114. 4 3Much of the discussion in the following page is taken from U. S. ., Bureau of Foreign Commerce, op. cit., pp. 9~13. ~110~ Brazil's terms of trade helped to promote a high level of economic activity, and a perceptible rise in per capita income. The result was a rise in entre— preneurs' profits and total demand, and an enlarged capacity to import. As has been mentioned earlier the pent—up demand after the war and the fear of shortages in foreign goods during the Korean conflict encouraged Brazilians to import heavily. In addition the increasing output of consumer goods, influenced by the rise in consumption, and the inflationary repercus— sions (measured by the rise in the cost of living, Table 41) which had their start in the early fifties, made themselves felt strongly in such commodities. In the course of the postwar years under study growth of income has been more or less uniform. whereas the capac1ty to import has been subject to marked fluctuations in the volume of exports and in the terms of trade. This growth of income caused an increase in demand for both domestically-produced and imported consumer goods in addition to imported materials and fuels required for industrialization, hence the propensity to import remained at high levels, accompanied by a rise in the domestic consumption of export commodities which led to the contraction of such crops as cotton, cocoa and others (see Table 43). These circumsrances might have had a disastrous effect on Brazil's economic development in View of the high percentage of agricultural commodities going into its export. trade (varying between 60 and 80 percent yearly). It was this type of pressure. originating in the rapid rate of Brazilian economic development. that was responsible for imbalance. Most of the postwar years under study indicate the disequilibrium position of Brazil, -1ll~ reaching high adverse balance of payments in the years 1951 and 1952 (see Table 4b). The degree of seriousness of this disequilibrium is reflected in the capacity to import as a percentage of total imports showing a ratio of 79 and 75 in 1951 and 1952 respectively. TABLE 46 BRAZIL: IMPORTS AND CAPACITY TO IMPORT ‘ (In millions of cruzeiros at 1950 prices) 3 1948 1949 1950 1951 1952 1953 1954 1955 Imports 16. 376 18,305 21. 980 32., 370 28, 200 21, 704 30, 274 25, 793 Capacity £0 import 16,043 16,091 23, 182 25,486 21,044 23,479 27,951 27,441 Capacity to import as percent of imports 98 88 105 79 75 108 92 106 (1"Capacity to import" here defined as payments available for imports. Compiled from: United Nations, Department of Economic and Social Affairs, Economic Commission for Latin America, Economic Survey of Latin Amarigi, l95§_(New York, 1956)., p. 14. For Brazil“s balance of" payments position in later years, another United Nations survey gives the figures in current United States dollars. The survey suggests a favorable balance of payments of $190 million for 1956 and an adverse balance of $200 and $280 million for 1957 and 1958 respectively. The critical position of this unfavorable balance reached in 1958 is again shown 4 4 United Nations, op. cit., 1959, p. 107. -112- by the capacity to import of only 74 percent of total imports. The ratio of gold and foreign exchange reserves to imports is indicative of the country's capacity to import. The fluctuating ratios show the degree of seriousness afflicting Brazil (see Table 47). TABLE 47 BRAZIL: RATIO OF GOLD AND FOREIGN EXCHANGE RESERVES TO IMPORTS . 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 20.2 66.8 64.4 60.7 25.7 26.3 45.9 29.6 37.6 49.5 32.0 34.4 Calculated from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). It has been noted that the effective demand for imports, particularly of automobiles, depends to a marked degree on the buoyancy of Brazil‘s export income. Exports are dominated by coffee and a small number of agricultural commodities. It must be remembered that exports of these commodities, and coffee in particular, are liable to sudden and drastic changes in value as world price levels fluctuate. This factor, together with the heavy imports, have been perhaps some of the reasons why Brazil has been forced to manipu“ late her import and export regulations so frequently during the past few years under review. -113- Brazil’s foreign trade regulations45 In Brazil, export licenses have been required since 1955 as well as shipping permits showing evidence of intention of converting export receipts into cruzeiros. Foreign exchange must be negotiated through the Bank of Brazil at the official rate of 18. 36 cruzeiros to a dollar, or the equivalent in other currencies. In order to compensate for the overvaluation of the cruzeiros at the official rate, a bonus is to be paid to the exporter varying according to the commodity imported and the foreign currency received. The bonuses allowed in each category for exports in convertible currencies have been higher (about 4 percent) than those allowed for exports in other currencies. These bonuses are payable in addition to the official exchange rate (which for U. S. dollars is 18.36 cruzeiros) for the various currencies. Since the estab- lishment of the system in January 1955 there have been several shifts of com- modities from one category to another depending on the market condition abroad or rising costs in a domestic industry. Since the latter part of 1958, there have been three export categories: the higher the category. the higher the export bonus for which the product qualifies. The third category, comprising minor export products, may be negotiated in the free exchange market. Exchange re- sulting from major export products must be negotiated at the official rate through the Bank of Brazil. Since coffee is in the lowest category, it seems that the sys~ tem has been designed to promote the export of other commodities and to lessen 4 5For further details see U. S. , Bureau of Foreign Commerce, WTIS, Licensing and Exchange Controls--Brazil, Part 2, No. 60-41, August, 1960. Much of the discussion in the next few pages is taken from the above source. ~114- the country's dependence on a single product. In addition to export promotion, the exigencies of the foreign exchange led Brazilian government to use various types of measures to control imports as well. The mechanics of the control system have been designed to prevent the accumulation of a payments backlog and to foster domestic industries. The system of exchange and import licensing controls which was established in 1953 resulted in the application of multiple rates of exchange. Under this complex system imports were grouped in five categories with goods considered essential in the first category and least essential in the last. The effective rate of any import has been, therefore, the official selling rate of 18.82 cruzeiros per dollar, plus an exchange tax of 10 percent in addition to the bid prices (referred to as agios or premiums) paid for the auction certificate. Explanation of the foreign exchange system during period under treatment falls outside the scope of this study, however it is important to understand certain features that are applicable to automobile imports. Auction rates have varied widely depending upon the currency being auctioned and the category of imports. In general, the premiums for dollar certificates, in all categories, have been considerably higher than for other currencies. The effectiveness of import restrictions is partly governed by the auction of limited amounts of foreign exchange and the payment of the resulting exchange sur- charges. The total exchange auctioned during 1953-58 is shown in Table 48. The new tariff legislation of 1957 provides for the continuation of the exchange system but in a modified form. Imports have been reduced to two categories, General and Special (nonessential). The cruzeiro cost to the - 115- TABLE 48 BRAZIL: TOTAL EXCHANGE AUCTIONED AND QUOTATION FOR THE DOLLARa .1953 1954 i955 1956 1957 1958 Millions of U. 3. dollars 156 835 559 b 597 576 485 Average weighta 34 50 (69)(99) (ll2)(77)b 85 143 a Average weighted quotation, number of cruzeiros for the dollar, including the basic official exchange rate. bEach figure refers to half year weighted average. Compiled from: International Financial Statistics, Washington, D. C.: International Monetary Fund, April, 1955, p. 56; and United Nations, Depart— ment of Economic and Social Affairs, Economic Commission for Latin America, Economic Survey of Latin America, 1957 (p. 127), 1_958 (108), New York: 1959. importer is the auction premium plus the official selling rate of 18.92 cruzeiros to the U. S. dollar. Import licenses are required only for the Special category, but certificates of exchange cover are required for others. During the latter part of 1958 premiums for foreign exchange rose sub- stantially from about 70 and 225 cruzeiros to a dollar in the General and Special import categories respectively to about 200 and 300 cruzeiros in the same categories. Early in 1959, when the amount of foreign exchange to be auctioned was reduced, the premiums increased still further to about 280 and 400 cruzeiros for the two categories. 46 From the above discussion, it is clear that the combination of tariff duties and the exchange auction system 46 U. S. ., Bureau of Foreign Commerce, WTIS, Economic Development ln_Brazil. 1958, Part 1, No. 59-44, April, 1959, p. 11. ~116- makes the importation of nonessential (luxury) goods very expensive in terms of cruzeiros. Even commodities listed as General (after several changes, automobiles have been in this category since late 1958), are almost as expen- sive as those listed as Special. Auctioning of foreign exchange is subject to constant study and revision; as a result there is little reason to believe that import premiums on cars will be reduced while Brazil is in the process of developing the motor vehicleindustry. Brazil's automobile industry As has been mentioned earlier, Brazil has been encountering several developmental problems, among them transportation. The absence of proper transportation facilities has been perhaps the greatest impediment to the con~ tinued growth of the Brazilian economy. Among several possible causes two are particularly prominent: population dispersion and a mountainous escarpment. Most of the population is isolated in clusters along the coastal region, primarily the northeastern corner of the country, the Rio-Sao Paulo district and the southernmost states. The escarpment which runs along the Atlantic coast from the northeast to the southwest prevents the rivers of the interior, almost without exception, from reaching the coast. 47 For a long time, coastal shipping was the only lateral connection between various coastal population centers, since railroads tended to fan out into the hinterland from 4 the ports. 8 4 7The significance of this should be particularly clear to Canadians, who depend heavily on the Great Lakes-St. Lawrence system. 48 U. S., Bureau of Foreign Commerce, $.33” No. 58-87, p. 12. -117- The deterioration of the railroads and coastal shipping has encouraged reliance on the alternate forms of transportation, highways and the air, for both passenger and commercial goods transport. It was not until the end of World War II, however, that a national highway construction was envisaged. As a result highways increased from about 172 thousand miles in 1947 to , approximately 300 thousand miles in 1956. More than 2, 600 miles were paved by 1956, 40 percent of it in Sao Paulo and Rio de Janeiro. A five-year plan for l956~60 called for the construction of some 8, 000 miles and the paving of 3, 500 miles. 49 The use of highway transportation has in turn been encouraged by the rapid construction of good roads between the important industrial centers. Implementation of national policy It has been indicated earlier that in the early postwar period Brazil imported a relatively large number of automobiles. The heavy imports during that period resulted in a considerable drain on Brazil's foreign exchange re- serves, aggravated by the fall in the world price of coffee after the Korean conflict. When the balance of payments position became acute in 1951-62 and again in 1954, the Brazilian government was forced to limit automobile im- ports to a minimum by introducing a series of complex import restrictions. Table 41 illustrates the effect of such measures in the decline of automobile imports into Brazil. Brazil has also moved to establish a domestic motor vehicle industry ”Ibid., p. 13. -118- as part of a total industrial developmental program. From 1947 to the early fifties, the development consisted simply of assembly operations. The several assembly plants provided some incentive for local auto parts manufacturers which expanded from 20 manufacturing establishments in 1948 to 300 in 1953.50 During the early fifties several government decrees were issued in connection with the establishment of the automotive industry, starting with commercial vehicles (motor trucks, jeeps, station wagons, and buses). After the imposition of strict import measures on automotive parts produced in Brazil, and the prohibition of built-up commercial vehicle imports, consid- erable concessions were made to automotive firms planning manufacturing facilities in the country. For instance commercial vehicle chassis containing 65 percent of locally made components were classified as semi-manufactured products subject to an ad valorem duty of 35 percent. A local content of 80 percent, by weight, rendered the chassis duty free. 51 Brazil has had rigorous restrictions on automobile imports. Quotas and foreign exchange allocations for the importation of automobiles have always been restrictive. Furthermore, high import tariff dutiest(up to 150 percent ad valorem on c. i. f. values), high consumption taxes (15 percent on duty-paid 50United States Foreign Service Dispatch No. 353, Sao Paulo to the Department of State, Washington, D. C. , March 31, 1960. 51"The Brazilian Motor Industry, " Motor Business, No. 18, March, 1959, p. 31. -ll9- value) and a surtax (5 percent ad valorem on c. i. f. value) have limited automo~ bile imports. 52 A more severe restriction than the tariff system has been foreign exchange control which resulted in an almost prohibitive exchange rate for automobile imports. It can be understood readily why automobile imports suffered a setback in Brazil. The decline in the United States share in the Brazilian car market can be reasonably attributed to the fact that a large proportion of American automobiles weigh more than 1, 600 kilograms (3, 527 pounds) and are generally priced higher than their European counterparts. America's lightest four-door sedan weighs 2, 725 pounds. Chevrolet, Ford and Plymouth weigh between 3, 300 and 3,500 pounds. 53 Consequently the 150 percent ad valorem duty has been applied to the American cars in addition to higher exchange dollar premiums than for other foreign currencies; the result is a phenomenal initial cost. The exchange and tariff systems are designed to protect and encourage the development of domestic industries and to preclude the creation of reserve drain resulting from the serious shortage of foreign exchange currently afflicting Brazfl. More than half of the automobiles registered in Brazil as late as January 1, 1959 was of American origin. However, continental Europe is 5280 percent ad valorem on c. i. f. value of automobile imports weighing not more than 1,600 kilograms and 150 percent ad valorem if weighing more than 1, 600 kilograms: quotmg U. S. , Bureau of Foreign Commerce, “Statement of rates of import duty on Automotive Vehicles, " May 27. 1958. 53, . . . . 'Those Economical Foreign Cars, " Changing Times, July, 1957, p. 19., making inroads in the Brazilian market. — 120~ It is worth noting that only a small proportion of the European automobiles registered were from American manu~ facturing subsidiaries (see Table 49). TAB LE 49 AUTOMOBILE REGISTRATION IN BRAZIL, BY MAKE (January 1, 1958) Number of Number of Number of Car model units Car model units Car model units Austin 10, 363 Hudson 7, 231 Prefect~Thomas 3, 333 Buick 7, 849 Kaiser 3, 607 Renault 6, 019 Cadillac 7, 631 Lincoln 5, 082 Standard‘ Vanguard 6, 736 Chevrolet 93. 839 Marquess 3, 343 Studebaker 11, 100 Chrysler- Fargo 7, 967 Mercury 16, 260 Taunus-Rhein 1, 218 Citroen 7, 967 Morris 7, 074 Vauxhall—Bedford 3, 891 Consul~Zephyr 2, 308 Nash 5, 385 Volkswagen 5, 942 De Soto 5, 413 Oldsmobile 7, 205 Volvo 1, 596 Dodge 16,639 Opel 3, 250 Willys 381 D. K. W. 4, 708 Packard 5,508 Others 18, 236 Ford 90, 964 Plymouth 6, 948 _ Hillman. 4, 872 Pontiac 6, 792 Total 395, 909 Compiled from: Global Automotive Market: Survey and World Motor C§_n§g(New York: McGraw~Hill International Corporation, 1958). p. 9. European competition intensified in 1959. Brazilian car imports from the major automobile producing countries totalled approximately 28 thousand units, with West Germany providing (in round percentages) 67 percent . United 4 States 22 percent and France 11 percent. 5 4 5 United States Foreign Service Dispatch No. 375, Sao Paulo to the Department of State. Washington, D. C., April 13., 1960. " 31:22.:— -121- Trend of automorive development Under regulations issued in 1956 and 1957, the Brazilian government established the Executive Group for the Automotive Industry (GEIA) to encourage and supervise the manufacture of automotive vehicles by various foreign firms. Since Brazil was fostering the development of the automotive industry, special arrangements were instituted to lessen the effects 10f the tariff and exchange control system on the importation of parts required by this growing industry. In February 1957, the Brazilian government approved a law granting thirty months' suspension of all tariffs and taxes on imports of machinery and ,7: equipment for the automotive industry under the plan approved by GEIA, in order to encourage and promote a national car industry to replace the assembly operations. 55 A special exchange rate for imports of parts and accessories for the manufacture of automobiles was granted to companies with production plans approved, prior to the end of 1957, by GEIA. Such manufacturing plans re- quire the utilization of a gradually increasing proportion of parts produced in Brazil. This special exchange rate, effective until June 30, 1959, was the official selling rate (18.82 cruzeiros per U. S. dollar) plus a surcharge equal to the weighted average of the premiums paid in the exchange category of the commodity and the currency involved, during the 6 months prior to August 14, 1957. The surcharge has gone up since then. 56 55Global Automotive Market Survey and World Motor Census (New York: McGraw—I—Iill International Corporation, 1957), p. 13. 5 6U. S. , Commerce, "Restrictions on the Importation of Assembled and CKD Automotive Vehicles, " May 27, 1958. -122~ In addition to the above, specific prOVision57 was made to allocate $12 million and $8 million in foreign exchange during 1958 and 1959 respectively. for the importation of automobiles weighing not more than 1, 600 kilograms and valued at no more than $2, 300 f. o. b. These automobiles were to be imported through specific exchange auctions, with the minimum cost of exchange equal to 100 cruzeiros per U. S. dollar. They could be imported by manufacturers and assemblers, provided the Ministry of Transportation and Public Works was informed. In this case the automobiles had to be imported completely knocked down (CKD), showing proof of the purchase of locally manufactured parts equivalent to the omitted items, and reductions in import duties were to be granted in proportion to the omission of weight. In other words, the more the value added in the importing country, the more the reduction in duties, as is exhibited below. Weight omission (%) 15 25 35 45 over45 Reduction in duties (%) 40 60 70 80 90 It must be noted, however, that of these special foreignexchange auctions, only a part was in convertible currencies. By the end of 1958, when negotiations were closed. nine automotive vehicle factories (National Motor Factory (F.N.M.), Ford. General Motors, International Harvester, Willys, Mercedes Benz, DKW-Vemag, Volkswagen, and Romi~Isetta) were in opera~ tion. Agreement had also been reached between GEIA and other manufacturers: Borgward, N. S. U. , B. M. U. , Simca, and Toyota. The local development of 57 U. S. , Bureau of Foreign Commerce, WTIS, Licensing and Exchange Control_S__-~Brazil, Part 2, No. 60-41, August, 1960, p. 5, — 123- the automotive industry encouraged the development of the parts manufacturing industry. GEIA estimated in 1958 that 1,200 parts manufacturers were in operation, of which about 150 were operating on a large scale. 58 It must be recognized, however, that only a few of the nine automotive firms in operation, together with the others reaching agreement with GEIA were automobile manu- facturers; though some were producing both cars and commercial vehicles, the rest were engaged in manufacturing vans, jeeps, trucks, and buses. Higher priority was and continues to be given to the manufacture of commen- cial vehicles, as there has been an increasing emphasis on road transportation in Brazil. Since only automobiles are here of concern, attention must be concentrated on them. According to Motor Business, 59 the automobile companies discussed below now have begun manufacturing in Brazil. Brazfl‘s first complete automobile was manufactured by DKW-Vemag during 1958. TOtal output for the year was 3, 720 units, of which 1, 600 were station wagons. Vemag, a former Studebaker—Packard selling organization, produces DKW cars, vans, and jeeps under agreement with Auto Union of West Germany. Volkswagen started production in 1959. at a daily rate of 20 units. These automobiles were. however, completely knocked down (CKD) imported under special exchange regulations (referred to earlier) for automo- biles. 58 U. S. , Bureau of Foreign Commerce, WTIS, Economic Developments 59 . . ~ Much of the discuss10n on the next page on the structure of the Brazflian Motor IndUSIry is taken from "The Brazilian Motor Industry, " Motor ~124~ Willys Overland, which began its production of jeeps in 1957, started in 1959 to produce Aero Willys cars (similar to the ones produced in the United States until 1953). ‘ In 1959, Willys made an agreement with Renault to manufac- ture Dauphine cars during the same year. The first company to start local production in Brazil was Mercedes Benz. Although this company started in 1956 with the manufacture of commer- cial vehicles, it expanded its operation by adding two car models during 1959. Motor Business further indicates that Alfa Romeo, Borgward and Simca recently began to manufacture automobiles. However, no decision had been made prior to the spring of 1959 by N. S. U. and B. M. W. of West Germany as to when they would start manufacturing. By this time, the rumor was also out that the Ford Motor Company might produce an automobile in Brazil in addition to its manufacture of commercial vehicles. The planned automobile output for 1960 as approved by GEIA for each manufacturing firm is shown in Table 50. , Under GEIA’S regulations 95 percent, by weight, of automobiles should have been produced locally by 1960. Should the automobile manufacturers fail to comply with this requirement, the Brazilian government would give no con— cession for the import of automotive component parts required by domestic manufacturers, The Foreign Commerce Weekly in its February 8, 1960 issue, stated that as of October 1, 1960, imports of supplementary parts and acces~ sories for the automotive industry would be subjected to the specified tariff duty, ranging from 60 percent to 120 percent ad valorem. The variations in the range of tariff depended on the percentage level, by weight, of locally ~ 125- TABLE 50 PLANNED AUTOMOBILE OUTPUT FOR 1960 Automobile manufacturers Automobile output Alfa Romeo 6, 000 Borgward 55, 000 Mercedes Benz 12, 000 N. S. U. 6, 000 Romi-B. M. W. Isetta 4, 300 Simca 12, 000 Vemag-D. K. W. 5, 500 Volkswagen 15, 000 Total 65, 800‘ Compiled from: "The Brazilian Motor Industry, " Motor Business, No. 18, March, 1959, p. 33. produced components utilized in the manufacture of automobiles. As a result of this proposal the local motor vehicle (cars and com- mercial vehicles) content, by weight, rose from 60 percent in 1957 to 80 percent in 1959. Furthermore foreign investments in automotive equipment imported without exchange coverage exceeded $200 million, and over 20 billion . . . 60 . . cruzeiros went into local expenditure. These figures apply to the industry as a whole, since no breakdown for automobiles alone was available. The same dispatch suggested that the Brazilian participation in the total automotive parts sold in Brazil in 1959 represented 42 percent, while American firms accounted for 32 percent. Firms from WeSt Germany accounted for 13. 5 60United States Foreign Service Dispatch No. 30, Sao Paulo to the Department of State, Washington, D. C. , July 24, 1959. ~126‘ percent, followed by British. French and other foreign companies. The realization of this local content objective depended on the amount of investment. At the end of 1959 investments in automotive machinery and equipment totalled some $200 million, and were expected to exceed $270 million by the end of 1960.61 In addition, investment value of land and buildings purchased and constructed in the four-year period, 1957-60 was calculated at 8. 6 billion cruzeiros. This sum of investment appears to have been short of the expan~ sion plan. Motor Business62 asserts that in adhering to the program an investment of $800 million, of which $400 million is to be raised in Brazil, would have been in order. Furthermore the industry was confronted by shortages of certain raw materials, particularly steel and rubber. To overcome the shortage, import tariff duties were reduced on steel plates from 50 percent ad valo rem to 20 percent, and steel plant capacity has been also increased. Even if planned mills are completed there will be a deficit in domestic production of some .2 million tons by 1965. Apparently iron and steel consumption during 1956-65 was underestimated in the plans, which anticipated a surplus after 1960. 63 The installation of the automotive industry, the expansion in the auto parts industry, and the new ship building sector have intensified the steel shortage. 61United States Foreign Service Dispatch N0. 353, Sao Paulo to the Department of State, Washington, D. C. , March 31, 1960. 62"The Brazilian Motor Industry, " Motor Business, No. 18, March, 1959, p. 33. 3 6 U. S., Bureau of Foreign Commerce, op. cit., No. 59-44, p. 5. -127- The increasing demand for tires and tubes has created periodic shortages in rubber manufactures. Consequently rubber tire manufacturers (Firestone and B. F. Goodrich) have been expanding their facilities. Supple~ menting these rubber manufacturers a synthetic rubber factory was installed to help alleviate the shortage. 64 These factors, in conjunction with the foreign exchange difficulties as well as lack of specialized labor, might be a hindrance in the realization of GEIA’s shortwterm plans of automobile production. In a speech to the American 1 Chamber of Commerce for Brazil, the president of the Automotive Association of Sao Paulo outlined the major problems facing the industry: the lack of adequate credits to finance sales to the public, a deficiency of certain raw materials and a shortage of specialized labor. 65 Brazil seems cognizant of the fact that it will be confronted ‘with many problems while developing the automobile industry. In order to ensure the growth of this sector of the induStry, Brazil may continue to shelter itself by its high protective barrier. Obviously then, under these circumstances com“ panies with a higher local content per automobile will gain distinct competitive advantages. The future pattern of the Brazilian automobile industry will. therefore. be determined by the pressure on foreign—owned companies to increase the Brazilian—made content of their automobiles as rapidly as possible. The next half decade Will perhaps witness a very rapid expansion in tar 64Ibid. , p. 7. 65United States Foreign Service Dispatch No. 30, Sao Paulo 10 the Department of State. Washington, D. C. , July 24, 1959. an exchange problems and its need' for industrialization. This expan- sion may be accompanied by a fierce competitive battle for the market. ~129- Xingu—61% Petroleum is the keyStone of Venezuela's economy. Since 1955 this nation has ranked first as a petroleum exporting country and second in pro. duction, accounting for 16 percent of the free world's output. This industry provides about 75 percent of all the government's revenue and 98 percent of the total requirements of foreign exchange. The government's revenues from petroleum provide a strong support throughout the country for public work projects and other developmental programs. The Venezuelan automobile market The phenomenal increase in the number of automobiles in use in Venezuela is shown in Table 51. Between 1948 and .1958 cars in use from all TABLE 51 VENEZUELA: AUTOMOBILE POPULATION AND NUMBER OF PERSONS TO A CAR 1938 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 Car population (inthousands) 18 46 51 57 7O 86 109 112 140 205 2‘22 213 Number of persons per carl90 96 88 80 71 58 48 49 40 28 27 29 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1939, 19494960). 66 . . These and other facts appearing in this paragraph are taken from U S. , Bureau of Foreign Commerce, WTIS, Basic Data on the Economy of figment, Part 1. No. 57458, August, 1959, p. 4. ‘ -130- sources rose from 46 thousand tniits to over 200 thousand units, making Venezuela the highest ranking nation in Latin America in the ratio of cars per capita. Yet this position does not really indicate that there is anything exceptional about the extent of car ownership in Venezuela: it merely sug- . gests that this country is relatively wealthy and the ratio of car ownership, is quite consistent with the level of its per capita income increase. (More about this relationship will be discussed later. ) Since Venezuela does not manufacture automobiles, the demand for automobiles is met from foreign sources. Table 52 gives the volume that l the Venezuela market has absorbed during the postwar years. The same table serves to show the importance of this market to North America (United States and Canada) and to the other major automobile producing countries. Throughout the postwar period (1948-58) Venezuela's automobile imports exceeded 250 thousand units, three-fourths of which came from the United States and Canada. It is fairly clear from Table 52 that most of the automobiles were imported during the second half of the period under review; conversely the North American share of the Venezuelan market showed a de- cline, reaching as low as 50 percent of market as compared to over 90 percent in the early years. It is obvious that the North American rivals penetrated the automobile market and increased their percentage shares in Venezuela. Venezuela, the top automobile market for North America, offered a great advantage over the other countries discussed. For one thing, this nation enjoyed a high purchasing power, and for another it did not have balance of payments difficulties. The problem with which the United States even yet - 131- TABLE 52 VENEZUELA'S AUTOMOBILE IMPORTS MARKET SHARES, BY COUNTRY OF ORIGIN U. S. 8: United West Total Canada France Italy Kingdom Germany number 1938 93. 6 0.1 n.a. n.a. 6. 3 3,302 1948 93.8 0.9 -- 5.2 -— 14,994 1949 92.1 1.9 0. 5 5.4 -- 16,009 1950 89.2 1.7 0.4 8.1 0. 5 17,053 1951 89.7 1.1 0.1 6.4 2.7 15,759 1952 91.1 1.4 0. 2 5.4 1.9 17,331 1953 88. 4 2. 2 0. 4 6. 7 2. 2 21,566 1954 87.5 1.8 1.0 5.3 4. 4 25,242 1955 87.3 2.0 1. 2 4.5 5.0 30, 932 1956 74. 9 3. 4 2. 9 6. 2 12. 7 24, 209 1957 69. 3 4.6 4. 4 6. 7 15.0 29,433 1958 49. 5 9.0 3. 7 12. 3 25.6 39,525 aGermany for 1938. n. a. : not available. Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1949-59). continues to be faced is not so much a restricted size of the automobile market (since the market has been expanding) as a declining share. In order to put in perspective the major developments in the automotive market, the preceding pattern will be followed in discussing the general setting within the framework of the Venezuelan economy. The Venezuelan economy Venezuela's national income more than doubled between 1950-58, -132- from approximately 7. 7 billion bolivars to 17. 6. Allowing for changes in the value of money, Venezuela's national income, at 1953 prices, rose from 8. 3 billion bolivars to 17. 1 during the same period (see Table 53). The adjusted TABLE 53 VENEZUELA: ADJUSTEDa NATIONAL INCOME, PER CAPITA INCOME AND THEIR INDEXES National Per capita Index (1953 = 100) income inCOme National Per capita (millions of bolivars) (in bolivars) income income 1950 8, 252 1, 796 81 92 1951 8, 692 1,743 85 90 1952 9, 715 1, 949 95 100 1953 10, 258 1,943 100 100 1954 11,411 2,098 111 108 1955 12,622 2, 252 123 116 1956 13, 530 2, 344 132 121 1957 15,931 2,682 155 138 1958 17,087 2, 785 167 144 aIncome deflated by the cost of living index in Venezuela (1953 = 100) 1:59 125; L52 25.3 E E 216 29$ :92 93 100 101 100 100 99 101 98 103 b One bolivar equals United States $0.. 30. Calculated from: International Financial Statistics, Washington, D. C: International Monetary Fund (several volumes); and United Nations, United Nations Statistical Yearbook, 1958, p. 452. income shows only a moderate change when compared with current income. This is explainable by the fact that the inflationary pressure so evident in other Latin American countries was missing in Venezuela. The cost of living ~133- index in Venezuela remained about constant during the period under study (see Footnote, Table 53). Table 53 also shows that the per capita income increased from 1, 796 bolivars in 1950 to 2, 785 bolivars in 1958. At the conversion rate of 3. 35 bolivars to one U. S. dollar, per capita income rose from $536 to $831 be- tween 1951-58. The difference between growth in national and per capita incomes reflects the fast rate of the population growth. The Venezuelan population is expanding at a rate of. . approximately 3. 66 percent annually, a rate of expansion much higher than the Latin American average, partly as a result of immigration. 67 In the absence of balance of payments difficulties, the level of demand for imports of automobiles is influenced to a degree by the rate of growth of the national income. A correlation analysis of adjusted per capita income of Venezuela with the imports of automobiles shows a fairly clear correlation between the two, a coefficient of 0.7650 for the period 1950-58 (the earliest year for which comparable data are available). 68 This correlation probably would have been higher had the distribution of income been less concentrated. 671bid., p. 1. 68The equation for correlation analysis in Venezuela is: NExy - (Ex) (By) V [max2 - (13:02:) Exisyz - (By)? Where r= correlation coefficient; x = per capita income (adjusted); y = auto- mobile imports; N = number of years covered 9 (124,748) - (1,007) (1,070) VI} (116,105) - (1,007)ETE(139,790) - (1,070fl r = = 0.7650 - 134- Although employment (46, 000 in 1958) in the petroleum industry is only about 2 percent of the total labor force, the higher wages69 it pays labor influences the wage standards in other sectors of the economy. Wage and salary payments of the oil and associated industries have stimulated activities in all fields. The favorable market conditions enjoyed by Venezuelan producers during the postwar period have been reflected in the sharp rise of their export sales. These undertakings have contributed to more efficient production in many industries and to the higher standard of living. Foreign trade On the trade front, Venezuelan exports more than doubled between 1948 and 1958 (see Table 54), with petroleum's share of the total exports remaining fairly constant. Imports have also increased though to a lesser degree than exports, thus improving the favorable trade business. Venezuela's trade is and has been predominantly with the United States. During the period 1950-58, the United States and Canada combined (the lagtter accounts for only a small percentage of their total) took between one-thi rd and two-fifths of Venezuela's exports by value. They have accounted for three-fifths to about three-fourths of Venezuela's imports. Table 55 shows Venezuela's trading position with the United States and Canada and the other trading areas. The trade pattern in Venezuela has remained fairly constant, although 6 9U. S. , Bureau of Foreign Commerce, Basic Data on the Economy of Venezuela, Part 1, No. 57—68, August, 1959, pp. 11-12. - 135- TABLE 54 VENEZUELA'S FOREIGN TRADE Total (millions of U. S. dollars) Petroleum as Terms f. o.b. c.i. f. Net percent of of trade exports imports balance total exports (1953 = 100) 1938 181 96 85 89a 80a 1948 1,040 727 313 96 80 1949 1,040 669 371 97 n. a. 1950 1, 161 537 624 97 102 1951 1, 353 642 711 96 90 1952 1, 552 722 830 95 95 1953 1, 518 739 779 94 100 1954 1, 698 820 878 94 106 1955 1,874 975 899 96 106 1956 2,118 1, 026 1,092 94 100 1957 2, 367 1, 668 699 92 108 1958 2, 319 1,428 891 91 107 a1937. n. a. : not available. Calculated from: Direction of International Trade, New York: Joint publication by the United Nations, International Monetary Fund, and Inter- national Bank for Reconstruction and Development, annual issue, Series T (several volumes); and International Financial Statistics, Washington, D. C. : International Monetary Fund (several volumes). the years under study indicate a trend toward increased exports to and de— creased imports from the United States and Canada. Increasing high earnings from foreign sales of oil, which have been strengthened in some years by the favorable terms of trade, have enabled the country to purchase more and more vital items from abroad. Venezuela, unlike most other Latin American coun— tries, had not been plagued with dollar shortage prior to 1959. On the contrary, -136- TABLE 55 VENEZUELA: PERCENTAGE DISTRIBUTION OF TRADE BY AREASa Exports 1950 1951 1952 1953 1954 1955 1956 1957 1958 U. S. and Canada 38 3 1 35 39 39 40 42 44 44 Latin America 3 6 1 1 10 7 8 9 10 1 1 Continental Europe - — - - 49 44 45 44 39 33 3 1 Sterling area 6 5 5 5 5 7 9 11 8 Rest of world — - 6 - — 2 4 2 2 2 5 Imports U. S. and Canada 72 72 73 71 66 63 62 66 60 Latin America 3 2 2 2 1 1 1 1 1 Continental Europe 1 3 1 4 1 5 1 7 2 1 2 3 24 22 26 Sterling area 7 7 8 8 7 7 8 6 7 Rest of world 5 5 2 4 5 5 4 4 5 aTotal may not add to 100 percent due to rounding. Compiled from: International Financial Statistics, Washington, D. C. : International Monetary Fund (several volumes). Venezuela's gold and foreign exchange position pointed to an unusually favor- able situation as seen in Table 56. In a country where there are ample gold and foreign exchange reserves, importers can freely choose to buy from sources of supply that are most advantageous. The Economic Survey of Latin America indicated a deficit of $390 million for 1958 in the Venezuelan balance of payments, as compared to a - 137 - TABLE 56 VENEZUELA: GOLD AND FOREIGN EXCHANGE RESERVESa AND RATIO OF RESERVES TO IMPORTS 1950 1951 1952 1953 1954 1955 1956 1957 1958 Millions of U. S. dollars 373 373 434 477 475 526 942 1,446 1,050 Ratio of reserves to imports 55.9 49.0 51.4 52.1 46.4 49.7 75.4 77.4 65.7 aReserves refer to gross assets in gold and foreign exchange and ex- clude liabilities, which are difficult to calculate and in many countries are negligible. Calculated from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). surplus of $414 and $495 million in the two preceding years. 70 Not only have the reserves declined considerably but also the reserve ratio suffered a setback in 1958 relative to 1956 and 1957, reflecting somewhat on the capacity to im- port. As a matter of fact imports during that year declined considerably; exports also declined moderately. During the Suez conflict European demand for Venezuelan oil in— creased because of the partial cutting-off of supplies from the Middle East. The increase in petroleum exports was reflected in its percentage share of the total export figures for 1956. Venezuela's total exports of crude petroleum and derivatives declined 7 0United Nations, Department of Economic and Social Affairs, Eco- nomic Commission for Latin America, Economic Survey of Latin America, 1958 (New York, 1959), p. 57. -138- in 1958. This decline was largely influenced by the intensification of voluntary restrictions on imports in the United States, which constitute Venezuela's big— gest single petroleum market. This falling off in exports was also partly attributable to the readjustment of Venezuela's production and exports to . . . . . . . 71 . prevailing conditions prior to the Suez crisis. At any rate, foreign exchange reserves were at a level believed by most international economists to be suf- ficient for a safe margin even though they were down considerably in 1958. National objectives Too much dependence on a major export item has its obvious dangers (as has been noted with coffee in Brazil) and these have apparently been borne in mind by Venezuelan officials. The government's policy for many years has been to diversify production of all types through plowing back the oil revenue into the economy. Its objective in part is to reduce the country's dependence upon petroleum for its national income. This is especially important when approximately 50 percent of national income is derived from exports, of which petroleum accounts for over 90 percent (see Table 57). As a part of this policy, the government has, in some cases, attempted to protect the products of local industry from foreign competition through high import duties or import restrictions. For example, rubber tires and inner tubes have carried import quotas which were changed periodically. 72 Protec— 71Ibid. , p. 37. 72 U. S. , Bureau of Foreign Commerce, Licensing and Exchange Controls-~Venezuela, Part 2, No. 59-83, November, 1959, p. 2. - 139- TABLE 57 VENEZUELA: RATIO OF EXPORT TO NATIONAL INCOME 1950 1951 1952 1953 1954 1955 1956 1957 1958 50.7 52.2 49.5 47.2 49.6 50.2 51.9 50.8 44.2 Calculated from: International Financial Statistics, Washington, D. C.: International Monetary Fund (several volumes). tion accorded domestic firms in Venezuela has been generally below that existing in other Latin American countries. Venezuelan import duties on noncompetitive items have been mostly moderate to nominal relative to those imposed by Argentina and Brazil. This country makes no distinction between dollar and nondollar imports in its import licensing, hence the Venezuelan market is generally very competitive. A prior license from the Ministry of Finance (Ministerio de Hacienda) is required, however, for the importation of partially assembled automobiles regardless of the kind of currency. The Venezuelan government has expressed its interest in developing manufacturing industries. Manufacturing employs about 10 percent of the country's total work force. There is still virtually no machinery manufactured in Venezuela. The only manufacturing operation of notable size is the building of bus and truck bodies, yet this is relatively small when compared to imports. Manufacturing in Venezuela has been handicapped by many factors 73Ibid., p. 1. -l40- including high costs, uncertain production of domestic raw materials, expen- sive transportation, power shortage in some areas, a limited market in . . 74 . Venezuela, and an inadequate supply of skilled labor. This has tended to make Venezuelan manufactured goods expensive to produce and hence difficult to market in foreign areas. Much of the progress that has been made in manu- facturing has been due to protective tariffs. About 40 percent of the gainfully employed population in Venezuela has been engaged in agriculture, including livestock raising, yet in many . . . . , . 75 areas output has been insuff1c1ent to meet the nation 5 requirements for food. The government has an active policy designed to promote agriculture as a means of diversifying the economy and lessening the dependence upon petro- leum industry. In recent years the policy has had effect and has resulted in a reduction in the amount of agricultural produce purchased from abroad. This country yet remains a long way from being self- sufficient in food. Highway network Highway transportation has become of great importance to Venezuela because of the inadequate railroad system. 76 The latter system is in poor condition and suffers from lack of integration. Its mileage in 1957 totalled only 590 miles, and the traffic flow from one part of the country to the other 74Meet Venezuela, Montreal, Canada: Mercantile Bank of Canada, 1956, p. 8. 75 . U. S. , Bureau of Foreign Commerce, op. cit. , Part 1, No. 57~68. 76 . . . - Much of the diSCUSSion in the next two paragraphs 18 taken from Ibid. -141- is restricted because the railroad lines are disconnected and operate on dif- ferent gauges. In the absence of adequate railroad systems, and the expansion of general economy, the highway network expanded as an important part of the government's developmental program. In January 1, 1959 Venezuela had some 20. 000 miles of roads, of which less than 4, 000 miles were paved as compared to less than 3, 000 miles in 1955. 77 The major portion of heavy freight moved on land is carried by truck transport. Regular truck and bus service is maintained between all important cities and towns of the country that are accessible by highways. In other words, among the Latin American countries, Venezuela has one of the most highly developed road networks, although by American standards it is still short of serving the requirements of this rapidly industrializing country. Implementation of national polig The increasingly high standard of living and the general expansion of Venezuelan economy have resulted in expanding car imports into the country. With an ample supply of dollars and other foreign currencies there are modest tariffs, but no restrictions on the importation of cars from any source and no differentiation in application by country. This means that in the Venezuelan market, automobiles from all producing countries compete on equal terms, and the market is a highly competitive one. This then is a case in which competition has played a role in the setback of the United States. 7 . 7Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation, 1959), p. 39. ~142— In an attempt to foster local indUStry the Venezuelan government has been legislating Since the early 1950's to favor the importation of auromobiles in unassembled form and of lighter weights. A schedule of import customs duties as a measure to implement this policy is shown in Table 58. TABLE 58 VENEZUELA: IMPORT CUSTOMS DUTIES ON AUTOMOBILES (1953) . . a Duties per kilogram Tariff NO. Designation of goods (in bolivars) 320 Automobiles with bodies, weighing: A up to 800 kilograms 0. 55 B. 800 _ 1,400 0.60 C. 1.400 ~ 1,600 0.80 D. 1.600 - 1,700 1.00 E. 1,700 ~ 2, 000 1. 40 F. More than 2, 000 kilograms 1. 60 G Completely unassembled, unpainted: 1. weighing assembled up to 1, 800 kilograms 0.001 2. weighing assembled 1, 800 — 2, 000 0.05 3. weighing assembled more than 2, 000 0. 10 dDuty is calculated on gross weight (excluding tires and tubes) but with a deduction of 20 percent from the duty when import packed in the usual reinforced wooden cases. Compiled from: Bulletin International Des Douanes. No. 30, ‘17th edition (Brussels: International Customs Tariffs Bureau. July 21, 1953), p. 42. It is eVIdent that this progressive custom duty favors the lighter automobiles while seriously handicapping the larger ones, especially those over 1, 700 kilograms. Since most United States cars fall in Tariff 320 C and over (only the conventional cars are in C) this duty clearly penalizes the -143—- American automobiles. Furthermore, import tariffs on unassembled automobiles, which are much lower than for assembled, encourage assembly. For that reason American automobile exporters find it profitable to assemble in Venezuela, while others are finding it beneficial to set up local manufacturing operations in that country. 78 A United States Foreign Service Dispatch from Caracas reports that there are two principal assembly plants in Venezuela, one operated by General Motors Corporation and one by Chrysler Corporation. III 1959, these tWO companies imported over 18 thousand automobiles of both assembled and CKD units. It is significant that 57 percent Of this total was in the CKD con~ dition for assembly in Venezuela. The total figures Include the European~made units of these manufacturers as well. 79 During 1959, Venezuela imported over 45 thousand cars from the major automobile producing countries; their respective percentage shares were as follow: United States (43 percent), West Germany (29 percent), United Kingdom (14 percent), France (14 percent), Italy (4 percent), and Canada (2 percent). Again in 1959 the United States showed a further decline 1n the market as compared to previous years. While more European cars are imported into Venezuela. the United States still retained 80 percent Of car 78‘1bid., 1958, p. 12. 7, ' 9United States Foreign Service Dispatch No. 96, Caracas to the Department Of State, Washington. D. C. , July 27. 1960. — 144— registration in that country. Taxes may also produce some adverse effect on the American position in the Venezuelan car market. According to United States Foreign Service Dispatch the government published an ordinance which provided for new taxes on automobiles, effective October 28, 1959. 81 The new tax was on a graduated weight basis. (See Table 59.) TABLE 59 VENEZUELA: ANNUAL TAXES ON AUTOMOBILES (1959) Weight of car Annual tax (in kilograms) (in bolivars) 40 - 1, 000 150 1,001 - 1,500 200 1,501 - 2,000 300 Above 2, 001 400 aOne bolivar equals approximately United States $0. 30. Compiled from: The United States Foreign Service Dispatch NO. 407, Caracas to the Department of State, Washington, D. C. , November 16, 1959. It can be seen from this table that the annual tax. increases sharply as the weight goes up. This tax undeniably discriminates against United States automobiles, since most American cars would disqualify for the first two ranges. Since this tax is paid annually, it has cumulative influence on the 80Global Automotive Market Survey and World MOtor Census (New York: McGraw-—Hill International Corporation, 1959), p. 39. 81 United States Foreign Service Dispatch No. 407, Caracas to the Department of State, Washington, D. C. , November 16, 1959. -145- sale of used United States cars. Furthermore, an ad valorem tax is levied on automobiles registered for the first time. This additional tax will be applied in the following manner (see Table 60). TABLE 60 VENEZUELA: TAX ON FIRST REGISTRATION OF AUTOMOBILES Value of automobile (in bolivars) Ad valorem tax A Not exceeding 7, 000 2 B 7,001 - 10,000 3 C 10,001 ~ 12, 500 4 D 12,501 - 15,000 5 E 15,001 - 20,000 6 1/2 F 20,001 - 25,000 10 G 25,001 ~ 30,000 15 H Above 30,000 20 Compiled from: Global Automotive Market Survey and World Motor Census (New York: MCGI3W"Hi11 International Corporation, 1959), p. 39. This ad valorem tax also falls more heavily on the higher valued American automobiles than on the smaller European cars, and raises the prices to levels severely curtailing sales competitiveness. Though Venezuela imposes various taxes on every automobile, these taxes as such really cannot be considered discriminatory since they are applied to all cars regardless of origin. However, when taxes are taken as a per- centage of a specific price, or progressive duty rates are levied on graduated weights, the amount of the tax and (11:7 definitely hinders the sale of higher- —146- priced and larger weight automobiles. Although Venezuelan importers with a plentiful supply of dollars and other currencies are free to select from either continent, certain governmental measures, as just mentioned, have permitted a considerable competition from Europeans to penetrate the Venezuelan car market. The European small car, lighter in weight and lower in price than its American counterpart, enjoys a favorable competitive position. Conclusion Three major factors-~import restrictions, lack of modification of American car design for the foreign market, and competition of foreign car producers--are seen to have been of prime significance in the decline of the Latin American market for United States automobiles. It may be safely assumed that, to the extent that the large Latin American countries studied represent the total Latin American picture as well as the foreign market in general, these factors constitute a generic explanation. CHAPTER IV SECONDARY FACTORS PERTAINING TO THE DECLINE OF UNITED STATES AUTOMOBILE EXPORTS Previous chapters indicated the primary reasons for the decline of American automobile exports to be: foreign exchange difficulties leading to trade restrictions, unsuitability of American cars (as to size, power and price) for the mass foreign market, and the effectiveness of competition of foreign producers. However, it is possible that, in addition to these basic factors, certain less clearly identifiable forces may have been at work to bring about the decline in foreign sales of American automobiles. These forces, by nature elusive and probably impossible to measure with exactitude may never- theless have been appreciable. Pricing, market and product development, design trends, dealership pattern, advertising and sales promotion, service, and credit practices all warrant some examination. Taken alone or in some combination, these variables do constitute a substantial part of the strategic and tactical operations of American automobile firms abroad. Unfortunately, these avenues to foreign market penetration do not lend themselves to precise research for at least three reasons. First, automobile manufacturers in the United States and abroad do not seem to compile compar- able data on such subjects. Ford Motor officials recognize the difficulty here -l47- — 148 - implied and have flatly stated that there is no possibility of getting worthwhile objective information from automotive firms; the U. S. Department of Commerce . l . . . holds the same View. Second, both American and foreign companies hold confidential the data on these strategic and tactical marketing efforts since their disclosure could weaken their respective competitive posmons. Third, if the data were available they would lack comparability, for market promotion programs are commonly used to serve the purpose of encouraging sales of more than just passenger cars. For example, parts and service outlets in Latin America generally are organized to meet the needs of cars as well as l . . 3 commerCial vehicles. The lack of real and comparable information does not seem sufficient grounds for their neglect. The influence of these marketing strategies and tactics, when combined with the effect of the major causes for the decline, may have been crucial. The automotive companies, both in the United States and abroad, consider these so-called secondary aspects of sufficient signifi- cance to spend much money, time, and effort on promotion and distribution. Pricing Price has meaning only when viewed against the nature of the product 1Statements of three officials of the firm made to the writer in an oral interview on July 21, 1961; Personal letter from U. S. Department of Commerce, August 9, 1961. 2Ibid. 3Global Automotive Market Survey and World Motor Census (New York: McGraw—Hill International Corporation, 1959), pp. 13. 17, 39. -l49- bought and sold. A comparison of American and European automobiles by selected specifications (power, price and performance) shows that the latter are half as heavy, two-thirds as expensive, half as demanding of gas, and one-fourth as powerful as the American (see Table 61). TABLE 61 A COMPARISON OF AMERICAN AND EUROPEAN AUTOMOBILES BY SELECTED SPECIFICATIONS (1957)a Average for Average European standard ten leading as percent Selected specifications Americanb EuropeansC of American Curb weight (lbs) 3, 564 1, 924 54 Price excluding purchase tax (U. 3. dollars) 2,217 1, 472d 66 Miles per U. S. gallone 19.3 37 192 Engine cubic capacity 4, 358 l, 185 27 Horsepower 171 42 25 Wheelbase (inches) 115 93 81 Number of cylinders 8 4 50 31957 is the latest year for which comparable data are available. bPlymouth V8 Belvedere and Ford Fairlane V8 Town Sedan. CConstituting 80 percent of 1957 production in categories up to 1, 600 c. c. , or one-fourth of total production in all categories (Motor Business, June, 1958, pp. 12, 14). Entry of American compacts into the market did not begin to be felt until 1960. This new factor is discussed later in this chapter. dPrices are converted to American dollars at the current rate. 6Mean of 30, 40 and 50 miles per hour steady speed (standard gas). Calculated from: "Current Cars Compared, " The Economist (London), October 19, 1957, pp. 12-13. -150- While fear is sometimes expressed that the United States is pricing itself out of the world market, it is noteworthy that the entry of our cars into many countries is limited by high tariffs, exchange controls and other trade barriers. At any rate, United States automobile exports have been encountering increased competition, which shows up in the substitution of West European exports for the American in third markets. Thus between 1948 and 1958 the United States share of automobile exports fell from 40 percent to 7 percent. In export marketing, unlike domestic, two prices must be considered: the amount asked in the exporter's currency, and the amount which must be paid in the importer’s currency. It is not unusual in international marketing for the price in terms of foreign exchange to be far more important than the price asked by the exporter. One illustration will perhaps suffice to give us the effect of pricing in foreign sales. The price characteristics of American automobiles at times would seem to restrict their entry into foreign markets and especially into those where trade barriers to American automobile exports are imposed. For example, Brazil's premiums for foreign exchange in late 1958, which were 200 and 300 cruzeiros to a dollar in the General and Special (nonessential) import categories respectively, were raised in early 1959 to about 280 and 400 cruzeiros for the two categories. Automobile imports changed periodically back and forth from Special to General classifications during the fifties. Re- gardless of which classification was applied, automobiles of American origin suffered because of their higher price. Table 62 contrasts the prices of standard American and European automobiles as sold new in Brazil. - 151 - TABLE 62 BRAZIL: CONTRASTING PRICE DATA FOR AMERICAN AND EUROPEAN AUTOMOBILES (l 957 - 58) Average standard Average leading American European Price (country of origin in U.. S. $) 2, 217 1, 472 Transport cost (est. 10% of price) 222 147 Total $ 2,439 $ 1, 619 Price in cruzeiros (85 cruzeiros per dollar) 207, 315 137, 615 Add 150% ad valorem duty (c. i. f.) 310, 973 206, 423 Total 519,288 344,038 Add 15% consumption tax on duty paid value 77, 893 51, 606 Add 5% surtax on c. i. f. value 10, 366 6, 881 Total dealer's price in cruzeiros 607, 547 402, 525 Calculated from: Chapter 111, Table 48; Chapter IV, Table 61; U. S. Bureau of Foreign Commerce, ”Statement of rates of import duty on automotive vehicles, Brazil, " Special release, May 27, 1958. It has been noted in Chapter III that American cars of heavier weight and higher price imported by Argentina, incur three times as high a surcharge as that applied to cars of European origin of lower weight. Likewise in Venezuela we have noted that tax rates on automobiles increase according to graduated weight. Such differential cost factors as these surcharges and progressive tax rates affect the American selling prices unfavorably. Tables 63 and 64 aptly show the disadvantage in price at which American automobiles are sold in Argentina and Venezuela. Used car prices are a good indicator of short-term prospects for the - 152- TABLE 63 ARGENTINA: CONTRASTING PRICE DATA FOR AMERICAN AND EUROPEAN AUTOMOBILES (1957-S8) Average standard Average leading American European Weight in pounds 3, 564 1, 924 Weight in kilograms 1, 616 873 Price (country of origin in U. S. $) 2,217 1,472 Transport cost (est. 10% of price) 222 147 Total 2,439 1,619 Price in pesos (40 pesos per dollar) 97, 560 64, 760 Add surcharges (based on weight)a 275, 000 80, 000 Total dealer's price in pesos 372, 560 144, 760 aSurcharges of 275 thousand pesos are applicable to automobiles between 1, 000 and 1. 500 kilograms in weight and not exceeding U. S. $2, 000; automobiles weighing over 1,500 kilograms and in excess of U. S. $2, 000 are prohibited. Calculated from: A communication between U. S. Department of Commerce, Bureau of Foreign Commerce, and its Detroit Field Office, March 7, 1956; Chapter IV, Table 61. sale of new automobiles. These prices are considered in relation to new car prices, inasmuch as the discounts on list prices asked for used cars are a measure of strength or wealqiess of a market for a Specific car. It should be borne in mind that consumers in any market, ceteris paribus, are influenced in their effective demand for new cars by the prices they can get for their old . . 4 automobiles. Used car prices for a "neutral" country, Sweden, are selected 4 A country permitting freedom of choice; see Chapter I, Table 13. - 153- TABLE 64 VENEZUELA: CONTRASTING PRICE DATA FOR AMERICAN AND EUROPEAN AUTOMOBILES (1957—58) Average standard Average leading American ~ European Weight in pounds 3, 564 1, 924 Weight in kilograms 1, 616 873 Price (country of origin in U. S. $) 2, 217 1, 473 Tran3port cost (est. 10% of price) 222 147 Total 2, 439 1, 619 Price in bolivares (3. 3 bolivares per dollar) 8, 049 5, 343 Add duty (based on weight) 1, 616 524 Total dealer's price in bolivares 9, 665 5, 867 Calculated from: Chapter III, Table 58; Chapter IV, Table 61. to serve our purpose in assessing car depreciation (see Table 65). Two significant features seemed to have bearing on the market for trading in cars. First, the annual rate of depreciation when trading in big cars was relatively greater than that incurred with small ones. At the end of one year, as much as 26 percent was lost on the list price of a larger car, and more than 40 percent after the third year, as compared to 20 percent and 30 percent for the small cars. Second, the heaviest fall in price appeared to be in the first year and declined at a slower rate in later years. In the immediate postwar period when automobiles, particularly popular models, were in short supply cars were traded in more frequently since trade-in values declined very slowly. However, when 30 percent and -154-= TABLE 65 PRICE DISCOUNT FOR AUTOMOBILES IN THE SWEDISH MARKET BY ENGINE CAPACITY GROUP Percent of list price (February 1956) 1955 .1954 1953 Models by c. c. (1 year old) (2 years old) (3 years old) Average 9 models (800 - 1. 200) 80. 3 77. 2 70. 8 Average 8 models (1, 200 - l, 500) 77. 9 74. 1 68.6 Average 8 models (2, 000 and over) 73.6 66. 2 58. 0 Compiled from: "The Swedish Market for Vehicles and Tractors, " Motor Business, No. 6, March, 1956, p. 29. 40 percent of total list price is lost, after the third year, for the smaller and the larger cars respectively, it becomes increasingly important to evaluate the cost advantages of different sizes of automobiles in addition to their initial price. Automobile owners were, and still are, more reluctant to replace their cars as frequently as in the immediate postwar years. 5 Fur— thermore, they are likely to retain their automobiles for at least three years after which time the discount on resale or ownership cost per mile declines. The above tendency did not hold in Latin America; however, it may become noticeable in Latin American countries when car supplies are in~ creased. In the case of Venezuela discussed earlier, for example, the annual tax which increases with heavier cars most likely did penalize the American cars, thereby discouraging the used car market. 5 Personal letter from U. S. Department of Commerce, August 9, 1961. -155- These and other measures, discussed in earlier chapters, which place an undue handicap on the larger, expensive, and more powerful American automobiles appear to have had a detrimental effect on United States exports. United States automobile exporters have reported continued declines from the immediate postwar period, a time at which they enjoyed with the United Kingdom a virtually duopolistic position in world markets. It was during this period also that American automobile producers failed to recognize the revival and resur~ gence of foreign competition particularly that of West Germany. Revitalized competition There has been a tendency, especially in the postwar period, for American automobile manufacturers to locate and expand their productive facilities inside foreign countries to take advantage not only of the increased demand, but also of the lower cost complex. Such a course of action helps the American exporter to mitigate the negative effect of the high price of his automobile--which of course proceeds in many cases from trade barriers as well as from high unit labor costs6 and high material outlays at home. By setting up capital equipment, manufacturing plants and assembly facilities through their foreign subsidiaries, the American manufacturers attempt to assure their market. The prospects of sharing in the growing world automobile markets by exporting capital goods necessary to make cars depend, however, upon the ability of the American to meet their European counterparts 6U. S. Senate, Committee on Commerce, The United States and World Trade ~ Challenges and Opportunities, 87th Cong. , lst Sess. , 1961, Report No. 446, p. 116. -156- in these markets. Western Europe has experienced a substantial rise in automobile out- put. Modern production methods, including automation, have been introduced on a large scale. Returning from a tour of Europe in 1958, Mr. Ernest Breech, then Chairman of the Board of the Ford Motor Company, said: "Europeans have a great awareness today of the economies of scale, and they are fast integrating much of their heavy industry. Scarcely a day passes that you do not hear of new mergers, new joining of once small, high cost companies into bigger and more viable units. "7 Mr. Breech also indicated that the European countries were investing their accumulated capital in improved plant and equipment. Further- more, he pointed out that the "old tradition" of high cost, low volume, cartelized production and pricing has been largely overcome. In short, major automobile producing countries were seen to be shifting to manufacturing and marketing methods to produce high volume low cost automobiles. Traditionally, American automobile industry (despite its higher wages) has been able to compete with European manufacturers because of its superior plant, large capital investment, economies of scale and improved managerial methods. With the European developments cited above, the United States has partly lost this competitive advantage. 8 This brings up another important question as to how significant are 7Ernest R. Breech, A New Challenge from the Old World, an address delivered at the annual Pittsburgh Chamber of Commerce Division in the Penn-Sheraton Hotel, Pittsburgh, on December 1, 1958, p. 2. 8Ibid., p. 4. ~157- prices in making purchasing decisions? In international as well as in domestic markets price can become important if there is a substantial price differential between the two sources of supply. Otherwise there may be other factors more important than price. Sales successes have not been in the cheapest cars nor have they always been in those automobiles which offer the largest size, or the highest power for the price asked. 9 It is evident from what has been discussed that the ability to widen the market share depends more on having the right kind of automobiles, with ample push behind them than on establishing a price level below the major competitors. The limited domestic market for most European automobile producers has indeed made it vital for the industry to export so as to reduce unit costs. This cost reduction was the result both of heavy capital investment and integration of production, as discussed in Chapters I and II. Although the inability to secure internal company data does not permit a complete analysis, it may be deduced that even with the increase in exports the automobile manu- facturers would not have been able to keep their costs competitive had they not concentrated on producing as few models as possible and continuing their production over a relatively long period. This concentration in Europe on fewer models of cars is likely to prove of increasing importance as competition increases. 9United Nations, Secretariat of the Economic Commission for Europe, Economic Survey of Europe in 1960 (Geneva, 1961), pp. 19-20. —158- Market and Product Development The policy of making few models (as referred to in Chapter II) was adopted especially by West Germany, France, Italy and Sweden in the mid 1950's. Some of the manufacturers who complied with such a policy have enjoyed considerable success over the years. Volkswagen, for instance, the most popular European car, has its basic design virtually unchanged since the war, so that the company must have amortized its original tooling costs several times over and accumulated substantial reserves. 10 In the United States, on the other hand, car designs change almost every year in order to stimulate consumer replacement demand and, in a measure at least, to satisfy the American urge for improved quality and different product. Needless to say, millions of dollars are allocated for the cost of designing and tooling up for a new model change. For example, Chrysler spent $163 million for special tools, dies, jigs and fixtures in 1959, nearly double the 1958 figure. 11 Furthermore, European automobile manufacturers have become manifestly interested in developing exports as well as in diversifying the markets for well over one-third of their total combined production goes abroad (as shown in Chapters I and II). Too much reliance on the home mar- ket would make the industry vulnerable in case of sharp seasonal fluctuations 10,, . . . An Assessment of German Competition, " Motor Busmess, No. 4, September, 1958, p. 8. 11"Vehicle Maker $ Signs Record Another 'Comeback' Year in 1959, " Ward's 1960 Automotive Yearbook (Detroit: Ward's Automotive, May 9, 1960), p. 85. - 159- in domestic demand. Also it is vitally important for the industry to diversify its export markets as a way of offsetting a sudden downturn in one single market. It is noteworthy that the United States has been relying heavily on a relatively unstable foreign market; it has been exporting to the Western Hemisphere between two-fifths and two-thirds of its total car exports, usually around three-fifths. 0n the other hand its share in Europe, the most expansive automobile market, has been less than one-fifth and declining (see Table 66). TABLE 66 UNITED STATES AUTOMOBILE EXPORTS AND THEIR COMPOSITION BY AREA OF DESTINATION Total actual Western West number Hemisphere Europe Asia Africa Oceania (000) (percent) (percent) (percent) (percent) (percent) 1938 162 33.7 28.7 8.3 17.6 11.6 1948 218 40.8 19.9 10. 6 27.7 1.0 1949 140 43.0 26.6 12. 9 16.7 0. 7 1950 120 55.8 27.2 7. 6 8. 6 0. 9 1951 217 60.1 20. 9 10. O 7. 9 1. 0 1952 141 62. 6 26. 5 9. 6 7. 7 0. 7 1953 154 59. 9 20. 8 10. 7 8. 0 0. 6 1954 173 53. 5 26.7 9. 9 8. 9 0. 9 1955 212 51.2 24.8 11.1 11.7 1.1 1956 175 57. 4 19.4 11. 3 11. 4 0.6 1957 142 59. 9 l6. 4 10. 8 12.4 0. 6 1958 122 63.7 14.6 9.4 11. 5 O. 9 1959 104 67.1 15.1 9.0 7.9 0.8 Calculated from: The Motor Industry of Great Britain (London: The Society of Motor Manufacturers and Traders, Limited, 1956-1959). ~160- Since the mid 1950's, world markets for automobiles have been de- veloped and strengthened by establishing manufacturing or assembly facilities in potential markets. Another method which the Europeans have followed in developing markets has been the commercial agreements with rival manufac- turers. Two examples may suffice. In 1960, Renault and Alfa Romeo, for example, have concluded a commercial agreement to sell each others' products in their respective countries; Simca and Fiat made a similar arrangement in the same year. Furthermore, Renault and Simca have been strengthening their distribution system considerably, the latter making in 1960 an agreement with Krupp for the sale of Simca cars in Germany. 12 The Swedish manufacturers have also taken the initiative in expanding their export sales by means of commercial agreements. In the last decade, quota restrictions were used to limit the automobile imports in Norway. In order to expand their market, Volvo and Saab manufacturers concluded an agreement with the Norwegian authorities to increase their automobile quota in exchange for specified quantities of components from Norwegian manufac- 13 turers. Product de Sign trends Up until the latter part of 1958, the design trends of the American automobile seemed to be on the basis of the bigger the better. Beginning in 12 "The French Motor Industry, " Motor Busines_s_, No. 22, April, 1960, p. 23. 13,, . . The Swedish Motor Industry, " Motor Busmess, No. 14, March, 1958, p. 6. ~161- 1955 the size of the American automobiles increased every year--new cars were getting longer, wider, heavier, albeit lower. The increase in car size necessitated more horsepower (BHP), which in turn called for enlarged engines, adding more weight, requiring heavier chassis, etc. (see Table 67). TABLE 67 TRENDS OF U. S. AUTOMOBILES BY WEIGHT AND POWER Average Average weight Average engine capacity (lbs. ) BHP (c. c.) 1946 - 50 3,300 110 4,100 1955 3, 400 170 4, 500 1956 3, 400 210 4, 900 1957 3, 500 230 5,000 1958 3, 600 260 5, 300 1959 n. a. 250 5,400 n. a. : not available. Compiled from: "The United States Passenger Car Industry, " m Business, No. 21, December, 1959, p. 36. It is apparent from this table that the power increase seems to have reversed itself in 1959. This was partly the result of an agreement by the automobile manufacturers, in the interest of promoting highway safety, not to use engine power as an advertising theme. These powerful models were incompatible with the inadequate state of streets and roads in Latin American countries and in other areas of the world. During the fourth quarter of 1958 the Rambler American and the -l62- Studebaker Lark experienced a considerable success as compared to the previous quarters. In fact in 1959 Rambler's output was over 400 thousand units, nearly double the 1958 level; Studebaker's output exceeded 150 thousand units in 1959, three times the 1958 level. 14 In addition, the United States witnessed a substantial increase in imports of small foreign automobiles, taking 8 percent of total car registrations in that year and rising to 11 percent in 1959. 15 This market penetration led the big three and other American automobile manufacturers to reevaluate their sales, make intensive studies and focus attention on new car design; the result was the wholesale introduction of the compact cars in 1959. Thus the United States has at least protected its home market, as reflected in the drop of car imports. By 1960 less than 7 percent of total American car registrations were imports, a decline from 11 percent experien- ced in 1959.16 Most of the ”economy compacts" are lighter in weight and lower in price than the conventional American cars, 17 hence they would qualify for lower tariffs, surcharges, and local taxes referred to earlier in Chapter III. Ward's in 1960, after witnessing a 58 percent increase in the export of 4 1 "United States Passenger Car Production, " Ward's 1960 Automotive Yearbook, op. cit., pp. 55-57. 15 Calculated from: Automobile Facts and Figures (Detroit: Automobile Manufacturers Association, 1961)," pp. 5, 16. 16 . . TIE. , estimated on ten month basis. 17 "The Economy Compacts. " Consumer Reports, March, 1961, pp. 148-49. ~163- Ramblers between 1958 and 1959, anticipated an overall increase in the export of this type of automobile not only to Latin American countries, but also to other world markets. 18 Motor Business, for example, suggests that the greatest opportunity for development of exports is likely to come from the compact cars which could be priced to compete with most other automobile producing countries. 19 For over half a century all but a fractional percentage of the world's automobiles have been of a basic design. The engine has been at the front, driving through a gear box located near the feet of the driver, and thence by a propeller shaft to the back axle carrying the driving wheel. The Volkswagen achieved a revolutionary departure in design. A number of original features are found throughout: the suspension, the type of'engine, and, above all, its location at the rear of the car. 20 The design of the Volkswagen has proved one of the success stories of the automobile industry. West Germany has been competing on every mar- ket since the end of World War II, and has outstripped all but its American rivals. Because of European competition in their best Latin American markets, l8"Vehicle Maker $ Signs Record Another 'Comeback' Year in 1959, ” Ward's 1960 Automotive Yearbook, Op. cit. , p. 92; and "Compact's Impact Detailed, " Automotive News, Detroit: April 24, 1961, p. 2.. 19 "The United States Passenger Car Industry, " Motor Business, No. 21, December, 1959, p. 39. 20,, _ The Small Car In Europe, " Motor Busmess, No. 4, September, 1955, p. 15. . - 164- the United States automobile makers were forced in the last half of the 1950's to reappraise the situation. Marketing and promotion methods Marketing methods and sales promotion efforts of the major car producing countries come first under scrutiny. Since West Germany's cars, especially the Volkswagen, are largely responsible for capturing the export trade, it is worthwhile to examine their promotion methods. Against this success it is interesting to measure the performances of other rivals in automobile exports. Dealership Pattern Starting from zero after World War 11, West Germany tried to recap- ture export markets. As its productive capacity increased, reentry into foreign markets was facilitated by new distributive networks. Today Germany has by far the largest number of dealers, mostly for Volkswagen. In the United States alone during 1957, Volkswagen had 350 dealers of whom two~ thirds had exclusive dealerships. All of them stocked a full range of parts and special tools, and maintained trained mechanics. 21 This policy has been followed throughout West Germany's major automobile markets. 22 There is no complete breakdown for car and truck dealers in the 21 "The Market in the United States for European Cars, " Motor Business, No. 13, December, 1957, p. 27. 22 "An Assessment. of German Competition, " Motor Business, No. 4, September, 1955, p. 6. ~165- selected Latin American countries to help us evaluate the dealership patterns. Nevertheless, as of January 1, 1959, there were in Argentina 1,400 car and truck dealers of whom I, 350 were handling American products. Many of these dealers handled multiple makes. While there are no data available for Brazil, Venezuela had on the same date at least 300 car and truck dealers, of which 190 were handling American motor vehicles. 23 Since these outlets handled multiple makes and many models, the dealers may have promoted the fast moving makes and models such as the small European cars, which were gaining wide popularity. Dealer cooperation is inculcated by the European car manufacturers who go to a great deal of trouble to develop their Social contacts with their respective dealers, aiding them in all sorts of practical 24 ways. Advertising and Sales Promotion Since no reliable figures on advertising are available, it is difficult to be precise about how much effort the American businessmen have devoted to foreign advertising and sales promotion for their cars in the selected Latin American countries. Nevertheless, all types of modern advertising media seem to be used--television, radio, magazines, newspapers, illuminated signs, car cards, and billboards. In Argentina and Brazil there are several hundred advertising agencies, among them branches of several important 23Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation, 1959), pp. 13, 17, 39. 24,, . . , . An Assessment of German Competition, ' op. Ci_t_. , p. 9. -l66- American concerns, all using the major cities as the center of activity. It must be noted, however, that only in the past few years have similar agencies been in operation in Venezuela. 25 Americans have been utilizing many types of advertising media to secure car sales in Latin American markets, especially when branches of American concerns are there at hand. Yet, the question does not appear to be one of volume or media but rather of failing to understand the mores and motivation of the people of the countries under study. A prerequisite for creative marketing in a given country is the under- standing of human behavior and motivation. The automobile has a different significance in different countries, depending on the standard of living, types of roads, extent of travel and recreation and other influences. Because of basic differences in each country, an advertisement cannot be directed effectively to all Latin American markets with the same emphasis. The new American approach for the development of an advertising and sales campaign in Latin America was to appeal to nationalism. Faced with increasing competition from European automobile manufacturers, Kaiser of Argentina in 1960 mounted stickers on the rear window of each car, reading . . , . 26 . . in Spamsh 'one more-—yes, Argentina. " This same local promotion was 25U. S. , Bureau of Foreign Commerce, WTIS, Basic Data on the Economy of Argentina, Part 1, No. 58-73, November, 1958, p. 19; Basic Data on the Economy of Brazil, Part 1, No. 58-87, December, 1958, p. 20; Basic Data on the Economy of Venezuela, Part 1, No. 59-68, August, 1959, p. 16. 26”What U. S. Companies are Doing Abroad, " ULS. News and World Report, November 7, 1960, p. 102. ~167— introduced by Kaiser during the same year into other Latin American countries, and now is being followed by others. While advertising may have been important, other promotional tech- niques have been introduced. Perhaps the most striking innovation to promote sales was the 1958 insurance scheme introduced by Swedish Volvo and still in effect. Under this scheme (which applies only to the home market so far), the Volvo car carries with it a five-year accident insurance policy free of charge. This guarantee covers all accidental damages beyond Kr. 300 and is payable by Volvo Company to the owner of the automobile. In order to reimburse the cost, the company sets aside an equivalent of $100 per car in a special fund. If the automobile is sold the insurance is transferred too. 27 This of course not only enhances the second-hand value of the automobile, but also keeps the model in production longer. Moreover, sales techniques can be questioned. An article entitled "Is the U. S. Being Priced Out of World Markets?" indicates that American firms commonly wait for foreign customers to come to them, instead of training their salesmen well enough before sending them out to secure sales orders. 28 As a possible reflection of a previous lassitude in the area of foreign advertising, American automobile firms are now increasing their . . . . . . . 29 expenditures on advertismg campaigns in foreign markets. 27"The Swedish Motor Industry, " _M_otor Business, No. 14, March, 1958, PP. 5—6. 28Laurence Dowd, "Is the U. S. Being Priced Out of World Markets?" in Richard M. Hill, editor, Marketing Concepts in Changing Times (Chicago: American Marketing Association, 1960), p. 185. 2 9An oral interview with Ford officials on July 21, 1961 ~168- Service and Spare Parts Availability In the immediate postwar period, when demand was far in excess of supply, many dealers (in world markets including Latin American countries') entered the car business for a quick profit, and thus service was subordinated to sales. With the growing competition, the German manufacturers, led by Volkswagen, introduced their new distribution policy of' "service before sales, "30 thus insuring spare parts availability and extending servicing , facilities. This practice gave the German automobile industry a fine repu~ tation with foreign buyers since customers Were interested not only in purchasing a suitable car, but in ease of maintenance. An automobile buyer in the United States will scarcely place an order with a dealer who does not maintain a stock of spare parts and render the required services. Servicing and stock availability are even more important in foreign markets. Not infrequently, when repairs or replace- ments are needed, the necessary parts are shipped from the United States or other manufacturing sources, resulting in a long delay. " . . . the surcharge rates on parts are so extremely high it is impossible for the dealer to maintain too large a supply. "31 There are several thousand motor vehicle fuel outlets in existence in these countries. Table 68 shows the number of fuel outlets, the nature of their functions, and the degree to which they sell parts or perform services. It can 30 . "The German Motor Industry, " Motor Business, No. 12, September, 1957, p. 14. 31 Personal letter from U. S.‘ Department of Commerce, August 9, 1961. ~169- be clearly seen that Venezuela has the smallest number of fuel outlets. Although limited in its outlets, Venezuela enjoys extenswe services and repairs. TABLE 68 MOTOR VEHICLE FUEL OUTLETS IN ARGENTINA, BRAZIL, VENEZUELA (1959) Argentina Brazil Venezuela Number of outlets 16, 500 18, 900 1, 425 Percent which sell: no parts or accessories 10 18 10 limited parts and accessories 60 52 70 extensive parts and accessories 30 30 20 Percent which perform: no service or repairs 50 15 (45) limited service and/ or repairs 40 65 ( ) extensive service and/ or repairs 10 20 55 Compiled from: Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation, 1959), pp. 13, 17. Credit and Installment Practices Credit is an ever~present problem in international marketing. An exporting firm has to view credit extension in a somewhat different light than in a domestic market. The importer's credit status is affected by his country’s entire financial, political, and economic situation. At the outset, it is well to emphasize that the influence of these conditions varies from country to country. Generally in Argentina as well as in Brazil much of the United States credit was extended on a documentary draft basis, or on an open—account credit - 170 in the case of long~established relationships. With the progressive decline of gold and foreign exchange reserves in Argentina late in 1957, the United States traders came to place heavy reliance on irrevocable letters of credit, a practice still followed extensively. 32 Furthermore, Americans traditionally insisted upon quoting prices to foreign buyers in dollars and usually required payments in dollars too. Argentine dealers also extend credit in the local market. It is true that dealer sales are usually transacted on a strictly cash base because of the possible difficulty in recovery. But the use of installment selling of‘local manufactured goods is not uncommon; in the last few years, several finance companies in Argentina have been established to underwrite such sales. For example, a finance company was established in February 1960, for the purpose of making low cost credit available for the purchase of automobiles built by Industria Kaiser Argentina (IKA). The company was formed under the auspices of IKA, which is building jeeps and three passenger cars~~the Carabela, the Renault Dauphine, and the Bergantin. 33 Domestic sales of parts and accessories on the installment plan were usual in Brazil as early as 1958. In fact, it is not unusual to see . . . 34 . advertisements featuring installment payments. Despite steady and 32U. S., Bureau of Foreign Commerce, WTIS, Basic Data on____ the Economy of Argntina, Part1, No. 58- 73, November, 1958, p. 20. 3 3Automotive Market Report (Pittsburgh: Automotive Publishing, Inc., February 29, 1960), p. 4. 34 U. S. Bureau of Foreign Commerce, WTIS, Basic Data on the Econom_y__ of B_ra211, Part I, No. 58- 87, December, 1958, p. 20. ~171- considerable increases in means of payment, there are significant protests against the inadequate credit. Dr. Gar01a Filho, president of Motor Vehicle Manufacturers of the State of Sao Paulo, indicated in 1960 that one of the major problems facing the automotive industry is the lack of adequate credit to finance sales of cars to the public. 35 He pointed out that all nations have systems for financing the sale of durable goods to consumers. Now that the national auto industry produces its own automobiles in large volume, moderate financing of sales should not be considered unreasonable. According to Dr. Filho, the govern- ment was studying measures to increase sales of automobiles in the future. By 1959 the United States firms selling in Venezuela usually were using widely time drafts ranging from 30 to 90 days. However, well—established Venezuelan firms ordinarily receive open-account credit from their American suppliers. 36 Venezuela has had ample gold and foreign exchange reserves, hence its credit Standing in the past has been relatively high in contrast to that of Argentina and Brazil. Consequently, the letter of credit seldom is used since it implies some doubt as to the credit rating of the importers. Facflities for commercial credit are provided either by local banks or by firms directly concerned in installment sales. Several firms special- izing in automobile financing began operating in the mid~fifties. One such 3 5The United States Foreign Service Dispatch No. 406, Sao Paulo, Brazil to the Department of State, Washington, D. C. , May 6, 1960. 36U. S. , Bureau of Foreign Commerce, WTIS, Basic Data_on tlfi Economy of Venezuela, Part 1, No. S9~68, August, 1959, p. 16. .. 172- finance company, ”Venezolana de Financiamiento, S.A. " (VEFISA), was ' l formed in 1956 by American and Canadian private capital to help in financing ' services in Venezuela. VEF ISA, which initially engaged in financing automobile , dealers, later included in its seIVices handling of installment sales and credit . 37 extensmn for wholesale purchases. During the latter part of 1958, installment terms for automobiles ranged from 20 to 24 months by almost all dealers, with some offering as many as 30 months. In December of 1958, Venezuela enacted a new statute to govern installment selling. Under this statute, the right of car ownership sold on installment credit terms remains with the seller until the final instal- . 38 . . , . . lment IS made. It is conceivable that such a statute could discourage their trading in used cars since car ownership cannot be transferred until the payments on the automobile are fully covered. The success of West German car manufacturers in the export market is frequently ascribed to their extended credit: terms. However, it is true that liberal credit policy has also forced retrenchment on the German car makers, in South America. Nonetheless, their credit terms were noticeably 39 longer and more reasonable than in the case of British or American firms. West Germany saw fit to offer liberal credit terms. Most European 37 Global Automotive Market Survey and World Motor Census (New York: McGraw~Hill International Corporation, 1956), p. 21. 3 8U. S. , Bureau of Foreign Commerce, WTIS, Basic Data on the Economy of Venezuela, Part 1, No. 59-68, August, 1959, pp. 16—17. 39, , . 'An Assessment of German Competition, " Motor Business, No. 4, September, 1955, pp. 67. ' "T ”— ~173- automobile producers who Were engaged directly in international marketing granted credit in many instances. United States exporters may not have used credit extension as much as they might have done in competing for foreign markets. The reason would seem to be that their foreign business constituted a much less important share of their total output than did the foreign markets of the major European car producers. Latin‘American Consumer Buying Habits and Motives There are considerable differences in the extent of car ownership and buying habits in various parts of the countries in question. In Brazil, for instance, the major cities or densely populated states which comprised only 17 percent of the land area and 57 percent of the population in 1957, had 88 percent of the Brazilian automobiles in use during that year. Automobiles are kept for a few years as elsewhere in the world and then sold to groups less able to buy new cars. At any rate, cars are kept in use for a longer time than in the United States. In Argentina, for example, over 40 percent of automobiles in use in 1958 were over 20 years old. In the absence of reliably-kept records on scrappage rates, or lack of access to such records as may exist, it is difficult to assess the automobile life. There are at least three factors that can reflect on car scrappage rate—«economic conditions, automobile mileage, and dura- bility. It is beyond the scope of this thesis to do more than glance at the effects of changing economic conditions in automobile ownership and operation in the selected Latin American countries. -174- There was, as early as 1957, a tendency to increase fleet cars; a case in point is Argentina‘s taxi fleet which increased from 7,000 to 10, 000 units as a result of the abolition of the law against cars for hire. 40 Fleet cars in Argentina tend to be used for a long period. Furthermore, the prolongation in use of a large percentage of prewar cars can be partly explained by the fact that it was not until recent years that the supply of cars caught up with the demand, though still short in some areas. By this time the rise in prices and built-in restrictive measures such as tariffs, exchange premiums, and local taxes opened a large gap between the value of old cars and new ones. Many potential buyers could not find the necessary capital to purchase a new car, but have been able to pay the lower price for a used or a small car. The manufacture and export of the small cars helped extend the automobile market to countries of moderate income and thus stimulated the mass demand for cheaper, more economical cars which were made available in the early fifties. What might not have been an economical proposition to buy expensive, large American cars immediately after the war, may have become so later. 41 It has been noted that, as late as January 1959, automobiles in use in the Latin American countries discussed were largely of American origin. However, as the European rivals were making inroads in these countries, the 40Global Automotive Market Survey and World Motor Census (New York: McGraw-Hill International Corporation, 1957), p. 11. 41 "The Replacement Demand for Automotive Products, " Motor Business, No. 17, December, 1958, p. 19. -l75- American proportion of automobile population was on the decline. In any event, the market shares of the different countries do not directly reflect consumer preferences, since import restrictions on American cars distort the freedom of choice. Evolution of Trade in American Automobiles--A Practical Strategy American automobile manufacturers: awakening awareness of foreign markets The compact car, the newcomer in the American market, is an indication of the effect of trade upon the evolution of the automobile. The American automobile exporters, on the defensive in recent years, now are moving back to the offensive both in the United States and abroad. United States compact automobiles have checked drastically the invasion of the American market by small foreign cars. As we have seen earlier, from a record sales of 670 thousand automobiles in 1959, American imports dropped to some 450 thousand units in 1960. The European car pro- ducers are showing real concern about this setback, for the American market is one of their largest. This is evidenced by the fact that many European automobile firms cut down their production, reduced their work week, and laid off workers. It has been indicated that the American subsidiaries abroad have been particularly hurt in sales to the United States. On the other hand, Volkswagen retained its sales volume. All Europe's car makers are now . . . 42 reappraismg their future prospects. 42 United Nations, op. cit. , pp. 17-18. -l76- The sales increase enjoyed by the United States is apparently due to the introduction of the compact cars. Today there are 14 American com- pacts, of these five are economy compacts (Corvair 700, Falcon, Lark 6 ‘ Regal, Rambler American Super, Valiant V—200) and the remaining nine are luxury compacts (Buick Special DeLuxe, Comet, Lancer 770, Lark V-8, Oldsmobile F-85 Deluxe, Rambler Classic V-8, Rambler Classic 6 Super, Tempest 4, and Tempest V-8). The Rambler Classic 6 model is the current version of the car which, more than any other, sparked the recent phases of the compact car revolution. 43 The American compact, as pointed out by Ward's in 1960, has been designed primarily for the domestic market to meet the challenge of European car makers. Whether or not the American designer also had in mind foreign markets, his creation of American versions of the compact car was followed by an increase in American exports of automobiles. 44 Nevertheless, the United States manufacturers, at least since 1960, seem to be moving aggressively with their compacts to capture the rapidly 43Consumer Reports gives a useful definition of the classifications in substantially these terms: An economy compact is a car suitable for all-around family use in which relatively low initial price, mechanical simplicity—-usually involving a manual transmission—--and economy of operation combine to keep down ownership costs. A luxury compact is likely to be more completely equipped. The car may have automatic transmission and power steering, it may be a V~8; and though it should conform to the compact car concept of small overall size, advantageous operating economy, and easy maneuverability, it may even cost as much, or more, to buy than a full-size car. As taken from "Compact Cars, " Consumer Reports, March, 1961, pp. 114, 145, 148, 149. 44 ”Vehicle 35 Signs Record Another 'Comeback' Year in 1959, " Ward's 1960 Automotive Yearbook, op. cit. , p. 69; and Automotive News, op. cit. ~177- expanding automobile markets abroad. However, it may be assumed that competition for car markets abroad will become more rigorous. In order to compensate for lost sales in the United States, automobile manufacturers abroad may find it necessary to push harder in other parts of the world where continued growth is expected. Wich much of Europe enjoying unprecedented prosperity, it is the main target for all car exporters. Britain, for‘instance, may be influenced to try to expand its car sales in its Commonwealth as well as in its traditional markets; France, to Latin America, the Middle East, and the British Commonwealth; and West Germany, to Europe and elsewhere. 45 American compacts are all increasing in Western Europe's market, especially in higher income countries such as Switzerland and Sweden. 46 But the compact car is still much larger and more expensive (see Footnote 43) than the small car that dominates the mass market abroad and Europe in particular, and so competition in world's car markets is still difficult. Both Ford and General Motors considered the idea of making a small car at the end of World War II and discarded it. Postwar experience of other manufacturers tends to reinforce their view. Volkswagen, in a reverse instance, after buying a new plant in New Jersey to make its small cars, discovered that the manufacturing costs in the United States would be too 4’5"French Sag in U. S. Auto Market, " Business Week, October 15, 1960, pp. 134, 136; and United Nations, Economic Survey of Europe in 1960, p. 20. 46"Europe's 61 Cars in a First Look, " U. S. News and World Report, October 31, 1960, p. 94. —l78- high, considering the size of the car market. 47 In the United States as well as in other major car producing countries, each firm attempts to maximize the degree of standardization between the parts of its various models. Because of its economic importance, this standardization is extended even to other firms, which may buy parts from independent produ- cers. This point was discussed earlier and emphasized in the case of the United Kingdom's numerous models. Since the manufacture of the small car departs measurably from that of existing models, it would probably entail new assembly lines and thus con- struction of a new plant. The costs of designing and tooling up for a new small car are considerable. It has been estimated that tooling costs in the United States, as early as 1957, for a completely new engine ran about $50 million; total tooling costs for a small car approximated $250 million. 48 With such a large investment by American producers, it is unlikely that the price for an American manufactured small car (of the Volkswagen type) would be competi- tive with the ones imported into the United States. To embark on such an expensive venture Would necessitate a large volume of production to offset the cost differential. In any event, if a decision is made to start production of a small car in the United States, it is likely that parts such as transmissions and engines, which involve high labor cost, would initially be imported from Europe. Manufacturing activities and the assembly operations in the Latin 47"How U. S. Auto Makers View Small~Car Market, " U. S. News and World Report, May 3, 1957, p. 35. ' 4[8"The Market in the United States forvEuropean Cars, " Motor Business, No. 13, December, 1957, p. 32. - 179 - American countries discussed is another possibility to capture more sales. But it will take time before these areas can develop into adequate substitutes for a car market potential such as the one which formerly existed in the United States. With this cost disadvantage in home production, quota restrictions, currency dislocation and other trade barriers in foreign markets, the American automobile producers were left with no recourse but to expand and modernize their overseas manufacturing and assembly facilities in order to participate in the growing market for foreign-source automobiles. As has been noted earlier, continuing development of these facilities in overseas countries has enabled the American car manufacturers abroad to increase their total business despite the decline in the American export share of the overseas market. Automobiles manufactured by American foreign operations, like most foreign-built automobiles, have been smaller than those produced in the United States. These automobiles found acceptance not only in their domestic mar- kets but also in other areas throughout the free world. 49 Furthermore, the American sales organizations abroad have been able to maintain a full range of models manufactured by the parent company and its foreign subsidiaries. Such an arrangement provides the flexibility for each subsidiary to adapt its activity to the particular conditions of. its own market. With the establishment of the automotive industry in Argentina and Brazil, various automobile firms have established production facilities there. 49Annual Reports, Chrysler. Ford, and General Motors, 1955-1960. -180- The only American firm which is manufacturing automobiles in Latin America is Kaiser. Chrysler Corporation, which had considered plans to manufacture a car model in Agreement with Kaiser, abandoned the idea and withdrew. American automobile makers in Latin America, with the exception of Kaiser engage only in the production of commercial vehicles. It was rumored in 1960, however, that Ford may introduce an automobile in Brazil. The largest automobile manufacturer in Argentina, according to 1960 figures, is Kaiser. which produces almost half of the total car output. Its share rises to about three-fifths with the inclusion of its Dauphine which is produced on license agreement with Renault. Most European automobile manufacturers are operating on license agreements, or in a joint venture with a local company. Kaiser's projected car production for 1964 would constitute only two-fifths of the total car output as compared to three-fifths in 1960. In Brazil, Kaiser's production is confined to pick-up trucks and jeeps. While British manufacturers have no manufacturing facilities there, the other major European car manufacturers shared the planned output of some 65 thousand units in 1960. As pointed out in Chapter III, the instability of South American econ— omies in the past has influenced the automobile producers not to undertake car manufacturing, but to concentrate on commercial vehicles. The latter are of more importance to the underdeveloped countries and thus are favored by law, -l8l- . . . 50 . . . . . as in Argentina, a developed nation. This may have been unWise, Since it is conceivable that the domestic car industry in Latin American countries may continue to receive a high degree of protection from foreign competition. Such a course of action may make it virtually impossible to export American auto- . . . 51 mobiles to this area in the future. In order to get their share of the growing foreign market, United States automobile manufacturers, who once were very skeptical of small cars in general, are now not relying on exports of standard cars and compacts alone-~they are contemplating the introduction of a still smaller car. Indi- cations are that American automobile manufacturers are planning subcompact cars. Ford plans seem to envisage a Volkswagen-size car. It 'is expected to . . . 52 be priced somewhere around $1, 600 in the Umted States. Some of the American smaller car manufacturers, according to The Wall Street Journal and Ward's (both commenting in 1960), will utilize their facilities and employees abroad to manufacture at least some parts in their foreign subsidiaries. Ford is planning a small car with a four~.cylinder engine, to be called the Cardinal. It has been rumored that Ford would tool up and 50"The Argentine Motor Industry, " Motor Business, No. 23, July, 1960, p. 29. 51Ibid. 52.. Has the Auto Boom Moved Overseas?" U. S. News and World Report, December 12, 1960, p. 71. -182- build a good part of the car in its West German affiliate. 53 General Motors has not disclosed any plans for a small car, but is said to have in preparation a somewhat similar car. The same is said about the Studebaker-Packard Corporation. It is most likely that Chrysler and American‘Motors will produce . . . 54 Similar versmns. The Probable Impact of Economic Integration on Automobile Trade World trade patterns are undergoing significant changes as presently best illustrated in Western Europe. Regional economic integration among countries such as the European Economic Community (commonly known as the European Common Market or ECM) and the Free Trade Area Association are being established. A similar approach is contemplated by the Latin American countries in order to integrate the regional economies. In order to meet the anticipated competitive advantages which economic integration will yield non American producers, the United States automobile manufacturers have been accelerating their investments for modernization and expansion of manufacturing and assembly facilities abroad. Although no specific figures are available for the application of these investments to the Latin American market, it is likely that a considerable portion is being allocated to that area. General Motors has a big program for the immediate future: $500 53"Ford Confirms It May Build Part of New Small Car in Europe, but Not Before ‘62, " Wall Street Journal, September .7, 1960, p. 2; and ”Foreign Cars Vie For Larger Shares of U. S. Market, " Ward's 1960 Automotive Year- M(Detroit: May 9, 1960), p. 177. 4 5 ”Has the Auto Boom Moved Overseas, " U.S. News and World Report, December 12, 1960, p. 71. -l83~ million for plant equipment and tooling in 19 foreign countries is a part of this plan. Ford Motor Company is expected to invest $196 million during the early sixties, in addition to the $358 million for its purchase of the remaining shares of its British subsidiary. Chrysler Corporation has wholly-owned subsidiaries in six foreign countries besides a 25 percent interest in Simca. Last but not least, American Motors Corporation is planning to start building its Rambler in Australia. 55 For the American automobile manufacturers to produce the right kind of car demanded in overseas markets, manufacturing facilities abroad seem to be the best location from which to supply an acceptable product. Furthermore, the development of regional economic communities throughout the world necessitates manufacturing abroad in order to circumvent tariff barriers and other discriminatory measures imposed on United States car exports. 55mm, p. 70. CHAPTER V SUMMARY AND' CONCLUSIONS Although the postwar period was, on the whole, one of world eco- nomic prosperity, it is fallacious to think that the steady growth in trans- portation throughout the world led to a comparable growth in American automobile exports. The fact is that the United States automobile manufac- turers suffered a set back in the world automobile export market and largely confined their exports to the Western Hemisphere. Moreover, demand for United States cars in leading Latin American countries declined appreciably especially in the decade of the 1950's. Primary Reasons For The Decline There are various underlying reasons for this decline of American automobile exports--some primary causes and some secondary factors. Three reasons fall in the primary category: the imposition of severe import restrictions against American automobile exports, the effectiveness of competition by foreign car producers, and the lack of a United States produced automobile appropriate for the foreign market in terms of size, power, price, and performance. These basic factors can be succinctly discussed through a concrete study, using the principal Latin American countries. The effective demand for automobile imports by Latin America depends - 184- -185- to a marked degree upon the buoyancy of the countries' export incomes. The three countries studied in Chapter III may be divided into tw0 groups as far as balance of payments and automobile manufacturing are concerned: Argentina and Brazil, which had and still have foreign exchange problems and possess car manufacturing facilities, and Venezuela, which had virtually no balance of payments difficulty up to 1958, nor any manufacturing facilities prior to this date, except assembly plants. Import restrictions The exports of most Latin American countries are dominated by a small number of agricultural commodities or in the case of Brazil, by coffee alone. The reliance on the export of these commodities, which are vulnerable to sudden and drastic changes in value as world price levels fluctuate, has resulted in balance of payments difficulties. This situation, together with the general rise in imports, was one of the reasons Why leading Latin American countries were forced to impose and manipulate import restrictions in such a manner as to discriminate against United States automobiles. In addition to the effect of exchange problems on the effective demand for United States cars, automobile sales to Argentina and Brazil were also affected by the increase in local production. The need for motor vehicle transportation was severe in the two growing nations of great geographical expanse, and so the pressure to manufacture their own automobiles was great. In the early postwar period car manufacturing was postponed because large foreign exchange reserves enabled Argentina and Brazil to permit the -186- import of cars freely. However, large imports of automobiles represented a drain on the two countries’ foreign exchange reserves, as has been noted in Chapter III. When the balance of payments position became acute in the early fifties, severe restrictions were imposed on car imports. Yet these countries required a constant supply of automobiles to meet the transport needs incident to their economic development. Local manufacturers of automobiles In 1959 the automobile industries in Argentina and Brazil were still in their early stages, having been set up only a few years before. These nations soon resorted to the age-old device of protectionism in the special form of quantitative barriers erected against imports of automobiles. In order to stimulate the growth of domestic industry, further restrictions were imposed on the allocation of foreign exchange reserves for other than essential imports. The foreign exchange quota allocation led, and continues to lead, to a very sharp reduction in the United States share of these nations' automobile market. This allocation, therefore, helped the European car manufacturers, particularly West Germany, to increase their exports to Argentina and Brazil and it also aided the incipient Argentinian and Brazilian automobile industry. Not only did the market share obtained by the major European automobile producing countries increase substantially at the expense of the United States, but the Argentine and Brazilian automobile industries also grew fast. Domestically produced automobiles in Argentina and Brazil commanded -I87- 3 figure above the prices of similar models that were imported in the early fifties. Domestic car sales may have suffered from buyers' resistance over the next few years on account of high domestic prices of automobiles. No doubt the automobile industry in both Argentina and Brazil will have to face problems in the next half decade. The problems that confronted it during the planning period are over, however, and the industry is well on its way. Nevertheless, the car manufacturers in the two countries probably will continue to take shelter behind high protective barriers in order to insure the development of the industry. It is likely that production costs will continue to be very high in view of the shortage in steel, energy, and skilled workers, scarcities noted in Chapter 111. These costs, however, may be reduced as the level of output increases. For unit costs to be significantly reduced, the scale of production of both Argentina and Brazil must be greatly increased. In the absence of adequate terms for installment purchases and very limited exports, the only way to achieve economies of scale may be merger and concentration. One drawback to concentration at the present time is that too many foreign firms have been encouraged to establish manufacturing plants in the area. But a large measure of concentration may come naturally, depending on the financial position of the industry. Only the larger manufacturers will be able to finance from earnings and to obtain credit for large expansion and integration programs. To be sure, the production cost complex may become less foreboding. Efforts are being made to expand the car market. Installment buying practices -l88- have been encouraged but are still not adequate, in view of the low per capita income. Measures have also been taken to increase car output by exporting, particularly to the neighboring Latin American countries. But in view of the high cost, export potential is a limited possibility; competition can thus be attained at present only by the use of export subsidies. The tariff structure and local taxes of the three countries studied have very much favored the import of small cars and of completely knocked down (CKD) cars for local assembly. In one respect, however, the Venezuelan market offered a great advantage as compared to Argentina and Brazil: there was no balance of payments difficulty so that the problem with which the American manufacturers were faced was not so much a restricted size of the automobile market as a restricted share. With American assembly operations in Venezuela, imports of assembled cars may well decline further, especially if a local manufacturing industry were to be established in this nation. With continued expansion of local manufacturing, it is likely that the American manufacturers, other than Kaiser, will suffer from not having estab- lished automobile manufacturing facilities in Argentina and Brazil. The domestic industry still may receive a high degree of protection from foreign competition through continued stringent foreign exchange control and high surcharges. As a consequence, the United States car manufacturers may be excluded from an increasingly important automobile market. Size and price of American automobiles It has been noted in Chapters 11 and III that the effect of tariffs and —l89- local taxes seriously discriminates against the import of American standard cars, and that importers favor small automobiles and to some extent medium- size ones. American automobiles have become unnecessarily large, noncom- petitively priced for large volume selling, and expensive to operate, especially in countries where gas prices are high. The absolute increase in automobile sales to Latin‘America, as elsewhere, has been brought about by the spread of car ownership to the lower income groups and the widening of the middle income groups. The middle income groups tend to buy the smaller and the cheaper cars rather than the expensive American standard cars. Sales of American automobiles abroad, as has been noted in Chapter III, are very low and replacement demand negligible. The future Latin American demand is not likely to change radically until personal incomes have grown considerably and both prices and operating costs come within the reach of a far larger part of the population. While the United States manufacturers have a wide range of automo- biles to offer, they are in danger of losing some export opportunities by offering cars of too large a capacity and at too high a price for the world market and the Latin American countries in particular. The export potential for American standard cars appears to be limited now that foreign buyers have a wide range of choice from among the automobiles manufactured abroad. An opportunity for developing markets for American cars might come through the export of American compact cars. These compact cars, smaller in size than the American standard product, would qualify for the lower taxes and surcharges referred to in Chapter III, and would sell in larger quantity in -190- Latin American markets and elsewhere if they were competitively priced. Automobile manufacturers, however, may have the alternative course in shifting to Operations abroad. As previously stated the decline in the export market for United States automobiles has been the result of a whole complex of factors of varying im- portance. Having discussed the primary factors we may turn to the secondary factors, principally the failures by American automobile manufacturers to use the most effective marketing policies and practices. In the immediate postwar period, the United States and the United Kingdom were virtually the only major suppliers of the world automobile demand. During that time the car exporters were merely of order takers from a loosely run network of world-wide distributors. The reentry of European automobile manufacturers into the export market, West Germany in particular, together with their modern marketing and promotional efforts helped them get larger shares of the world automobile export market at the expense of the United States. Although Americans have been utilizing many types of advertising media, only few American firms undertook any real advertising or sales campaign in foreign markets. Instead of sending out trained salesmen to secure orders, they commonly waited for foreign customers to come to them. With people of moderate income, credit extension is specially essen- tial for the purchase of a durable good as expensive as automobile. Yet, throughout the 1950's Americans usually demanded a letter of credit in advance of shipment while their competitors were granting liberal credit terms. -191- Furthermore, Americans selling in foreign markets continued to insist upon quoting prices to foreign buyers in dollars and also usually required payment in dollars. This was true even in the postwar period, despite the dollar shortage experienced by many countries. Consequently American manufacturers lost foreign customers to competitors who were willing to make quotations and accept payments from foreign buyers in their own currencies. Alternatives Before American Automobile Producers The opportunities of building automobile sales volume and profits from overseas business are very attractive today and profitable foreign sales should grow substantially in the years ahead. However, competition from European car manufacturers is becoming increasingly intense and must be taken into account. Many European countries must export to live. The United Kingdom and West Germany, for instance, have lost important world markets which they held before World War 11, so they are now making a determined effort to establish or expand markets in Latin America. In the face of this competi- tion, it would seem that the United States must exercise much of the same diligence and apply the same critical analysis to foreign markets as it does in its domestic activities. There is a tendency, however to adapt more and more American business practices because they are considered the most modern and efficient in the world. Such practices, hOWever, are most effective if they are adapted to the actual circumstances of each foreign market. What specifically must the American automobile manufacturers do to -l92~ meet the challenge? At least three alternatives can be suggested: obtaining of trade concessions, adjusting design and price to meet foreign competition, and, finally, expanding manufacturing and marketing facilities and efforts abroad. . . . l Obtaining of trade concessmns For decades, United States foreign trade policy has been directed toward the freest possible movement of goods across national boundaries in order to serve the interests of all trading nations. Under the Reciprocal Trade Agreements program, the United States has reduced import tariffs on automobiles to the lowest levels in the world. Automobile tariffs at present stand at an ad valo rem duty of 8 1/2 percent. The United States has traditionally relied on competition as the principal motivating force in its growth and development. Such competition has been based on product, price, and quality at home as well as abroad. Heavy American imports of automobiles attest to the favorable treatment accorded to foreign car makers. Yet the United States in turn has been sub- jected to tight import controls such as quotas, high tariffs, and other local charges, many of which are of a discriminatory nature. Although most import quotas have been abandoned and automobiles have been freed from some obstacles, there are still many trade barriers in force and new ones emerging. 1Much of the discussion in the next few paragraphs is taken from United States Motor Vehicle Exports--Analysis and Proposals (Detroit: Auto- mobile Manufacturers Association, April 5, 1960), pp. 1-3. ~193— During the postwar years many countries in the world were confronted with balance of payments difficulties and wanted to restore balance in their external accounts and attain a satisfactory level of output and efficiency. In view of such a situation, the United States accepted the restraints with under_ standing. However, circumstances have undergone significant changes and it would seem appropriate for American automobile manufacturers to press American authorities, as they seem to be doing currently at the Geneva Gatt conference, for relaxation of foreign restraints on American automobiles. Tariff concessions will help American car manufacturers to compete in foreign markets. And, at the risk of editorializing, it may here be said that they are entitled to equitable treatment. The theory that trade is a tw0-way street applies just as much to foreign competitors as it does to Americans. If the United States markets are accessible to foreign producers whose unit labor cost is lower and whose plant size and efficiency are comparable to Americans, then it would seem reasonable for the American car manufacturers to seek fairer access to foreign markets. Trade liberalization is most desirable as it would enable free nations, whether industrialized or underdeveloped to grow faster. The long run effect could be for the United States to expand the scope of its economic activity and possibly to strengthen its economic leadership and influence in the world. In addition, trade liberalization would permit American industry as well as American consumers to reap the benefits of lower cosr and more efficient production, resulting in higher levels of world trade. — 194- The United States and the rest of the world differ in both their per capita income and automobile requirements. These differences in wealth and market provide considerable opportunities for the mass-produced cars of one area to be sold as the specialty of the other. As referred to in Chapter IV income dictates that the poorer countries, ceteris paribus, want smaller automobiles than even the American compact. The European car manufacturers obtain their economies of scale in mass- production of small automobiles and so they have a cost advantage in producing them. The American consumer wants, or at least appears to want, an automo- bile as big as or bigger than the compact car; so American large volume production is in this line, and so is its cost advantage. There is a wide gap in wages between American and European manu- facturers. Wage competition has been met by American producers through larger capital investment, modern machinery and equipment, and managerial techniques. But now that the European producers have also obtained many of these balancing factors, the wage differential alone will become increasingly significant to American automobile manufacturing, especially in the manu- facture of a small car. Adjusting design and price Trade concessions alone, however, is not an assurance for more foreign sales. The United States manufacturers should modify their car designs to give them a wider acceptance in the world market, or at least in important sections of it. The American compact manufacturers seem to have -l95- done this only to the extent that countries with moderate incomes can afford these only relatively smaller and lower priced cars. The potential market for such a car is somewhat limited as it does not satisfy the requirements of most foreign markets. Important Latin American markets for United States car exports are declining and will probably continue to do so, partly as a reflection of efforts to protect local manufacturing and development. Furthermore, countries throughout the world, including Latin America, are discriminating against large, expensive, and high-powered automobiles. For United States manu- facturers, then, to capture a larger portion of world car markets, it would seem to be necessary for them to supplement their typical car exports by setting up or participating in manufacturing enterprises abroad. This will entail a whole new set of risks and adjustments in Latin America; this is not only a means of averting import restrictions, but it also holds the possibility of lower production costs as industrial development unfolds. Expanding manufacturing and marketing facilities abroad American automobile manufacturers who are already engaged in international operations can supplement their standard models from their foreign sources. Such arrangements may add considerable strength to the American car producers and help them to meet varying foreign demands on their product lines. Certain American foreign based subsidiaries are already moving toward this type of product and line diversification. An automobile as small as the European small car is not likely to be ~196- produced in its entirety at the lowest possible cost in the United States. In order to manufacture such a car, it would be feasible to import high labor content components (1. e. , engines and transmissions) from foreign affiliates, taldng advantage of labor cost. Such a course of action could lower the cost and hence help the car manufacturers in becoming competitive in the produc- tion of a small car suited to world markets as well as to the potential American market for small automobiles. American car manufacturers who have limited or no manufacturing facilities abroad might well consider joining an existing foreign automobile manufacturing firm. This could be done by the American partner providing a part of the investment, with the foreign company furnishing the manufacturing base and production management. Such an arrangement could be advantageous to American firms, particularly the smaller concerns--Chrysler and American Motors. When we add to the common interest the strength of American and foreign product lines, all the elements of successful market entry- -product, money, and management--appear to be available. Admittedly, there remains the problem of a joint effort in implementing the complex coordination and management. The American auto makers can offer to the foreign partner such assistance and facilities both abroad and in the United States as are analogous to what the foreign partner can give the American manufacturers in his own country. The two manufacturers would diversify each other's product line and probably cut production costs. The exchange of specialties and component parts, as well as other cost reductions and possible sales opportunities, could -l97- enable the car manufacturers to increase their business and ultimately their profits. Separate marketing arrangements should be made by American auto- mobile manufacturers to serve distinct regions of the world. Countries with disparate cultures, habits, and characteristics require particular marketing approaches as well as different products. It will be some time before even Europe can be considered a single, homogeneous market as is the United States. Marketing as well as manufacturing facilities can be established for purposes of concentration in one country of a region, and economies of scale as well as those of organization may there be achieved. The development of the ECM and the EFTA and other trade areas will make it especially important for Americans to concentrate their marketing efforts in order to survive profitably in the face of competition. Major areas of the region could be covered by setting marketing organizations under the jurisdiction of the country used as a marketing center. A trend in this direction is already evident in the actions of American automobile manufacturers. 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