Eric Peters

There are three ways to find yourself in a deep hole: One is to jump in; another is to fall in. The third is to get pushed.

By an amazing trifecta of bad luck, bad decision-making and bad public policy, the U.S. auto industry finds itself in a deep pit -- with no ladder in sight.

Bad luck came with the first energy shocks of the early 1970s, when cheap and readily-available fuel suddenly became expensive and hard to get. Detroit was unprepared.

Unfortunately for GM, Ford and Chrysler, their models had been designed when fuel was cheap and plentiful - so they tended to be large and heavy. But when gas prices suddenly shot upward, and people found themselves in queues for fill-ups, such cars became almost instantly unpopular.

Drooping sales were just the leading edge of a much larger problem, however.

Enormous sums had been committed to suddenly unsalable vehicles, including capital investment for tooling and manufacturing facilities. Normally, these costs are amortized over the production life of a vehicle, typically 6-10+ years. But when the market changes suddenly, an automaker can be left with hundreds of millions in liabilities.

It was a wholesale slaughter affecting virtually the entire model lineups of GM, Ford and Chrysler.

The diminished resources for research and development into more efficient engine types, updated car "platforms" and emerging technologies put domestic automakers at a tremendous disadvantage. It's no accident Toyota pioneered the first hybrid car brought to market, the Prius, while Honda was the first to develop a viable fuel-cell vehicle.

Tight budgets made it very difficult for U.S. automakers to update their designs as often as the Japanese, so the domestics fell behind in both customer perception and nuts and bolts reality.

Customers, predictably, fled.

Meanwhile, the Japanese got an unexpected wind at their back. The small, efficient cars they specialized at building were suddenly hugely popular, and they did not have to amortize new investment. Their profits and market share increased. Much of their profit was reinvested in even better designs, expanded manufacturing facilities and so on, enabling the mainline Japanese brands to grow into full-line, major manufacturers in a decade.

The Japanese never looked back. GM, Ford and Chrysler have never fully recovered.

Eric Peters

Eric Peters is a senior fellow at the National Center for Public Policy Research. His work has appeared in the Wall Street Journal, Investors Business Daily, Houston Chronicle, National Review, Detroit Free Press and Detroit News.

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