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Home | Blog | Toyota Up, Ford Down

Toyota Up, Ford Down


Tags Monopoly and CompetitionProduction Theory

This morning's New York Times business page reports that Toyota is expected to replace Ford as the second-best selling automobile manufacturer in the United States next month. This is a significant event in the auto industry. Ford has held the No. 2 spot since the 1920s.

The story is rich with information. Several Ford models that sold well six years ago suddenly performed poorly when gas prices rose. While Ford has been shuttering plants and reorganizing, Toyota just opened a new factory in San Antonio and is considering building an eighth factory (and an engine plant too). Toyota also benefits from its Camry, which is the best-selling car in the US, as well as from its new Yaris, a gas-hybrid vehicle.

I found myself asking in the middle of the article the same questions that I ask when reading Behavioral Economics: This is all interesting information, but where's the theory? What principles explain why this is happening?

It is the why that matters, and good theory supplies it. One unstated factor is that Toyota has had the luxury of establishing manufacturing facilities in parts of the country that are both closer to markets and that are characterized with lower levels of taxation and regulation. Another is its ability to avoid union labor when technology now often makes unskilled labor as productive as skilled labor.

One stated factor, however, is that Toyota seems to get the point that consumers drive the economy, that firms exists first to satisfy consumer wants, and that it is these wants that should determine producer activity (and not the other way around). To wit:

A Toyota spokesman, Joseph Tetherow, said the company's goal was not to beat Ford, but to satisfy its owners. "I don't think we celebrate who we pass or what our standing in the market is," Mr. Tetherow said. "It's focused on providing the right product to the customer."
"If we're going to pass them," he said, "it's their responsibility."

The article suggests at the end that Toyota learned this lesson the hard way since, after all, not all of its tenure in the US car market could be called unrelenting success. Its initial entry back in the 1950s, the Toyopet (pictured here and here), was a flop with consumers. And it has taken the firm 50 years to claim the No. 2 spot.

These are lessons that Detroit is learning, albeit slowly. They apply in many business page articles that focus on firms that are in trouble. But they are only learned when theory interprets the data. Successful firms satisfy consumers first--not environmentalists first, or labor first, or politicians first. In the long run, they forget this at their own peril.

Christopher Westley a professor of economics in the Lutgert College Business at Florida Gulf Coast University and an associated scholar at the Mises Institute.

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