On Creative Destruction in a Free Market

Here is an example of the creative destruction that a free market, especially one free of government interference, can generate [emphasis added].

In 2011, auto makers sold fewer than 13 million cars and light trucks in the U.S., and this year’s sales are expected to approach 14 million, levels that once would have been considered catastrophic for the U.S. auto industry.

Instead, the industry’s major players are steaming ahead.  A much leaner Chrysler Group LLC next week is expected to report $2 billion in operating profit for 2011.

“Not too many years ago, the U.S. industry looked at [sales of] 16 million [vehicles a year] as a permanent fixture in the landscape,” Chrysler CEO Sergio Marchionne said earlier this month at a conference sponsored by Automotive News.

“We can survive at 10 million” a year, he said. “The U.S. recession provided critical impetus to address the critical issues that the industry had dragged behind it for years.”  Last year Chrysler sold 1.37 million vehicles in the U.S., 26% more than in 2010 but again well below the 2.14 million it sold in 2006.

Peter Nesvold, a financial analyst at Jeffries & Co. in New York, said the turning point for the industry was closing and downsizing plants, which took out about 30% of its production capacity and eased the pressure to keep making cars even when customers aren’t buying.

“Supply and demand are roughly equal, and that’s healthy,” he said.

Notice that.  Excess production was eliminated, and while in this case there was a net job loss, because the company is now competitive, it has a chance of surviving, and the majority of the company’s employees are able to stay in their jobs.  Furthermore, today’s Fords, GMs, and Chryslers are better cars with more gee-gaws, like GPS navigation and touch screen dashboards; hybrid versions exist today, too, that were not available before the recession forced a sorting out, and were not going to be available any time soon before that sorting.

Leave a Reply

Your email address will not be published. Required fields are marked *