U.S. Auto Decline Was Driven by Slow Adaptation, Not Just Cheap Labor, Finds ITIF

WASHINGTON—America’s auto industry once dominated the world, but over the past 60 years it has lost significant ground because Detroit was too slow to adapt as the industry changed. A new report, the second of a three-part series evaluating the competitiveness of the U.S auto industry, from the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, finds that U.S. automakers fell behind in adopting innovative production methods and that this slow response was a central cause of the industry’s decline, not just cheaper labor abroad. Today, the industry faces a similar test as Mexico pressures on cost and China intensifies competition on scale, speed, and innovation.

“For too long, the story of U.S. auto decline has been told as a cheap labor story,” said Stephen Ezell, vice president for global innovation policy at ITIF. “But the deeper problem was slower adaptation. Competitors improved faster, and the United States paid for that delay in lost production, lost market share, and lost time.”

The decline has been steep and long-running. The Big Three’s share of the U.S. auto market fell from 92 percent in 1965 to 45 percent in 2015 and then to just 38 percent in 2024. Their U.S. vehicle production dropped from 9.9 million units in 1994 to 4.6 million in 2024, a decline of more than 50 percent. America’s share of global vehicle production fell from 46 percent in 1965 to just 14.7 percent in 2022. And from 1963 to 2023, the United States ran a persistent trade deficit in passenger vehicles that cumulatively reached $425 billion.

The critical component of this decline was initially Japanese and later other foreign automakers mastering lean production methods while Detroit remained tied to an older mass-production model. From 1967 to 1980, Japanese automakers increased labor productivity by 7.9 percent per year, compared with just 1.3 percent for U.S. manufacturers. U.S. firms eventually improved, but only after a long delay that allowed foreign competitors to widen their lead in efficiency, quality, and manufacturing performance.

Detroit also misunderstood what made its rivals so effective. U.S. automakers too often treated Japanese success as a labor-cost story when the deeper advantage was actually organizational: better supplier coordination, stronger worker engagement, faster learning, and a more effective production culture. In the late 1980s, Japanese firms needed 1.7 million adjusted engineering hours to develop a $14,000 car, while U.S. competitors took an average of 3.2 million hours. At the assembly level, GM’s Framingham plant required nearly twice as many adjusted assembly hours per car as Toyota’s Takaoka plant.

This report provides a warning that the industry is facing a new version of the same challenge. Mexico has emerged as a formidable production hub largely because of labor-cost advantages. Adjusted for purchasing power parity, Mexican auto wages averaged just 25 to 30 percent of U.S. levels from 2000 to 2021. China, meanwhile, poses a broader competitive threat. From 2003 to 2023, China’s share of global automotive production increased by nearly 300 percent, while the U.S. share fell by 39 percent. China is not just producing more vehicles. It is moving quickly in electric vehicles, batteries, robotics, and faster product development cycles.

“America’s auto decline was largely self-inflicted,” said Ezell. “The U.S. industry was not beaten simply by cheap labor abroad; it was beaten because competitors adjusted faster, built better production systems, and capitalized while Detroit was slow to adapt. Now the United States faces a similar moment as Mexico puts downward pressure on labor costs and China competes with scale, innovation, and speed. The industry simply cannot take 10-15 years to adjust this time if it’s to survive the Chinese competitive threat.”

Contact: Austin Slater, [email protected]