Making Cars

Political Economy; Industrial Development; China and EV's

The views expressed in this blog are entirely my own and do not necessarily represent the views of the Department of Energy or the United States Government.

Ford manufacturing plant converted to war-time production of jeeps during WWII

The manufacturing of cars occupies a unique place in American political discourse. Auto workers are often the primary class of labor that politicians reach for when talking about manufacturing or blue collar jobs. This uniquely vaunted place in the narrative of America has, among many other benefits, led to uniquely large sums of public capital for car makers. Direct examples include:

• the $85B 2008 bailout of the auto companies

• $40B in loan authority specifically for auto manufacturing under the DOE’s Loan Program Office and $2B in grants specifically set aside in the Inflation Reduction Act for automakers

As both an urbanist acutely aware of the cost of cars in our cities and someone who works on the clean energy transition (which relies heavily on EVs), I’ve thought a fair amount about auto manufacturing. In this post, I want to share some early thoughts on¹:

• The political economy of car making

• The role of car making in industrial development

• What the EV transition means for both of those perspectives; also China

Political Economy

TL;DR Automakers disproportionately internalize the captured value but externalize costs

Where does the unique political heft of the automotive industry come from? I argue it is because automakers disproportionately internalize the captured value but externalize costs.

First, they internalize the captured value:

• Because making cars is a relatively complex process, it requires a non-trival amount of labor. This creates a significant amount of jobs, which then become economically and politically significant for the local representatives of those areas.

• Automakers tend to have relatively high profit margins, as they sell relatively complex products directly to consumers. These high profit margins can be re-channeled into significant political lobbying and economic heft

Unfortunately, while car manufacturers capture significant value, they externalize the cost:

• Cars have been the leading cause of death of children in the US from 1990 to 2022, until it was recently surpassed by guns

• While many libertarians and conservatives demand that public transit “pays for itself”, cars and the resulting infrastructure they require, never have. The cost of this infrastructure is borne by the public taxpayer, not by the carmaker.

• Gas-powered cars generate enormous air pollution (on the order of thousands of premature deaths every year in the US) and carbon emissions (about 3% of global CO2 comes from US transportation).

• Finally, cars are expensive. The cost differential between living in a place that requires you to have a car to get around vs living somewhere where you don’t is enormous, an important element of cost-of-living that is not priced into our conversations about cities today.

This is in contrast with e-bike, locomotive, and bus manufacturers, who produce products which have far less externalized costs and are more economically efficient.

• Making an e-bike, locomotive, or bus requires less manufacturing labor-hours per people-mile moved, which means they occupy a much smaller center of economic gravity, both in terms of jobs created and the manufacturers economic contribution to a region.

• Because public transit as a mode of transportation is not D2C, it is generally more equitable in how the costs are borne. These systems also provide significant cost-of-living savings for the consumer, but as a result, the companies have less revenue and lack the economic and political capital that carmakers internalize.

Carmakers have used their significant political economy advantages to limit foreign competition through tariffs and regulatory barriers. As a result, Americans not only are forced to buy a car just to live in most parts of the country, they also have fewer options in the kinds of car they buy, which are increasingly oversized and more expensive.²

Industrial Development

TL;DR Cars create a population sized consumer market that acts as a demand pull in maintaining a skilled labor pool that can produce general purpose industrial technologies.

What would happen if we lost domestic car manufacturing? Why might it be important to maintain this industry, despite the political economy imbalances that are particularly exacerbated in the US? And why does every advanced industrial country have a strong auto manufacturing base?

I’d argue two attributes of auto manufacturing make it a unique industrial field:

1. The knowledge embedded in making a car is a General Purpose Technology. It requires the cost-effective manipulation of metal and a fine-grained understanding of how to build engines, which convert energy to motion — skills which are needed in any developed country for most types of manufacturing.

2. It is a massive consumer-facing industry, with a total addressable market far larger than any other field that fits requirement #1. Building the manufacturing capacity to meet this market provides a latent pool of skilled labor capacity

The auto industry is a massive civilian market, which provides supplemental capacity and spillover effects to the aerospace and defense industries. In a world where much of technology is abstracted away from us, tinkering with internal combustion engines is still the gateway for many hardtech founders. The importance of having this latent industrial capacity is perhaps best captured historically by Ford’s incredible pivot from making mass-market civilian cars to mass producing bombers and jeeps in World War II.

What happens next

While these two perspectives on car making helped me think about how auto manufacturing fits into a country’s balance of power, the auto industry today is also undergoing a seismic shift. Most cars today use internal combustion engines (ICE), a technology that uses fundamental principles known since the industrial revolution. But the transition to electric vehicles (EV) will benefit certain companies and startups that have first-mover advantage in this space and likely kill off many legacy OEMs that for incumbency and inertia reasons, will be left behind.

How do we think about the impact this may have?

• While the specifics of the workforce transition are still unclear, there will likely be some level of disaggregation between the “engine” i.e. battery making, and the car making, as most car companies do not have the internal expertise to build batteries (or the willingness to develop that expertise). The sum of those activities may actually require a larger workforce than ICE manufacturing, but the fact that those manufacturing processes will likely be done by different companies (battery makers and auto makers), will fracture the center of political and economic power. While car makers today use an OEM model (i.e. they do final assembly but maintain vast networks of Tier 1 and Tier 2 suppliers), the fact that batteries are a disproportionately valuable component will change the power OEMs exerted previously.

Labor balance between ICE and EV batteries

• Electrifying everything will not happen at once. While EVs will be the clear solution for light duty passenger vehicles, it is unclear what will be used for medium/heavy duty vehicles (MDV/HDV), which have a broader set of possible duty cycles. Regardless, MDV/HDV will likely transition away from ICE at a slower rate than light duty. What will be the implications from a workforce perspective when the majority of car makers use battery technology but the vehicle types relevant to defense still use some variety of high-powered engines or turbines? ³

• Finally, there is the China question. When it comes to manufacturing the technology powering the entire clean energy transition, China is an unambiguous leader – the same is true for EVs. China is also unique because of its incredible ascent towards industrial development and manufacturing in the past several decades. While the US has legacy carmakers that have built ICE engines for a century at this point, China’s first generation of car-makers are EV manufacturers. The Chinese auto manufacturing ecosystem is also far more dynamic than the US’s triopoly and Chinese companies do not necessarily follow the same OEM model. Instead, battery companies are making cars, car companies are making batteries, tech companies like Huawei are making cars and all of them are integrating software and building solid cars for much lower prices. Already, the EU is working to protect their legacy automakers. While the US already has strong regulatory barriers that will keep out most Chinese competition, the innovator's dilemma for the US is the outsized political influence of legacy OEMs that have created barriers to competition and are unwilling to invest in the next generation of industrial technologies.

Thanks to Willy Chertman and Masao Dahlgren for their conversation and feedback.

1. Note: almost everything in this article could also be said about the role of civilian aviation and aerospace manufacturing, but given that aerospace companies tend to be more obviously dual-use and sell into both civilian and defense markets, it seemed a bit too obvious to focus on.

2. Examples include: tariff on imported cars, inadequate safety standards for pedestrians, emission regulation carveouts leading to larger cars, and a general lack of regulation harmonization between US and EU.

3. If anyone has a good report on the power density needed for hybrid military vehicles to pencil out, the advantages for thermal and acoustic signature reduction, or the logistics savings from reduced fuel consumption, I would love to see it!