Why Toyota Wants Gm to Be Saved - a Game Theory Case Study

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Here’s the latest twist in the auto bailout:

Detroit’s Big Three aren’t the only automotive companies that want to see the government step in with some much needed financial help.

Overseas automakers, most notably Toyota Motor, all endorse some form of federal aid to keep General Motors, Chrysler LLC and possibly Ford Motor out of bankruptcy.

[source: CNN "Why Toyota wants GM to be saved"]

The news seems strange. Business is a dog eat dog world. The usual response is to kick a competitor while he is down. As McDonald’s founder Ray Kroc put it, “If any of my competitors were drowning, I’d stick a hose in their mouth and turn on the water.”

So why would Toyota help the Big Three? Game theory tells us to think deeper. The real reason Asian automakers want to help is out of self-interest. The CNN article explains several of the strategic reasons for helping the US automakers.

They involve:

supply costs
demand issues
deterring new entrants
Let’s examine each issue in detail. (all quotes are from the CNN article on the bailout)

Supply costs

While automakers are competitors in car sales, they are indirectly partners in the auto parts supplier market. The more cars that are sold-regardless of who sells them-the greater demand there is for parts, and consequently, the lower the price will be for everyone.

Asian companies have a vested interest in protecting demand for the delicate supply market:

The overseas automakers, who between them produce more than 3 million vehicles a year at U.S. plants, all worry their production would be hurt if one of the U.S. automakers went under. That’s because a Big Three failure would likely lead to widespread bankruptcies in the auto parts supplier industry.

The risk is increased because many parts only have a single supplier. Ultimately costs and time for production would be increased in the transition period. And increased costs would further damage automakers because of demand issues.

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