Economic Analysis of U.S Automobile Manufacturing Industry, Term Paper Example

Executive Summary

The contents of the report comprise of economic analysis of U.S Car Industry. The first part provides an introductory overview of industry followed by the definition of industry. The next part of the report discusses the Industry profile followed by the description of industry Structure. The report also provides future outlook of the industry. The scrutiny of the macro and micro environmental factors affecting the industry is undertaken. Porter’s Five Forces analysis has been used to analyze the level of competition. The report will also provide information regarding the tactics used by major players of the industry to develop an edge over other competitors.

Introduction to the Industry

Definition of Industry

The automotive industry consists of companies engaged in the designing, developing, manufacturing, marketing and selling motor vehicles. It includes all the products and services provided to the consumers before the sale of the vehicle. The after delivery services such as repairing and fuel filling are not included in the automotive industry.

Industry Profile

After the World War II the auto industry in US became the pillar and the beneficiary of economic growth. The Big Three including General Motors, Ford and Chrysler with other automobile manufactures built a range of products suitable for every consumer needs. The U.S. automotive manufacturing industry is a large and dynamic industry which is going through structural changes. The changes in the structure started with the entry of international competitors in the American automobile industry as domestic manufacturers. The noticeable contributors in the US automotive industry are described below:

Chrysler

The subsidiary of German-based Daimler-Benz, Chrysler was founded in 1925. Ranked as the thirteenth largest manufacturer of the automobiles the company owns a range of brands including Chrysler, Dodge, Jeep, RAM, and Global Electric Motorcar brands. The product range includes Passenger cars, minivan manufactured under the Brand name of Chrysler, Dodge includes Passenger cars, minivan, crossover, and SUV heavy vehicles are under the brand name of Ram and Jeep includes SUVs and crossovers.

Ford

Headquartered in Dearborn Michigan, the Ford Motor Company was founded in 1903. The company manufactures and finances cars. In 2007, for the very first time the annual sale of the company in US was recorder as third highest after General Motors and Toyota.  The company manufactures models include the Focus, Fusion, Taurus, Mustang and trucks under the brand of Ford, Lincoln, Mercury, and Volvo.

General Motors (GM)

Based in Detroit, Michigan the company was ranked as the biggest automobile manufacturer in the world till 2008. The company filed Chapter 11 bankruptcy and fold, discontinued and scaled back many of its brand s and made four brands Chevrolet, Cadillac, Buick, and GMC, its focus in North America.

Honda

Honda Motor Corporation founded in 1946 manufactures an array of automobiles and motorcycles with other power generating products including generators, engines, marine motors, etc. The product line of Toyota includes Accord, Civic, CR-V, Fit, Insight, and Odyssey.

Toyota

Toyota Motor Corporation headquartered in Japan designs, manufactures and sells 70 different models under its brand, including sedans such as Toyota Yaris, Corolla, mid-size Camry, and full-size Avalon. Vans include the Estima, Sienna, and others and many other small cars. The company has also introduced the first hybrid car Toyota Prius. The company has also launched collaboration with Tesla Motors to manufacture electric vehicles.

“Despite robust growth in the market for automobiles, the industry subsequently sustained a prolonged shakeout in the number of producers and evolved to be an oligopoly dominated by three firms. The industry also evolved to be heavily concentrated around Detroit, Michigan, which not only was home to its top three firms but most of its other leaders” (Klepper, 2001). The U.S. automobile manufacturing industry is an important contributor to the manufacturing base of the nation. The industry contributes about 5% of the total GDP. The industry and its sub sectors provide employment to about 666,300 domestic employees in 2009. The number showed a decline of 24percent from the year2008 (Bureau of Labor Statistics). A research conducted by Economics and Business group stated that only automotive parts sector contributed 4.5 million jobs in 2004 (Economics and Business Group, 2007)

The depression in the world economy adversely affected the growth of the automobile industry as a whole.  As a result, revenues of GM declined $122 billion in 2008 as compare to the highest revenue in the industry $167 billion in 1998. Despite negative performance of the industry as a whole, the foreign automakers Toyota and Honda succeed to achieve growth in their revenue in 2008. The growth was resulted from the increase in market shares of Toyota and Honda in the United States. Toyota had revenue of $214 billion in 2008 as compare to under $100 billion in 1998. Toyota presently occupies the position of the largest automaker in the world with a staggering annual growth of 8 percent, making company the biggest beneficiary American carmakers demise.

 Industry Structure

The intensity of capital and labor is high in the auto manufacturing industry. The main components of costs function in the automobile industry include Labor, Material and Advertising. The labor requirements including machines and robots are intensive in the automobile industry.  The raw material for the manufacturing of automobile including steel, aluminum, dashboards etc are provided by the suppliers. Advertising is an important component of automobile manufacturing cost. The companies in the industry spend a fortune to research market and consumer tastes and positioning their product to the customers.

The industry does not merely comprise of the auto makers but the auto parts production is another profitable sector of the automobile industry, which is further sub divided in:

• Original Equipment Manufacturers (OEMs) – The companies supply parts to the manufacturers of auto mobiles as it is not possible for the automobile manufacturers to produce all the parts. Most of the parts are produced by the manufacturers themselves but still they cannot produce each and every part of a new vehicle.
• Replacement Parts Production and Distribution – The replaceable parts of vehicles after the purchase of vehicle are included in this category.
• Rubber Fabrication – All the rubber parts in the vehicle are included such as tires, hoses, belts, etc.

The demand for vehicles in the automotive industry is highly dependent on the trends and tastes of consumers. Although fleet sales constitutes a major proportion of industry revenue but still consumer sales is regarded as the driving force of industry revenue. For this reason, car manufacturing companies spend a fortune in analyzing the consumer tastes and requirements. In the automobile manufacturing building higher business confidence should be a major priority as compare to taking account of regular factors such as earnings growth and debt load.
Another factor affecting the demand of the vehicle is to redesign or introduction of new vehicle design in the market by a company.  The change in design can lead to delays in production resulting in shape of increased costs and dissatisfied customers. The introduction of new designs can also lead to increased profits for the company, but change also involves risk factor.

Revenue Generation

Selling automobiles is the main source of revenue generation for automobile industry. Other revenue generating sources include selling auto parts which is directly connected with the life span of an automobile. Increase in the lifespan of car increases the demand for replacement parts.  With improvement in manufacturing quality the life of the auto parts has increased. This will have positive repercussions for the customers but have negative effects on parts makers.

Another source of revenue for the automakers is the provision of services offered with the new vehicles. The manufacturing companies also attract consumers by offering lower financial rates of car leasing as compare to financial institutions, hence acquiring their portion of revenue.  Extensive warranties are also an important factor in the revenue generation of the automobile industry.
With increasing trend of the car leasing all over the world, demand for automobiles has also increased. Leasing has improved the affordability of vehicles for consumers to some extent that in most parts of the world the fear of over capacity has been raised.

The Future Outlook

The entire automotive industry suffered as a result of the global economic recession in 2009. With the reduction in the vehicle production and vehicle sales, the production and demand for the automobile parts used in the production of new vehicles also declined. Slight sales growth is expected in the automotive industry as the number of vehicles sold in 2010 are expected to increase to 12.4 million till the end of 2010. Despite the prediction for growth, automotive parts suppliers and automakers will experience difficult times till 2012.

Porter’s 5 Forces Analysis

The competition posed to the industry is further analyzed by undertaking the Porter’s 5 forces analysis of the automotive industry.

1. Threat of New Entrants. The capital intensive nature of the automobile industry reduces the threats of new entrants.  The foreign automobile manufacturing companies posed threats to the position of Big Three. The foreign competitors had cutting edge of required capital, technologies, management skills and low cost products.  The entrance of foreign competitors undermined the market share of big players of American automobile companies.
2. Power of Suppliers. The bargaining power of suppliers is low as the competition is high due to a greater number of firms competing in the market.  Most of the suppliers cater the requirements of a number of car manufacturing companies limited to one or two. In this situation if the manufacturer chooses to switch supplier, it can create the disaster for supplier’s business. To avoid the situation the suppliers need to be highly responsive to the demand specifications of automobile manufacturer resulting in shape of low bargaining power on their part.
3. Power of Buyers. In the past the bargaining power of consumers was assumed to be low as there were not any alternatives available. But with the passing time the bargaining power increased as the consumers started choosing alternatives offered by foreign companies. Although the market demand is governed by the consumers tastes and preferences but also the expensive nature of products leads to low buying power as not big volumes of cars are purchased by consumers.
4. Availability of Substitutes. The threats of substitutes are not only posed by the manufacturers competing in the industry but also the alternative modes of transportation can pose a threat of substitution. The high operating and maintenance cost of vehicle encourage people to switch to other modes of transportation such as bus or train as the quality public transport facilities are available in US.  The fluctuation in the fuel prices also effect the consumers’ decisions to opt for a vehicle. Consumers prefer vehicles that are fuel savvy.
5. Competitive Rivalry. The industry is an oligopoly, where the price based competition is restricted as compare to highly competitive market in which all the competing firms earn meager profits due to the low levels of return resulting because of high level of competition. The participants of the industry have avoided price-based competition understanding the fact that it doesn’t lead to increase in the market size. The trend has been changing as the companies are offering lucrative offers in shape of discounts, long-term warranties, and preferred financing, changing the market in to price competitive market.  Although the strategy has been successful in fancying the customers, but the pressure on the manufacturing companies has been increased (Investopedia).

Conclusion

Despite all the efforts of the leading US automobile manufacturers had to face a disappointing reduction in their revenue in US industry. On the other hand all the three leading Japanese automobile producers are generating high revenue in the US market.  The Japanese automobile companies are responding well to the changing requirements of consumers of operating ease, affordability, environment friendliness.   The products of the US Big Three have been refused by the consumers due to more expensive automobile fuels. The foreign counterparts including Toyota, Honda and Nissan succeeded to capture the main markets of US automakers, by offering fuel-efficient vehicles to the consumers. As described in the industry structure, automobile industry is a labor intensive industry. The high cost of labor in US including salaries, benefits, healthcare, and pensions resulted in significantly high labor costs as compare to the foreign competitors leading to the automotive industry disaster.

As Japanese car makers continue to rein the market, the only way for the Big Three to compete is to manufacture vehicles which can be fixed easily, are fuel efficient, avoid traffic jams and enhance the driving experience. The cost of manufacturing should be minimized and the production efficiency should be maximized. These are some possible solutions to the problems facing the Big three’s and other American automotive companies.

References

Bureau of Labor Statistics data using NAICS 3361, 3362, and 3363, available at http://data.bls.gov/PDQ/outside.jsp?survey=ce, accessed on 26/10/2010

Economics and Business Group, (2007).  Contribution of the Motor Vehicle Supplier Sector to the Economies of the United States and its 50 States, Center for Automotive Research, January 2007, accessed on 26/10/2010 http://www.cargroup.org/documents/MEMA-Final2-08-07_000.pdf

Investopedia, The Industry Handbook: Automobiles, available at http://www.investopedia.com/features/industryhandbook/automobile.asp, accessed on 26/10/2010

Klepper, S., (2001).  The Evolution of the U.S. Automobile Industry and Detroit as its CapitalCarnegie Mellon University, November 2001, available at http://www.druid.dk/uploads/tx_picturedb/dw2002-440.pdf accessed (27/10/2010)