The US Automobile Industry – Economics Report

1.     Introduction:

To conduct the industrial analysis and understand how the firms in an industry operate, the US automobile industry was chosen. The report presents a brief introduction of the industry and discusses the major economic behavior and indicators in that industry. The types of the products, demand and supply factors, level of concentration are discussed in detail. The cost and market structure, and pricing decisions are also discussed in the report. The report concludes that the US automobile industry is an oligopoly with three main suppliers sharing the largest part of the market share.

2.     Industry Analysis

 

2.1            Industry Introduction

One of the most important industry in the US is the automobile industry for its huge contribution to the US economy; 3-3.5 percent of the overall GDP (Uzwyshyn, 2012). The industry is also one of the largest exporter in the country and the production of more than 8.5 million has surpasses various countries including Japan (OICA, 2011). The industry has contributed to the employment and has employed around 1.8million individuals directly (Uzwyshyn, 2012). The main characteristics of US automobile industry are the organizational and technological changes. The productivity is better than European Union but less than Japan (Leheyda, 2007).

During the recent global financial crisis of 2008-09, the industry faced an enormous decline the sales of the automobile due to the low purchasing power of the customers. Within the last five years, the industry has recovered from the crisis and  observed huge demand of the vehicles as the customers are enjoying low interest rates and better employment opportunities (IBIS World, 2016). Though at a slower rate of around 6%, the growth in the industry will continue due to consumer confidence and strengthening economy during the next five years (IBIS WORLD, 2016).

The list of major automobile manufactures in the US is as follows:

  • Buick (1903–present)
  • Cadillac (1902–present)
  • Chevrolet (1911–present)
  • Chrysler (1925–present) [1]
  • Dodge (1914–present)
  • Ford (1903–present)
  • General Motors (1908–present)
  • GMC (1912–present)
  • Jeep (1941–present)
  • Lincoln (1920–present)
  • Ram (2009–present)
  • SRT (2013–present)
  • Tesla (2003–present)

The automobile industry is dominated by the top three automobile sellers, also known as Big Three, are as follows:  

  • General Motors – Produces Buick, Pontiac, Chevrolet, and Cadillac among others.
  • Chrysler – Jeep and Dodge among various others.
  • Ford Motor Co – produces Volvo and Lincoln among various others.

2.2            Products

Companies in automobil industry produce cars, jeep and chassis. Other than that, the companies also produce electric cars in assembling plants. The industry does not include the motorcycle and truck manufacturers. Not necessarily the company must be the manufacturing automobile to be included in the automobile industry, but industry includes all the companies involved in the marketing, production and maintenance of automobile (IBIS World, 2016). Thus, the companies develop, design, market and sell the automobile in the US and worldwide consumers and customers.

2.3            Demand and Supply factors

The US automobile producers mainly target US consumers and the other main market is the Candian market. Thus, the largest importer of vehicles and spare parts produced by US automobile manufacturers and their subsidiaries is Canada (Nag, et al., 2007). The Canadian market is also dominated by Big Three; Ford Motor, General Motors and Chrysler. The automobile industry has observed huge growth and demand in the vehicles during the last five years after a couple of years recession in 2008-2009. The increased demand is associated with the regaining of consumer confidence, higher disposable income, lower interest rates, and reduced oil prices (IBIS World, 2016). Thus, the demand factors of the US automobile industry include:

  • Financing options
  • Price of automobile
  • Availability of spare parts
  • Disposable income
  • Advertising
  • New offers or deals

The supply of the US automobile industry includes:

  • Cost and availability of cost of production (especially labour and material in this industry)
  • Fuel availability and prices
  • Access to latest and advanced technologies
  • Government regulations
  • Availability of substitutes
  • Taxes

2.4            Level of concentration

Big three companies, Chrysler, Ford motor and General Motors, make almost 76% of the US automobile. Japanese motor companies like Nissan, Toyota, Honda, Isuzu and Mitsubishi make 18% market share of US automobile industry, whereas Mercedes and BMW, Eurpean automobilemakers makers make around 2% market share (Nag, et al., 2007; IBIS World, 2016). The industry is characterised by the few automobile suppliers, large concentrations, market specific collusion, and differentiation strategy which leads to oligopoly market structure. According to (Reference), the US automobile industry is the best example of oligopoly, with the few automobile makers to share the maximum market share as the oligopolistic market is defined as a market where 10 or less than 10 manufacturers directly influence the whole industry and one another’s profits (Nag, et al., 2007), as shown below in figure 1.

The US Automobile Industry - Economics Report
The US Automobile Industry – Economics Report

The profit and fate of the automobile industry are mutually interdependent and the profitability of one company is associated with other major companies in the industry (Uzwyshyn, 2012). This practice was best observed during the global financial crisis of 2008-09 when all big three companies faced the same challenged and responded to these challenges in the similar way and they all went into economic straits. Despite the fact the companies behave equally to most of the macro variable shocks and fluctuations, the companies in oligopolistic structure compete on differentiation and offer distinctive features (Goldberg, 1995). Thus, for the companies to be successful in the oligopolistic structure, US automobile industry in our case, they need to focus on the marketing and advertising activities and market segmentations. Automobile industry is somewhat protected by barriers to enter into the market to produce new or same products due to huge investment required in this business, license and other development costs (Uzwyshyn, 2012).

2.5            Cost structure

The automobile industry is both labour and capital intensive as it requires both of these factors of production in abundance. Thus, the major cost of making and selling automobile includes the following elements:

  • Materials – raw material for making or assembling automobile include everything from seats, steel, tires, aluminium, etc. This raw material is to be produced by the suppliers.
  • Labour – labour for making or assembling automobile includes everything from machines and robots to humans. Robots and machines are playing a major role in making the automobile whereas the humans are involved in designing and engineering automobile.
  • Advertising – As discussed before, advertising and marketing play a major role in the success of the automobilemakers. Thus, they spend million and billions of dollars each year on broadcasting, media and print advertising. Money is also spent on the market research to know consumer preferences and new trends.

2.6            Downstream and Upstream industries

The US automobile industry supports the large range of business segments, both downstream and upstream industries, as shown in figure 2. Upstream industries include Mining, fuel, electronics, and plastic (Atkearney Analysis, n.d.). Whereas the downstream industries include car rentals, insurance and finance companies, used car market, warehousing, and transportation. The collaboration and interdependence of automobile industry with upstream, downstream and other industries help grow and develop the economy (Atkearney Analysis, n.d.).

Figure 2: Upstream and downstream industries

Source: Atkearney Analysis (n.d.)

2.7            Strategic Interaction among companies

No company can work in isolation and so is true for automobile industry. The companies need to integrate and interact with each other within the industry and with the companies in the backward and forward integration. According to Mackinnon, et al. (1983), the big three companies behave in a cooperative way to be competitive and successful in the industry while on the other hand, minor companies have behaved competitively. To assess the interdependence of the companies in the automobile industry in the US, the Deutche bank (2006) conducted a study and presented the interdependence of these companies in the following table.

Table 1: Interdependence of automobilemotive manufacturers

Source:Deutsche Bank, 2006

The interdependence of the firms on other companies in an industry is the main characteristic of an oligopolistic market structure. This interdependence is due to the small number of producers or manufacturers (automobile producers in our case) (Nag, et al, 2007). These firms have to cooperate with each other, as if the price or output is changed by one supplier, the reaction of this change will be intense and unlike the monopolistic competition, as the customers will switch to other two market leaders. Thus, while formulating the pricing decision, the oligopolist consider the reactions of the other companies to be profitable and competitive in the market.

2.8            Pricing

2.8.1       Price discrimination

To set the prices in the automobile industry, it is necessary to see to what extent the automobile from other companies and segments are the substitutes with respect to the linkages of consumer demands (Leheyda, 2007). Price elasticities play an important role in determining the price behavior in the industry but statistics on the cross-price elasticities with respect to other markets’ or other companies’ cars are not largely found in the literature. There are mainly two car segments focused by the automobile industry; premium and economy markets. The consumers in the premium automobile market are mostly older, less price sensitive and with higher income looking for luxurious and comfortable vehicles. The young, with less income and price sensitive consumers are in the economy market segments looking for small cars. Therefore, it is unlikely that premium market consumers will switch to the economy class vehicles in an event of luxurious cars price goes up and the vice versa (Leheyda, 2007)

2.8.2       Collusion

These big three companies in the US automobile industry have been found cooperating and colluding to make the competition less intense and turn things in their favour (Bertomeu, et al., 2015; Bresnahan, 1987; Green and Porter, 1984). The collusion in the oligopoly makes the players act like a monopoly and enjoy the benefits associated with the monopolistic price structure. They can restrict output to bring the prices at their desired level. The companies do not feel like kicking the company which is facing trouble and down, as sustaining it up would be the better for mutual interest;  the lesser of two evils (Bertomeu, et al., 2015).

3.     Conclusion

The industry chosen for this report was the automobile industry in the US. The purpose of this report was to examine how companies operate and behave in the industry. The analysis in this report included a market concentration, market structure, demand and supply factors, pricing decisions and inerdependece of the companies. The analysis shows that the automobile industry truly holds an oligopolist structure as the industry is dominanted by three large manufacturer including Fort motor,General Motor, and Chrysler. The companies cooperate with each  other for mutual benefits, but they generate growth and development for upstreama and downstream industries as well.

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