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Automobile Industry

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AUTOMOBILE INDUSTRY Fletcher Baldwin Conor McNerney Patrick Litten Gina Kim Dien Nguyen Competition Regime III (info taken from Texas Department of Motor Vehicles ... – PowerPoint PPT presentation

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Title: Automobile Industry


1
Automobile Industry
  • Fletcher Baldwin
  • Conor McNerney
  • Patrick Litten
  • Gina Kim
  • Dien Nguyen

2
Outline
  • Supply and Demand
  • Production and Comparative Advantage
  • Unions and the Work and Labor Market
  • Fuel Economy Standards
  • Auto Market Competition

3
Supply, Demand, and 2011 U.S. Auto Sales
  • Situation from 2008-2010
  • Demand and Supply Factors for 2011
  • Sales Predictions in 2011
  • Was the Forecast Correct?

4
Situation from 2008-2010
  • U.S. auto sales were in a multi-year slump
  • Rising gas prices caused the SUV to fall out of
    favor
  • Credit crunch of 2008 dried up available
    financing for new-car purchases

5
Demand Factors for 2011
  • Consumer motivation
  • Confidence
  • Stock market
  • Employment
  • Ability to fund purchase
  • Pent-up Demand
  • What is it?
  • When will it release?

6
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7
Supply Factors for 2011
  • Earthquake in Japan
  • Production shortages in Japan
  • Will demand outpace supply?
  • US automakers will be able to meet demand

8
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9
Outlook in 2011?
  • 12.9 million domestic vehicle sales
  • Demand will overcome rising prices from supply
    shortages
  • Foreign shortages caused by the earthquake will
    resolve before the year is over

10
Did It Hold True?
  • 12.8 million new car sales
  • Hopefully, pent-up demand will continue to drive
    sales up
  • Key Points
  • GM 13
  • Ford 17
  • Chrysler 26
  • Toyota -7
  • Honda -7

11
Comparative Advantage and Production Cost Analysis
12
Comparative Advantage
  • Definition The ability to be better suited to
    the production of one good than to the production
    of another
  • Opportunity cost
  • This technology over that technology
  • This raw material over that raw material
  • Advertisement

13
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14
Production Cost Analysis
  • Comparative Advantage
  • What and How Much to produce
  • GM and auto-workers
  • Germany (a case study)
  • SWOT matrix

15
SWOT
The SWOT Matrix Strengths Weaknesses
Opportunities Max-Max Most potential using your strengths to take advantage of opportunities Min-Max Developing a strategy to overcome weaknesses to utilize opportunities
Threats Max-Min Use of strengths to cope with threats Min-Min Invite foreign investments and make them want to come Work to improve
16
Germanys SWOT
Germanys SWOT Strengths Educated, skilled labor force. Engineering gtAutos Weaknesses High labor and social costs Slow innovation High unemployment rate
Opportunities Increased trade with EU High-demand for German Cars Use high demand Take advantage of trade Outsourcing Foreign investments
Threats North America Pacific Rim and Asia low cost and high quality Learning from others TRICKY
17
Work and labor market
18
Labor Unions
  • Labor Union goals
  • Raise wages
  • Improve working conditions
  • Additional compensations
  • Unions act as a monopoly

19
Side Effects of Unions
  • Reduce number of jobs available
  • Raised labor prices have negative effects on
  • Consumers
  • Non-union workers
  • The jobless
  • Taxpayers
  • Owners of corporations

20
Economics of the Labor Market
  • Labor supply
  • Labor demand
  • Equilibrium wage
  • Labor unions aim to alter
  • equilibrium wage
  • equilibrium quantity of labor

21
Marginal Wage
  • Marginal Wagechange in total wage/change in
    quantity of labor
  • Unions labor equilibrium
  • wage rate labor supply curve

22
United Auto Workers
  • Founded in 1935 amid the Great Depression
  • Union formed to produce change

23
UAW and the 08-09 Auto Crisis
  • Big Three Hourly Wage 28
  • Foreign Competitors 14
  • 85-95 of union wages and benefits paid to
    out-of-work UAW laborers
  • Millions paid to out-of-work workers

24
UAW GM Break-Even Point
  • Break-Even Point RevenueCosts

25
Fuel Economy Standards
  • Impacts, Efficiency, and Alternatives

26
Introduction
  • What is fuel economy?
  • It refers to the fuel efficiency relationship
    between distance traveled by an automobile and
    the amount of fuel consumed.
  • What are fuel economy standards?
  • A required fuel economy threshold that cars of a
    certain class must meet.
  • Why do we have them?
  • They are emission regulations that set specific
    limits to the amount of pollutants that can be
    released into the environment.

27
CAFE Program
  • Established by the Energy Policy and Conservation
    Act in 1975
  • Created to improve the average fuel economy of
    cars and light trucks sold in the U.S.
  • Was one of the main forces behind a 35 percent
    increase in new vehicle fuel economy between 1978
    and 1985

28
Impact of CAFE
29
Criticism
  • CAFE standards impose significant costs on
    automakers and consumers.
  • Short Run vs. Long Run Effects
  • Gasoline taxes are far more cost-effective and
    more effectively reduce gasoline use.

30
Criticism
  • Why doesnt the government increase gasoline
    taxes dramatically then?
  • What do economists say?

31
Feebates
  • Inefficient vehicles receive a surcharge (FEE-),
    and efficient vehicles are granted a rebate
    (BATE).
  • What is a pivot point?
  • What are the components of the system?
  • What are the characteristics of the system?
  • Is this system a viable alternative?

32
Auto market competition
33
Types
  • Regime I All models of cars
  • Sports car, truck, hybrid, limousine...
  • Regime II different manufactures
  • Ford, Toyota, Lexus, BMW...
  • Regime III different importers/distributors
  • A lot... see next slide

34
Competition
  • Regime III (info taken from Texas Department of
    Motor Vehicles)

List of distributors in Texas
35
Rivalry in the Auto Industry
  • Due to global competition
  • The entry of foreign producers (Honda, Toyota...)
  • Threats of substitutes (bus, train, new models)
  • Dealership sales, services.
  • ? Decrease in concentration ratio (measure of the
    monopolistic of the market)

36
Oligopoly and Cartel
  • But...they are smartGetting market power by
    rent-seeking, informal collusion, differentiating
    products (reducing competition)
  • Ex The Big 3 and SUV prices
  • Wheres the evidence?.... they are making lots of
    profits (take a look at Toyota income)

37
Herfindahl Index
  • Indicator competitive/oligopolistic/monopolistic
    market

38
Imperfect competition
  • Substantial barrier to entry (equipment,
    buildings, patents, license, trademarks)
  • Price is set by dealers
  • Number of firms is small
  • Products are differentiated (types, bonus,
    discounts, guarantee...)
  • Incomplete info

39
Imperfect competition...barrier to entry
  • Taken from Toyota balance sheet 2011-quarterly

40
Imperfect competition...zero profit?
  • They are making lots of profits (info taken from
    Toyota income statement of 2011-quarterly)

41
Questions?
  • Balloon Car

42
References
  • Anderson, S. (2011). Automobile fuel economy
    standards Impacts, efficiency, and
    alternatives. Review of Environmental Economics
    and Policy, 5(1), 89-108. Retrieved from
    http//reep.oxfordjournals.org/content/5/1/89.full
  • Dowgiewicz, Kathryn. "UAW an iconic union turns
    75." Michigan History Magazine 94.4 (2010) 23.
    Gale U.S. History In Context. Web. 12 Apr. 2012.
  • Lorio, J. (2012). 2011 Auto Sales. Retrieved
    from http//www.automobilemag.com/features/
    news/1201_2011_auto_sales/viewall.html
  • Plache, L. (2011). Top Factors Driving 2011
    Auto Sales. Retrieved from http//
    www.autoobserver.com/2011/05/top-factors-driving-2
    011-auto-sales.html
  • Plache, L. (2011). 2011 Forecast 12.9 Million
    Still Holds. Retrieved from http//
    www.autoobserver.com/2011/06/2011-forecast-129-mil
    lion-still-holds.html
  • Reynolds, Morgan O. "Labor Unions." The Concise
    Encyclopedia of Economics. Library of Economics
    Liberty. Web. 12 Apr. 2012.
  • Toyota. (n.d.). Retrieved from http//finapps.forb
    es.com/finapps/jsp/ finance/compinfo/FinancialIndu
    strial.jsp?tkrtmperiodqtr
  • Toyota. (n.d.). Retrieved from http//finapps.forb
    es.com/finapps/jsp/ finance/compinfo/IncomeStateme
    nt.jsp?tkrtmperiodqtr
  • Weihrich, H. (1999). Analyzing the competitive
    advantages and disadvantages of Germany with the
    tows matrix. European Business Review, Retrieved
    from http// www.usfca.edu/ fac_staff/
    weihrichh/docs/germany.pdf
  • White, Jerry. "UAW Membership Continues to
    Plummet." Wsws.org. Web.
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