AUTOMOBILE INDUSTRYFletcher BaldwinConor McNerneyPatrick LittenGina KimDien Nguyen

Outline• Supply and Demand

• Production and Comparative Advantage

• Unions and the Work and Labor Market

• Fuel Economy Standards

• Auto Market Competition

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?

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

Demand Factors for 2011• Consumer motivation

• Confidence• Stock market• Employment

• Ability to fund purchase

• Pent-up Demand• What is it?• When will it release?

Supply Factors for 2011• Earthquake in Japan

• Production shortages in Japan• Will demand outpace supply?

• US automakers will be able to meet demand

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

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%

COMPARATIVE ADVANTAGE AND PRODUCTION COST ANALYSIS

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

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

• SWOT matrix

SWOTThe 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 comeWork to improve

Germany’s SWOTGermany’s SWOT Strengths:

Educated, skilled labor force. Engineering =>Autos

Weaknesses:High labor and social costsSlow innovationHigh unemployment rate

Opportunities:Increased trade with EUHigh-demand for German Cars

Use high demandTake advantage of trade

Outsourcing Foreign investments

Threats:North America: $$Pacific Rim and Asia low cost and high quality

Learning from others TRICKY

WORK AND LABOR MARKET

Labor Unions• Labor Union goals:

• Raise wages• Improve working

conditions• Additional

compensations• Unions act as a monopoly

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

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

labor

Marginal Wage• Marginal Wage=change in total wage/change in quantity

of labor• Union’s labor equilibrium: wage rate = labor supply curve

United Auto Workers

• Founded in 1935 amid the Great Depression

• Union formed to produce change

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

UAW & GM Break-Even Point

Break-Even Point: Revenue=Costs

FUEL ECONOMY STANDARDS

Impacts, Efficiency, and Alternatives

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.

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

Impact of CAFE

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.

Criticism • Why doesn’t the government increase gasoline taxes

dramatically then?

• What do economists say?

“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?

AUTO MARKET COMPETITION

TypesoRegime I: All models of cars

o Sports car, truck, hybrid, limousine... oRegime II: different manufactures

o Ford, Toyota, Lexus, BMW...oRegime III: different importers/distributors

o A lot... see next slide

CompetitionoRegime III (info taken from Texas Department of Motor

Vehicles)

List of distributors in Texas

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)

Oligopoly and Cartel• But...they are smart

Getting market power by: rent-seeking, informal collusion, differentiating products (reducing competition) • Ex: The Big 3 and SUV prices

• Where’s the evidence?.... they are making lots of profits (take a look at Toyota income)

Herfindahl Index• Indicator – competitive/oligopolistic/monopolistic market

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

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

Imperfect competition...zero profit?• They are making lots of profits (info taken from Toyota

income statement of 2011-quarterly)

Questions?

Balloon Car

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-2011-auto-sales.html

• Plache, L. (2011). 2011 Forecast 12.9 Million Still Holds. Retrieved from http:// www.autoobserver.com/2011/06/2011-forecast-129-million-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.forbes.com/finapps/jsp/ finance/compinfo/FinancialIndustrial.jsp?tkr=tm&period=qtr

• Toyota. (n.d.). Retrieved from http://finapps.forbes.com/finapps/jsp/ finance/compinfo/IncomeStatement.jsp?tkr=tm&period=qtr

• 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.