Microeconomic Analysis of the Automotive Industry

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Table of Contents

Will Power of Price
Introduction to microeconomics
Car Price Trends
Buying Behavior
Trade and income distribution among countries for the car industry
Labor issues
Government policies
Prices
Global economic conditions
Work cited

Microeconomics is concerned with the assessment of how firms, households, as well as individuals arrive at decisions towards the distribution of scarce resources, usually in markets where products and services are being traded. The automobile sector is highly diversified, and the issues of microeconomics apply here as well (McManus 2006).

The automobile industry is a crucial industry globally that offers employment to more than 25 million people. The United States, Germany, Japan, South Korea and China have been noted as the five top-most manufactures of autos globally. In 2007, auto sales averaged $ 1, 172 billion on a global scale (Ramrattan 2001).

The United States currently leads in terms of auto sales, at a stagnate value of 37 percent, followed by the European market at 30 percent. Figures from the Asian region, specifically in Japan and China continue rising tremendously. This is a useful pointer of where the auto market may be headed in the coming few decades (Romero 2008).

The observed slack in automobile markets that are quite well-established, coupled with the stiff competition being fronted by Asia, and the ever-rising production costs could be touted as the prime causes of the serious problems that seem to have engulfed western auto manufacturer giants (Romero 2008).

Prior to the global oil crisis of the 1970s, the United States and German automakers dominated most of the global market for automobiles. This was however to change when the crisis hit the globe, and more people opted for smaller cars that were economical in terms of fuel consumption. This is how Japan rose as a renowned automaker.

There are many factors that affect the price of automobiles, such as taxation by the respective governments, road tax, and insurance premiums (Romero 2008). The price of cars also differs with respect to models, meaning that consumers shall be willing to pay a premium price for a certain model. The value of the respective currency is also a factor that affects the price of cars, as will the prevailing economic condition, such as a recession period, and the price of oil (Sullivan et al 2005).

An understanding of buyer behavior in the car industry has become an important factor for consideration by the auto manufacturers and car dealers alike (Romero 2008).

The car as a product involves a more complex purchase process in relation to other basic commodities like food. Even then, there are still some characteristics of the buyer that will influence their choice of purchase.

These could include income, age, status, taste and preferences, and reference group. The performance of a car and its feature attributes will also affect buyer behaviors. In spite of the advance in technology in the automotive industry, competitive pressure is now being witnessed by the developed and economically stable countries from countries with lower incomes (Gil-Pareja 2003).

The emergence of such new-end manufacturers in Central and Southern Europe, Asia and Latin America is a perfect example. Save for the current moment when the major players in the automobile industry are faced with an imminent collapse that has been occasioned by the credit crunch, the sector has previously been amongst the largest employer. Approximately 25 million people are employed directly or indirectly in the automobile sector, on a global scale (Romero 2008).

There are a number of microeconomic issues that impact the car industry. These include labor relations, and these are known to affect the productivity and overall efficiency of the sector. Government policies on taxation, environmental protection, and the issue of car over-reliance on oil as the prime source of fuel are also factors that affect the car industry (Sullivan et al 205).

Price is another issue, and this will be influenced by the cost of raw materials and labor, as well as the rise in oil prices. Such global economic conditions as the credit crunch are other factors that impact the car industry.

Will Power of Price

Price variation factors in the automotive industry (value of the dollar relative to the euro, variation in tax across jurisdictions, motor vehicle model specifications)
Buying Behavior
Influences of buying behavior in the motor vehicle industry (production, research and development, marketing decisions and operations, government policies, reference group cost, lifestyles, economic conditions, car attributes, price, performance)
Buyer behavior model (for instance, use of advertisements)
Trade and Income distribution among countries for the car industry
Major players in the auto industry (Germany, the US, Japan).
automotive growth in the South American market had been occasioned by a need by major players in Europe and America to cut down labor and production costs
Highest car market in Europe (22.9 million motor vehicles sold in 2007).

Issues shared by the microeconomics for the car industry.

Labor: labor unions reduce efficiencies, causes strikes and damages, but also facilitate training of the workforce, and its job security.
Government policies: issues of global warming and compliance by the automakers, as well as alternative sources of oil.
Price: cost of labor and raw materials.
Oil prices: shipment cost of raw materials increase in tandem, with rising in oil prices. A reduction in car units purchased is also observed.
Global economic conditions: recession, the credit crunch, and increased taxation.

Introduction to microeconomics

As a sub-branch of economics, microeconomics is concerned with the assessment of how firms, households, as well as individuals arrive at decisions towards the distribution of scarce resources, usually in markets. In this regard, microeconomics explores how such behaviors and decisions impact on the demand and supply for both products and services (McConnell & Brue 2004).

These are a deciding factor on the demand and supply of these products and services. In turn, the demand- supply relationship impacts on the price of these products and services. In view of this, microeconomics is charged with the responsibility of assessing the mechanisms of the market that creates relative prices for both goods and services, as well as the distribution of scarce resources (McManus 2006).

As a sector that is highly diversified, the automotive industry worldwide is composed of manufacturers, dealers, suppliers, retailers, and automotive engineers, original manufacturers of equipments, retailers, parts manufacturers, fuel producers and trade unions, among others (McConnell & Brue 2004). The automobile industry is crucial on a global scale, seeing that it offers employment to more that 25 million people (McManus 2006).

The United States, Germany, Japan, South Korea and China have been noted as the five top-most manufactures of autos globally. On the other hand, the United States is both the largest consumers, as well as the leading producer of automobiles. On its own, the US accounts for over 6.6 million jobs (both directly as well as spin-offs). This is almost a 10 percent representation of the country’s $ 10 trillion economy (Sullivan et al 2005).

In 2004, the manufacturing sector of automobile worldwide has been shown to have accounted for close to $ 1, 172 billion in the sales. At the same time, the industry has enjoyed a 2.7 percent cumulative growth since 2004 (Sullivan et al 2005). At the moment, the United States leads in terms of auto sales, at a stagnate value of 37 percent. This is followed by the static figure of the European market at 30 percent (Romero 2008).

Figures from the Asian region, specifically in Japan and China continues rising tremendously. This is a useful pointer of where the auto market may be headed in the coming few decades (Datamonitor 2005). The observed slack in automobile markets that are quite well-established, coupled with the stiff competition being fronted by Asia, and the ever rising production costs could be touted as the prime causes of the serious problems that seems to have engulfed western auto manufacturer giants (Gil-Pareja 2003)

Usually, the maturity stage of any one given sector contributes to both fast and hard competition, as well as a consolidation of the industry (Bourdet 1996). In such a case then, only the bigger players in the industry are able to survive. This notwithstanding, the automobile market which is without doubt at the maturity stage of product life cycle, tends to give very interesting result.

The biggest players in the sector (save for Toyota) have been shown to be most unprofitable in comparison to the smaller companies (SEIDEL et al 2005). Late last year though, Toyota projected a major loss for the first time since the economic crisis that rocked Japan in the 1990s.

In the automobile industry in the United States, General Motors, Ford and Chrysler have for long been known to have dominated the automobile market for much of the period after World War Two. This increase in the concentration only stopped during the 1970s, as a result of the entrance of foreign-based automakers into the United States automobile market (Ramrattan 2001).

In essence, this led to heightened competition in the US automobile market. The foreign-based automakers made tidy sums of profits during the turbulent times in the 1970s, following the emergence of a global oil crisis (Ramrattan 1991). As a result, more American had to make do with smaller cars that were more economical in terms of fuel consumption, compared to the fuel guzzlers that were being manufactured by the automakers in the United States.

As such, more consumers opted to purchase smaller cars, and their demand rose tremendously to the benefit of the foreign-based firms. Ever since the 1970s, price wars and advertising wars have become the yardstick with which competition in the automobile industry is carried out. In the twenty first century, innovations in technology are increasingly being witnessed in the automobile industry, notably advances in the hydrogen technology, and which has thus far been touted as a possible replacement of petroleum as a source of energy source (McManus 2006).

Car Price Trends

For any particular car, its price shall often vary across both state and international boundaries as well. This is as a result of differences in local taxes, and also because the price structure of various manufacturers tend to differ across various markets. In addition, there is also a variation with respect to the specification of models, again varying from one country to another (Romero 2008).

For this reason, a specific model may have differing equipment levels in various countries. Moreover, there are customers from some of the markets who may be ready and willing to pay a premium price in a less competitive market (Bourdet 1996). As such, car manufactures tend to rake in more profits.

The issue of import taxes for cars that have been shipped comes in. There is also a variation in the price of new cars with regard to the time of the year. For example, a given country, or state for that matter, there may be ardent followers of car registrations that are date-specific. In this case, a massive demand surge shall often be witnessed in the event that such a registration date changes (Romero 2008).

The implication here then, is that car dealers are not likely to award discounts to prospective buyers. Some of the basic components of the prices of cars are its ex-showroom price, car insurance, and road tax (Degryse, Hnas & Vreboven 2000).

For the most part, car cost tends to remain standard across the various countries. On the other hand, both the road tax and the rate of insurance for individual countries will often differ. It is this difference of the road tax and insurance rates that has have been identified as the prime causes of the variations in as far as the prices of cars is concerned.

During the 1980s, the car industry in Europe witnessed considerable price variations across the member countries of Europe. This is according to the Consumer Union Bureau in Europe. Andera (2006) has also indicated that in 1983, in both the United Kingdom and Belgium, there was a massive 45 percent difference in price of a standardized car, prior to taxation.

Other factors come to play however, such as the market value of say, the dollar against the euro. In this regard, a car may be more expensive in monetary terms when the purchase is made in Europe as opposed to the United States, given the fact that the dollar has a lesser value than the euro

The automobile firms in the United States have traditionally relied on a stable policy in as far as the pricing of cars is concerned (Ramrattan 2001). On its part, General Motors fixed their prices on the basis of a specified target of the money they had invested. By and by, other firms too embraced this policy.

Ramrattan (1991) has shown that General Motors usually made an estimate of the sales they had made, and that of the unit costs they had sold. To this, they often added a markup of between 15 and 20 percent in order to arrive at an ideal price. In the 1960s, the price difference between Ford and General Motors was in the ranges of $ 10 and $ 20, while that between Ford and Chrysler ranged between $ 40 and $ 50. (Sherer 1980).

Buying Behavior

An understanding of buyer behavior in the car industry has become an important factor for consideration by the auto manufacturers are car dealers alike. This is because production, research and development, marketing decisions and operations, are to a great extent influenced by the likings and preferences of the buyers (McConnell & Brue 2004).

Additionally, consumer buying behavior shall also be influenced by such other exogenous factors as the policies of governments, and the conditions of the economy (Degryse, Hnas & Vreboven 2000). According to a model developed by Sullivan et al (2006), the purchasing decision made by consumers is usually on the basis of such personal attributes as education and age.

It is also affected by the attributes of a car, like its performance and price. The manufacturers of automobiles not only base their vehicle designs according to the buying behavior of their consumers, they also tend to base their process according to the purchase behavior of consumers too (McConnell & Brue 2004). The influence of the government in this process comes in by way of either raising or decreasing taxes.

Furthermore, the government may also implement new policies for the performance and design of automobiles. Other exogenous factors like the price of fuel shall also have an impact on the decisions that manufacturers make, as well as the purchase decision of the consumers (Gil-Pareja 2003).

For a better understanding of the market dynamics present in the automobile industry, there is a need for the establishment of a buyer behavior model. A buyer behavior is significantly reliant on product promotion, and the manner in which such products are promoted has a direct influence of the behavior of consumers (Ramrattan 2001).

As such, advertisement tends to enhance an appeal to the minds of a consumer, as well as a desire to purchase a certain brand of a car. Nevertheless, such a purchase shall also be dependent on the preference of such as consumer (Sullivan et al 2005). For example, a consumer may be out looking for prestige in a car. In this case, price would not be the prime factor, and they would thus prefer to pay a premium price to purchase say, a BMW, as opposed to a modest car such as Toyota.

The cost of a car does however have a great impact on the consumers, as it is the purchasing powers that determine the kind of a vehicle that a consumer would buy. As such, a majority of the consumers that are in the middle income earning group are very critical about the price of a vehicle, more than even it performance (Sullivan et al 2005).

Still, the issue of status comes in, and consumers have been known to make purchases of vehicles for prestige purposes. In addition, the power of a reference group is another factor that influences the purchase behavior of consumers (Bourdet 1996).

Because of their need to identify with and belong to such a reference group, consumers end up making car purchases on the basis of the influence of such a reference group. When the manufacturers of automobile have a deep insight into the minds of the consumers, then they are better bale to develop produce and then offer the right products to the right market in a most effective way.

Lifestyle also has an influence on the car purchases that consumers make (Romero 2008). For example, an extravagant person who enjoys living a lavish life tends to make purchases that are also rich in tastes. As such, they end up buying such vehicle as Mercedes. Age is another factor, as it is both tied to the purchasing power as well as preferences.

Young consumers are more outgoing and trendy, and so they would be more inclined to make purchases that reflect this. For instance, they would prefer purchasing the latest brands of car that are high in performance and also comfortable. On the other hand, a middle-aged man with a young family has more financial commitment, and so they would go for size, comfort and affordability in a car, depending of course of their income (Romero 2008).

Furthermore, the size of a car purchased could as well be dependent on the age of consumers, so that young unmarried consumers may purchase a smaller car, as opposed to a SUV that a family man might purchase.

Trade and income distribution among countries for the car industry

Unprecedented and tremendous changes have lately been witnessed in the automotive industry. There has thus been a gradual shift towards markets in the Asian region, as opposed to America and Europe (Ramrattan 2001). This has been occasioned by the attainment of maturity in the product lifecycle of the automobiles in both American and most of Europe.

The main players thus in the automobile market in Asia are India, China, and the ASEAN nations. Globally, the combined assets of the 10 top-most automakers constitute a 28 percent of the 50 companies in the world that manufacture cars. In addition, these 10 corporations employ 29 percent of the entire workforce in the industry, and still accounts for 30 percent of he overall sales (McConnell & Brue 2004).

Given the fact that production and overall operation costs in the developed countries have skyrocketed over the years, a majority of the players in the automotive industry are now turning onto these emerging market, with a view to effectively reducing and having better access to the costs of production (Andera 2006).

In light of this, automotive markets in Asia and South America have been projected to experiencing a major boom in the coming years. The growth as well as the development of the car industry is thus dependent upon a number of factors that these regions seems to offer, such as prices discounts, cheap financing, development in infrastructure, and a rise in the levels of income of the populace (McManus 2006).

In spite of the advance in technology in the automotive industry, competitive pressure is now being witnessed by the developed and economically stable countries from countries with lowers incomes (Gil-Pareja 2003). The emergence of such new-end manufacturers in Central and Southern Europe, Asia and Latin America are a perfect example. Moreover, the hitherto dominant players in this field namely, the United States, Japan and Germany, have in effect embarked on outsourcing, thank to the high rise in labor costs (Gil-Pareja 2003).

Countries with lower incomes have thus turned into dependable suppliers of automotive raw materials and inputs for much major auto producers as Japan, Germany and the United States (Bourdet 1996). Save for the current moment when the major players in the automobile industry are faced with an imminent collapse that has been occasioned by the credit crunch, the sector has previously been amongst the largest employer. Approximately 25 million people are employed directly or indirectly in the automobile sector, on a global scale.

Higher sales for the automobile industry mean better salaries for their workforce. In 2007, a total of 73 million automobiles are believed to have been produced globally. This includes both commercial vehicles, as well as cars (OICA 2007). In the same year, 71.9 million new motor vehicles were sold on a global scale.

Of these, 22.9 million found their market in Europe, while further 21.4 million were sold in the Asian-pacific region. The North American market of Canada and the united states accounted for 19.4 million cars, 4.4 million were sold in the Latin American region, with the middle eats buying 2.4 million cars, and the remaining 1.4 million cars were sold in Africa (Automotive news 2008).

Issues shared by the microeconomics for the car industry.

Labor issues

Labor unions have been shown to lead to a reduction in efficiency. This is as a result of the role of the union in fighting practices and work-related rules that hinders the placement of the most industrious employees in specific jobs (McConnell & Brue 2004).

There is also the issue of losses that may arise in the event of a strike that has been instigated by labor unions.

As such, there seems to be economic costs that are linked to such strikes. For example, in cases where there occurs a prolonged strike in the automotive industry, production would be greatly affected. Furthermore, layoff are bound to occurs in the feeder industries to the car sector, such as those dealing in for instance, the production of tires, paints, glass, as well as fabrics, all of which are vital in the production of autos (McConnell & Brue 2004).

Moreover, the sales of the cars are bound to plummet, and this could in turn see massive layoffs in the dealership centers. In addition, the wages of unionisable workers have been projected to be 15 percent higher, when they are compared with those of the workers without a union (McConnell & Brue 2004).

Nevertheless, union workers have also been shown to reduce efficiency in the automobile sector. This could be attained through an enhanced productivity by way of reducing the rate of turnover of the workers.

Besides, the job security that comes with union representation boosts their morale and consequently, the overall productivity and efficiency (McConnell & Brue 2004). Labor unions are also at a position to lobby for additional training of workers, further improving the efficiency of the sector.

Government policies

Government policies tend to impact on the decision that the automobile firms arrive at, in terms of price and production. To start with, the current debate on global warming is already being implemented by various governments, meaning that the auto makers shall have to comply with the set regulations in terms of carbon emissions to the environment (McManus 2006).

In addition, the current over-reliance on oil as a source of energy is also being challenged by governments, and this will mean that car manufacturers shall have to invest more in environmentally friendly cars, such as those driven by hydrogen. Of course, the ensuing cost shall be passed to the end-consumers, and other companies may have to diversify into new areas, meaning the production my have to reduce.

Prices

There are many factors that determine the price of a vehicle. To start with, the raw materials and labor cost significantly affect the price of motor vehicles. When these go up, then it means that the motor vehicles shall also rise in cost (Sullivan et al 2005).

If the income of customers does not increase in tandem with the rise in both labor and raw materials, and the respective car manufacturers do not act to cushion this effect, then there could be a reduction in the number of cars purchased.

When the price of oil goes up, a lot of other sectors are also affected. For example, the transport sector has to increase shipment costs of raw materials for the manufacture of automobiles in order to absorb the extra costs that they have incurred (McManus 2006). This means that the raw materials become more expensive, and this increases the production cost and eventually, that of the end-product.

Furthermore, consumers also likely to resort to other means of transport, such as public means (bus and rail), as opposed to driving of personal cars. The demand for cars thus reduces, and this has an impact on the interrelated sectors to the car industry.

Global economic conditions

When a global recession looms large, there is not enough money in the pockets of consumers, and so they tend to make do with the basic necessities (Romero 2008). Suddenly, a car may become a luxury for a lot more people that have been affected, meaning that the purchase of newer cars goes down.

Additional microeconomic issues that have an impact on the car industry includes taxation and insurance premiums, and the increase in these means the price of the automakers shall also go up.

Work cited

Andera, Jan (2006) “Driving under the influence of industrial policy on European car. prices”
Bourdet, Yves “Exchange rate regimes and import pricing: the case of Swedish car market”, Review of industrial organization, 11.1 (1996): 79-91.
Datamonitor (2008). “Volkswagen’s Chinese car sales reach record high for 2005”
Degryse, Hnas & Vreboven, Frank (2000). “Car price differentials in the European Union: an economic analysis, CEPR.
Gil-Pareja, Salvator (2003), “pricing to market behavior in European car markets”, European economic review, 47 (2003): 945-62.
McConnell, Campbell & Brue, Stanley. Microeconomics: principles, problems, and policies. New York: McGraw Hill, 2004.
McManus, W. (2006) “Can proactive Fuel Economy Strategies Help Automakers Mitigate Fuel-Price Risks” UMTRI University of Michigan, Transpiration Research Institute.
Ramrattan, Lall. “Dealership competition in the U.S. automobile industry”. American economist, 2001.
Ramrattan, Lall. (1991). “The Impact of Imports on Price Competition in the Automobile Industry” American Economist, Vol. 35.
Romero, Sebastian. (2008). “New Car Prices – Understanding The Price Variations”
Sullivan, J., C. Stephen, B. Goodman, and M. Everson (2005) “Market Penetration of More sustainable vehicles: The HEV case” Research and Innovative Center, Ford Motor Company, Dearborn, MI. Paper is extracted from Proceedings of Agent 2005 Conference.

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