AUTOMOBILE

INDUSTRY
Fletcher Baldwin
Conor McNerney
Patrick Litten
Gina Kim
Dien 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
SWOT
The SWOT Matrix Strengths Weaknesses

Opportunities Max-Max Min-Max

Most potential: using Developing a strategy to

your strengths to take overcome weaknesses to
advantage of utilize opportunities
opportunities
Threats Max-Min Min-Min

Use of strengths to cope Invite foreign investments

with threats and make them want to
come
Work to improve
Germanys SWOT
Germanys SWOT Strengths: Weaknesses:
Educated, skilled labor High labor and social
force. Engineering costs
=>Autos Slow innovation
High unemployment
rate
Opportunities: Use high demand Outsourcing
Increased trade with EU Take advantage of trade Foreign investments
High-demand for German
Cars

Threats: Learning from others TRICKY

North America: $$
Pacific Rim and Asia low
cost and high quality
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
Unions 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 doesnt 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
Types
o Regime I: All models of cars
o Sports car, truck, hybrid, limousine...
o Regime II: different manufactures
o Ford, Toyota, Lexus, BMW...
o Regime III: different importers/distributors
o A lot... see next slide
 Competition
o Regime 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

Wheres 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.