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
• Advertisement
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 your Developing a strategy to

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
Germany’s SWOT
Germany’s 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
• 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
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

• 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.