Automobile Industry

1. Automobile Industry Fletcher Baldwin ConorMcNerney 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?

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

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

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

15. SWOT

16. Germany’s SWOT

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 Wage=change in total wage/change in quantity of labor • Union’s 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: Revenue=Costs

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 doesn’t 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 • Where’s 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-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.