The US Automobile Industry - Essay Example

U.S. Car Companies Contents Contents 2 U.S. Automobile Industry 3 Causes of Failure of U.S. Companies 5 Initiatives to Improve 6 Market Functioning 8Profit Making Motive 10 Forecast 11 Work Cited 12 Appendix 13 Name of the Student Name of the Professor Course Number Date U.S. Car Companies U.S. Automobile Industry U.S. is one of the most efficient and prosperous economies in the world. The country is considered to be a developed nation and its economic system goes through massive commercial activities. With the growth of domestic economic system, the U.S. economy experienced large amount of growth in its automobile industry. This is because, rising commercial activities in the nation demanded for expansion of transport and communication sector (Bose 56). The automobile industry in U.S. was established long back in 1890. Since its inception, U.S. automobile industry soon became the largest auto industry in the world, in terms of scope and scale of business. The huge demand for the products of this industry in the domestic market of U.S., allowed the companies in the industry to enjoy economies of mass production (scale economies). This helped to speed up the rate of growth of the industry. At the beginning in 1890s, the U.S. auto industry began with approximately 100 automobile companies. These companies used to employ several modern technologies in their product and production processes. Steam engines, internal combustion engines and battery powered engines were the various types of engines found in the cars manufactured by these companies. Since that time, electric cars were available in the nation. The use of steam cars was also famous in the country; however, at times of cold weather, these cars could not be used. Lack of proper road infrastructure hindered this industry from expanding in the initial years. The Federal Aid Road in 1916 and the Federal Aid Highway Act in 1921, helped in allocation of substantial funds in U.S., to build proper roads. In 1896, Henry Ford introduced a new car company named The Ford Motor Company in U.S. Model T was the first model produced and sold by the company and its worth at that time was about $850. The model of the company became very famous in U.S. market and experienced high demand. High demand helped the company to enjoy economies of scale in production. This in turn reduced the cost of production and hence, profit and soon made the organization the largest auto company in the world. The next famous prominent auto company of U.S. that had become famous in the world market was General Motors Corporation (Hirsch 245). The company was founded by William Durant in 1908. The company acquired many small car producing firms, like, Cadillac and soon became a strong competitor of Ford Motor Company in the industry. Chrysler Group LLC was another famous car manufacturing company in U.S. Over time, the number of U.S. car producing firms started to increase in the global market and the degree of competition also significantly increased in the industry. The industry was almost at its peak till 1930s and offered a wide variety of automobiles to consumers in its domestic and foreign market (Best and Langston 145). Figure 1: Transition in Revenue of U.S. Automobile Industry (Source: Amadeo, “The Auto Industry Bailout”) The above bar graph shows the rough changes in aggregate revenue in the U.S. auto industry from 1999 to 2013. However, it should be noted that with the rising number of car producing companies in the industry, the bargaining powers of labourers in the industry significantly started to increase. The working conditions for the labourers in this industry were very harsh and inappropriate. Such problems among labourers gave rise to several labour unions in the country, like, United Automobile Workers Union. These unions used to set up several conflicting issues with the car manufacturing companies, on behalf of the interests of labourers. In order to avoid any type of unfair trade practices in the industry or reduce concentrated monopolizing powers, several regulations were introduced by the government in this industry, like, the National Traffic and Motor Vehicles Safety Act. However, it can be stated that from the above analysis that the growth and prosperity in U.S. economy had significantly helped in the development of its auto mobile sector. On the other hand, the rising revenue of the sector further facilitated mobilizing of greater amount of domestic products in the country. Thus, the economy of U.S. and its car industry were clearly dependent over each other. Causes of Failure of U.S. Companies Over time, there were various external factors and incidents in U.S. economy that negatively influenced the growth rate of the car industry. During 1930, the economy of U.S. experienced severe atrocities of the Great Depression. Severe recessionary trails in the market reduced the supply of money in the economy. There was fall in the disposable income of the consumers (hence, demand for cars in the industry) and the cost of borrowing funds were very high. Many luxury car producing companies in U.S., like, Stutz Motor Company and Peerless Motor Company, were experiencing grave losses in business and were almost forced to cease their operations. Even the companies that had used modern technologies went out of business at that point of time, like, the organization of Doble Steam Motors Corporation and Frankline Automobile Company. Thus, the first loss faced by almost all the car producing firms in U.S. was during the Great Depression. The only few companies that survived in the industry, during this period of time, were, General Motors Corporation, Hudson Motor Car Company, Ford Motor Company and Chrysler Group LLC. In the post war period, many of these existing companies faced serious losses in business due to lack of resources and proper labour power. The term ‘Big Three’ was very dominant in the U.S. auto industry, until the era of 1960. The second major incident that caused loss of market demand shares for many U.S. car producing companies was the emergence of globalization in the global economy. From 1970 onwards, most of the economies in the world undertook strict Open Door Policies. Countries like China, Japan and Germany experienced booming auto sectors during this point of time. The degree of imports and exports in almost all the business sectors significantly increased at this point of time. The existing domestic companies in U.S. car industry faced losses in market share, when companies like Toyota and Volkswagen had entered in the market of U.S. About 127018 cars were sold by the former company right in the first year of entrance. Thus, during the era of globalization, the U.S. car companies faced market share losses. Rather in 1973, oil crisis in the Gulf nations had strong negative impact on the industry. It was claimed by the researches that fuel efficient cars of foreign companies experienced a greater demand than the existing U.S. car companies in the market. The latest drawback faced by U.S. automobile industry was in the recent past, 2008 onwards. This was again due to the global financial crisis in the economy of the country. The Big three auto companies in the market (Ford Motor Company, Chrysler Group LLC and General Motors Corporation) started to face very weak financial conditions that further reduced their competencies in the industry. These companies started to keep their assets at stake in order to sustain the severe atrocities of market crisis. The CEO’s of the company rendered financial assistance from the government at this point of time. Figure 2: U.S. Domestic Automobile Production (Source: Authors creation) From the above graph, it can be clearly stated that the car companies in U.S. have experienced a rising trend in sales or production. However, the fluctuating curve elaborates the different loss making circumstances in the industry. Since 2008 onwards the market share of U.S. auto companies has significantly fallen due to: Severe foreign competition Lack of adequate domestic finance As indicated by the curve, a rise in domestic production in this industry (by 2020) can be experienced with the help of strategic business techniques, adopted by existing car companies of U.S. Initiatives to Improve The growth and profits of the American car companies were primarily because of mass production in business. However, these companies as stated in the above context are experiencing severe loss in market share due to increase international competition offered by the companies of foreign nations, especially the emerging markets. Rather, since the financial crisis, these companies are lacking sufficient fund for any further expansion. It was found that the companies of Chrysler, Ford and General Motors had asked for implicit bail outs from the state regulating authorities (worth $ 50 billion), in order to avoid bankruptcy and increase financial base. At the refusal of government, the three companies asked for loans worth $ 35 billion. In 2009, through the Automotive Industry Finance Program, the government of the country rendered a loan worth $ 13.4 billion to General Motors, $ 6 billion to GMAC and $ 4 billion to Chrysler. On several negotiations, ultimately in 2013 October, the government invested a sum of $ 80 billion in the entire auto industry of the country for the purpose of growth in the global market (Amadeo, “The Auto Industry Bailout”). In order to increase the market demand and productivity, after being successful in increasing finances, these companies have undertaken several strategic measures at their business. Figure 3: Initiatives to Increase Productivity (Source: Mohr, Stephan et al., “Manufacturing Resource Productivity”) The above figure explains the approximate measures taken on by the U.S. car companies in response to the competitive market. With all such measures, it is estimated that in 2013, the sales of automobiles of U.S. car companies were 40%. These firms had outdone the other German, Japan and Korean competitors in the industry. Figure 4: Growth of American Car Business (Source: Amadeo, “The Auto Industry Bailout”) The above chart shows the growth of the major car companies in the automobile industry in U.S. in the recent years. The chart indicates that the industry competition is now leaded by the U.S. car companies (General Motors and Ford) in the current epoch. Market Functioning Right after some years of its inception, the U.S. car industry experienced a Monopolistic Competitive Market structure. The market comprised of infinite number of buyers in the industry. On the other hand, there had been always few sellers in the market. The few car manufacturing companies in the industry produced similar products (different types of automobiles) in the market (Mankiw and Taylor 176). However, the natures of products manufactured by each of the companies were qualitatively different and therefore, each producer in the market had the power to manipulate prices of the products to some extent. However, it should be noted that the companies faced competition and thus, approximately settled competitive prices for the products. The consumers in this industry always enjoyed a high bargaining power in the market. This is because the switching cost in the industry was very low. The demand curve faced by each of the company in the industry was relatively elastic in nature. Figure 5: Demand Curve (Source: Mankiw 45) As denoted by the above graph, under the regime of elastic demand of consumers, a slight rise in the price if a single company’s car, relatively lowered its market demand to a greater extent. However, the luxury car producing firms experienced some potential customers with inelastic demand. For these customers, the Veblen Effect was high. However, at the times of recession, the gross revenue or sales of any car company in this market significantly fell (Klann 98). Figure 6: Fall in sales at times of Recession Price Marginal Cost Demand Curve (Initial) Marginal Revenue Demand Curve (Final) Quantity Q1 Q0 (Source: Authors Creation) The red line in the above figure shows the fall in market demand (faced by a company) at times of recession. This generated fall in the sales from Q0 to Q1. However, over time when the car companies in U.S. increased their financial base, they started to invent new production processes to gain greater advantages in the market. As stated in the above context, this helped the companies enjoy a higher market demand in the industry. Ultimately, with the essence of mass production, each of the companies is experiencing higher revenue due to economies of scale in production (Jackson, “Obama: U.S. auto industry is back”). Figure 7: Economies of Scale (Source: Mankiw 198) As shown by the above figure, scale of economies helped the firms to experience a lower level of long run average cost (LRAC). The existing domestic and foreign car companies in the industry also experience monopolistic competition. These firms at presence incur high expenditures in advertisement and research and development to gain higher competency. Exit of any firm in such an industry is free, but the entry is threatened by the existing rivals in the industry through use of patents, predatory pricings, innovations and high investments (Fama 288-307). Profit Making Motive From the context of the above analysis, it is very clear that the companies in the U.S. automobile industry have always experienced monopolistic competition in the market. Under this regime, each of the firms maximized their profit subject to cost constraint. Figure 8: Short Run Profit and Long Run Normal Profit (Source: Mankiw 222) As denoted by the above graph, it is expected that a firm facing monopolistic competition should enjoy supernormal profit in the short run, but in the long run, it should always exhibit normal profit. However, this is not experienced by the firms in the U.S. automobile market. In order to earn a greater amount of profit, the firms simply generate several obstacles to new entrants in the industry. They make new innovations in business and grab strong patents from the government to gain unique competency and hence profit in the industry. Beginners in the market often find it difficult to enter the industry and make such heavy investments to compete with the existing giant rivals in the market. High advertising expenses are made by the potential leaders in the industry to create a greater brand value among the consumers. In certain situations, the potential firms introduce the policy of Limit Pricing (Baumol and Blinder 134). By enjoying economies of scale in production, these firms simply lower prices and becomes difficult for the rivals in the market to sell products at such low prices. Thus the extensive competition in the industry and thrive to enjoy higher profit have made the U.S. automobile industry more competitive in nature. Forecast It can be considered that the U.S. car industry will expand both its terms of scale and scope of operations in future. All the firms in the industry in U.S. will roll out about 80 million new vehicles in its domestic and international market. It would prove to be knowledge based industrial segment and technological conceptions would be at its forefront. The giant powers in this industry would generate more employment opportunities for the global economy. Many of the companies would spread their business in some of the emerging nations of the world like China, India and Russia (Naughton, “How U.S. Workers Rebuilt an Industry”). It is supposed that in future, this industry would offer a wider range of products to the consumers as well as help them to improve their standards of living. This will enhance the national and domestic product of U.S. as well (Wood “Transition Time in the Rebounding U.S. Auto Industry”). Work Cited Amadeo, Kimberly. “The Auto Industry Bailout.” About.Com U.S. Economy, 2014. Web. 3 February 2014. Baumol, William Jack and Alan Stuart Blinder. Macroeconomics: Principles and Policy. Connecticut: Cengage Learning, 2011. Print. Best, Rick and Craig Langston. Workplace Strategies and Facilities Management. London: Routledge, 2012. Print. Bose, Chandra D. Principles of Management and Administration. New Delhi: PHI Learning Pvt. Ltd., 2002. Print. Fama, Eugene. “Agency Problems and the Theory of the Firm.” Journal of Political Economy, 88.2, (1980): 288 – 307. Web. 3 February 2014. Hirsch, Arnold, R. Macroeconomics. Connecticut: Cengage Learning, 2008. Print. Jackson, David. “Obama: U.S. auto industry is back.” USA Today, 2013. Web. 6 February 2014. Klann, Nils Hendrik. A bubble about to burst? The Spanish Real Estate Market. Norderstedt: GRIN Verlag, 2007. Print. Mankiw, Gregory N. and Mark P. Taylor. Microeconomics. Connecticut: Cengage Learning EMEA, 2006. Print. Mankiw, Gregory N. Principles of Economics. Connecticut: Cengage Learning, 2011. Print. Mohr, Stephan, Ken Somers, Steven Swartz, and Helga Vanthournout. “Manufacturing resource productivity.” Mckinsey, 2014. Web. 3 February 2014. Naughton, Keith. “How U.S. Workers Rebuilt an Industry.” Bloomberg, 2013. Web. 6 February 2014. Wood, Barry. “Transition Time in the Rebounding U.S. Auto Industry.” Market Watch, 2014. Web. 3 February 2014. Appendix Year Production Read More