Supply and Demand in the Global Automotive Industry - Essay Example

Supply and Demand in the Global Automotive Industry The global automotive industry is in charge for planning, manufacturing and selling motor cars. It includes motorbikes, cars, and individual vehicles among others. The term automotive industry refers to all vehicles from the manufacturing period to the time it lands in the hands of the consumer.1 The industry has a huge revenue base that one of the world’s most significant economic segments. The industry is largely dependent on the progress of new technology in the world. As markets in the different regions of the world mature, they long for the competitive advantage more and more. The greatest machinery that has been behind the progression of the automotive industry are the principals of economy known as demand and supply.2 The law of supply states that keeping all other factors constant, the more the price of a particular product goes up the more the quantity of that particular product is supplied. On the other hand, the law of demand also provides that keeping all factors the same, when the price is high the demand for the product will be great. Therefore, the automotive industry has survived on these two principles to sustain itself in the market. It has always been about the quality of the cars manufactured and the prices about the market and customers3. Economic ways, the global market, has been enjoying a relatively stable growth characterized by profits, and sales had improved to prerecession levels in countries. However, a substantial ambiguity concerning the future of the industry is still an issue. The European market looked much weaker around 2008, as it was just recovering from a six-year depression.4 However, the industry focused more on the US market, of which they were expecting the sales to rise to around 16 million cars from the 13 million cars that were presently being sold by 2008. In Russia, the industry was also undergoing a boom as sales rose to over 25 percent by the year 2014. In South America, the market also was improving by the year 2014, since sales hard increased by 15 percent. Major players in the industry would be eager to react to such demand shifts in the world.5 Aggressive competition within the fluctuating market have risen customers’ expectations, consumers have become demanding and have increased on their preferences6. Market fluctuation is caused by mobile client’s earnings; that is to say, customer’s earnings being seasonal. It affects the producers in a way that they cannot predict the size of the market and therefore, cannot be sure of the quantity to produce.7 At times, the producer may have unnecessary surpluses that may result in losses for the industry. Most producers in fluctuating markets tend to produce a lower scale, which results in fewer products and may cause increased demand forcing prices going high. Consumers are automatically negatively affected by such night prices. Such encounters infer that automotive manufacturer, hoping to continue in the industry successfully needs to be elastic and receptive to consumer needs8. One of the strongholds the auto industry has had is the kind of producers it has around the globe. It has various players though the principal ones include the following, Toyota Motors, Benz, Jeep, Volkswagen, Chevron, Ford, Infiniti, Jaguar, Kia Motors, Leyland trucks, Michelin, Nissan and Skoda among others.9 Different manufacturers are leading in the various market within the industry, for instance, Toyota is still driving in the European, Asian and African market followed by Benz. Then in America and the whole of North America Ford motors is the leading producer of vehicles in that market. Volkswagen is among the leading manufacturer in the Asian market alongside the big giants such as Toyota. The market is full of competition as far as automotive is concerned on the whole though other players in the industry have broken through the industry and below are some of the breakthrough the company has experienced.10 The United Kingdom is an experienced industry with various manufacturers, but Kia Motors is a new entrant who has successfully penetrated through. It has been able to use a seven-year warranty to its customers, and it has created competition to other competitors hence facilitating the breakthrough. Benz is another competitor who has broken through the European market.11 The company has advertised its brand through the manufacturer of sports cars and the reputation it has been able to create. Currently, Benz is known for having efficient engines, and they are durable, which has it also survive in the industry12. All these new entrants have been able to breakthrough because of the law of supply; the lower the product is supplied on the market, the higher the demand for that particular product. Therefore, the new manufacturers just improve on their products and make sure they are less in the market and thereby raising the demand13. One of the challenges the world economy has faced in the auto industry the price fluctuations, due to the economic depression the world met recently, fuel prices went high, which means consumers were not buying from producers and the whole economy was going down. The auto industry is very crucial in any economy’s growth; it took some governments take steps towards reviving the economy14. For instance, the American government provided incentives for hybrid electric cars to find a substitute for fuel. The idea was aimed at reducing the burden introduced by fuel prices and try to restore consumer’s stability because fuel prices affect all the aspects of the economy starting from the consumer to the manufacturer. The dynamics that have persisted in the industry leave some questions in minds of economists unanswered; various factors affect the demand, and supply in the automotive industry below are some of them analyzed. The demand curve showing the shift in demand for cars The first factor that has had an immediate effect on the demand for cars is the financing options available today. Most analysts assert that car loans are responsible for almost 85% of car sales in the industry today. It implies that when the rates of such loans reduce, the demand for cars raise because more consumers have enough money to buy cars. Whereas, when such rates are high, the demand for cars is likely to reduce because most people will not afford to buy the cars. For example, research shows that in India today majority of the cars bought are provided due to the lower interests rates imposed on auto finance15. The other factor is the level of advertising and marketing being employed in the industry today. Most of the manufacturers have adopted modern methods of advertising and marketing their products. The modes of advertising these days are also influenced by the kind of media ruling the world.16 When the manufacturers increase and improve on marketing strategies the demand raised, while when the manufacturer does not intensify advertising the demand will remain below average because people will not be aware of the new products. For instance, Nissan has strengthened it advertising strategy by forming a partnership with UEFA champion’s league. It implies various people who did not know about its new products are now aware17. The other factor that cannot be ignored is the price of the car. The price of a commodity is a very crucial factor in determining the demand is the price of the particular product because it cuts across all the other factors. When the price of a commodity is relatively small, the demand is high because the majority of the customers are going to buy it but when the price is high, the demand is most likely to reduce because many consumers will shun the product. Therefore, the price of a particular car will affect the demand for that car on the market18. The other factor that affect demand in the automotive industry is the income level of a consumer or a buyer. The income the buyer of is a pertinent factor, for example, when the global economy is doing well the demand of only increases because people’s income will increase. A research conducted in India shows due to increasing in multinationals settling in people have acquired jobs and, therefore, have a shift from lower CC-segment to beautiful CC-segment cars19. Supply has also been affected in the automotive industry and below are the factors influencing the supply of the industry products. Supply curve showing a Shift in Supply of Cars One of the factors affecting supply in the industry is efficient operations. In the automotive industry, competition so intense, it needs the existing players to establish ways through which they can minimize their cost of production. Efficient and active operations such as platform commonality, vindicating the workforce and reducing vendors can help the company enormously20. The other factor affecting supply in automotive is the size of network and availability of finance. A vast network of dealers would increase the supply level of a company because dealers will help reach customers.21 Whereas, on the other hand, when a corporation lacks a reliable network of dealers it may not get customers. For instance, some manufacturers in the industry have gone as far as securing partnerships with banks in rural areas to afford loans to people. Another factor affecting supply in the industry is the price of a particular car. When the price of a car is relatively high the supplier prefers to supply more because he or she expects to earn more. But in situations where the price of a car is lower, the supplier is not motivated to provide the market because of the fewer profits he foresees22. In the automotive industry, where the market is oligopolistic one manufacturer can set a price that will benefit the majority of the other suppliers. It is because in an oligopolistic market, the price of one car directly influences the price of other cars23. The other factor that affects the chain of supply in the automotive industry are the factors affecting supply. Factors of production such as the cost of labor, the cost of raw materials, and cost of machinery among others influence supply. For instance, if the cost of labor and raw materials become very expensive and the profits expected will be less hence less supply. However, on the other hand, where the costs of production are minimum there will be reasonable profits hence increased supply24. Lastly, government policies and taxes also affect the supply chain in the automotive company. In circumstances where plans have changed, for instance, increase or decrease of taxes, expect the price to fluctuate depending on such policies. When the cost of production is high, the supply will reduce25. There are also factors that have been noticed as being responsible for price fluctuation or factors that have been responsible for the constant change in the price of cars and below are some of them. The first factor is attributed to the taxation policy of a particular government in charge of the market in question. When the government is imposing high taxes, the price of that car is most likely to high because the producer of the manufacturer will set a price with an aim of recovering the cost incurred in bringing the product to the market26. The second factor is the cost of production. The costs of production are directly related to the price of any product. One of the primary objectives of business is to make profits, therefore if the cost of production, such as raw materials, labor among others is expensive, it directly means the price of that product is likely to be high because the producer has got profits27. The other factor is the income of the buyer, whereby when a buyer is financially stable it means he can buy more of the product on the market. The market forces of demand will raise the price of that product because when the consumer has more money and the demand for that product will go high, which will make the producer increase the price28. Lastly, prices in an industry can be influenced by the use of new innovative machinery. Innovations in the industry always reduce the cost of production, though sometimes they also increase the cost of production.29 For example, where technology replaces human labor, the cost of production will reduce but where a better car needs more labor, the cost of production will increase. In circumstances where the cost of production is high prices are always high and where costs of production are low, the prices tend to be low. The industry has also faced challenges in the labor market, below are some of the factors that affect the labor market. The exact wage rate the automotive industry offers is the first factor. Higher wages encourage people and also increase the number of people that would be ready to be employed in the auto industry.30 The other factor influencing the labor market is the overtime factor. Many employees find over time absorbing since it is an opportunity for making more money. Therefore, employees will be willing to work in the auto industry as long as they detect a possibility of overtime.31 The existence of substitute occupations also affects the automotive industry. Where other occupations can employ the employees in the auto industry, they tend to ask for higher wages because they have an option of going elsewhere. The other factor is government policy; some governments makes working conditions favorable for workers by imposing a minimum wage law or maximum wage law. In situations where a minimum wage is imposed, the employees are available but when the maximum is imposed labor tends to be scarce32. Bibliography Altekar, Rahul V. 2005. Supply chain management: Concepts and cases. New Delhi: Prentice-Hall of India. Arnold, Roger A. 2010. Economics. Australia: South-Western Cengage Learning. Automotive industries. 1947. Philadelphia: Chilton Co. Becker, H. 2006. 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