Micro and Macroeconomic Influences on the Automobiles Industry - Case Study Example

Student’s Name Instructor’s Name Course Date The Case: Micro and Macroeconomic Influences on the Automobiles Industry Part 1: Case Summary The case examines the influence macro and microeconomic factors on the automobiles industry of different players across the globe. The U.S. automobiles market recorded a 12.8% increase in its sales in 2012 as compared to the sales realized in 2011. During that year, the U.S. automobiles market sold 1.19 million automobiles. The resulting annualized rate was 14.94 million vehicles. It was evident that the market recorded the highest sales in the year since March 2008, prior to the onset of the global economic recession. The increased sales in the market emanated from the rise in the demand of passenger cars an indicator that the economy was recovering from the economic slump. Three industry players, Chrysler Group LLC, Honda Motor Co. and Toyota Motor Corp. recorded the increase in annual sales realized in 2012. The 2011 earthquake in Japan had influenced negatively the production of automobiles by Toyota and Honda. Consequently, the Asian automobile manufacturers were recovering from the impact of the earthquake that had hit Japan. So far, the case presents two macroeconomic factors that affected the automobiles industry thereby resulting in a decline in the sales realized and the number of automobiles assembled by the players. The economic 2008/2009 global economic recession suffices to be the first macroeconomic factor that reduced the demand for automobiles because of its adverse impact on the spending power of customers. The case also identifies the other factor, the 2011 earthquake in Japan that had affected the delivery of parts for vehicle assembly thereby reducing the number of assembled automobiles in the year. The case also attributes the massive sales of automobiles in 2012 to the increasing consumer demand for vehicles in the year. The demand emanated from the need to replace aging vehicles by customers. The case also identifies two other factors that contributed to the increase in automobile production in 2012. The factors, adequate availability of affordable labor, and the favorable foreign exchange rates contributed to the rise in the performance of the automobiles industry in 2012. The weakening value of the US dollar in relation to the Japanese Yen lured Japanese automobile manufacturers such as Toyota, Nissan, and Honda to increase the production capacity of their assembly plants in the US in the quest to export automobiles to Europe, the Middle East, Korea, and other target markets. Increasing investment from foreign firms in the domestic economy contributed to the fast recovery of the US economy from the global economic crisis. Consequently, the US automobile sector recorded an increase in its employees working in the automobiles sector from 566,400 in 2010 to 756,800 in 2015. The case also indicates the gradual recovery of the economy to the initial state before the crisis. The increasing demand for automobiles also elicited the rebirth of U.S. automakers such as Ford, GM, and Chrysler that had suffered immensely from the economic crisis. The favorable market conditions lured the auto manufacturers to invest in the engineering and design of automobiles in the quest to meet the rising demand for automobiles in the market and compete favorably with Asian rivals. The case reveals that US automakers installed better features in their automobiles to counter the rivalry presented by their Japanese competitors. Rather than having to deal with the adverse effect of the 2011 earthquake in Japan to the production of automobiles, Toyota also encountered quality issues associated with their design of the floor mat and the gas pedal in 2010. Honda also encountered technology and quality issues associated with its Honda Civic car. Honda officials associated the fault with the underestimation of U.S. rivals in the manufacture of automobiles. Toyota found it difficult to assemble most of its automobiles overseas since it made approximately 50% of its automobiles in Japan. However, Honda and Nissan found it practical to shift a significant portion of their production to North America since the number of automobiles manufactured in Japan represented only one-third of the total production capacities of both companies. Akio Toyoda had already announced Toyota’s plan to make 3 million automobiles on an annual basis in Japan and export half of the automobiles. On the contrary to the President’s decision, other officials advocated for streamlining the vehicle production process on the basis of cost reduction, utilization of new technology on vehicle parts, and high precision production. The case also mentions the economic downturn in China during the period that had influenced negatively the sales of automobiles in the country. For instance, at a time when the U.S. automobiles sector recorded massive increases in sales, the automobiles sector in the Chinese market recorded a mere 2.5% increase in the sales realized from the sector in 2011. Regardless of the decline in the performance, global automakers still considered China to be a viable investment destination. The massive size of the Chinese economy acted as the economic incentive behind the decision of foreign firms such as Toyota, Nissan, Ford, and Honda to target the Chinese market. Despite the fact that Ford had lagged behind in entering the largest global market, the company’s decision to enter the market yielded fruits as evidenced by the ability of the automaker to sell 1.2 million passenger cars in the market in 2011. The demand was approximately half the total number of automobiles that the company developed in North America during the year. The recession and the economic crisis in the Eurozone had an adverse influence on the automobiles sector in the market thereby resulting in massive losses and the need for bailouts for some companies. Part 2: Relevant Economic Issues and the Economic Theory A review of the size of the automobile industry in relation to the entire business activity indicates that the automobile sector is small. However, it is important to note the strong correlations between the sector and other parts of the economy. Consequently, a shock affecting the economy will trickle down to the automobile sector. There is a unilateral movement of business cycles and the automobile industry. However, it is evident that the amplitude of the movements is higher in the automobile industry as compared to the business cycles (Haugh et al. 12). This indicates that the automobile sector exhibits a volatility that is higher than that of the entire manufacturing sector. It is evident that the demand for automobiles declined significantly around mid-2008 at the onset of the economic meltdown especially in the USA and Canada. Several reasons account for the decline in car sales at the onset of the crisis and during the crisis. The inability of households to access credit sufficed to be the primary reason that fueled the decline in automobile sales in the period. Limited access to credit compelled households to postpone car purchases during the period thereby resulting in the decline in car sales. Consequently, a positive improvement in the conditions of the financial market could improve the ability to credit services thereby sparking car purchases once again. The period of declining car sales resulted in massive losses for some of the big players in the market. The results were bailouts for some players such as GM and Chrysler and reduced profitability for other industry players such as Ford. In order to salvage firms in the industry, governments also resorted to offering subsidies. Bailouts indicated the direct involvement of governments in the industry that would have an adverse impact on the industry in the future. In the quest to cushion firms from the meltdown of the industry, countries have also introduced car-scrapping schemes (Haugh et al. 6). The implementation of such schemes has had the effect of increasing sales in the short term. However, the solution was not permanent to the declining sales. The car-scrapping schemes heightened the demand for new cars by individuals at the expense of other products thereby resulting in the crowding out effect. It is evident that there are significant variations in the share of the automobiles sector to the entire economy of countries across the globe. In mature economies in North America, Europe and specific countries such as Japan, the automobiles sector plays a significant role to the economic development of the countries’ economies. In specific countries such as Czech Republic and Germany, it is evident that the automobiles industry contributes 4% of the total output. In developed nations having large assembly plants for automobiles, it is evident that the sector accounts for 2% of the total employed workforce. As a result, the sector has employed a substantial proportion of the national workforce in its value chain either downstream or upstream. Downstream sectors that employ individuals in the automobiles industry include car financing, maintenance, and insurance. Upstream sectors include employees in the transport and steel sectors. Consequently, the automobiles industry poses a significant multiplier effect to the other aspects of the economy. Consequently, the economic recession and its contribution towards reducing car purchases also influenced negatively the financial wellbeing of all actors in the automobiles sector. Concerning the multiplier effect and the G7 countries, it is evident that when the value added from the sector increase by $1, the output increases by $3. Countries such as Japan, Slovakia, Spain, Canada, and Hungary export approximately 20% of their total automobiles output. However, the decline in the demand for automobiles in target markets, especially the USA at the onset of the crisis implied a consequent decline in car sales realized from the market. As mentioned earlier, the direct relationship between the movement of the automobiles sector and other business cycles is responsible for the multiplier effect of the economic downturn to the industry. In fact, the correlation is stronger in countries such as Japan, Germany, and the USA (Haugh et al. 7). This indicates that in such countries, the automobiles sector would suffer the more adverse effect in the event of an economic recession such as the 2008/2009 economic downturn. It is also proper to state that there is a strong positive correlation between private consumption and car sales (Haugh et al. 10). The correlation plays a pivotal role in the total output of automobiles. In the United Kingdom, Canada, and the United States, the correlation is much higher than that in the other OECD economies. This provides an explanation for the decision of other firms in the industry to reduce their total output in specific market in accordance with the level of private consumption. At the heart of the crisis, automobile manufacturers resorted to decreasing the production of automobiles in specific markets such as the US that exhibited a massive decline in private consumption because of the economic crisis. However, the situation was different in 2012 as mature economies started recovering from the recession. An increase in private consumption resulted in a consequent increase in car demand and car purchases thereby boosting car sales realized by firms in the industry. Consequently, Ford, GM, Nissan, Toyota, and Honda among other players in the sector responded by increasing their output to take advantage of the increasing demand of automobiles. Part 3: Case Analysis The case mentions that car sales in the U.S. increased to 1.19 million in September 2012, reflecting a 12.8% increase in comparison to the previous year. The increase emanated from a higher demand for passenger cars manufactured by major industry players such as Toyota, Honda, Ford, and Chrysler. Additional sales emanated from the increase in private consumption in the market. The recovering economy from the 2008 recession improved credit access to households in the economy thereby escalating the demand for passenger cars in the market. Even though manufacturers of passenger cars had recorded a massive increase in passenger car sales in 2012, it is evident that the sales realized by the industry players in 2007 before the crisis exceeded the sales realized in 2012. Apparently, the U.S. automobiles market was gradually recovering from the recession. In 2012, the U.S. stood out as the second largest single market for passenger cars (Office of Industries 1). As compared to 2007, automobile sales realized in 2012 were less than the sales realized from the same market in 2007 by 1.6 million units. Even though high gasoline prices contributed towards depressing the market, it is clear that the recession played a major role in reducing the demand for automobiles in the market. The two factors had a combined effect of depressing automobile sales in 2008 and 2009 by over 35% as compared to the sales realized in 2007. A review of the U.S. automobiles market between 2007 and 2012 indicates a different trend. Before the recession, the demand for light trucks exceeded the demand for passenger cars. However, the converse was true in 2008 and 2009 at the onset of the economic recession when the demand for passenger cars exceeded the demand for light trucks. Besides the recession, high gasoline prices lured customers to resort to fuel-efficient passenger cars as opposed to light trucks. The recession had the impact of limiting credit access to households as well as reducing private consumption. In 2009, the U.S. market indicated a slight increase in the demand for light trucks. Since the economy had not recovered from the recession at that moment, it is evident that the reduced gasoline prices accounted for the slight increase in the demand for light trucks. Moreover, the market also presented two light truck offerings that were fuel-efficient, the Chevrolet Silverado and the Ford F-Series (Office of Industries 27). Japanese automakers such as Honda, Toyota, and Nissan decided to increase their automobiles output in the U.S. market. Besides increasing the output of their assembly plants in North America, the automakers also resorted to increasing their exports to the market. Besides the contribution of the recovery from the recession through increased credit access and private consumption, the ready availability of labor and the favorable exchange rate between the Japanese Yen and the US dollar encouraged Japanese automakers to increase their exports to the market. The U.S. dollar was declining against the Japanese Yen. The weakening U.S. dollar implied that it was less expensive to manufacture automobiles in the U.S. as compared to Japan. Japanese automakers decided to use the U.S. market as the hub for their production activities in exporting automobiles to other markets in Europe, the Middle East, and Korea. The weakening U.S. dollar emanated from the increase in the U.S. consumption of exports. Automobiles were some of the significant imports in the U.S. following the recovering of the country from the recession and the increase in private consumption. As more imports entered the U.S., foreign exchange markets recorded an increase in the supply of U.S. dollars. Consequently, the increasing demand for Japanese imports increased the circulation of U.S. dollars in Japan following the high rate of converting U.S. dollars to Japanese Yen in Japan. The resultant effect is an increase in the demand for Japanese Yen that indicated the weakening of the U.S. dollar against the Yen. The depreciation of the dollar against the Yen made the U.S. a favorable destination for automakers that intended to export automobiles to other markets across the globe at reduced expenses. The Great Tohoku Tsunami and Earthquake in Japan influenced negatively the production of automakers by Honda and Toyota in 2011. The disaster destroyed nuclear reactors in the region that were responsible for the generation of electricity to areas and plants in the region. The evacuation of the area also made it impossible for automakers to reopen the plants soon after the occurrence of the disaster (Canis 1). Some of the manufacturing facilities located in the affected region were integral to the supply chain of the global automobiles industry. Some of the plants assembled automobiles whereas others built components and parts for automobiles. The destruction of the supply chain compelled Toyota and Honda to close their assembly waits for several weeks as they assessed the impact of the disaster on their suppliers. It is evident that the Chinese economy recorded slow growths in 2011. However, automakers such as Ford and GM still ventured into the market to capitalize on the massive size of the economy. China’s massive economy guaranteed a ready market for automakers in the industry. The decision of Ford to enter the market in 2011 enabled it to increase its output in the market to 1.2 million units. Consequently, the output would account for almost half of the company’s total output. Works Cited Canis, Bill. Motor Vehicle Supply Chain: Effects of the Japanese Earthquake and Tsunami. Diane Publishing, 2011. Haugh, David, Annabelle Mourougane, and Olivier Chatal. "The automobile industry in and beyond the crisis." (2010). Office of Industries. Passenger Vehicles: Industry & Trade Summary. United States International Trade Commission. (2013). Read More