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Automotive Industry/ Economic Theory

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Autor:  anton  01 January 2011
Tags:  Automotive,  Industry,  Economic,  Theory
Words: 1981   |   Pages: 8
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Automotive Industry


Automotive Industry

In the automotive industry there are many factors and policies that affect the automotive industry and its performance. The following topics and their impacts on the automotive industry are as follows:

В• Supply and Demand (Sales)

В• North American Free Trade Agreement (NAFTA)

В• External Affects

В• Labor Supply and Demand

В• Federal Policies

В• Economic Influence

Supply And Demand

High competition from foreign car imports causing US manufactures to seek deals with lower cost overseas companies. This movement is in effort to reduce manufacturing costs of domestic vehicles in order to stay competitive with foreign manufactures. By reducing manufacturing costs, domestic manufactures are seeking ways to reduce the cost of their vehicles in order to improve sales. (National Environmental Trust [NET], n.d., pg. 5) One of the main strategies to reduce costs of the domestic automobiles, manufacturers of component parts are relocating their manufacturing sites to countries such as Canada, Mexico, India, China and the Philippines to reduce the costs of these components. The affect of these moves is obviously a loss of domestic jobs and a reduction of cash flow into the US economy.

Another factor that is very influential to the automotive industry is that of rising fuel costs. Higher oil prices have forced automotive manufactures to slash prices on their larger less gas efficient vehicles while at the same time raising the prices of highly efficient vehicles. Due to higher gas prices the demand for less efficient vehicles is low forcing the manufactures to slash prices in order for them to move the vehicles off their lots. The opposite is occurring to higher efficient vehicles. With the gas prices increasing the demand for higher efficient vehicles is increasing which means the manufactures can raise prices due to the higher demand. (Reuters [R], 2007, pg. 1) While fuel prices and cost cutting practices are a couple of factors that affect the automotive market, these factors also affect the US economy as a whole.

North American Free Trade Agreement

NAFTA was envisioned to bring the neighboring economies up to a higher level and we could then all benefit from stronger economies and lower prices. Unfortunately this has not really been the case. While we are seeing increased exports of US agricultural goods, the loss of US manufacturing jobs is growing everyday. Not only are we seeing loss of US jobs we are seeing huge declines in the trade deficits with both Canada and Mexico as a result. With the loss of jobs in the US and the weakening dollar, production of goods in Mexico seems to be more attractive to US firms. Many US manufacturing plants shut down and move to Mexico where the labor is cheaper. With NAFTA, many of the large corporations' are taking advantage of this situation and moving their manufacturing plants to Mexico.

The chart below shows After NAFTA took effect in 1994, the United States developed large and rapidly growing deficits with these trade partners.

(Scott, 2006, pg. 1)

So as we can see, NAFTA is not working as it was intended but just the opposite. The US is losing jobs and we are buying more goods from across the borders while reducing the amount we export. The idea was good, but the performance so far has been very poor. By reducing the amount of US jobs and increasing the amount of trade deficits to other countires, the automotive industry is hurting itself. By demanding cheaper components to reduce the prices of their vehicles, they are actually eliminating US jobs and the incomes that are associated with these jobs. If people are out of work, they obviously can not afford to purchase a new vehicle.

External Affects on the Automotive Industry

There are many factors in the forms of externalities on the automotive market that affect consumers. With the increased competition from rival automakers, higher safety and gas mileage standards set by the government consumers are both benefiting and suffering from these effects.

Positive Externalities

Due to the increased competition of carmakers consumers are reaping the benefits of more selection and lower prices. Car makers today are forced to find better and cheaper ways to produce vehicles to persuade consumers in their direction. It is this increased competition that allows consumers to select vehicles that are of higher quality and at lower prices. Increasing global competition is changing the environment facing most companies today. As trade barriers fall and transaction costs decline, new global competitors are entering previously more isolated domestic markets. In response to this intensified competitive pressure, local companies are pushed to enhance performance by innovating and adopting process and product improvements. (MCKINSEY GLOBAL INSTITUTE [MCKINSEYGLOBALINSTITUTE], 2005, pg. 1) The effect this has on the economy is that with vehicles being priced to persuade buyers, more money is being poured into the economy from vehicles sales.

Another benefit is that of increased safety standards for today's vehicles. Vehicles today are much safer then they were 10 years ago, with this increase in safety standards consumers are much safer on the roads.

Negative Externalities

Probably one of the biggest negative externalities of the automotive industry on society today is that of vehicle emissions. Gasoline powered vehicles account for 95% of light-duty vehicle sales. Gasoline-powered vehicles emit carbon monoxide, nitrogen oxides, and hydrocarbons, otherwise referred to as volatile organic compounds. CO reduces the flow of oxygen in the bloodstream and causes problems ranging from difficulty of breathing and inability to exercise to more serious cardiovascular effects. (Parry, Walls, & Harrington, 2006, pg. 1) It is this negative impact form vehicle emissions that affects everyone in our society. The impact on the economy from this negative externality would be increased cost to manufactures which in turn is passed on to the buyer and increased cost to society due to medical needs.

Another negative externality from the increased competition in the automotive market would come from manufactures needs to reduce costs. In many cases if a producer is forced to reduce the cost of its production, many jobs may be lost to cheaper manufactures across our borders. The negative impact on the economy is very obvious as many local jobs would be lost. While competition and reduced cost needs are for the benefit of us the consumers, the cost to achieve these goals may very well be at the sacrifice of local workers.

So as we can see, the automotive industry impacts the economy is many different ways. While some externalities may be good for consumers, the methods to achieve these may also be negative to local economies.

Automotive Labor Supply and Demand

In many areas of the country, especially in the state of Michigan we have seen a great number of manufacturing jobs lost to companies overseas or over the North American borders. In many communities the loss of jobs creates a labor surplus which in turn drives down the wages of employees looking for work simply due to more competition for existing jobs within the community.

Due to the fact that the labor supply in this scenario has increased due to the plant closures locally. The direction of the labor supply would shift to the right. Simply because the labor market is now flooded with more prospects for existing jobs and the demand for new employees stays about the same the labor shift would be to the right. Increased supply and same demand basically translates into lower wages for employees that are competing for available positions.

In this scenario, the equilibrium would be in the favor of employers looking for workers. With the increased supply of available workers, the employer can offer lower wages to prospects simply because the increased workers now available are competing for the same jobs. If a worker really needs a job, they may be more willing to sacrifice a lower wage to become employees again and regain needed benefits.

Again, due to the lower production costs of manufacturing components across the US borders. The inequalities are very simple; it is much more cost effective to produce components in countries such as Mexico, India and China. Even with adding in the transportation costs associated with partnerships with these countries, it is still cheaper than manufacturing costs of the US. (Martin, 2006, pg. 1) The affects of this new global competition and movement towards price reduction, the workers in the automotive industry are being squeezed and forced into lower paying jobs or unemployment in many cases.

Federal Policies Affects on the Automotive Industry

The Federal Government monitors economic data to determine the course of the US economy. It is this monitoring that result in the reduction or increase in interest rates that affect the purchasing power of the citizens of the US. By monitoring the consumer price index (CPI) the federal government attempts to steer the US economy away from inflation or recession. It is this type of monetary policy that controls the amount of money in circulation within the US economy. By controlling the amount of money in circulation the Fed also controls the interest rates to banks which in turn gets passed on to the consumer who would like to acquire a loan through the local bank. By controlling the interest rates to consumers, the Fed is also controlling the inventories of vehicles purchased and even the price. When interest rates are low, more people are likely to buy a new vehicle even if the price is a little higher. When the interest rates are higher, less people are likely to take out a loan and the car companies find themselves with a larger inventory, which in turn forces them to offer rebates and cut prices. (usinfo, n.d., pg. 1)

So as we can see, Federal policies do have a direct impact on the automotive industry by regulating the interest rates offered by banks. When the Federal Reserve makes a move on interest rates by either reducing or increasing them, consumers to the automotive industry are impacted. Reduction of interest rates allows consumers a better deal from the banks which in turn may prompt the general public to take the plunge and purchase a new vehicle. The opposite is also true when the interest rates are increased. The general public may find themselves waiting to purchase a new vehicle until the rates come down again. So obviously, when purchases increase the automotive industry must produce more vehicles. When purchases are down the industry finds itself with higher inventories and then must reduce production or even lay off workers until inventory levels are reduced.

Economic Influence

So as we can see, there are many factors that can and do influence the automotive industry from an economic standpoint. From rising fuel costs, global competition and even the FED's decision making on the US economy. Right now the US automotive market is suffering most from global competition and the increased cost of fuels. It is these factors that have and will continue to have a direct affect on the US economy as increased costs and industry cut backs will reduce the amount of money that is poured into the US economy. While the recent cuts in interest rates and new stimulus package that was just released by the government may temporarily improve the automotive sales and the US economy, the future of the US automotive industry is in trouble and this will likely continue as cost reductions within the industry are required to maintain market share.


MCKINSEY GLOBAL INSTITUTE (2005, 11-07-05). Increasing GlobalCompetition and LaborProductivity. Retrieved 12-08-07, from http://www.frbsf.org/economics/conferences/0511/4_IncreasingGlobalCompetition.pdf

Martin, S. B. (2006, April). Global Sourcing Dynamics, Inequality, and В‘Decent Work' in AutoParts: Mexico Through the Brazilian Looking Glass.. Retrieved 12-17-07, from http://www.ia.newschool.edu/docs/wkg_papers/Martin_2006-08.pdf

National Environmental Trust (n.d., n.d.). Fuel Efficiency,Oil Prices,and U.S. Auto Industry EmploymentOil Prices. Retrieved 11-21-07, from http://www.net.org/reports/energy/CAFE_summary.pdf

Parry, I., Walls, M., & Harrington, W. (2006, June). Automobile Externalities and Policies. Retrieved 12-8-07, from http://econ.yorku.ca/~jametti/4080/Parry_etal_06.pdf

Reuters (2007, 11-21-07). Shrinking U.S. auto mkt to spark overseas deals.. Retrieved 11-21-07, from http://news.moneycentral.msn.com/category/industryarticle.aspx?feed=OBR&Date=20071121&ID=7847122&industry=IND_AUTOMOTIVE&isub

Scott, R. E. (2006, September 28, 2006). Revisiting NAFTA. Retrieved 11-27-07, from http://www.epinet.org/content.cfm/bp173

usinfo (n.d., n.d.). Monetary and Fiscal Policy. Retrieved 1-15-08, from http://usinfo.state.gov/products/pubs/oecon/chap7.htm

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