Economy Affection on the Automobile Industry - Case Study Example

Running head: Economy and automotive industry Economy and automotive industry Automotive industry is most vulnerable to the economic fluctuations of a country. When the economy increases automotive industry will also have positive impacts and when the economy recess happens, the automotive industry will be the first which will be negatively affected. Economic dip will force the public to cut down their expenses and they will first reduce their spending on purchasing luxury things like automobile vehicles. This paper analyses the effect of economic shifts, price elasticity, monetary and fiscal policies on automotive industry Introduction Automotive industry is one of the worst affected industries in the world due to the current economic crisis. Most of the automobile manufacturers are struggling hard in order to survive in the market. “In 1990, Mexico exported around 180,000 vehicles, whereas in the first 11 months of 2002 manufacturers in Mexico have sent 1.23 million units abroad. (DeMarines) The growth of automobile industry was huge before the current economic recession starts. Not only Mexico, the leading car manufacturers in Japan, America and Germany were also recorded huge growth in their sales before the unexpected crisis began to affect the whole world. In November, 2008, U.S. sales for the Toyota, Lexus and Scion brands combined fell 33.9 percent; year-to-date sales were down 13.4 percent in the United States, to about 2.1 million, according to Auto Data Corp. (Henry) Inside the 789 Chrysler showrooms to be cast aside, fear is starting to set in as dealers try to figure out what to do with expensive inventories that werent selling well (MSNBC.com) The proposed $ 700 billion bailout package especially to save the automobile industries in America from total destruction, is seems to be not enough as per the experts. GM and Chrysler announced last week to shed almost 2,000 retail outlets to bolster the survivors. Reducing competition from stores with the same brands is supposed to allow the remainder to boost prices and profit, and to reinvest in their businesses (Merx) “In their appeals to Congress, the U.S. automakers were short on accepting blame themselves, and long on blaming high gas prices, the credit crisis and a global recession for the sales downturn and their economic dire straits” (Henry) When we analyze all the above factors we can conclude that automotive industry is directly linked with the economy of a country. Fluctuations in economy will affect the automobile industries more than any other industries. Shift in policies and also the supply and demand of automobiles in the market can also affect the automotive industry Effects of price elasticity, supply, demand and economic conditions on automotive industry Elasticity in economics is a term used when the market will react to the shift of price by a certain degree. The current world is driven by demand. Normally, this demand goes on increases, but in unfamiliar or unexpected situations, demand may become elastic. For example, the current economic crisis has reduced the demand for vehicles considerably even though adequate supply is there. When the fuel prices increases, then also the demand may decreases. On the other hand when the fuels prices or the vehicle prices decrease, the demand may be increased. In an inelastic demand, the quantity of the vehicles sold will not be varied much whereas in elastic demand, the quality of vehicles sold will be affected. In other words an inelastic demand may not have much influence on the shift in price. “Dealers borrow money to buy their inventories, then repay the loans and make a profit when the vehicles are sold. But Chrysler sales were down 46 percent the first four months of the year; so many dealers have been paying interest for months. Even if the vehicles are sold at cost, dealers still lose thousands in interest payments” (MSNBC.com) Most of the car manufacturers have more dealers and showrooms than actually required based on the sales. These dealers quiet often take loans from financial sources for a higher percentage of interest in order to keep their vehicle inventory. When the sales come down their inventories will pile up and they will force to sell out the stock at any cost which may result in huge losses to the dealers. The dealers will be more cautious even when the market builds up because of their past experiences. The solution for the above problems is only to reduce the number of dealers. The reduced number of dealers will reduce the unhealthy competition and the genuine dealers will be properly rewarded. Apart from the economic fluctuations like the variations in supply and demand, environmental problems also contribute heavily to the dip in the sales of automobiles. The environmentalists strongly oppose the heavy production and use of automobiles because of the environmental problems associated with automobiles. Automobiles liberate toxic gases like Carbon dioxide (CO2) which actually destroys the protective shield of the nature, the ozone layer. Moreover the lead batteries used in automobiles cause severe threats to environment. “The use of lead in cars accounts for the largest remaining source of lead pollution, finds a new report released. One car component, the lead starter battery, is responsible for the majority of current lead use in the world. The amount of lead in cars is particularly significant because of its serious impact on human health, including behavioral problems and learning disabilities. Children are particularly susceptible to lead exposure, which occurs when lead dust contaminates floors, soil, or other areas in which children live or play”(Gearhart) The campaigns against environment destruction also negatively affected the sales of automobiles. Joined by an uncommon alliance of auto executives, union leaders and environmental activists, President Barack Obama on announced a national program to cut new vehicle carbon emissions and raise mileage by 30 percent, while also reducing oil needs and changing the kinds of cars Americans buy. Administration officials said consumers were going to pay an extra $700, anyway, for mileage standards that had already been approved. The Obama plan adds another $600 to the price of a vehicle, a senior administration official said, bringing the total cost to $1,300 by 2016. (Obama unveils mpg rule, gets broad support) President Obama’s plan to introduce new policies will definitely increase the price of the vehicles though it may be helpful in increasing the mileage of the vehicle and reducing the environmental problems. Manufacturers must be forced to stop the production of old model cars and they have to implement modifications in their production units to cater the production needs of the new model cars which will again result in heavy expenditure to the automobile manufacturers. They are already destroyed by the current weak economy and President Obama’s plan may increase their burden which may result in closing down of some manufacturing plants. The supply will be affected because of these policies and current economy. Car owners may not throw away their vehicles only because of the environmental problems. They are at present not in a position to go for a new vehicle because of the weak economic performances. Thus the new policies along with the poor economic conditions may definitely affect the supply and demand of the automobiles in the market. “Higher demand for fuel efficiency is driving up small-car prices in a couple of ways. First is simple supply and demand. Toyota said on July 1, 2008, it had only a one-day supply of the Toyota Prius hybrid – meaning in effect that it is sold out, and has a waiting list” (Henry Jim) Some reports have shown that the Americans already started to use line buses more frequently for their transportation purposes instead of their own cars in order to cut down their travelling expenses. This is not a good sign for the automobile manufacturers. People who found comfortable journey on line buses may not purchase cars for their personal use. Moreover, the expenses for the line bus journey is cheap compared to using a personal car. Wage inequality in automotive industry U.S. automakers have made major progress in recent years closing both the labor-cost gap and the quality gap with foreign companies manufacturing autos in the United States. (Dickson) Wage inequality is a major problem in US automobile industry. Different car manufacturers offer different salaries to their workers. No standards have been implemented as far as wages in automotive industries in US are concerned. The main reason for wage inequality is the current economic crisis. The sudden unexpected crisis resulted in many people losing their jobs or salaries being cut down. The weaker trade unions have not raised many protests against such untimely termination and cutting down of salaries. “Americans today see union political power waning: 41% believe they will be weaker in the future, according to Gallup” (Carty) Weaker trade unions may not be able to protest against the workplace discriminations and wage inequalities. The threat of losing jobs and reduced salary structure has demoralized most of the employees working in the automobile sector. It is evident that demoralized employees may not perform well and the productivity of the automobile manufacturing units may be drastically affected. Effect of monetary and fiscal policies on automotive industry Monetary and fiscal policies can affect automotive sector seriously since most of the transactions in automotive industry depends on these policies. These policies actually controls the money flow in the market by increasing and decreasing the interest rates of various types of loans. For example, most of the automobile manufactures, dealers and even the customers depends banks like financial institutions for getting loans for their task. Car purchasers need loan to buy cars, dealers need loan for keeping the inventory in a good size and the manufacturers also need assistance from the banking sector. Moreover, the government’s fiscal policies determine the price of the vehicle. Fiscal policies can affect the manufacturers and the dealers as well since the variations in different kinds of taxes can affect the automotive industry positively and negatively Conclusions Automotive industry in America is currently facing a big challenge for survival. Though huge bailout packages and other measures are in place to assist them, nothing seems to be the right answer to the problem. The current economic crisis seems to be the main reason for the destruction of automotive industry. But the manufacturer’s visionless policies also boosted the downfall. President Obama’s proposal to manufacture fuel efficient vehicles may be a right step in the long run, but it can adversely affect the manufacturers at present because of the additional expenses they have to meet to set up new plants. Many people in the automobile sector have lost their jobs because of the current crisis and the trade unions were unable to protect them. References 1. Gearhart, J. Griffith, C, & Mills, K. (2003), Automobile industry largest source of lead pollution today. Environmental Defence Fund, Retrieved July 9, 2009, from http://www.edf.org/pressrelease.cfm?contentID=2889 2. Henry, J. (2008), Toyota loss helps validate Detroit big three, bnet.com. Retrieved July 9, 2009, from http://industry.bnet.com/auto/1000478/toyota-loss-helps-validate-detroit-big-three/ 3. Dickson, D. (2008), U. S. auto industry closing great divide in quality, wages, Retrieved July 9, 2009, from http://www.washingtontimes.com/news/2008/nov/24/us-auto-industry-closing-great-divide-in-quality-w/ 4. Carty, S. (2009), UAW strike in ’36-’37 changed workers’ lives across USA, Retrieved July 9, 2009, from http://www.usatoday.com/money/autos/2009-01-13-flint-striker-autoworkers-union_N.htm 5. DeMarines, R. (2002), NAFTA Provides Big Benefit For Mexico’s Auto Industries, Retrieved July 9, 2009 from http://findarticles.com/p/articles/mi_m0UDO/is_6_16/ai_95751413/?tag=content;col1 6. Obama unveils mpg rule, gets broad support, MSNBC.com. (2009),. Retrieved July 9, 2009 from http://www.msnbc.msn.com/id/30810514// 7. MSNBC.com. (2009). Chrysler dealers shift into ‘everything must go’. Retrieved July 9, 2009. from http://www.msnbc.msn.com/id/30794379// 8. Merx, K. & Naughton, K. Bloomberg.com. Dealer math in GM, Chrysler cuts is more sales at fewer stores. Retrieved May 18, 2009 from http://www.bloomberg.com/apps/news?pid=20601209&sid=aVXrNfdjNdQQ&refer=transportation 9. Henry Jim, 2008, Supply and Demand: Small Cars Command Bigger Prices, Retrieved May 18, 2009 from http://industry.bnet.com/auto/1000104/supply-and-demand-small-cars-command-bigger-prices/ Read More