Auto Industry Structure and Resources

An oligopoly is defined by Keat and Young (2009) as, “A market in which there is a small number of relatively large sellers.” The auto industry is considered to be to an oligopoly because there are a large number of sellers, thus leaving the consumer only a certain number of companies from which to purchase an automobile. The major manufacturers include Ford, Chrysler, General Motors (GM), Toyota, and Renault/Nissan.

According to Taylor (2012), profits are going to be derived from a handful of mega-companies in North America, Europe, and Asia. These companies include General Motors (GM), Ford, Toyota, Volkswagen, Renault/Nissan, Hyundai/Kia, and Fiat/Chrysler. The chart below, taken from Taylor’s article, demonstrates global sales of auto makers in 2011 and what is predicted to be the companies’ global sales in 2020. (Taylor 2012). This chart reflects which auto makers are at the top in terms of sales, so this could also be interpreted as the companies that are the strongest within the industry.

An industry is a group of firms that market products which are close substitutes for each other. Some industries are more profitable than others due to the dynamics of competitive structure of an industry. There are basically five forces that determine the long-run profitability of an industry; threat of entry of new competition, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and degree of competition (Porter, 2008). Many companies within the United States and world may look to the automotive industry as a possible “cash cow.” This is due to the large inelastic demand followed with a hefty pay off per sale. As a company interested in entering the automotive industry competition, one may find that it is easier said than done.

Since 1860, there have been over 1,800 manufacturing companies that have entered into this competitive market within the United States. Of those 1,800 manufacturers, over 760 have gone out of business, leaving a success rate of less than 57% (Georgano, 2000). Entry into this manufacturing arena requires a huge down payment. Procuring machinery, personnel, factories, and raw materials can put a multi-million dollar price tag of investment and overhead before one sale is completed. Before these complicated pieces of machinery start rolling off the production line, sales strategies and logistics need to also be considered sinking more overhead and investment into start up costs.

For the manufactures that decide to exit this market, there is a large sum of invested money and jobs that are lost. In many situations, losing such a large degree of sunk costs in a plant closure tends to become the precursor to company bankruptcy or selling off of the company. The excess inventory, machinery, and other assets will need to be sold off to try to maintain survival of the existing company. If the company has debt, income from selling off assets or the bankruptcy will be utilized to pay these debts. Either way, exiting this market can cause great financial drain and costly repercussions of the company’s financial livelihood.

In recent years, more manufacturers have taken the financial risk on and been able to enter into the market. The automotive market structure began as an oligopolistic structure due to the limited vendors. In this system, several large sellers have some control over the prices. As time progresses and more domestic and foreign manufacturers enter into the competition, a more perfect competition (many buyers and sellers, none being able to influence prices) is emerging (Business Dictionary.com, 2012) reducing elasticity within the market.

Education and training, wages, and technology are three major factors which impact the quantity and/or skill level of the labor supply in the auto industry. In reviewing the labor supply, we will divide the industry by business and front-line workers. These two general groups would require great variance in education and skill; therefore, the potential labor supply for each should be reviewed separately.

The front-line workers in manufacturing, production, and sales of the auto industry generally require minimal education and receive on-the-job skill training. These workers may have a high school diploma and great variance in skill level for manufacturing and sales. They will receive the training needed on the job and their wages will not greatly vary; therefore, the effect of changes in training and wages for those workers of the industry would be considered minimal in changes to the supply curve.

For this group, advances in technology would have a greater impact. In reviewing the labor supply for the business segment of the automobile industry such as business management, engineering, and marketing, this is the population of the industry which must: understand and keep track of changing consumer demands, understand how to maximize opportunity for growth, how to forecast, how to market, and be innovative in design and features of automobiles as technology continues to advance and the market remains competitive.

According to the Consumer Population Survey (CPS), in 2011 the U.S. Labor Force, age 25 and older, with only a high school education made up over three and a half million potential laborers; while in the same year, those unemployed with a college degree equated to around two million (Bureau of Labor Statistics, 2012). Therefore, the total labor supply for the industry was nearly six million with varying skill levels.

The auto industry was hit hard during the recession and is still coping with large structural changes. Over the past couple of years, the automobile companies have closed plants and discontinued brands and they downsized, restructured and cut budget to bring costs more in line with sales. They also cut jobs, as many as 300,000 or more according to some estimates. Recently, the profits of the auto industry have turned around and they are, again, making profits.

There is now a shortage of workers with the right skill-set. The challenge is finding the right workers with the right skills needed by the workers in the industry, especially as more teams work globally. Because of the new technologies and operations, so called “un-skilled” workers are rarely needed now. The workers also need problem solving skills and decision making skills.

Creating a workforce with these abilities requires a different approach by the human resources team. Better workforce planning is essential to creating the right fit. Automakers are turning their attention to building automobiles that either rely less on traditional fuel sources or use cheaper renewable sources of energy. These “green” solutions will attract consumers.

As automakers are turning their attention to new technology, their talent must be able to grow with them. The shift in consumer preferences in the auto market towards hi-tech, fuel-efficient and environmentally friendly vehicles is a significant challenge to the industry. Auto manufacturers and suppliers will have to adapt quickly to the new technology and invest in research and development. Globalization has also put pressure on the auto industry and its traditional workforce.

The future demand will be that auto companies have a flexible workforce that can constantly learn and refresh its skills. The workforce must be able to be flexible and the industry must leverage rapid learners and be able to re-train employees and re-design jobs. This will be costly for the automobile industry but will be needed to be successful and beat the competition. There may not be a need for the unskilled worker in the auto industry, but there will always be a need for workers. Their roles will change to keep up with the technology and changing markets.

Steel, plastic, aluminum, rubber, and glass are the top five materials used in the automobile production process (George P., 2012). While some of these materials are derived from a natural resource which could potentially pose risk on quantity, such as steel from iron ore and rubber from petroleum, there are forms of either synthetic or renewable resources for each as well as the ability to recycle all of these materials for reuse.

None of these materials are of precious minerals and there are no real variances found in quality of such materials. For example, recycled steel, aluminum, and glass can be used in automobiles because they can be recycled indefinitely without losing their properties (RubberAsia, 2009, Hincha-Ownby, 2010, and Blue, 2012).

Historically, the automotive and construction markets have remained the largest consumers of steel, with more than half of the steel produced. Over the past few years, China has emerged as the major consumer of steel, with the U.S. next, followed by Japan. In 2008, the steel industry suffered a decline due to the recession. This was seen by consumers buying existing inventories of vehicles rather than buying new stock. The industry turned around in 2009 and continued to grow.

Replacement tires are the second highest operating expense for commercial fleets, next to fuel (Automotive Fleet, 2011). In 2010, the cost for tires in the passenger car segment was up 11%. Almost 60 percent of the world’s rubber is consumed by the global tire industry. China is the world’s largest rubber consumer, with U.S. following close behind. Increase global demand for tires is created by the increasing volume of vehicles produced in China, South America, and India.

The Internal Rubbery Study Group forecast that by 2020, there will be a 3-million-ton shortfall of natural rubber in the world. Natural rubber prices are at a historic high due to surging demand for the product in Asia (Automotive Fleet, 2011). The three largest rubber-producing countries are Thailand, Indonesia, and Malaysia, all which sustained floods and rains in the past several years. These disasters harmed the rubber harvests, causing higher prices which are forecast to continue.

Higher raw material costs are the most significant challenge facing the tire industry. All national tire brand manufacturers have raised prices to offset the increased cost of raw materials.

References: Automotive Fleet: Market Trends. Retrieved from http://www.automotive-fleet.com/blog/market-trends/story/2011/02/Higher-Raw-Material-Costs-Put-Upward-Pressue-on-Replacement-Tire-Prices.aspx Blue, J. (2012). Green Living. Glass and aluminum recycling. Retrieved from http://greenliving.nationalgeographic.com/glass-aluminum-recycling-2933.html Bureau of Labor Statistics (2012). Databases, tables, and calculators by subject.

Retrieved from http://data.bls.gov/pdq/SurveyOutputServlet Business Dictionary.com. (2012). Market Structure. Retrieved September 20, 2012, from Business Dictionary.com: http://www.businessdictionary.com/definition/market-structure.html Georgano, Nick (Ed.). The Beaulieu Encyclopedia of the Automobile. Chicago: Fitzroy Dearborn, 2000. George, P. (2012). How Stuff Works. Top 5 materials used in