Economics Automobile Industry There is no industry more present in the world-wide community than the automobile industry. The automobile has changed the lives, culture, and economy of the people and nations that manufacture and demand them. Ever since the late 1800s when the first “modern” car was invented by Benz and Daimler in Germany, the industry has grown into a billion dollar industry affecting so many aspects of our lives. There are more than 400 million passenger cars alone on the roads today.
During the early part of the twentieth century, the United States was home to more than 90 percent of the world’s automotive industry, but has shrunk to about 20 percent in today’s world. This drastic change has occurred by the booming economies in such nations as Japan, Germany, Canada, France, Italy, and other nations. The US auto industry “sales totaled $205 billion, or 3. 3 percent of the total Gross Domestic Product. ” (Tardiff 394) By the end of 19th century, there were about 500 auto manufacturers, but that number dropped sharply to 23 by 1917, and today the Big Three dominate the market.
Ford, General Motors, and Chrysler make up the Big Three which account for 23 percent of the world’s motor vehicle production in 1997, with the Japanese industries coming in second, producing 21 percent. Germany produces 9 percent, Spain, France, South Korea, and Canada each produce 5 percent of the international market in 1997. In the US alone, the auto industry, which includes it’s 500,000 car-related businesses, create 12 million jobs. The automobile is clearly an oligopoly, but each company’s control of the market has gradually diminished because of rising foreign competition.
The US has three main auto manufacturers, Japan has five major producers as does Germany. Each of these companies produce differentiated versions of the same product, have control over their products’ prices, and rely heavily on non-price competition. Each company produces a new line of cars for each model annually. There are many different types of cars, like sedans, station wagons, Sport Utility Vehicles (SUV), two-doors, and four-doors, but by comparing models between two competing companies, you can see how great the similarities are.
The auto industry can still thrive even though it’s products are so similar because the demand for cars is immense and continuous. People rely on cars for so many things that life without one seems impossible, especially in the US which registered 141 million cars in 1988, whereas Japan, the second highest, only registered 30 million. The creation and production of a new car starts about three to four years before it is released to the public. The initial planning stage begins in the company’s corporate headquarters with ideas for the car from product planners and company officials.
Automotive designers draw prospective sketches of the new car, and once approved, model makers create small scale models of the car in fiberglass or clay, then forge life size models also in clay or fiberglass. Automotive engineers then develop each part of the car, and mock-up builders create those indigenous parts of the new car. Test drivers check over the entire system, analyzing how it runs, and then gives suggestions on improving the vehicle. Automotive engineers test all the new, specialized parts of the car, and after all the parts are tested, plant engineers plan how to best mass-produce the new car.
Of all the people working in the automobile industry, most will be found in this next industry which is the assembly plant. In the United States, the majority of these assembly plants can be found in the Michigan, Great Lakes area, and it, on average, takes about ninety minutes on the assembly line for an entire car to be produced. When planning a new car model, the company tries to create what the consumer wants. This is very difficult because as stated earlier it take between three and four years to develop a car.
When General Motors begins developing a new product, it starts by assembling a new team to coordinate the production. After this team is assembled, millions of dollars are spent on dispensing and analyzing public surveys, private firm’s own research, government research, and past car sales to determine what the consumer wants. These specifications include physical dimensions, cost, fuel efficiency, comfort, market price, appearance, and performance. GM then would go on to begin producing the car. The most time consuming step when creating a new model is supplying the specialized pieces of the new model.
Some of the parts can be carried over from previous models or other cars, but many times the company has to either create the new pieces themselves or buy them from a large scale supplier, like ITT Automotive. The company then looks for the supplier that will supply the parts the cheapest. After the model car has been created and approved, the plans are made for it to be made on the assembly line. The car is then ready to be sold to the public through private dealerships which, in the US, are not linked with any major automobile manufacturer.
GM would then sell its cars to whichever dealership is willing to buy from them. In many Japanese firms, like Toyota, a new system has been created and has been coined ‘lean production’. The basic manufacturing ideas are the same, but it emphasizes developing relationships between the company and those it deals with. When Toyota begins developing a new car model, it already has a team assembled which has worked on previous models. The Toyota team then collects the same information about what the public wants just like the GM team but has a much cheaper way of going about it.
Unlike the GM firm, Toyota has formed business ties with car dealerships, and in some cases even owns them. These dealerships use a new set of techniques to sell their cars, called “aggressive selling,” in which a very permanent, personal, and hopefully life-long relationship is created between the company, the dealer, and the buyer. Since the company keeps ties to its consumers, it already knows what the consumer wants, and the consumer is more willing to buy from the company. Toyota continues developing and producing its car, and it comes across the same problem as the GM team of not having all the specialized parts it needs.
Like with the dealerships, Toyota has formed many symbiotic relationships with car part suppliers. These suppliers work hand in hand, with the Toyota team and develop any products that Toyota needs for its new model. The past decade has seen many interesting fluctuations within the automobile industry. Overall the auto industry fluctuates with the normal business cycle, for motor vehicles are an elastic demand to consumers. The more the price for cars goes up, the less people buy cars.
For many years, the automobile industry has seen very large profits because the demand and necessity for cars has increased significantly. Recently, large foreign competitors and steadily increasing prices in motor vehicles have reduced these surplus profits within the industry. Consumers are now demanding lower prices and more luxuries in their cars. To deal with this consumer demand, auto manufacturers have begun by lowering employee pay rolls, replacing employees with machines and more capable workers to improve productivity, and many times merge with other companies to better compete in the market.
Production growth has been about 2-3 percent for the past few years in the auto industry, and hopefully will continue by implementing new cost efficient procedures. American industries, competing in the international markets, face the problem of a strong dollar compared to the weaker currencies of foreign nations. This means that American cars to foreign nations are more expensive, and foreign cars to Americans are cheaper. This supply and demand problem was solved by the Clinton administration which opened up many foreign markets previously closed to the US auto makers.
One of the main markets that the Clinton administration opened up was the Japanese market. This was such a positive victory for the US industries because the Japanese were notorious for charging very little for the cars they sold in foreign countries, making up the difference with extremely high prices for the cars they sold in the closed markets of Japan. The North Atlantic Trade Agreement also opened up trade to many nations in Latin America, especially Mexico. Overall, between 1992 and 1995 export sales rose 22 percent and the sales to Mexico and Japan each rose 250 percent.
The auto industry is also a major source of jobs in the world. “During the early 1990s, approximately one of every seven jobs in the US domestic economy is related to the production, sale, operation, or maintenance of motor vehicles” (Tardiff 396) which makes abundantly clear the impact the car industry has on society, with GM, Chrysler, and Ford Companies making up three fourths of those jobs. Auto workers are also among the most highest paid workers in any industry and also the most productive.
This great increase in worker productivity, due to advancing technology, also accounts for the huge profit gains the Big Three have received in the past few years. Until the late 1960s, the government did not get involved in implementing regulations on the automobile industry. Most of the regulations now placed on car manufacturers have to do with making the car drive safer and be more environmentally sound. Seat belts, reflectors, bumpers, windshield wipers, defrosters, dashboard controls and specialized lights, brakes, tires, and windows were all the result of government action.
Today safety has become extremely important to car makers because of the high deaths that result from automobile accidents, the government, and most influentially, people’s growing concern for their well-being. The Environmental Protection Agency (EPA) has created standards for new cars called emission standards, which prevent excess carbon monoxide from being released into the atmosphere. There has been much talk of creating international standards to regulate the automobile and recently some progress has been made.
Many nations including the US and Japan has become “active participants in the Group of Experts on the Construction of Vehicles, of the United Nations Economic Commission for Europe (ECE/WP29), the principal international forum for harmonization issues. ” (Hoover’s Online) The future of the automobile industry looks rather stable. More than ever, international competition will keep individual company’s sales from soaring. Cost efficiency is a major issue with today’s car manufacturing, as is expanding into developing countries.
The Far East and Latin America are expected to be the source of most new profits and demand in the years ahead. “The current global car market is expected to grow from about 44 million vehicles sold per year to 64 million by 2002. ” (Hoover’s Online) The automobile industry is also spending great amounts of time and money in developing new cars and luxuries to offer their customers. Like in airplanes, car makers are looking into placing a “black box” in each car to record valuable information in case of a car accident.
Intelligent Vehicle Highway Systems was a government sponsored study analyzing traffic patterns and ways to improve motor transportation. Creating environmentally safe vehicles is also a major concern. Companies are looking into solar powered, battery-operated, and electric cars, plus a new technology that converts liquid hydrogen into electricity. All these new low emission automobiles are still under development, but many prototypes are expected to reach the market by 2003-2004. The rise of computer technology in today’s society has greatly affected the automobile industry.
Global Positioning System is an up and coming navigational system becoming more and more common in cars today, especially SUVs, which are predicted to be in heavy demand in the next few years. Thermal detectors in the windshield used to display hard to see objects at night are in development and researchers are looking into the possibility of placing computers in brakes to automatically slow the vehicle when rounding a curve or when encountering another hazardous situation. The automobile has become a necessity in the lives of millions of people living in developed countries and it’s influence is spreading around the world quickly.
As cars become more and more advanced, suited with better handling capabilities, safer features, and more computerized systems, it’s no wonder that so many people invest so much time, energy and money into this industry. The automobile has come along way since the days of Henry Ford, and you can rest assured that it will continue to evolve. Even though the car itself will continue to change as will the industry that creates these incredible machines, there is no doubt that people’s demand and love for cars will go on for a long time to come. Works Cited McBride, Gordon.
“Automobile Manufacturing. ” Career Information Center. 2 vols. New York: MacMillan Library Reference USA, 1996 p. 98-100 Tardiff, Joseph, ed. ” Motor Vehicles and Motor Vehicle Equipment. ” US Industry Profiles. New York: Gale Research, 1998 p. 394-401 Broughty, James. Careers in Transport. Chicago: The Institute for Research, 1999 Womack, James P. , Jones, Daniel T. , and Roos, Daniel. The Machine that Changed the World. New York: MacMillan Publishing Company, 1990 Farr, Max. “Automobile Industry. ” Hoover’s Online. Online. Internet. February 2000 Bibliography Works Cited McBride, Gordon.
“Automobile Manufacturing. ” Career Information Center. 2 vols. New York: MacMillan Library Reference USA, 1996 p. 98-100 Tardiff, Joseph, ed. ” Motor Vehicles and Motor Vehicle Equipment. ” US Industry Profiles. New York: Gale Research, 1998 p. 394-401 Broughty, James. Careers in Transport. Chicago: The Institute for Research, 1999 Womack, James P. , Jones, Daniel T. , and Roos, Daniel. The Machine that Changed the World. New York: MacMillan Publishing Company, 1990 Farr, Max. “Automobile Industry. ” Hoover’s Online. Online. Internet. February 2000 Word Count: 2199