The Automotive Industry

The Automotive Industry

Introduction:

The automotive industry is a worldwide industry that involves itself in the manufacture of motorcycles, trucks, vans, buses and coaches. There are many companies involved in this industry, including BMW, general motors among others.

In this section I will take a look at the motor cycle’s section of the motor industry.

The motor cycle industry has experienced worldwide growth in production, sales, and also profit margins for the past four years. Almost all industry players including Harley Davidson, Honda, Kawasaki, and Suzuki among others recorded from modest to remarkable sales within this period of time.

Shifts and price elasticity of supply and demand

The responsiveness of consumers to a price change is measured by a product’s price elasticity of demand. Some products are highly responsive to price changes while others are not. In some commodities Modest price changes cause very large changes in the quantity purchased, Economists say that the demand for such products if relatively elastic or simply elastic. For other products Substantial price changes cause only small changes in the amount purchased, the demand for such products is relatively inelastic or simply inelastic.

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In the view of the industry the industry products are relatively inelastic; this is due to the fact that many products in this industry are luxury goods. The products have some kind of a ‘snob appeal’ and this is why that even though the prices of products have been rising steadily demand has also increased relatively. A recent survey of the American market showed a statistic trend as the one below.

American market share is as follows:

Harley-Davidson 34.8%

Honda 23.7%

Suzuki 14.6%

Kawasaki 13.6%

Yamaha 10.0%

BMW 2.3%

Ducati .9%

Moto Guzzi .1%

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The pie chart below represents this information.

To improve on market share every company uses its own strategy. But in any industry there are four core elements of marketing strategy. These four elements are strategies that involve the product, pricing, promotion, and distribution. All firms within the industry seem to employ a different mix of the four elements in order to achieve its growth or industry projections.

Positive and negative externalities:

An externality is ca cost or benefit borne out of an economic transaction to parties not directly involved in the transaction. In the motorcycle industry some of the positive externalities include an increase in technological advancement not only in the industry but also in other industries. Through increased inventions the technology has become readily available and this has resulted in cheaper products.

In addition there has been a remarkable reduction in transportation costs, especially in china and India where increased use of motorcycles and scooters in transportation has reduced traffic congestions as well as reducing the public expenditure in transport.

In the same context there has been an increase in negative externalities including smoke pollution, noise pollution, and water pollution as a result of industrial waste among others. Due to the increased pollution, The American Motorcyclist Association (AMA) has announced that the review the Environmental Protection Agency "Letter of Guidance" on the issue of motorcycle-emissions rules has been completed.

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The AMA had sought clarification of EPA regulations for "kit" and "custom" motorcycles in use within the country. Under the regulations, a person will be allowed only one kit motorcycle in their lifetime that will be exempt from meeting EPA emission requirements. For custom motorcycles, a manufacturer will be allowed to create and sell up to 24 bikes a year that don’t meet EPA emission requirements. In addition these bikes will be specifically labeled that they are exempt, and these bikes will be show bikes that will be rarely ridden.

Wage inequality:

Just like in many other industries the motorcycle industry is faced with the problem of wage inequalities. These inequalities have three dimensions. The first dimension involves different wages for workers in the same firm, e.g. the managers of a certain firm may be paid more than the engineers in the same firm.

A recent example of this was in the Harley-Davidson firm where early this year workers went on a two week strike demanding an increase in their wages, and especially a proportionate proportion of the profit margin commission. On February 2, 2007, upon the expiration of their union contract, about 2,700 employees at Harley-Davidson Inc.’s largest manufacturing plant in York, PA went on strike after failing to agree on wages and health benefits. [1] During the period of the strike, the company refused to pay for any portion of the striking employees’ health

The second dimension involves workers being paid less or more depending on the factory location. In this case due to cheaper labor in the third world and china many companies have relocated their factories to these economies so that they end up paying less to their workers. This has prompted many workers especially in Latin America to go on strikes regularly demanding equal pay with their equivalent workers based in Europe and America.

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The third dimension involves different wages depending on sectors. In this regard you might find that a certain industry e.g. the motorcycle industry might end up paying less to their workers as compared to another sector like the banking sector.

Monetary and fiscal policies:

In order to promote the industry many governments have adopted different monetary and fiscal policies. There is no single policy that has been adopted industry wise. To improve the sector the South Korean government has encouraged the chaebols’ to specialize their operations in order to be more efficient. In addition the government has ensured that there exists a low interest rate to help the chaebols’ acquire loans cheaply. In other economies like Vietnam the fiscal policy involves deficit financing for the industrial sector in order to maintain the booming economy.

Generally for the development of this sector there is need to have an expansionary monetary policy regime that should be compounded by a contractionary fiscal policy regardless of the geographical location of the specific firm.

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Conclusion:

The automotive industry is a value adding sector in any economy. This means that the industry is very important for the growth of the economy. Thus its economic importance lies both in its scale and complexity of its direct and indirect interrelationship with other industries in the economy. The economy of a country and of the global village is of ultimate importance to the growth of the industry.

Since the industry produces non-basic goods (luxury goods) it is important that the disposable income arising from productive work in other sectors is sufficient to allow for the public to purchase goods from this sector. In addition the size of the population and its purchasing power is important to the development of the industry. The correlation of the industries e.g. how the other industries supply the industry with raw materials or purchase finished products from the firm goes a long way in supporting the industry.

Economic influences that can affect the industry in a negative way:

There are many economic situations that can negatively impact on the industry. These scenarios may originate from the local economy of where the firm is located or it may arise from the global market. In the local economy, increased taxation of exports, increased interest rates, and changes in the political arena, an unprecedented appreciation or depreciation of the local currency may all negatively hamper on the industry. In addition global depression of the world economy may hamper negatively on the development of the industry.

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References:

Development of Supporting Industries for Vietnam’s… retrieved on 3rd l 2007. Available at: ww w.letcher.tufts.edu/research/2006/Mori_MALDThesis_010406.pdf

Mankiw, N. G. (2004), Principles of economics (3rd Ed.), Chicago, ILLIOIS: Thomson South-Western

Philip Hardwick (1982), an Introduction to Modern Economics, Longman, U.K

Thai Industrial Strategy: An Overview, retrieved on 3rd l 2007. Available at:

www.grips.ac.jp/teacher/oono/hp/docu01/japan04.doc

[1] Strike shuts down Harley-Davidson plant, Company suspends production of motorcycles amid contract dispute," U.S. Business, MSNBC.com (Associated Press, Feb. 2, 2007)

[2] Striking Harley workers take hits in the pocketbook," The York Dispatch (Feb. 12, 2007).