Automotive Industry/ Economic TheoryEssay Preview: Automotive Industry/ Economic TheoryReport this essayAutomotive IndustryECONOMIC THEORYAutomotive IndustryIn 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:
Supply and Demand (Sales)North American Free Trade Agreement (NAFTA)External AffectsLabor Supply and DemandFederal PoliciesEconomic InfluenceSupply And DemandHigh 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 AgreementNAFTA 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 IndustryThere 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 ExternalitiesDue 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 todays 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 ExternalitiesProbably 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.
The automobile is a highly efficient, efficient, and high efficiency vehicle. The majority of its manufacturing takes place in low income and low-wage, low-employment areas to meet high demand. For example, the U.S. auto industry requires four times as many cars a year than manufacturing does. More than 10 million cars and trucks are used in the U.S. today. To put it plainly that we need 9.2 million cars (i.e., the car industry spends almost a trillion dollars on auto production every year) at our cost of producing 10.8 Btu. For every pound of new car and truck production that costs 8.3 Btu, only 0.2 Btu would be produced. Thus the automobile is a large cost, expensive, and inefficient vehicle. This is also a major problem facing the automobile industry. For more than a century, American automakers have been building automobiles that have become more and more common. One of the largest automakers, Ford, sold about 1.25 million, 7.3 million cars in 1980 and 1.1 million vehicle sales in 1980. These figures suggest that the automobile industry was the highest grossing consumer of any of these technologies. This is a significant problem for American automakers. As a result, some automakers began selling more expensive cars and trucks. Although the auto industry’s profits have grown at a relatively slow track pace, a large portion of the current car sale is driven by their large share of low-wage manufacturing workers, which comprise about 70% of the automobile industrial base. The automotive manufacturing industry generates about 2% of all U.S. economic output. For more than a century, many American manufacturers have relied on low wages for many of the most critical types of production. Yet these workers are still largely underpaid. Despite this, nearly half of all U.S. auto workers are employed by low wage manufacturing companies. For the automotive industry, the labor demands it must pay to make vehicles are such that they need to compete with high wages. In a recent study the RAND Corporation identified that, since 1970, American manufacturing has gained the greatest percentage of manufacturing jobs within half the employment gaps in the U.S. compared to the rest of the developed world. The American automotive industry also has strong ties to international trade. This is due in part to the highly competitive auto manufacturing market in South America. If the production disparity in the developed world were to grow the vast majority of other countries would be left behind with lower rates of employment, lower productivity, and worse quality of life. As a result of these positive impact factors, the automobile industry would be no exception. The automobile industry loses the lion’s share of its profits when its workers are paid less wages that they get today. It will lose the lion’s share of its earnings when it is faced with increasing production deficits that will hurt low wage workers. The current U.S. federal minimum wage is currently $7.25 an hour. Under the current current federal minimum wage of $7.25 an hour, the average consumer is paying less than $19 per hour. (Parry, Walls, &) American automobile manufactures are already experiencing layoffs based on low-wage manufacturing while the average American is getting $3.10 an hour paid a little above the minimum wage. The U.S. average worker already earns $23.00 less per hour
Another negative externality from the increased competition in the automotive market