Macro and Micro Environments: Automotive Industry

Taken from: (Howes 1993)

Motor vehicle production has increased exponentially over the past century, and there is an apparent global demand for these products. From the chart (figure 1), demand is growing significantly all over the world, but the United States market is the fickle. All other markets, supposedly less developed than the American market, are constantly growing, but the U.S. market appears to have its ups and downs.

For product placement, many would probably start considering intensifying marketing efforts in other international markets such as Asia. The automotive industry in the U.S., and quite likely in most markets, is structured as an oligopoly with few players – dominated by only three big players: Toyota, General Motors and Ford (Dearie 2004). The industry competition is fierce which forces many players to increasingly look towards offshore operations to place products and productive assets in less developed (but definitely developing) countries.

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For pricing, the industry is extremely sensitive and shows high elasticity (Dearie 2004). Perhaps proof of such elasticity can be seen in the chart above (figure 1), that the U.S. market for car production shows an undulating pattern in more recent times.  During the earlier times since the automobile’s invention, pricing was relatively stable, but as of later the strategy employed by key players in the industry is to constantly monitor the pricing and marketing strategy of competitors to make frequent adjustments. One of the more salient points made by Dearie is that customers can sometimes come across rebate offers of up to $1,800 – which can account for about 10 percent of the value of some cars.

Car sales in the U.S. can be very dependent on macroeconomic conditions. During recessionary periods, car sales typically take a dip and this is quite likely due to the price sensitivity of American consumers for these products (Barney 2002). During recessionary periods, income drops and heightens consumer price sensitivity which make it even more difficult for the automotive industry to make a sale. Credit Suisse First Boston’s Wendy Needham relates that investors typically pull money out of car manufacturers and car parts suppliers during recessionary periods. Particularly, in here interview, she pointed out that investors pulled out after 9-11 due to fears of a double-dip recession. In the microenvironment, Wendy Needham called to attention that there was a 10 - 12 percent decline in manufacturing volume in North American operations despite what appears to be strong sales.

The strong sales and the lower production actually meant that there was an excessive supply and, in 2001, manufacturers had to put everything on discount to simply clear their inventories. The foregoing illustrations of the macro and microenvironments make clear the necessity for strong promotional efforts. In this highly competitive industry, automobile manufacturers need to establish a strong presence and a veritable link or relationship to customers both when production turns to a low due to macroeconomic conditions and even when there is excessive supply in the microenvironment.

In the U.S., the transportation sector uses oil to meet 97 percent of their energy requirements and this sector accounts for about 70 percent of the total oil consumption for the country (Kelley 2006). The high dependence on oil puts the transportation sector – and its suppliers, at risk of oil price shocks. According to Kelly, a 4 percent reduction in the oil supplied to the nation means that the cost of a barrel of oil could likely shoot up to $120 within a matter of days. The disruptions in oil supply due to wars being fought in the middle east already established so much when oil prices started moving up since the war in Iraq. The automotive industry is highly dependent on energy owing to massive requirements in operating manufacturing plants. Oil price shocks negatively affect the pricing strategy of this industry as profit margins are cut thin by competition and price-wars and more so during energy crises.

Setting interest rates is a form of government control through monetary policy and, according to Jim Henry, interest rates have significant effect on car sales (Henry 1995). This is because higher interest rates mean that customers who cannot afford to pay the full price of the car assume debt and pay amortization. When interest rates are high, monthly payments are much bigger. In a sense, the interest rate environment is part of the pricing, and it is such a component that automobile manufacturers cannot directly influence. According to Henry, 1995 saw the highest interest rates and were likely to be the highest levels for some years to come. The news was actually good as automobile manufacturers looked forward to declining rates in coming years. Moreover, Henry reported that monetary policy in that period pointed towards a cut in short-term lending rates – which tends to affect all other rates, particularly for long-term loans and mortgages.

According to Buckley, lower interest rates allow automobile players to offer better terms to customers (Buckley 1994). Buckley related in his article an executive in the Mexican automobile industry appealing that the government lower interest rates so as to offer more flexible payment terms and consequently boost care sales. This stems from the fact that manufacturers are typically borrowers too – that any savings players get from lower interest rates is directly passed on to customers. The competitive environment demands as much from these players.
Figure 1 (Hernandez 2006)

GDP can be used to monitor business activity at the aggregate level. Plotting out GDP shows waves and shows that the economy grows at an inconstant rate. Economic systems are typically characterized by periods of “boom” and “bust” (Hernandez 2006). The graph of the business cycle, as depicted in the graph below shows 3 points. The first (A), represents the peak which indicates that the economy has achieved a temporary maximum. The opposite of the peaks are when GDP growth rate is subject to (B) troughs, which represent the lowest output and employment levels. Lastly, (C), represents either an acceleration or deceleration which is either economic recovery or recession, where recessions are defined in economics as a continual decline of real output, employment and trade lasting at least 6 months (Hernandez 2006).

In introducing new products to the market, manufacturers must be keen to identify the business ups and downs. Monitoring GDP is not only important for government and economists, but it is a necessity on all who do business. The three points in the graph constitute the business cycle and companies must time product development, production and launches according to the cycle. This plays a vital role in the state of the automotive industry as the business cycles directly relate to the income level associated with specific phases. The business cycle has a significant effect on the aggregate economy.

During economic contractions, and most especially during recessionary periods, government revenues are on the decline (de la Dehesa 2001). When players introduce new products, they should ensure that the industry is moving upwards or recovering to avoid lower sales during economic contractions. In other words, introducing a new product goes beyond coming up with an excellent idea or notion, it must also be coupled with timing and planning when launching this brilliant new product.

• Barney, L. (2002, January 7). Meet the street: auto industry gears up for 2002. TheStreet.com. Retrieved March 24, 2007 from:Available at: http://www.thestreet.com/funds/meetthestreet/10006207.html
• Buckley, T. (1994, Jan 31). Mexico: Mexican dealer eager for NAFTA. Retrieved March 24, 2007 from:Available at: http://www.autonews.com/apps/pbcs.dll/article?AID=/19940131/FREE/401310760&SearchID=73273212267208
• Dearie, J. (2004). Automobile industry. Retrieved March 24, 2007 from:Available at: www.nd.edu/~indorg/studentpresentations/IndustryAnalyses/DearieAutomobileIndustry.ppt
• De la Dehesa, G. (2001, Jan 10). Fiscal policy as a stabilizer of business cycle fluctuations in the Euro-area. Retrieved March 24, 2007 from:Available at: <www.europarl.europa.eu/comparl/econ/pdf/emu/speeches/20011218/deladehesa.pdf>
• Henry, J. (1995, May 1). Interest rates likely at peak. Retrieved March 24, 2007 from:Available at: http://www.autonews.com/apps/pbcs.dll/article?AID=/19950501/FREE/505010772&SearchID=73273211822240
• Hernandez, I. (2006, April 28). Business cycles. Retrieved March 24, 2007 from:Available at: http://pgpblog.worldbank.org/business_cycles_1
• Kelley, P. & Smith, F. (2006, August 11). Are we ready for the next oil shock?. Retrieved March 24, 2007 from:Available at: http://www.washingtonpost.com/wp-dyn/content/article/2006/08/10/AR2006081001316.html
• Kurylko, D. (1995, November 13). Car sales to keep growing, DRI says. Retrieved March 24, 2007 from:Available at: http://www.autonews.com/apps/pbcs.dll/article?AID=/19951113/FREE/511130770&SearchID=7327329973795

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