The Automobile Industry Essay

Submitted By Jake-Little
Words: 2663
Pages: 11

The Automobile Industry
Finance 414
Spring 2014
John Anderson, Kevin Kwong, Jake Little

Automobile Industry
Overview

The auto industry has been quite volatile over the last decade. It was arguably the hardest industry hit by the recession, but it has climbed back with the rest of the economy. However, the outlook for the “Big Three” US automakers (Chrysler, Ford, and General Motors) is not as promising as the Asian automakers (Toyota, Honda, Hyundai, Nissan). The Big Three have lost major US market share over the last half-century. The ability to expand globally is what will allow companies to survive in this industry. China is growing into a country where owning a car is becoming the norm, and the market potential there is enormous.

Production efficiency, cost control, and meeting the demands of new markets are required attributes for successful auto companies. Environmental regulations threaten the future of the auto industry, and because the barriers to entry are too great for other major players to come into the mix; whichever major automaker adapts to new markets and environmental regulations most effectively will be the most successful.

Below are graphs that show the severity of US market share loss for the big three American automakers:

History

The evolution of manufacturing and fuels have propelled the auto industry. After WWII, there was a boom in industrial production and automobiles were being made in factories that were used to make tanks and weapons during the war.

As production boomed and families began buying multiple cars, it became apparent that the credit market was linked to the number of auto sales. This is understandable as income, access to financing and economic factors are homogeneous with auto sales.

Consequently, the auto industry was left in near ruin after the current recession. The Big Three (Ford, GM, and Chrysler) reported major losses in 2008, and their financial situation continued to get worse in 2009 until the government stepped in to bail them out. This problem spread to the foreign automakers that included Toyota and Honda. In 2009, Toyota reported a loss for their very first time in 70 years. Bankruptcy would have crippled General Motors and Chrysler had the US government not provided a bailout. In addition to the bailout, the government came up with a program in late July of 2009 that was intended to increase car sales. This program was called Car Allowance Rebate System, and it was also known as Cash for Clunkers. How this program worked was that a consumer would get a cash rebate of between $3,500 and $4,500 for trading in an old, fuel-inefficient vehicle for a new vehicle that was more fuel-efficient. Even though this program was supposed to last four months, it proved to be very successful after just one month. In late August of 2009, a total of 690,114 vehicles were sold, and sales were $2.9 billion. The big three survived the recession, and are now climbing back. Global competition is the highest it has ever been, and the big three are now the big three in name only.

Current Assessment

As financing has become increasingly available since the recession, we have seen a nice rebound from the automotive industry. 2013 was the best year for the industry since 2007. In 2013 15.6 million cars were sold in the US, up from 10.4 million sold in 2009. As well, auto manufacturers have added more than 173,000 jobs over the last 4 years, indicating consistent growth.

The recession forced competitors in the industry to operate at greater efficiency. Manufacturers have essentially restructured and trimmed the fat by closing factories and cutting underperforming brands. This will allow companies to be profitable should sales slip. With the Federal Reserve entertaining the idea of raising interest rates, we should not be surprised should auto sales slip due to the decrease of available financing.

The demand for fuel…