Auto Makers

TOP CONTRIBUTORS

J.D. Thornton

Todd Sullivan

Andrew Lewis

During 2007, the worldwide automotive industry produced 73.1 million vehicles.^[1] In 2008, production declined 3.7% to 70.5 million vehicles. The auto industry as a whole grew more than thirty percent between 1995 and 2005.^[2] Over the past thirty years differences in government regulation and economic opportunities have created three major clusters of producers- in Western Europe, the U.S., and Japan/South Korea- that developed different characteristics regarding the size, power-train and fuel efficiency of their vehicles.

In the European market, where taxes have made gas expensive, car makers have become expert producers of small displacement gasoline engines and diesel engines(which can generally achieve 35% better fuel economy than a petrol engine of equivalent power). Low gas prices in America have encouraged an ongoing increase in vehicle size and engine displacement. As engine technology has improved and now allows more power from a smaller engine, instead of substituting smaller engines with equivalent power, cars produced for the American market have utilized new technologies to increase horsepower and torque. These design characteristics also hold true for foreign companies such as DAIMLER AG (DAI), Toyota Motor (TM), Nissan Motor (NSANY) and Bayerische Motoren Werke AG (BMW) that derive a large portion of their revenue from U.S. sales. Conversely, Japanese companies such as Subaru (owned by Fuji Heavy Industries) and Honda Motor Company (HMC) have continued to exclusively build more fuel efficient automobiles.

These major car producing regions have recently been joined by a mushrooming of auto-producers in the great emerging economies of India, Russia, China, and Brazil. These four markets, collectively known as the BRIC countries, represent the future for automotive sales growth- with 2007 car sales increasing in China 22% ^[3] Brazil 26%^[4], Russia 36% ^[5], and India 12%.^[6] Amazingly, for 2009 it is expected that there will be more new car sales in China than the United States, albeit in part due to generous government subsidies of new car purchases.^[7] The automobiles produced for mass consumption in these developing markets sell for a fraction of the price of cars in Western Europe or the U.S.(the new Tata Nano sells for a mere $2500^[8]) , but consequently are lacking in safety devices, comfort equipment such as air-conditioning or stereo equipment, and reliability.

Major Auto Makers

The Major car producing nations in the world and their outputs in 2007 are Japan: 11 million, U.S.: 10.5 million, China: 8.1 million, Germany: 6 million, South Korea: 4 million, alongside smaller producers such as France, Spain, Brazil, Canada, Mexico, and India - where between 2 and 3 million automobiles were assembled.^[9]

The following table illustrates the 15 largest carmaking companies by volume for 2007.

Factors Affecting Supply

This section will discuss the major costs faced by automakers and the factors that will aggravate or mitigate these costs over the coming years.

Labor

The following chart illustrates the relative cost of labor in a number of major auto-producing nations compared to the United States. A major factor effecting The Big Three are high union enforced wages and costly pension and healthcare liabilities. However, through ongoing negotiations with unions to reduce wages and the adoption of more efficient manufacturing methods such as greater automation, America's big three automakers have brought their production costs in line with their Asian competitors.^[11] This is a significant change from fifteen years ago when Japanese car producers required on average half the labor hours to build a car than their American competition.^[12] Nevertheless, as shown in the table below, there are tremendous cost savings to be realized by moving production away from Japan, Western Europe, and the U.S., to less developed economies. For example, Volkswagen pays its workers in Germany $50/hour to work a 28 hour week, whereas its factory in Slovakia pays workers $6/hour for a 40 hour week.^[13] Those companies best able to move production will realize an enormous advantage.

Indexes of hourly compensation costs in manufacturing.

Material Costs

Due in large part to massive demand from emerging economies, the prices of all major raw materials used in the manufacture of automobiles has increased considerably over the past several years. These materials include rubber, plastic, copper, steel, and aluminum. As of mid-2008 the prices of these commodities have increased 45%, 20%, 23%, 66%, and 40%, respectively, since the beginning of the year.^{[15][16][17][18]} Higher raw material costs squeeze the profit margins of automakers and as most have increased simultaneously, it has become useless for automakers to substitute one material for another - for example use more aluminum instead of steel. The future pricing trends for these materials will be definitive in determining automaker profitability into the future. However, for perspective it should be noted that steel -the most used material in new automobiles- represents only about 3% of the cost of building a new car.^[19] Similarly, many car companies and especially the Big Three use independent suppliers to provide components for their vehicles, thereby helping to shield them from commodity price increases.^[20]

Production Methodology

The third factor affecting the cost and the quality of automobile production are the manufacturing techniques employed by auto company. While Japanese producers were once universally the most efficient because of new factories that embraced the most current labor saving automated assembly lines (as well as not having to deal with the UAW), that gap has largely closed and today production methods are basically the same at all major automakers around the world.^[21] By the summer of 2008, Chrysler and Toyota both required an average of 30.37 hours to make a vehicle, GM 32.29 hours, and Ford 33.88 hours.^[22] This evidence reflects the fact that the difference in labor usage between the most and least efficient major car producers shrank to 3.5 hours in the first half of 2008.^[23] When Japanese producers entered the US market in the 1970s and 1980s their cars often required half the labor hours than the domestic competition. In today's globalized and increasingly competitive auto market differences and inefficiencies in production methods are increasingly stamped out as all automakers are forced to adopt the most efficient production methods in order to be competitive with industry leaders.

Another important factor in production is the quality of the product produced. While traditionally Japanese producers topped the list for reliability, this is no longer the case and reliability cannot be generalized geographically.^[24] The 2008 JD Power Initial Quality Rankings indicate build quality and reliability for all major producers. Larger firms such as Toyota or GM that produce a wide range of models often have difficulty in making all of their vehicles reliable.^[25]

Technology, Competition, and the Third World

The growth of auto consumers and producers in the world's emerging economies present an interesting twist on the issues of quality, productivity, and labor costs discussed above. All major car companies, excepting perhaps Daimler and BMW, are struggling to straddle the gap between the quality and features demanded by the developed world and the low prices necessary to access the rapidly expanding third world auto market. Automakers have taken the step of directly marketing vehicles under the brand of the mother company and/or through the purchase of a local producer or distribution agreement/product licensing with a local car maker. For example, Ford markets the Volvo and Ford brands in China, but some Ford cars are produced by a local company called Changan motors, who also use technologies licensed or purchased directly from Ford in their own designs.^[26] Similarly, both GM and Volkswagen operate joint ventures with Shanghai Auto; these joint ventures are respectively the number one and three chinese car manufacturers by volume for 2007.^[27] VW has another joint venture called FAW VW, which is the number two chinese car manufacturer. Other western automakers have similar agreements, such as Chrysler and Chery Auto or Fiat and Nanjing Automobile.^[28] Not surprisingly the result of such extensive use of joint ventures is that chinese automakers have quickly and cheaply acquired a great deal of technology and operational knowledge, which have not always been used legally. There have been numerous lawsuits where foreign motor firms accuse chinese companies of taking their technology and illegally incorporating it into their own vehicles. Two high profile cases currently taking place include a lawsuit between Fiat and Great Wall Motors^[29] and another between GM and Chery Motors.^[30] Technology sharing disputes and legal tensions also continue in India, Brazil, and Russia.^[31]

Despite the rapid acquisition of technological know-how by new automakers in the developing world, these companies have been largely unable to capture the growing demand in emerging markets in the same way as more established automakers. For example, sales of domestic producers in China such as Geely or Chery have stagnated as the sales of Volkswagen, GM, Ford, and other foreign companies have grown prodigiously.^[32] This is because even though the foreign vehicles are more expensive, overall they are considered a much better value when performance, reliability, and extra features are considered. So while young automakers from the developing world will certainly continue to gain both technological and market experience, established international car companies still have considerable advantages in technological, management, and marketing that should give them a solid advantage in the BRIC countries for some time to come.

Tai Hayes was here

References

1. ↑ International Organization of Motor Vehicle Manufacturers Production Data
2. ↑ International Organization of Motor Vehicle Manufacturers Production Data
3. ↑ Associated Press News Wire
4. ↑ Oxford Analytica Abstract
5. ↑ "Crisis? What Oil Crisis?"
6. ↑ Indian auto sales overview
7. ↑ Marketwatch: China tops U.S. in car sales so far this year
8. ↑ Cost of Tata Nano
9. ↑ Worldwatch Institute: "Vehicle Production Rises, but Few Cars are Green."
10. ↑ OICA 2007 World Ranking of Manufacturers
11. ↑ "Chrysler Matches Toyota in Efficiency"
12. ↑ "Chrysler Matches Toyota in Efficiency"
13. ↑ Autobrief Newsletter: Slovakia's Auto Boom
14. ↑ Bureau of Labor Statistics
15. ↑ US News and World Report: Car Prices About to Increase
16. ↑ Business News Americas: Aluminum prices jump to US$1.48/lb
17. ↑ The Economic Times
18. ↑ "Commodity & Option Prices and 20 Year Charts"
19. ↑ "Manufacturing and Steel Prices" by Peter Morici
20. ↑ Encyclopedia Britannica
21. ↑ Encyclopedia Britannica
22. ↑ Autoblog: Chrysler ties Toyota for most productive plants in North America
23. ↑ Autoblog: Chrysler ties Toyota for most productive plants in North America
24. ↑ Consumeraffairs.com: Consumer Reports Finds European Cars Perform Well, Lack Reliability
25. ↑ Consumeraffairs.com: Consumer Reports Finds European Cars Perform Well, Lack Reliability
26. ↑ The Auto Writer: Ford Inks Huge Export Deal with China
27. ↑ GM's Joint Venture is China's Top Selling Brand
28. ↑ China Daily: Fiat mulls new joint venture in China
29. ↑ Motor Authority: Fiat may sue China's Great Wall Motor over copycat
30. ↑ China Daily: GM charges Chery for alleged mini car piracy
31. ↑ Outlook Business: We want to be in every BRIC economy
32. ↑ WIRED: Once Feared Chinese Automakers Are Being Eclipsed