A Story for the Australian Automotive Industry

Introduction to the Topic

Australia is one of only a few countries with the capabilities to design cars from scratch and manufacture in significant volumes. Car sales in Australia are also an important factor of the Australian Automotive Industry and the Australian Economy in total.

The Australian Auto Industry (A.A.I. in short) can be divided into two interrelated sectors, the Production ( Manufacturing) sector and the Car Sales (or Import-Sales) sector, both equally important for the total performance of the A.A.I. On one hand, the Manufacturing sector refers to the market conditions under which Australian Manufacturing businesses compete, by producing vehicles and related products, with the main aim of maximizing profits. On the other hand, the Sales sector refers to the market conditions under which car representative sale businesses compete, by the sale of cars and related products, having the same aim with businesses within sector one.

It is very important to state the distinction between these two sectors within the A.A.I., as we will be talking about two different market structures, business strategies, competition conditions, e.t.c. In order to analyse these market structures it would be appropriate to develop two economic models, one for each A.A.I. sector.

1.1-Analyzing the Manufacturing Sector

There is only one market structure that can best describe the market conditions in the Manufacturing sector if A.A.I., this is Oligopoly. As there are only two organizations that produce cars in Australia, and these are Ford and Holden, the competition methods and pricing strategies are based between these two organizations. The following economic model shall help define the competition and economic conditions for the Australian Automotive Manufacturing market.

The first important characteristic of Oligopoly that needs to be stated is that prices between competitors tend to be “sticky”, which means that they change less frequently than any other market structure. This statement will be explained in more detail later on, when we will be developing the Game-Theory model, as it is a very important concept of competition. The second most important characteristic is that when prices do change, firms are likely to change their pricing policies together. These two characteristics can boost up competition within the market. Firms will either try to match rivals’ price changes or ignore them. This is depended on the Game-Theory that is explained bellow.

However, the recent market conditions for the Australian Automotive Industry and the actions of the Australian Government have worsen the competition conditions and possible pricing options available for firms in the market. The production and maintenance costs for a manufacturing business in Australia are already high and rising, mostly due to lack of economic resources and advance of technology. That is, as Holden and Ford try to compete each other, given that prices tend to be “sticky”, they are forced to focus on technological advantage and marketing. Both of these business sectors produce high costs. Furthermore, the Australian government has made it clear that is unwilling to further subsidize automotive organizations in the market. All these factors stated above produce a negative effect on the competitiveness of both firms. In other words, rising costs alongside with decreased revenue push firms in experiencing lower and decreasing levels of profitability.

Profitability and the level of competitiveness are highly interrelated in an oligopolistic market structure, being the two most important factors, alongside with product differentiation, in the competition policies that the firms follow. When we say that the level of competitiveness of a firm is very low, we mean that the firm cannot react effectively to any price changes or competition changes or even changes in production costs. This may leave the firm depended on its’ competitor’s pricing and competition actions, not being able to affect the market competitiveness at all. The firm is then exposed to external danger and can be pushed out of the market, or even worse to shut production and declare bankrupt.

1.2- The Game-Theory Model for Oligopoly

The Game Theory model is used to explain the pricing and competition policies of firms in an oligopolistic market structure. Furthermore, it can show the few different competition policies based on pricing that the two firms can follow, that is High and Low as stated above. All firms in this market structure follow a Game-Theory model, although it is surely more detailed than our example, in the process of trying to forecast competitors’ pricing and competition movements and also keep track of the competition levels in the market and market share. But how does this happen?

For example, let’s say that there are four different fields, each divided in half. These fields represent the pricing strategies that Holden and Ford may use in the process of competing each other. Field A and C represent a High-Pricing policy for Holden, while fields A and B represent a High-Pricing policy for Ford. Lastly, fields B and D represent a Low-Pricing policy for Holden, while fields C and D represent a Low-Pricing policy for Ford. When both firms decide to follow a High-Pricing policy they share a profit of, let’s say, $12 million. If Holden decided to move to a Low-Pricing policy it will experience a maximum of $15 million profit, while Ford’s profitability will fall to $6 million. The exact opposite may also occur, while if both firms decided to follow a Low-Pricing policy they would realize a maximum of $8 million of profit.

What we can identify from the above example is that firms in an oligopolistic competitive market rarely change their pricing policies because this may produce a negative effect on their profitability levels. However, Holden and Ford, being the only two firms in the Australian Automotive Industry, they will focus on competing through product differentiation and marketing. That is, they will try to compete by differentiating their products, for example by producing vehicles with different features, or even base their production on technological advantage. Marketing plays an important role here, as it is the main tool that delivers and connects the customer with product. For example, if Holden introduces a new driving technology that improves driving experience and safety and produces this technology alongside with a newly designed vehicle, it is quite likely that Holden will effectively differentiate its newly designed vehicle from a relative vehicle of Ford and lure more customers in the store. Holden may also use marketing techniques to deliver this technology to the public, in the form of knowledge; hence try to boost sales without changing its pricing policy. However, it is important to state that this new technology may produce higher production costs, if not evaluated properly; hence Holden can only rely in increasing its market share to gain greater profitability. The sales part, however, will be analyzed in more extend within the next chapter of this report.

The Game-Theory is not just a theory for the Automotive Industry in Australia, it’s a fact. It shows us that auto manufacturers in Australia have based their competition strategies on all the factors stated above and as much as they possibly can on pricing strategies. They may advertise that they have low prices, but in fact their prices are very stable. If we have a close look at Holden’s or Ford’s websites, we will identify that there is a huge variety of products and each firm competes in that. However, the new market conditions stated before have greatly changed the way auto manufacturers think of the future and this in turn may change their pricing and competition policies, or even determine their existence in the market.

2.1- Analyzing the Import/Sales Sector

While the auto manufacturers are considered to be operating in an oligopolistic market structure, importing and selling vehicles or relative products is a different story. The import and sale of vehicles is the second and equally important business sector of the Australian Automotive Industry. There are many different car selling businesses and we shall only consider first-hand sales, as second-hand sales in general are not included in economics and more specifically in GDP measurements. To enter the industry hard at all as there are not many barriers to entry, however someone who is interested needs to consider of the high costs in setting up an automotive dealership. All businesses in this market are mostly based on product differentiation to compete and while prices are not “sticky”, pricing competition is set up by the market mechanism and tends not to be considered a regular phenomenon. Lastly, cost analysis and cost management play a very important role. All of the above characteristics refer to the Monopolistic Competition Market Structure. In this market structure we will focus on two phases, the short-run phase and the long-run phase, each with different competition characteristics and outcomes.

An important factor that we need to state here is that when the costs of developing a vehicle in the manufacturing sector rise, then the cost for selling the vehicle for a dealership may rise as well. This is always depended of course on if the vehicle was produced in Australia and if it was produced overseas, under what economic conditions was it produced. Price might be “sticky” for manufacturers, however prices will change much easier in this sector if needs be. Here firms will change their pricing policies if costs either rise or fall and this is always depended on the market mechanism. The amount of competitiveness along with the amount of price elasticity of demand will depend on how many rivals the monopolistic competitive firm will have to face.

In such market the following situation is very common, a situation that helps us distinct between short-run and long-run:

Stage One

In this stage the firm experiences economic profits. However, this fact will draw new firms in the market causing the profits to be competed away.

Stage Two

The economic losses indicated in this stage will cause many firms to exit the market, as they cannot keep selling under these market conditions.

Stage Three

In the final stage, the market clears-up, or reaches equilibrium point. As all firms that needed to exit the market have done so, the market mechanism comes to the point where no economic profits/losses are realized by the firms. This is the point where the market is most stable.

Studying the situation above we can identify one very important fact for any monopolistic competitive firm in the Australian Automotive Industry/ Sales sector. That is that in this market structure, in the long run, firms will realize only normal profits and the market mechanism will eventually reach an equilibrium point. Hence, in the long-run firms will compete mostly through product differentiation. However, in the short run firms may experience economic profits or losses and this is what causes firms to enter or exit the market and “shows” firms how to compete and when to apply pricing competition policies.

Conclusion

The Australian Automotive Industry may be experiencing rough market conditions, mostly because there is no more government support; however competition and profit maximization is still possible. Thinking of moving overseas is not always a good option for the manufacturing businesses, as the Australian Economy needs the manufacturing sector, as it represents a reasonably big part of GDP.
Market competition conditions are well defined for every manufacturer or car dealership, hence any business in the market ought to use the available to them competition strategies and achieve higher market share and profitability level or stabilize its profitability levels. Either way, these are the main goals for almost every profit-motivated business in any market type under any market structure. However, every business ought to define the market structure that is operating in, so that it can then clearly define its goals, strategies and policies. The market mechanism is in all cases responsible for all the above strategies and most of the cases responsible for setting up pricing policies or indicating pricing and marketing strategies.

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Application of Big Data in Automotive Industry

Industry projections reveal that by 2015 the automotive industry will become the 2nd largest generator of data from proliferating sources; that includes sensor signals, GPS based navigation logs, ad-hoc network based in-car data, registration & license records, warranty & insurance claim databases, etc. Harnessing this astounding quantity, variety, velocity & veracity of data instigates manifold applications and areas of focus for key stakeholders of the automotive industry.

Designers, OEMs and ancillary manufacturers can enhance ruggedness, efficiency, longevity, features, security, theft prevention measures of vehicles & spare parts in alignment with inputs from the big data analytics of engineering parameters, routes & driving habits, cabin preferences, communication media usages, service reports, to name a few – thus living up to the dramatic shifts in expectation and experience of customers. Car dealers can revamp their balance-sheets by maintaining a perfect synchronization between value-cum-supply chain management, inventory management, aftermarket service, proper warranty coverage policies and reminders.

Commercial fleet managers, tax authorities, traffic controllers, insurance agencies and State/ Local Governments will be able to address a wide array of common and exclusive concerns by adopting surprising revelations of data crunching techniques. Of particular importance is a proxy model that can standardize several compatible issues like monitoring of load, over-the-road taxes, emission levels, route optimization, traffic rule violation & diversion, assessment of idle time, multiple driver scenarios, accident prone situations and individuals, fraud and theft detection & reporting- all of these in a real-time scenario leading to annunciation and predictive automatic prevention. A special case for study is that of tax evasion by citizens after earning easy cash for scrap cars, by determining the likelihood of selling his car within a certain span of time, and thereby alerting the concerned authorities.

Apart from the mainstream advantages, fringe benefits of big data are also aplenty if conventional mindsets and processes shares the stage with it. For instance, websites and softwares catering to the queries of car owners regarding depreciation of resale value for their used cars can capitalize on the value added by data analytics, in order to optimize their responses around a reasonable maximum selling price – a much more uniform, practical, and acceptable approach for individuals seeking cash for scrap cars, but delaying the decision for lack of information and fear of getting exploited.

Incidentally, many micro, small and medium scale enterprise in the ‘used car’ industry has floated an apparently lucrative scheme called “cash for scrap cars” only after re-christening an old concept with the common yet catchy phrase. As such, it is not objectionable, but only up to the point when no murky affairs are organized behind the dead, rusted metals of their junkyards. From a social perspective, a large and complex puzzle involving apparently disparate issues like increased frequency of carjacking & other criminal occurrences in a certain area, along with the existence of unexplained, unaccounted funds in bank accounts of residents of that same area, is indeed very much a big data problem with a potential of creating serious offenses if not checked in real time, bypassing the convention of causal inspections.

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Automotive Industry at a Glance

The World Automobile Industry is enjoying the period of relatively strong growth and profits, yet there are many regions which are under the threat of uncertainty. Carmakers look for better economies, market conditions which are ideal to have a successful stay in the industry. The automotive industry has a few big players who have marked their presence globally and General Motors, Ford, Toyota, Honda, Volkswagen, and DC are among them. It has also been suggested that automotive industry has accelerated more, after the Globalization period, due to easy accessibility & facilities among nations and mergers between giant automakers of the world.

Moreover, the advancements in industrialization led to a rise in the growth and production of the Japanese and German markets, in particular. But in 2009, the global car and automobile sales industry experienced a cogent decline which was during the global recession, as this industry is indirectly dependent on to economic shifts in employment and spending making, it vulnerable. While demand for new and used vehicles in mature markets (e.g. Japan, Western Europe and the United States) fell during the economic recession, the industry flourished in the developing economies of Brazil, Russia, India and China. Boost in global trade has enabled the growth in world commercial distribution systems, which has also inflated the global competition amongst the automobile manufacturers. Japanese automakers in particular, have initiated innovative production methods by adapting and modifying the U.S. manufacturing model, as well as utilizing the technology to elevate production and give better competition. The World Automotive industry is dynamic and capacious, accounting for approximately one in ten jobs in developed countries.

Developing countries often resort to their local automotive sector for economic growth opportunities, maybe because of the vast linkages that the auto industry of the country, has to other sectors. China is by far the largest market for sales followed by Japan, India, Indonesia, and Australia. Sales figures of 2005 to 2013 indicate that sales for vehicles in China doubled during this period, while Indonesia and India also benefited. However, there was slump in sales during this time in Australia, New Zealand, and Japan. Interestingly, this year competition in the truck segment has become more intense, with the three big U.S. automakers striving for supremacy in both performance and fuel economy. The Japanese aren’t giving up, either, with both Toyota and Nissan launching new pickups in 2015.

India is the seventh largest producer of automobiles globally with almost an average production of 17.5 million vehicles with the auto industry’s contribution amounting to 7% of the total GDP. It has been estimated that, by 2020 the country will witness the sale of more than 6 million vehicles annually. India is expected to be the fourth largest automotive market by volume in the world where, two-wheeler production has grown from 8.5 Million units annually to 15.9 Million units in the last seven years and tractor sales are expected to grow at CAGR of 8-9%, in next five years, making India a potential market for the International Brands. As 100% Foreign Direct Investment is allowed in this Sector, India is expected to have a speedy expansion, to, soon to become the largest automobile Industry. While India is second largest manufacturer of two- wheelers and largest of motorcycles, it is also estimated to become the 3rd largest automobile market in the world by 2016 and will account for more than 5% of global vehicle sales. As large number of products are available to consumers across various segments, providing a large variety of vehicles of all the types, manufacturers aim towards customer satisfaction and loyalty.

Following the FDI policy, entry of a number of foreign players with reduced overall product lifecycle and quicker product launches have become a regular occurrence in the automotive industry of the country. Indian auto market is seen as the potential market which can dominate the Global auto industry in coming years. Moreover, giant dealers and manufacturers are inclining towards the country because of ease of financial norms as well as an environment so conducive to support in their projects.

With Narendra Modi’s Make in India Campaign, the automotive industry is expected to witness quite a few changes, where 800 Cr have been allocated in the Budget to promote the Energy and Hybrid Vehicles manufacturing. This move is expected to cut down the prices making these electric and hybrid vehicles cheaper and more eco-friendly. It is also expected that this move will curb down the carbon dioxide emissions to 1.5% till 2020. This program will subsidize the purchase of new hybrid and electric cars, as well as other vehicle types. It specifies incentives of up to 29,000 rupees for scooters and motorcycles, and up to 138,000 rupees for cars. Three-wheeled vehicles, light commercial vehicles, and buses will also be eligible for incentives of varying amounts as well.

The used cars sector in India has emerged as one of the major industries due to its easy accessibility and lower rate of interests. But growth in used car sales are lower than new car sales as people still prefer to purchase new cars as opposed to buying used ones. A big reason of this could be the fact that there is a reduced supply of used cars, and high prices of these used cars are pushing the consumers to opt for the low priced new cars. But despite of lower growth compared to new cars segment, used car industry has been showing a fast and steady growth. According to the industry analysts, the sales of used cars are expected to boost up in the next few years.

Till last decade, consumers were involved in unorganised sector of Used Vehicles industry, there were no organised players to assist the consumers in buying of used vehicles, and about 60% of used vehicle sales were customer to customer where there is a trust factor. The remaining sales were managed by the local dealers. But then in 2001, Maruti came with the first company of selling used cars in 2001- Maruti True Value. Despite the automobile industry witnessed slow sales numbers in the last few quarters, the used or pre-owned car segment is growing fast, and is likely to accelerate in future. In fact in the last fiscal year, more used cars were transacted, 10% more than the new ones, according to the assessment by Maruti Suzuki India Ltd. and Honda Siel Car India Ltd. With the organised players stepping in, the used cars market has benefited from fair deals, warranties, better retail network, credibility, transparency, easy availability of finances. These have all made buying a used car easy. Organised used car showrooms provide the platform to the prospective consumers to choose cars from various brands and segments. Car makers have realized the potential of used car market and are making conscious decisions to operate in the pre-owned car sector also. Besides exhibiting multiple brands, the branded used car retailers, also offer one-stop shop for all inquiries and grievances. All the major Car dealers have now established their pre-owned car segment retail showrooms, Maruti True Value, Ford Assured, Hyundai Advantage and Toyota U Trust are some of the major used car dealers.

Constant decline in fuel prices and better financial policies in the past year are the factors that are being expected to be the reasons for the number of new buyers to be increased in the market, which declined in 2013-14. But during this period, one segment that benefited from this decline was the used vehicle market, with increased awareness, financial reforms and organized firms. Most of these used cars buyers are younger people who prefer buying Pre-owned cars which come at lower prices and they get a good bargain for the same. Indian used vehicle market which is still, almost quarter of new vehicle market is growing at a rapid pace. The Pre-owned car sector is expected to grow by 15-18% in coming years.

Also with the rising in number of organized players have boosted the amount of confidence people are putting in buying a pre-owned car. These players not only offer a good line up of used cars but also offer finance & extensive vehicle check facility for 100% customer satisfaction.

The Automotive Industry is an important part of every economy as it is interrelated to growth of sectors of the economy. India as one of the progressing economy is resolving towards making its automobile industry more and more successful ultimately, linking it to overall development. With the Make in India Campaign and promotion of eco- friendly vehicles, India is expected to soon to become largest automobile industry globally. Used vehicle industry is expected huge gains with more and more people resolving to it along with the growth in the new car market. With more resources for the buyers and sellers, the automotive industry is expected to flourish meritoriously in coming future ultimately taking the country forward.

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The US Automotive Industry and The Big Three

too much about this country’s automotive history. For this history lesson, we are focusing on the automotive “industry” rather than the history of the automobile itself.

When It All Began

In the 1890s, the American automotive industry began and, thanks to the use of mass-production and the large size of the domestic market, quickly evolved into the largest automotive industry in the world (though this title would be taken from the U.S. by Japan in the 1980s and then from Japan by China in 2008).

The U.S. motor vehicle industry actually started with hundreds of manufacturers, but by the end of the 1920s, three companies stood apart from the rest:

General Motors
Ford
Chrysler

The Big Three

These three companies continued to prosper, even after the Great Depression and World War II. Henry Ford began building cars back in 1896 and started the Ford-Motor Company in 1903. Ford utilized the first conveyor belt-based assembly line in 1913, improving mass production of its Model T. The assembly line decreased costs significantly and the Model T sold so well that it propelled Ford into the largest automobile company in the U.S.

General Motors was founded by William Durant (formerly a carriage maker)n in 1908. In the first couple of years, GM acquired Buick, Oldsmobile, Oakland (later to become Pontiac), Cadillac, and a number of other car companies. Durant also wanted to acquire Ford but Henry Ford opted to keep his company independent. Having become a little to “acquisition-happy,” Durant over-extended the company and was forced out by a group of banks who took controlling interest in the company. Durant then teamed up with Louis Chevrolet and founded Chevrolet in 1913, which became a quick success. Durant retook majority control in GM after acquiring enough stock and GM acquired Chevrolet in 1917. This did not last long, however. Durant was forced out again in 1921. In the late 1920s, GM overtook Ford as the largest automaker.

The former president of Buick and a former executive of GM, Walter Chrysler took control of the Maxwell Motor Company in 1920, revamped it, and reorganized it into Chrysler Corporation in 1925. Chrysler acquired Dodge Brothers in 1927 and, in 1928, introduced the DeSoto and Plymouth brands thanks to the dealer network and manufacturing facilities that came with the Dodge acquisition. By the 1930s, Chrysler overtook Ford and became the second largest automaker.

1950s and Beyond

By 1950, America produced almost 75 percent of all automobiles in the world. At the start of the 1970s, however, U.S. auto companies (especially the Big Three) were severely affected by increased competition from foreign auto manufacturers and high oil prices. In subsequent years, companies bounced back occasionally but the crisis reached its pinnacle in 2008, prompting Chrysler and General Motors to file for bankruptcy reorganization and be bailed out by the federal government. While Ford was also affected by the crisis, it decided to power through on its own and did not take the bail out. We actually have a lot of respect for Ford as a result of this. They did not take the easy way out.

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