Managerial Economics
Thomas1122
CLA2pp.pptx
Automobile Industry
BUS 505 Managerial Economics
Jinyue Zhang
Li Li
LI MIN TU
Lina Li
Manoj Khatri
Oluwasegun Adey
_____
Market Structure
Concentration Ratio & Entry Barriers
Concentration
Ratio
Economies of scale
Brand Identification
Capital Requirement
Switching Costs
Distribution Channels
Cost Disadvantages
Government Policy
Entry Barriers
The transformation of the business of selling cars and trucks is happening before our eyes at an incredible pace -- promising to change forever an industry that has long been noted for its high costs, poor service and extremely unpleasant selling process.
Network Effects
Stakeholders and data access channels
Car manufacturers
Consumers buy, lease or rent cars
Suppliers of after-sales services
1. Human-Machine Interface (HMI)
2. In-Car Data Network
3. Geo-Location (GPS) Data
Stakeholders and
data access channels
Dealership
The production structure of the industry
Initial capital requirements, sunk costs, and economies of scale
Every Stage of production process is established through an appropriate structural division
The production units are classified as primary auxiliary or servicing sections
There is a relationship between production structure and location of production
The production of a new product calls for the reorganization of production links and structure in an industry
1.The primary structural production unit in any industry is the workplace where employees work (Bhardwaj, 2014). Therefore, a structural division determines the production process at any stage in a company.
2.Subdivisions such as preparatory, manufacturing, and assembly are involved in primary production (Bhardwaj, 2014). For instance, manufacturing process is responsible for auxiliary subdivisions and the serving links determine how raw materials are stored.
3.Every company has a way of establishing its production structure depending on the location and the nature of operations that the industry is involved in.
4.When a new product is introduced in the industry, then the production links need to be changed to suit the production of that product (Bhardwaj, 2014). Every product has an appropriate production structure from planning to producing final output.
Initial Capital
Requirements
Initial Capital requirements is the total funds required in automobiles industry to achieve its business and operational costs
Hence, planning for this aspect determines the other parts in the industry plan
The startup expenses needs consideration when making initial capital requirements
Also, reserve contingencies are key when making initial capital requirements
1.Every industry needs a minimum capital to start its operations (Arnold, 2006). The total funds that is required for those operations including servicing employees compensations, acquiring all the materials and other expenses constitute initial capital requirements.
2.Planning for the initial capital in the industry determines how all operations will succeed (Arnold, 2006). For example, the initial capital planned dictates the scope of operations which, consequently, reflects the final output.
3.Start up expenses are inevitable and they should be considered to be among the initial capital requirements. For example, expenses related to unavoidable issues such as breakage of a given item should not deter further operations in the industry.
4.Higher renovation expenses or unplanned items should have their capital calculated based on the extent of deviation using a worst-case scenario.
Sunk Cost
Automobile industry experiences situation where funds are spent and cannot be recovered referred to sunk costs.
This cost is different from future costs that the industry may face.
Therefore, sunk costs are not included with the future decisions in the industry since they will not vary with the decision outcome
However, sunk costs can be possibly eliminated at some point and not until then can they be included in future decision in the industry.
1.Some situations involves spending funds and not expecting them to be recovered in the industry (Chockalingam et al., 2017). For example, manufacturing firm may experience sunk costs associated with lease expenses and cost of equipment
2.Despite sunk costs, the industry need to continue operating. Hence, these costs do not determine the future costs of the industry since they are anticipated when calculating the initial capital requirements.
3.Whether industry experiences sunk costs or not, its future depends on the decisions made currently since they are irrelevant to current and future budgetary concerns.
4.Sunk costs can be eliminated by sourcing more funds to the industry to compensate them. Consequently, when they have been eliminated, then they become relevant to the budgetary concerns and accounted for in decision making.
Economies of Scale
Economies of scale implies cost advantage that automobile industry experiences when it increases its output level.
The industry can implement this aspect at any stage of production process
Economies of scale reduces both per-unit fixed cost and per-unit variable costs
The sources of economies of scale determines the extent of increase in the level of output
1.Some situations involves spending funds and not expecting them to be recovered in the industry (Chockalingam et al., 2017). For example, manufacturing firm may experience sunk costs associated with lease expenses and cost of equipment
2.Despite sunk costs, the industry need to continue operating. Hence, these costs do not determine the future costs of the industry since they are anticipated when calculating the initial capital requirements.
3.Whether industry experiences sunk costs or not, its future depends on the decisions made currently since they are irrelevant to current and future budgetary concerns.
4.Sunk costs can be eliminated by sourcing more funds to the industry to compensate them. Consequently, when they have been eliminated, then they become relevant to the budgetary concerns and accounted for in decision making.
The future
In regard to technological innovations
Environmental friendly
(Hybrid, electric drive)
Utilize idle time
(Auto Pilot）
Safety
（lighter and stronger material)
1. Concern about climate change will put more pressure on automobile manufacturers to reduce carbon dioxide emissions. Carbon dioxide has been increased 1.75 times between 1999 and 2020. To reduce the rate, in the future, one in ten vehicles sold should have electric engines or at least hybrid. This will require carmakers to produce more efficient internal-combustion engines that meet new usage standards.
2. Traffic problems are getting worse in big city. The cost of keeping a car has risen so is the time spend in traffic. Auto driving, once seen only in science fiction, is no longer out of reach. It can help reduce traffic accidents, ease traffic congestion and make it easier for more people to get around. Tesla-Uber
3. In order to improve efficiency, the car factory is working on reducing the weight of the whole car. However, safety of cars often require heavier body parts. This contradiction has been alleviated by companies working on materials that are both light and strong, including aluminium, high-strength steel and carbon-fibre reinforced plastics (CFRP).
Example
Tesla’s future plans : self-driving “robotaxis”
The Tesla CEO said Tesla cars could one day make money for their owners as self-driving, for-hire cars. They'd be able to autonomously transport people when their owners are not using them, and the best part is, Tesla cars already have the hardware they need to do so. There’s a small camera above the rear view mirror so that owners can watch what happens inside their car when they're not around
Sustainable Market Share
How it can be achieved?
Force of change
Surfing the net for profits
Dealers still part of equation
Vision for the future
An understanding of the life-cycle value equations of both cars and buyers.
The transformation of the business of selling cars and trucks is happening before our eyes at an incredible pace -- promising to change forever an industry that has long been noted for its high costs, poor service and extremely unpleasant selling process.
Forming a strategic response
Functional improvements
Distribution channel strategy
Downstream value creation
Anticipated changes
The development of innovation strategies to capture that value.
Branding, Reputation
A considerable base of loyal consumers.
Consumers evaluate brands in terms of their earned reputation for product excellence relative to their total ownership cost.
Li Li
Five insights manufacturers use to leverage the value of their brands.
Product excellence and cost.
Rational consumer
Low cost of ownership
Improve positioning
Sustain meaningful change
Managerial efficiency
In strategic decision making
Effective managers value both individual and organizational contributions
Finding each person’s strengths and teamwork
Priority: putting important things first
Efficiency decision making
1.In practical work, some people value the importance of hard working but ignore the results, some like to emphasize the authority but lack the sense of contribution. people tend to simply locate their goals in their positions without taking into account the contribution of their work to the enterprise. Effective managers value both individual and organizational contributions
2. Finding each person's strengths is the key to the effectiveness of organizational work, and giving full play to people's strengths is an important purpose of organizational existence.
3. Less time and more things are the contradictions of management. An effective manager should be good at prioritizing. If you want to do all and can't put enough energy into it, you actually fail to do everything well.
4. When making decisions, Manager should first thinking about the right solution to the problem, and then studying implementation measures to ensure that decisions are turned into actionable actions. During execution, they need to value feedback and check to see if decisions are correct or effective.
Integration And Merger
Vertical
Backward Integration Integrate or merge the companies that produce vehicle components or the material
Example: Toyota’ directly controlled or affiliated firms include the steels, cooling and heating system, machine tools...
Pros: cut the middleman, quality control, efficiency
Forward Integration New business models like Car-sharing system or subscription model
Car-sharing example: Car2Go by Daimler, DriveNow by BMW
Subscription example: Access by BMW, Nissan Switch
The automotive industry comprises a wide range of companies and organizations involved in the design, development, manufacturing, marketing, and selling of motor vehicles. It is one of the world's largest economic sectors by revenue.
Horizontal
Merge other brand to
Improve economies of scale
Bigger base of customers
Example: Volkswagen Group
Affordability: Volkswagen, Skoda
Luxury car: Audi, Bentley
Sport car: Lamborghini, Porsche, Bugatti
Integration And Merger
Preventing entry of rivals
Threat of new entrants: Weak
High initial capital requirement
Brand reputation
Distribution network
Safety, reliability and durability
Legislation and government policy
The existence of economies of scale is perhaps the most significant entry barrier in the auto industry. Also customers have existing brand preferences.
Distribution network can refers to the sale network. Typically, OEMs don’t sell car directly. They cars are sold through the dealer network.
Legislation and government policy: think safety, fuel-efficiency, EPA and emissions
References
https://www.statista.com/statistics/249375/us-market-share-of-selected-automobile-manufacturers/
Arnold, M. (2006). Cost drivers and economies of scale in the automobile industry. GRIN Verlag.
Bhardwaj, B. (2014). The complete book on production of automobile components & Allied products. NIIR PROJECT CONSULTANCY SERVICES.
Chockalingam, A., Dabadghao, S., & Soetekouw, R. (2017). Strategic risk, banks, and Basel III: Estimating economic capital requirements. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3057235
