Logistics economics

Logistic Economics Tutorial 01

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Instructions 1. Clearly display group name with a list of group members’ name and student ID.

2. A well-organized answer is required; either by hand-written or word process. 3. Answers should include a range of appropriate methods of presentation, for

example, Calculation, Charts, Forms, Graphs, Diagrams, Table, etc, where they

are applicable. 4. Answers should include step-by-step explanation or calculation where applicable.

5. Submission must be bound and all pages numbered. 6. Answers must be precise and concise.

7. Answers for each question must not exceed 250 words in length.

A. Tutorial Questions 1. Describe the logistical concern from micro-economic perspective.

2. Changes in macro-economic factor will affect business logistic, explain.

3. Elaborate the role of logistics in an economy.

4. Evaluate the impact of transportation that affect logistical activities in a developing economy.

5. Refer to below B. Case Study: “Micro and Macro economic influences on the Global Automobile Industry” to answer this question: How would micro-economic and

macro-economic logistical activity favour the United States?

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B. Case Study

In September 2012, U.S. automobile sales increased

to 1.19 million cars and light trucks per month, a 12.8 percent increase from a year earlier. This increase represented

an annualized rate of 14.94 million vehicles, the highest sales rate since March 2008;

before the recession began in the United States. Much of the increase was driven by passenger car sales at Toyota Motor Corp., Honda Motor Co., and Chrysler Group LLC.

There was a significant increase in sales for Toyota and Honda from the previous year, as both companies were recovering from the earthquake that hit Japan in March 2011.

Analysts noted similar increases in August 2012 that were attributed to pent-up consumer demand for replacing aging vehicles and the low interest financing and other

incentives Japanese auto makers offered to regain market share lost in 2011 due to the lack of availability of their cars.

Automobile production in the United States had expanded in 2012, given favourable

foreign exchange rates and a plentiful supply of affordable labour. Toyota, Honda, and

Nissan Motor Co. all increased their production capacity in the United States with the goal of shipping automobiles to Europe, Korea, the Middle East, and other countries.

The strong value of the yen, and conversely the weak U.S. dollar, gave Japanese producers the incentive to produce cars in the United States for export around the world.

This investment by foreign automobile producers helped the U.S. economy that was still struggling to recover from the recession of 2007–2009. Automobile industry employment

in the United States was estimated to increase from 566,400 in 2010 to 756,800 in 2015. Although these estimates were well below the 1.1 million automobile workers employed

in 1999, they indicated that the economic recovery was moving forward. General Motors Co., which had once encouraged auto parts suppliers to relocate in low-wage countries,

now encouraged them to locate near U.S. auto plants.

U.S. auto producers, who had once essentially lost the competition to their Japanese

rivals in the 1980s and 1990s and who went through government-backed (GM and Chrysler) or private (Ford) restructurings during the U.S. recession, regained profitability

and invested in the engineering and redesign of their cars. Several Fords were designed with a voice- operated Sync entertainment system, and the Chevrolet Cruze that was

launched in 2010 came with 10 air bags compared with 6 for the Toyota Corolla. As the

Micro- and Macro- economic influences on

the Global Automobile Industry

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U.S. economy recovered, Americans also began purchasing more trucks and sport-utility vehicles (SUVs), which helped to restore profits and market share for the Detroit auto

makers. Trucks and SUVs made up 47.3 percent of the U.S. market in 2009, 50.2 percent in 2010, and 50.8 percent in 2011. This segment of the market had been hit

particularly hard during the U.S. recession.

As the U.S. automobile industry revived, the competition between Ford and GM again

became more intense. In 2008, Ford supported the government bailout for GM and Chrysler because Ford was worried that a collapse of these companies would also

impact the auto parts industry. As the domestic auto industry recovered, Ford, which had often focused just on Toyota as its key competitor, began developing strategies to

counter GM. Ford realized that customers who had long been loyal to Asian brands were again looking at U.S. cars, given the generally perceived quality increases in the U.S.

auto industry.

Japanese auto makers in 2011 and 2012 faced managerial decisions that were influenced both by the nature of the competition from their rivals and by macroeconomic

conditions, most importantly the value of the exchange rate between the yen and the

U.S. dollar. Production by both Toyota and Honda was hit by the earthquake and tsunami in Japan in March 2011 and by subsequent flooding in Thailand that disrupted

the supply of electronics and other auto parts made there. Toyota sales were also influenced by the recall and quality issues in 2010 related to the gas pedal and floor mat

design. Honda’s redesigned 2012 Civic was criticized for its technology and less- than- luxurious interior. The car was dropped from Consumer Reports’ recommended list in

August 2011. Honda officials acknowledged that they had underestimated the competition from U.S. producers.

The strong yen, which made exports from Japan less price competitive, also gave the

Japanese producers the incentive to produce their cars in the United States. Honda,

which had produced 1.29 million vehicles in North America in 2010, planned to open a new plant in Mexico and expand production in all seven of its existing assembly plants

to 2 million cars and trucks per year. Production abroad was a particular issue for Toyota, which made half of its automobiles in Japan, compared to Honda and Nissan, which

produced about one-third of their output in Japan. The president of Toyota, Akio Toyoda, grandson of the company founder, had made a public commitment to build at least 3

million cars in Japan annually, half of which would be for export. Some company officials

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argued for streamlining production in Japan by decreasing production without raising costs, essentially redefining the economies of scale in the company’s production process.

These officials believed the company could meet domestic goals with high-precision production, cost-cutting, and collaboration on new technology with parts suppliers.

Auto producers also focused on China during this period, although there was concern

about the slowing Chinese economy. Auto sales in China increased only 2.5 percent in

2011 compared with increases of 46 percent in 2009 and 32 percent in 2010. However, the size of the Chinese economy continued to be the major incentive for expansion in

that country. In April 2012, Ford announced that it would build its fifth factory in eastern China as part of its plan to double its production capacity and sales outlets in the country

by 2015. This production increase would make the company capable of producing 1.2 million passenger cars in China, approximately half of the number of cars it built in North

America in 2011. Ford lagged behind other major auto producers in entering the world’s largest car market. Ford’s strategy was to build cars from platforms developed

elsewhere to minimize costs. However, these platforms might not provide enough space in the back seats to appeal to affluent Chinese, who often employed drivers. General

Motors developed a partnership with Chinese SAIC Motor Corp. to become the dominant

foreign competitor in China. This partnership resulted in production changes such as designing Cadillacs with softer corners, dashboards with more gadgets, and increasing

the comfort of the rear seats to appeal to Chinese consumers. The challenge for GM was that SAIC could also use GM’s expertise and technology to make itself a major

competitor with the U.S. company. In 2012, the Chinese automobile industry began increasing exports, although these were not thought to be a threat in developed markets

in the United States and Europe, given perceived quality issues including lack of air- conditioning and power windows. However, Chinese producers were making inroads

into emerging markets in Africa, Asia, and Latin America.

The other major influence on the global auto industry in 2011 and 2012 was the recession

and economic crisis in Europe. In October 2012, Ford announced a plan to cut its operating losses in Europe by closing three auto-assembly and parts factories in the

region, reduce its workforce by 13 percent, and decrease automobile production by 18 percent. Ford predicted a loss of $1.5 billion in Europe in 2012 and a similar loss in 2013.

The cost-cutting in Europe was combined with the introduction of several new commercial vans and SUVs and the introduction of the Mustang sports car for the first

time. All European auto makers faced decreased car sales and chronic overcapacity at

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this time. Daimler AG, maker of Mercedes-Benz automobiles, announced that it would not achieve its profit targets, while PSA Peugeot Citroen SA announced a government

bailout of its financing arm and a cost-sharing pact with General Motors. There had been a smaller decrease in auto-producing capacity in Europe since the 2008 financial crisis

compared with that during the restructuring of the U.S. auto industry that was influenced by the federal government bailout.

The discussion of the global automobile industry in the opening case illustrates several microeconomic factors influencing managerial decisions. In 2012, Japanese auto

makers used low-interest financing and other incentives to regain market share lost in previous years. Toyota had to recover from the impact of its recall and negative quality

issues in 2010, while Honda stumbled on the redesign of its 2012 Civic by not incorporating features offered by its competitors. U.S. auto makers reengineered and

redesigned their production processes to add features with greater customer appeal. They also responded to the increased demand for trucks and SUVs, a market segment

that had been negatively impacted by the recession. Ford and GM began reengaging in their traditional market rivalry. All producers who planned to sell in China, the world’s

largest automobile market, had to recognize the difference in tastes and preferences of

Chinese consumers, such as the desire for larger back seats.

Decisions about demand, supply, production, and market structure are all micro- economic choices that managers must make. Some decisions focus on the factors that

affect consumer behaviour and the willingness of consumers to buy one firm’s product as opposed to that of a competitor. Thus, managers need to understand the variables

influencing consumer demand for their products. Because consumers typically have a choice among competing products, these choices and the demand for each product are

influenced by relative prices, the price of one good in relation to that of another, similar good. Relative prices are the focus of microeconomic analysis. The Japanese auto

makers’ use of low-interest financing and other pricing incentives noted above is an

example of a strategy based on influencing relative prices. Auto makers discussed in the case had to respond to changing consumer demand over time and to variations in

consumer tastes and preferences that influenced demand in different countries.

Production technology and the prices paid for the resources used in production influence a company’s final costs of production. The relative prices of these resources or factors

of production will influence the choices that managers make among different production

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methods. Whether a production process uses large amounts of plant and equipment relative to the amount of workers and whether a business operates out of a small office

or a giant factory are microeconomic production and cost decisions managers must make. As noted in the case, Ford Motor Co. used production platforms developed

elsewhere to minimize its production costs as it entered the Chinese market. However, this cost-minimizing strategy was not appropriate for producing cars with larger back

seats that appealed to affluent Chinese customers. General Motors also had to redesign

its Cadillac to meet Chinese demand. Source: Farnham, P.G. (2014) Economics for Managers, Third Edition, Global Edition, Pearson, p.33 – 37.

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C. Review Exercises 1. Discuss the implication of negative externalities of transportation market.

2. Explain the efficiency theories of transportation from the perspective of principle of tapering.

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D. Review Answers 1. S1, Slide 102 – 111.

2. S1, Slide 49 – 50.