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Essay On Economics Of Automobiles

Automobile Industry Analysis Essay


            The automobile industry is one of the leading industries at the global level. It plays a crucial role in the development of the global economy because of the high revenues and increased customer demands. The automobile industry helps to foster economic development of the country; therefore, it is widely recognized as a major economic sector. The automobile industry consists of multiple companies specialized in car manufacturing, as well as the ones involved in marketing and distribution of automobile products, such as cars, buses, vans, trucks, motorcycles, mopeds and motorized bicycles. The global automobile industry incorporates several large car manufacturers’ blocs that work collaboratively suppliers at the global level.

The major goal of this paper is to provide a detailed analysis of automobile industry that gives a clear description of the industry today and its prospects for the future. Due attention should be paid to the use of the strategy tools and theories, such as Porter’s five forces and PESTEL analysis and other approaches.

Porter’s Five Forces Analysis

  1. Bargaining Power of Suppliers

The bargaining power of suppliers is low for the reason of the availability of multiple suppliers in the auto-parts industry. Nevertheless, due to the growth of the supply system and its specialization, supported by new technological advancements, manufacturers have an opportunity to reject the delivery of materials because of poor quality (Pearlson et al. 39).

  1. Bargaining Power of Customers

The bargaining power of customers is moderate because in the automobile industry, customers need to have enough information about automobile products’ characteristics, as well as other factors that influence their decision making: price, quality, product image, brand, and environmental impact of the product. Many car manufactures produce products with the same characteristics and sell them at the same price.

  1. Rivalry between Existing Players

The rivalry between the car manufacturers is focused on addressing the demands of customers in terms of lower prices, better product differentiation, more effective distribution strategies, and stronger business relationship with supply system. Currently, the existing players in the automobile industry are BMW, Ford, Audi, Honda, Mercedes Benz, Fiat, Lexus, Infiniti, Acura, Toyota, Volkswagen and others.

  1. Threat of Substitutes

The threat of substitutes is moderate because automobile products vary, although they have the same purpose. Due to product differentiation, customers have an opportunity to select products considering such factors as price, quality and design.

  1. Threat of New Entrants

The automobile industry has high level of barriers to entry. It needs specific machinery, facilities, equipment, human resources, technological devices, distribution channels, etc. The automobile industry is attractive to new entrants, but requires them to solve a number of problems, like customer preferences, industry demands, environmental demands, and others. Thus, the threat of new entrants is low.

PESTEL Analysis

Political and legal factors

Political factors have a strong impact on the development and growth of the automobile industry. The production of hybrid vehicles requires more financial support from local governments because of the environment friendliness. The production of new vehicles must comply with the established vehicle emission standards. Governments across the globe should provide financial support to favor the distribution of vehicles with lower CO2 emissions (Geels 67). Besides, taxes and import laws affect the automobile industry growth. In fact, there are some legal requirements that should be met by the car manufacturers, including environmental regulations aimed at reduction CO2 emissions.

Economic factors

The increased prices for cars are associated with the inflation rate and economic crisis. Besides, the industry is dependent on oil prices. The following factors play an important role in the industry’s shifting in supply demands and price elasticity: local government taxes,prices for materials and resources, population growth, buying capacity, types of economic activities, commercial usage of vehicles, fuel economy dependence, and other factors (Orsatoa & Wells 994). The profitability of the automobile industry is related to the financial opportunities of customers.

Socio-cultural factors

Socio-cultural factors that influence the development and growth of the automobile industry include population growth rate, education level, lifestyles, safety issues, cultural differences, and the effects of consumer buying habits, their attitudes toward “green” or ecological automobile products. The automobile industry growth is dependent on the preferences of customers, most of whom need to purchase cars for families. They consider the space available in the car, safety and price.

Technological factors

Technological innovations play a crucial role in the development of the automobile industry. Due to the use of new technologies it is possible to enhance standards of driving. Besides, currently, the automobile industry is experiencing the problem of fuel consumption. The innovation of new cars, which are characterized as environment friendly vehicles, is aimed at reduction of fuel consumption. Besides, technological innovations are aimed at meeting the requirements of customer safety. New seat belts, air bags and other devices help to avoid injuries sustained in collisions. Anti-Brake Systems help to increase the stopping distance even on slippery pavement. The automobile industry needs investments in research and development to ensure that new technologies are useful and meet the demands of customers (Pauwels et al., 142). ). The production of high performance vehicles by car manufactures is increasing due to the benefits provided to customers: higher engine output, more innovative braking and suspension systems and other technical characteristics that guarantee high quality of products.

Environmental factors

There are some environment factors that affect industry development and growth, including fuel economy and air pollution caused by CO2 emissions. Environmental concerns make car manufactures use innovative technologies. The production of environment friendly vehicles, such as hybrid cars and electric vehicles, allows changing customer demands and preferences in the future. The advantages of these vehicles over gasoline cars include low emission and high energy efficiency (Zhuang et al. 137).

SWOT Analysis


  • Evolving industry due to popularity of cars among consumers;
  • Contribution to changes in lifestyles;
  • Product innovations due to new technology support and advancement;
  • Involvement of cheap workforce from the developing countries in car manufacturing (e.g. India, China, Indonesia and other developing countries).


  • Increased competition;
  • Strict regulations;
  • High taxes;
  • Environmental concerns;
  • High costs of research and development opppirtunities.


  • Introduction of fuel efficient cars;
  • The growth of strategic alliances;
  • Changes in customer preferences;
  • Expansion of markets (Pauwels et al. 142).


  • Increased competition;
  • Dependence on fuel prices;
  • High production costs;
  • High electricity costs;
  • Inflation rate;
  • Poor regulation of car markets (Orsatoa & Wells 1006).


            Thus, it is necessary to conclude that currently the automotive industry is experiencing growth. The production and distribution of vehicles in China and other countries with cheap workforce have increased significantly. However, the automobile industry has some problems that require implementation of joint efforts, e.g. environmental, economic problems and technological concerns. The analysis of the automobile industry shows that it is possible to strengthen its growth at the global level. The knowledge of markets should be improved and strong brands should be built to adapt to the changing environment. Because of the large number of players in the automobile industry, the increased competition is the challenge for the industry. Besides, constant fluctuations of fuel prices lead to changes in the prices of cars. Local governments’ regulations affect the industry in some way.

Works Cited

            Geels, Frank W. “The impact of the financial–economic crisis on sustainability transitions: Financial investment, governance and public discourse,” Environmental Innovation and Societal Transitions, 6 (March 2013): 67–95.

            Orsatoa, R. J. & Wells, P. (2007). “U-turn: the rise and demise of the automobile industry,” Journal of Cleaner Production, 15(11–12): 994–1006.

Pauwels, Koen; Silva-Risso, Jorge; Srinivasan, Shuba; Hanssens, Dominique M. (2004). “New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry,” Journal of Marketing: 68. 4 (2004): 142-156.

           Pearlson, Keri E., Saunders, Carol S. & Galletta, Dennis F. Managing and Using Information Systems, Binder Ready Version: A Strategic Approach. John Wiley & Sons, 2016.

            Zhuang, Ye; Nie, Shida & Guo, Konghui. “A study of semi-active suspension with tuned mass damper,” in The Dynamics of Vehicles on Roads and Tracks: Proceedings of the 24th Symposium of the International Association for Vehicle System Dynamics (IAVSD 2015), Graz, Austria, 17-21 August 2015. CRC Press, 2016.

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Reducing automobile-based gasoline consumption has been a major U.S. public policy issue recently. A key driving force behind policymakers' desire is the concern of environmental externalities and national security. Currently, there are three public policies towards reducing automobile gasoline consumption: raising federal gasoline tax, raising the Corporate Average Fuel Economy (CAFE) Standards and vehicle scrappage subsidies of government to retirement of old vehicles. My research studies the effectiveness of these policies in the United States. Among all polices, economists often argue that higher gasoline tax would be more effective in improving fuel economy efficiency. In my first chapter, I ask how gasoline prices influence households' automobile replacement decisions and thus market fuel economy efficiency, which is measured by average mileage per gallon in a city. I specify and estimate a structural dynamic model of consumer preference for new and used vehicles following the methodology proposed by Gowrisankaran and Rysman (2009). Since gasoline costs accounts for 65% of total operating costs, the current and future gasoline price must need to be taken into consideration for rational forward-looking consumers when they are making vehicle choices. Besides, the replacement decision for vehicles is dynamic as well: facing depreciation as the automobile ages and the improving features for new products, consumers need to decide whether to replace the vehicle in the current period or later. Therefore, a dynamic model of consumer choice would be crucial to correct policy evaluation of fuel economy efficiency, while previous literature fails to consider the dynamics. By taking dynamics into consideration, I am able to capture the inherent dynamic nature of a forward-looking consumer's decision, with rational expectation on the evolution of vehicle attributes and retail gasoline prices. I estimate the model using a rich dataset combing vehicle registration data on different cities, vehicle characteristic data, average gasoline price, etc. Although a high gasoline tax is never put in practice in the U.S. and may not be political feasible, I further conduct an experiment of raising gasoline tax to test how fuel economy efficiency is affected based on my model estimates. Experiments suggest that keeping a $4 gasoline price would result in a steady trend for a city's fleet fuel efficiency increase, while doubling current rate will only increase fuel efficiency in the first several years, but experience drops over time. The Corporate Average Fuel Economy (CAFE) are regulations in the United States that intended to improve the average fuel economy of cars and light trucks sold in the US. However, it is long been realized that with a more fuel efficiency car, consumers may be induced to drive more which partially offsets the original energy saving by the policy. Therefore, to assess the effectiveness of CAFE standards, it is crucial to ask: how fuel economy efficiency, which is measured by mileage per gallon (MPG), affects households' vehicle mileage traveled and its distribution. In my second chapter, I answer the question by estimating a structural model for joint determination of vehicle fuel efficiency choice and vehicle mileage traveled each year with a detailed micro-level data of National Household Travel Survey 2001. I further study the distributional effects on vehicle miles of fuel efficiency using instrumental quantile regression. Comparison on results and tests of weak instruments between my method and literature suggest that my model and choice of instruments provide consistent estimates, while using choice probabilities as instruments is not valid. My results support some earlier findings of rebound effects with a more precise quantitative estimation. In addition, I find new evidence that costs associated with raising CAFE standards vary across different quantiles of annual mileage driven and are especially high for those with below-average vehicle mileage driven. These findings also provide rationale in support of a tax on mileage, which is more effective in reducing gasoline consumptions, comparing to the costs of CAFE standards. My third chapter focus on 2009 CARS Program (Cash-for-Clunker). The 2009 CARS program attempted to boost the sale of new fuel efficient vehicles to replace old gas guzzlers. The program established a two-tier incentive system depending on whether buyers purchased a passenger vehicle or an SUV. The result is that many of the new purchased vehicles are indeed SUVs. The CARS program collected information about the old scrapped vehicles and linked it to the actual purchase of the new vehicles. It is thus possible to analyze the effect of preference inertia in choices by comparing the characteristics of old and new vehicles. The fact that effective prices that consumers face are determined by the mileage class of the old car also allows us to evaluate the distribution of valuation trade-offs between mileage and other characteristics such as size, performance, and vehicle class. My findings suggest that the 2009 Cash-for-Clunker is not very effective in terms of affecting consumers' choice of SUVs and big cars. For transactions under the program, consumers still prefer SUVs and large cars. The extra $1000 rebates actually increase consumers' tastes towards SUVs.