The Auto Industry

The Auto Industry

In the automobile industry, a great proportion of income comes from selling automobiles. Globalization is the inclination of world investment and business to move from a country and local markets to a worldwide environment, is a major factor that affects the auto market. More than ever, it has been easy for foreign auto dealers to enter the American market creating competition. Competition is a major factor that takes a toll on the auto industry. In America the car making market is driven by what's known as the "Big Three:" Investopedia.com says, "The profits (and losses) of the big 3 are thought to be an indicator of the overall US economy"

* General Motors - produces Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. * Daimler Chrysler - Chrysler, Mercedes, Jeep, and Dodge. * Ford Motor Co. - Ford, Lincoln, Volvo, and Jaguar.

However, Two of the biggest foreign car manufacturers are:

* Toyota Motor Co. * Honda Motor Co.

Mr. Michael E. Porter identified 5 competitive aspects that shape all industries in his book called "Techniques for Analyzing Industries and Competitors" The below 5 forces by Porter show the relationship between the various competitive forces:

Porter's 5 Forces Analysis

1.Threat of New Entrants- It was thought that the American automobile industry and the Big Three were safe. But this was not true when Honda Motor Co. opened its first office in Ohio. The expansion of foreign competitors began to decrease the market of American companies. Some factors that decrease foreign cars from becoming a threat are: loyalty to American made cars and the cost it would take to replace damaged parts that are manufactured in foreign countries.

2. Power of Suppliers - A lot of suppliers depend on a certain automaker to buy a majority of their products. If an automaker decided to change suppliers it could be the end of the supplier's business. Consequently, suppliers have little power.

3. Power of Buyers - American consumers became discouraged with many of the products being offered by auto dealers because of value and began looking for replacements, like foreign cars.

4. Availability of Substitutes The bigger cost of operating a vehicle, the more chance people will look for other transportation options. The price of gas has a large effect on buyer's decisions to buy automobiles.

5. Competitive Rivalry - Highly competitive industries earn lower profits because the cost of competition is high. However, recently the competition has become more intense preferred financing, and long-term warranties have made buyers more interested. And also put pressure on the profit for auto sales.

It is thought that advertising increases the global competition on the US from foreign automakers. So a school of thought in industrial economics seeks the informative side of advertising, saying that advertising does make markets more competitive and reduces income by giving buyers information about price and quality. These views are being distinguished by examining the effect of advertising on competition in the US auto industry. The data included advertising, sales, profit, and market-share figures for General Motors, Ford, and Chrysler over a 25-year period from 1970 to 1994. Asking if advertising increases or decreases profit. It is discovered that these attributes cannot increase their profits above normal levels by increasing their advertising expenditures. This supports the view that advertising is used to provide information and not to create entry barriers.

According to yahoo finance:

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