Halden Zimmermann’s latest blog post
Automobile Industry
Barriers to entry, price control, research and development, lobbying, serious oligopolistic competition are all characteristics of the automobile industry. The car industry has somehow met the demand of almost every individual capable of buying a new car; thus expensive sports cars, cheap luxury cars, powerful trucks and high tech weird looking cars. The first company to come up with this idea of different car models was General Motors. It sympathized with the desires of the consumer, and produced cars that fit the customer’s wants and needs while still making a profit.
Thus the evolution of research and development in the past, companies researched and developed cars that were maybe more powerful and more durable. But today, research and development is spread out into convenience, luxury, safety, fuel economy and performance. Maybe it was a mistake for GM to follow the demand of the customer because today the competitiveness of the industry relies on the choosiness of the customer. The fastest car, the more efficient engine and the safest body are often stressed when buying a car.
In 1910, Henry Ford came up with the idea of line assembly, in which workers did not have to build the whole car, just parts of it. Before this concept, in one year, Ford would build 4,000 cars, and after the innovation, they built 187,000 cars. One can imagine the type of competition between companies that occurred from then on. The race to produce cars faster and more efficiently was direct ratio to how much a company can price a car for. Thus opening the market, not only to the higher class, but to the middle and lower class. Now the technologically advanced production facilities of the car industry kills two birds with one stone. It not only produces a large volume of cars, thus lowering the prices, it eliminates the costly human element of the equation. Now the car industry can save money through the use of robotics and spend salary elsewhere. This type of conduct in the industry has brought about a greater need for unions. This hinders the decision making of each firm because unions can severely hurt a company through bad publicity as well as eliminating the work forces.
Barriers to entry in the automobile industry is a major characteristic. The cost to even build an assembly plant is enormous. It would cost more than $200 million to build one; also to sell your product would cost $250 million in advertising costs and the setup of dealerships would also be substantial. Therefore, before price competition comes into the picture, there are all these natural barriers to entry. Even though there is no real cut-throat price wars between the big companies, if one company ever dropped the prices, all would follow. Foreign price competition is inevitable. The price wars between Japan and Europe are enormous. The United States government during the Reagan years had to institute huge tariffs against the Japanese car makers, in order to let the U.S. car makers compete.
from Halden Zimmermann http://ift.tt/13knFRS
Halden Zimmermann 