Automotive Industry Analysis
Industry Analysis The automotive industry is considered to be highly capital and labor intensive. The major costs for producing and selling automobiles include: * Labor – While machines and robots are playing a greater role in manufacturing vehicles, there are still substantial labor costs in designing and engineering automobiles. Companies have plants that are human operated and they require pay.
* Materials – Everything from steel, aluminum, dashboards, seats, tires, etc. are purchased from suppliers. Companies now are working more closely with suppliers to limit their cost and reuse parts from previous models. Advertising – Each year automakers spend billions on print and broadcast advertising; furthermore, they spent large amounts of money on market research to anticipate consumer trends and preferences. Annual revenues in the automotive advertising market will hold steady at $40 billion globally through 2011, but as audiences continue to shift online, auto ad spend will as well, The auto market is thought to be made predominantly of automakers, however, auto parts make up another profitable sector of the market.
The major areas of auto parts manufacturing are: * Original Equipment Manufacturers (OEMs) – The big auto manufacturers do produce some of their own parts, but they can’t produce every part and component that is required by a new vehicle. Companies in this industry manufacture everything from door handles to seats. * Replacement Parts Production and Distribution – These are the parts that are replaced after the purchase of a vehicle. Air filters, oil filers and replacement lights are examples of products from this area of the sector. These are sometimes referred to as “after market” parts or products. Rubber Fabrication – This includes everything from tires, hoses, belts, etc.
In the auto industry, a good amount of revenue stems from selling automobiles. The parts market, however, is even more lucrative. For example, a new car might cost $19,000 to buy, however if you bought from the automaker all the parts needed to make that car, it would cost 300-400% more. Globalization, the tendency of world investment and businesses to move from national and domestic markets to a worldwide environment, is a huge factor affecting the auto market. This is a key component when analyzing the utomotive industry.
Now more than ever, it is becoming easier for foreign automakers to enter the North American market. Competition is the other factor that takes its toll on the automotive industry. Companies like Honda, Hyundai, Toyota and Nissan are very competitive in the North American market. They have taken a good portion of the market share away from GM, Ford and Chrysler.
Key Players In North America, the automobile production market is dominated by what’s known as the Big Three: * General Motors – Produces Chevrolet, Buick and Cadillac, among others. Chrysler – Chrysler, Jeep and Dodge. * Ford Motor Co – Ford, Lincoln and Volvo. Two of the largest foreign car manufacturers are: * Toyota Motor Co * Honda Motor Co Industry Insight Automobiles depend greatly on consumer trends and tastes. While auto companies do sell a large proportion of vehicles to businesses and car rental companies (fleet sales), consumer sales is the largest source of revenue. Therefore, taking consumer and business confidence into account should be a higher priority than considering the regular factors like earnings growth and debt load.
Another warning of analyzing an automaker is taking a look at whether a company is planning makeovers or complete redesigns. Every year, automotive companies update their cars. This is a part of normal operations; despite this there can be a problem when a company decides to significantly change the design of a car. These changes can cause massive delays and glitches. This results in increased costs and slower revenue growth.
While a new design may pay off significantly in the long run, it’s always a risky proposition.For parts suppliers, the life span of an automobile is very important. The longer a car stays operational, the greater the need for replacement parts. This means more revenue and sometimes-new customers to add to their current loyal customer base. On the other hand, new parts are lasting longer, which is good for consumers, but is not welcoming news for part makers.
When, for example, most automakers moved from using rolled steel to stainless steel, the change extended the life of parts by several years.A significant portion of an automaker’s revenue comes from the services it offers with the new vehicle. Offering lower financial rates than financial institutions, the car company makes a profit on financing. Extended warranties also factor into the bottom line. A strong emphasis on leasing has also helped increase revenues. The advantage of leasing is that it eases consumer fears about resale value, and it makes the car sound more affordable and desirable.
From a maker’s perspective, leasing is a great way to hide the true price of the vehicle through financing costs.Car companies, then, are able advance more cars. Unfortunately, profiting on leasing is not as easy as it sounds. Leasing requires the automakers to accurately judge the value of their vehicles at the end of the lease. Otherwise they may lose money.
For example the automaker will lose money on the lease if they give the car a high salvage value. A car with a low salvage value at the end of the lease will simply be bought by the consumer and overturned for a profit.