Monday, November 8, 2010

Current Conditions in the Automotive Market

General Motors fights for the coveted spot of number one in the global automotive manufacturing market. The company held the spot for more than sixty years until the first quarter of 2007 when Toyota Motors overtook GM as number in automotive sales globally. General Motors sold approximately 9.3 million vehicles worldwide in 2007 according to the General Motors website. Toyota announced the same number of sales at 9.3 million. According to Edmunds GM edged Toyota by merely 3,000 units to maintain overall global sales supremacy (, 2008). Light vehicle sales were 16.15 million for 2007; number one GM’s portion was 3.87 million units to, second place, Toyota’s 2.63 million units (, 2008). Current numbers are down significantly from 2007 and highs in 2006. General Motors has not announced summer numbers for the third quarter of 2008. The first two quarters are devastatingly low compared to recent years. GM sales, for the first three quarters of 2008, have been off 18.3% from the same time last year.

New companies entering the market, whose downturn has all but crippled U.S. companies; have their work cut out for themselves. Tata Motors Limited in India is one of three new companies trying to grab a share of the world market. Tata manufacturers light cars and trucks, also medium and heavy duty commercial vehicles. The company is bringing to market an inexpensive sub-compact car called the Nano. The vehicle will sell for approximately $2,500. The company hopes the car will sell well in gas guzzling countries such as the U.S. and China. The car has yet to pass safety standards in many countries and it is unknown how the upgrades will affect the price. Some companies are pulling out of slow or defunct areas of the globe. China has increased sales for GM in the last decade, but recently sales have also slowed in China for other manufacturers. Smart Car USA is another company in recent months to dive into the sub-compact market with the ForTwo. The company has had better than expected sales due to high fuel prices and exceeding U.S. highway safety standards.

General Motors adjusts prices continuously to entice customers to buy their automobiles. During the summer of 2008 GM advertised employee pricing for everyone. This scheme was believed to kick start sales. Due to the economic downturn customers did not rush out and begin buying cars and trucks. Employee pricing allows dealers to sell vehicles at a lower price, a small percentage above cost. Financing has become harder to qualify for because the financial industry is in a freefall and the government has to bail out the banks. Banks and lending institutions are tightening the reins on sub-prime and risky loans.

Technology may help save General Motors from complete collapse. The introduction of the Volt, a full electric plug in car, in 2009 is predicted to catapult GM into the next decade. New hybrid technology has helped brands Chevrolet and GMC to compete in the market of large SUVs. The Tahoe and Yukon hybrids have sold light numbers compared to smaller hybrids from Toyota and Honda. Cadillac has jumped onboard and has introduced the Escalade Hybrid. This truck is a full-size, luxury SUV that GM is hoping will entice luxury owners to convert to greener vehicles. New safety standards like second generation airbags, traction control, and roll-over avoidance are great leaps forward for the automotive industry. Luxuries like XM satellite radio, navigation systems, and OnStar are big selling points for General Motors. Automatic drive systems are in development and are still in the infant stage but the technology is quickly gaining ground.

Productivity within GM is nowhere the standards of Toyota or Honda and labor unions continue to put pressure on the American auto industry to drive up wages and benefits without stepping up production to pay for these costs. The labor units cost GM more each year as older workers retire and new workers must replace them. The retirement pensions continue to rise as retirees are living longer and wages for the factory workers rise because of union contracts. This phenomenon has caused GM to close plants and lay-off workers. Honda and Toyota do not have these problems because their employees do not retirement plans or large severance packages when a plant closes or staff is reduced. Fixed costs are rare in the automotive industry, and the variable costs grow each year. Fixed costs are the contractual agreements the company faces each year. Wages, benefits, and parts supplies are contracted to stay flat throughout the duration. The variable costs continue to skyrocket each year as fuel costs are out of control, shipping costs are tied to the rise in fuel, and energy costs like electricity and water.

Demand is waning every month and costs are rising. General Motors continues to change the prices of the vehicles or making deals with lower interest rates to bring customers into the dealerships. Nothing has helped drive sales up in the lagging economy. Dealerships are being consolidated or eliminated altogether to cut costs and give customers less options. Less competing dealerships allows GM to keep inventories lower and meet the drop in demand. AutoNation is the largest automotive retailer in the world. Bill Heard Inc. was the largest GM dealer franchise in the U.S. until the recent collapse and subsequent bankruptcy of the company. AutoNation has closed and consolidated a number of dealerships dropping the number of dealerships from approximately 350 nationwide to 250. This has helped GM to shed inventory costs and allowed production to drop off to meet demand. This also has caused GM to close plants and release workers. The plan is to close the Moraine and Janesville plants in December 2008 and early 2009 respectively. Over 8,000 jobs will be cut saving millions over the next five years as GM concentrates on producing smaller cars.
Supply and demand are tricky puzzles GM and the rest of American auto manufacturers are having a hard time figuring out. GM has lowered production to meet demand, but as the economy continues to spiral downward and costs for families rise, demand is slipping lower and supply is still too high. Inventories are setting dead on dealers’ lots while sales continue to slide. The hope of the government’s 700 billion dollar bailout of the financial industry is that lending will begin to help stabilize the economy and cash will flow back into circulation. The problem is consumers are scared and do not want to risk their money by making unnecessary purchases.

General Motors chief Rick Wagoner is optimistic about the future of the company. He believes the company will rebound and continue to reign as the superpower of the auto industry. Some experts have talked about the collapse of GM and eventual bankruptcy. Rick Wagoner has denied these claims and says the company is in great shape financially even though sales have dropped.

References (2008). 2007: A Historic Year for U.S. Vehicle Sales. Retrieved October 12, 2008, from (2008). GM Edges Toyota in Global Sales in 2007. Retrieved October 12, 2008, from

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