Sunday, June 22, 2008

Loom Future For US Car Manufacturers?

Signs of loom future for US manufactured cars (Ford, General Motors and Chrysler)

1. US economy is one of the worst hit with sharp slowdown in overall economic activity & rising prices (called stagflation) mainly caused by soaring fuel prices. Many consumers are pessimistic about future of US economy & thus cut their expenditure on big items such as cars

2. Second, US car manufacturers are losing out to Japanese auto-makers. It seems that the Japan has a comparative advantage in this field. Recent evidence showed that demand for Ford has fallen 15.8%, General Motors fallen 27.5% & Chrysler fallen 25.4%. Meanwhile demand has surged for brands like Nissan that increased by 8.4% & Honda up 15.6% (figures from BBC, 20th June 2008). It is well known across US & the Europe, that US cars are ‘big & bulky’ which makes it not being fuel efficient. Much attention has been paid on security feature of the car while the Japanese oversee the future direction of oil price hence coming up with more fuel efficient models

3. Third, it has decided to postpone its new models of pick-up trucks by 2 months & latest statistic estimated that Ford itself will produce lesser 90, 000 vehicles by second half of 2008 (figures from BBC, 20th June 2008)

4. Fourth, as for General Motors, its official has decided to shut down by large scale plants for SUV (Sports Utility Vehicle) & truck factories in US, Canada & Mexico. This may not be good news as they may no longer be able to produce at minimal cost due to failure to fully exploit technical EOS. Cost of raw materials such as steel is on the rise & yet it is spread over a smaller range of output

5. Fifth, Ford motor has suddenly decided to sell of luxurious brands such as Jaguar & Land Rover to Indian firm, Tata


1. Future for US car manufacturers will be even worse with direct competition from Chery Automobile, from China. Bear in mind, while Japanese-made cars are relatively cheaper in the long term thanks to its fuel efficiency, Chinese-made cars are not to be belittled too as they can be cheap due to its high ability in exploiting EOS. Thus the cheaper costs of production will be passed on to the end consumers. To some extent some may argue that, Chinese cars are of low quality & safety standards. Furthermore Chery is not a dominant brand. Much concerted effort is needed to build its reputation in US & across Europe. Hence this means not much of threat to US auto-makers

2. Fall in the demand for home made cars are temporary. Its officials said that they have already planned for the production of smaller & more fuel efficient cars in respond to consumers’ demand. This is in line with the spirit of free market economy (Remember what we learn in Unit 1? Consumers are the king)

3. Possibly, the US auto-makers are facing great diseconomies of scale (DEOS) resulting from overly large operation scale. As such rather than facing declining costs as quantity of cars increase, they face an escalating one. Measures to reduce work shifts, shut down production plants which are not that profitable such as trucks in the face of slowing economy & disposing non-profitable subsidiaries are a great head start to clean up their balance sheet

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