Factors affecting Demand Supply of automobile industry

REPORT FOR COMMUNICATIONS FOR CAPITAL MARKETS BY MR. KALTAN BOSE

Automobile Industry Demand and Supply Factors

Name - Nalin Gupta Roll No. - 45

Contents

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Introduction o Problem

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Findings

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o Demand Factors

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o Supply Factors

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Conclusion

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References

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Introduction The automobile industry designs, develops, manufactures, markets, and sells the world's motor vehicles. The automotive industry is one of the most important economic sectors by revenue. In 2009, the automobile industry is expected to see a growth rate of around 9%, with the disclaimer that the auto industry in India has been hit badly by the ongoing global financial crisis. The automobile industry in India happens to be the ninth largest in the world. Following Japan, South Korea and Thailand, in 2009, India emerged as the fourth largest exporter of automobiles. Several Indian automobile manufacturers have spread their operations globally as well, asking for more investments in the Indian automobile sector by the MNCs. Problem The automobile industry crisis of 2008–2010 was a part of a global financial downturn. The crisis affected European and Asian automobile manufacturers, but it was primarily felt in the American automobile manufacturing industry. The downturn also affected Canada by virtue of the Automotive Products Trade Agreement. The automobile industry was weakened by a substantial increase in the prices of automotive fuels linked to the 2003-2008 energy crisis which discouraged purchases of sport utility vehicles (SUVs) and pickup trucks which have low fuel economy. The popularity and relatively high profit margins of these vehicles had encouraged the American "Big Three" automakers, General Motors, Ford, and Chrysler to make them their primary focus. With fewer fuel-efficient models to offer to consumers, sales began to slide. By 2008, the situation had turned critical as the credit crunch placed pressure on the prices of raw materials. Car companies from Asia, Europe, North America, and elsewhere have implemented creative marketing strategies to entice reluctant consumers as most experienced double-digit percentage declines in sales. Major manufacturers, including the Big Three and Toyota offered substantial discounts across their lineups. The Big Three faced criticism for their lineups, which were seen to be irresponsible in light of rising fuel prices. North American consumers turned to higher-quality and more fuelefficient product of Japanese and European automakers. However, many of the vehicles perceived to be foreign were actually "transplants," foreign cars manufactured or assembled in the United States, at lower cost than true imports.

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Findings The automobile industry crisis of 2008–2010 makes us wonder what are the factors which lead to such a crisis. Let us discuss in detail the various demand and supply factors which affect the automobile sector.

Demand Factors 1. Financing Options Auto industry observers cite car loans as the biggest driving factor for the expansion of the Compact Car segment. At present, almost 85 per cent of all new car sales are backed by auto finance, compared to 65 per cent five years ago. Interest rates on car loans have come down drastically in the past four or five years, which helps prospective buyers take the plunge. The growth of the CC-segment in the past few years can be mainly credited to factors such as rise in income levels leading to increased affordability and simultaneous reduction in interest rates leading to lower EMIs. The drop in interest rates usually helps very few people to probably shift from the base model to a deluxe model. A larger shift happens if people are willing to take long-term loans, like five years instead of the earlier three-year loans. 2. Advertising And Marketing Due to the advertising techniques adopted by all the manufacturers in the CCSegment the sales have risen drastically. It is all due to because the companies now a days are using even aggressive selling techniques for which they are even coping with the Film celebrities and Cricket stars, like Maruti has contracted Irfan Pathan as the brand ambassador of Zen and for Santro Hyundai has contracted for Shah Rukh Khan. And the companies are even trying to approach to the customer as to there demand for a vehicle at special interest loans, etc. They are using data according to the customers return and earning capacity for attracting the customers for there vehicles. 3. Price Of The Car One of the major factors that affect the demand of any commodity in the market is the price of the commodity. As the law of demand also states that with an increase in price the demand of the commodity decreases and vice versa. Since, in the compact car segment market even there are very less competitors there is stiff price competition. Like the price of Zen in 2001 was Rs. 3.93 lacs which increased to Rs. 4.01 lacs in 2005, but still the sale of the Maruti brand keeps on increasing it was due to the company’s reputation with the customers. 4. Income Of Consumer / Buyer The income of the consumer or buyer of the car is a very important factor of demand. In recent time we have seen that due to increase in the Income of the general public, there has been a shift from the Lower CC-segment cars to the Upper CC-segment cars. 2

Due to the recent increase in the number of multinationals in India, the income level of the employees have risen drastically and has made CC-segment cars an entry level car for a lot of people. The average age of a CC-segment car owner has also dropped from 35 years to 31 years in India. 5. Increase In Affordability The demand for passenger cars is driven mainly by greater affordability, which in turn increases the aspiration level of the customers. Today with high amount of disposable income in the hand of Indian youth, who forms major portion of the population, PV market has larger addressable market. 6. Demographic Drivers Cars being aspirational products, purchase decisions are influenced by the overall economic environment. Increase in per capita income increases the consumption tendency of the customer. Growth in per capita income and rising aspirations and changing lifestyle is leading to increased preference for cars over two-wheelers, which is also having a positive rub off on car demand. 7. Availability Of Easy Financing Options A majority of PV purchases are financed through financial institutions. Over the past 4-5 years car industry has been benefited through significant increase in affordability due to the decrease in EMIs. Car finance rates dropped from 17% in 2000-01 to 11% in 2005-06. However it has increased and averaged at 13.75% in 2006-07. The current hardening of interest rates is expected to affect demand by reducing affordability. 8. New Offerings Car sales increase when a new model hits the market. Due to escalation in competition in Indian car market, frequency of new model launches has increased. In the past one year only the Indian car market has seen many launches namely SX4, Swift Diesel, Zen Estilo, Spark, Logan, etc. 9. Exports The share of exports from domestic production is currently at 12-13%, which is much lower than current export hubs. Currently, India’s share of global passenger cars export volume stands at less than 1%. But India is fast emerging as a manufacturing hub for leading global car makers, and several manufacturers have already firmed up plans for setting up manufacturing bases in India, which will also be used for exports.

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Supply Factors 1. Presence Across Segments Manufacturers with presence across various product segments can ensure higher volume and better capacity utilization by using the common manufacturing capacity. Typically a customer upgrades from one segment to higher segment and the presence across various segments ensures that the company retains its existing customers. 2. Efficient Operations Competition in PV segment is very intense and this requires the existing players to initiate steps to reduce their cost of production. Effective and successful operation methods like platform commonality, reduction in vendor base and workforce rationalization can help a company immensely. 3. Wide Dealer Network And Availability Of Finance A wide dealer network helps the company serve customers over wide geographical area. For e.g. Maruti has used its available wide service network as point of difference over competitors. The companies are tying up with the financial institutions having rural presence to provide additional financing options to customers in such areas. 4. Access To Latest Technologies Indian PV segment is highly competitive with as many a 14 players operating in it and more than 80 models on the offering. But still any new model launch meets with increase in sales volume for the company. Moreover in a time when a substantial portion of Indian customer is looking to upgrade in higher segment, companies with latest technologies and latest models will catch more attentions 5. Price Of The Car Price of the car is one of the major factors that affect the supply as well as the demand of a car. If the price of the car is high in the market, the manufacturer or the supplier will want to supply more units in the market so he can earn more profits. In the automotive industry where the market type is oligopoly, if one company drops its price for the car, there is a huge impact on the sales of the other cars as well as the same car. In the market the price of one car is inter-related to the price of the other cars in the same segment. The best solution is that market equilibrium should be achieved so that the amount of the quantity demanded should be equal to the amount of the quantity supplied to achieve maximum profits. A Market Equilibrium is achieved at the point of intersection of the demand line and the supply line. The point is the equilibrium point where the quantity demanded is equal to the quantity supplied. 4

6. Factors Of Production There are some factors of production which influence the supply of a car like Cost of Raw Material Labour Cost Machinery Input Cost These factors influence the supply of a car largely. If the cost of the raw material (Steel, Spare Parts, Rubber) increases there will be an increase in the cost of production leading to decrease in profit margins. Costs like labour costs, machinery and input costs also influence the supply with the increase or decrease in these costs. 7. Government Policies And Taxes If there is a change in the government policies regarding the increase in the road tax charged or the tax which is to be paid per unit sold, the supply of a car will fluctuate with the nature of the change. Recently the government has reduced the custom duty on inputs and raw material from 20% to 15% which has increased the supply.

Conclusion Market economies are assumed to have many buyers and sellers, high competition and many substitutes. Monopolies characterize industries in which the supplier determines prices and high barriers prevent any competitors from entering the market. Demand and supply refer to the relationship price has with the quantity consumers demand and the quantity supplied by producers. As price increases, quantity demanded decreases and quantity supplied increases. On the other hand, elasticity tells us how much quantity demanded or supplied changes when there is a change in any of the factor. The more the quantity changes, the more elastic the good or service. By studying various demand and supply factors affecting the automobile industry we can conclude that an upturn or downturn in this sector is due to an aggregate effect of multiple factors. These together govern the economies of automobile sector.

References http://www.wikinvest.com/industry/Auto_Makers http://en.wikipedia.org/wiki/Automotive_industry http://business.mapsofindia.com/automobile

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