Motor Vehicle Manufacturing Industry

Motor vehicle manufacturing comprises businesses that manufacture various types of
automobiles such as complete automobiles, heavy duty trucks, and light duty motor vehicles.
Some businesses in this industry also manufacture chassis of motor vehicles alone. The US
motor vehicle manufacturing industry is one of the biggest in the world and contributes around
3% of the country’s GDP (Wagner, 1).

Market structure of the industry

Motor vehicle manufacturing industry in the USA is an oligopoly. In an oligopoly, the
market is composed of a small number of firms. The small number of firms leads to limited
competition among the firms as the harder they compete the less profits they make (Mankiw 2).
The market structure is, therefore, characterized by high level of mutual interdependence among
the firms, especially when making decisions such as prices of products and output. Thus, instead
of competing hard among themselves, the firms in the industry collude with each other in order
to act as monopolies (Mankiw, 2). The cooperation allows them to make higher profits than they
would have made if they competed hard against each other.

The motor vehicles manufacturing industry is an oligopoly because a small number of
firms share a very large portion of the market. These firms are General Motors, Toyota Motor
Corporation, Ford Motor Company, and Fiat Chrysler (Wagner, 1). This oligopoly in the market
structure has been created by a combination of factors. The most important of these factors is
high barriers of entry to market (Mankiw, 2). The large amount of financial resources and

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technical expertise needed to enter the market usually keeps many firms from entering the motor
vehicles manufacturing industry. Additionally, the high level of product differentiation in the
industry has contributed to making it an oligopoly.

Microeconomic relationships, market outcomes and trends in the industry

The main microeconomic factors affecting the industry are labor costs and changes in
consumer tastes. Relatively high labor costs in the USA have made it hard for major US auto
makers to compete with vehicles manufactured in places like China where labor costs are low.
This factor, among others such as sluggishness in responding to market demands, has contributed
to continued shrinking of the US market share controlled by the Big Three domestic motor
vehicle manufacturers – General Motors, Ford, and Fiat Chrysler over the years and increasing
market share of foreign firms such as Toyota (Wagner, 1).

Another important trend is increasing shift of consumer preferences towards low
emission and fuel efficient vehicles. This trend can be seen in the increasing market share of
electric vehicle manufacturers, such as Tesla (Soltani-Sobh et al., 3). With the public
increasingly worried about issues such as climate change, sales of electric vehicles are likely to
continue increasing. The sales are particularly going to be boosted by various government
incentives such as subsidies to electric vehicle manufacturing companies and technology
improvements that enable the electric vehicles to have longer lasting batteries and for the
batteries to be charged for shorter times.

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The industry has also been recently affected by low demand globally as economic growth
has slowed in multiple parts of the world. The slowing demand has negatively affected motor
vehicle sales. The trend is likely to continue to the ongoing coronavirus pandemic that has
depressed demand. The effect of slowing global demand can be seen in the table below of motor
vehicle sales in the first quarters of 2019 and 2020.

Table of motor vehicles sales in 2019 and 2020

Q1- 2019 Q1- 2020 Change

General Motors 653,807 617,492 -5.5%

Ford 565,566 504,437 -11%

Toyota 531,308 484,115 -9%

Fiat Chrysler 498,312 431,509 -13%

Source: Car Figures

Government influence on market prices, output, and market structure

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Government policies often have a major influence on output and prices of motor vehicles
as well as the market structure of the industry. In particular, government regulations regarding
safety and environmental standards have the effect of increasing production costs as firms in the
industry seek to comply with the regulations (Mutrynowski, 4). Sometimes these increased
production costs may be passed on to consumers in the form of higher prices of motor vehicles.

Apart from government regulations, tax and trade policies also affect the output and
pricing of motor vehicles. For instance, reduction of corporate tax rate has the effect of
encouraging firms whose production units are in other parts of the world to return their foreign
operations to the US to take advantage of reduced taxes (Mutrynowski, 4). Additionally, trade
policies such as the renegotiation of North America Free Trade Agreement (NAFTA) may have
on production costs. For instance, after President Trump’s renegotiation of NAFTA in 2018,
automakers were required to increase the percentage of motor vehicle components manufactured
in north America (Puyana, 5). Since wages in North America are higher than in other parts of the
world, the policy is likely to make it hard for American motor vehicles to compete in markets
where labor costs are low such as China.

Another way that government influences output and pricing of motor vehicles is through
subsidies and tariffs. Subsidies have especially been key in increasing sales of electric vehicles
as they have made the vehicles, which have very high manufacturing costs, to be competitive in
both local and international markets (Soltani-Sobh et al., 3). Tariffs, on the other hand, make
imported vehicles more expensive in the USA thus protecting local market for local

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manufacturers. The negative effects of tariffs, however, is that they tend to make motor vehicles
generally expensive.

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Source List

1. Irwin Wagner. 2020. “US Car Manufacturers – Statistics & Facts” Statista
   https://www.statista.com/topics/1736/us-car-manufacturers/?
2. Gregory Mankiw. 2020. Principles of economics. Cengage Learning.
3. Ali Soltani-Sobh, Kevin Heaslip, Aleksandar Stevanovic, Ryan Bosworth, and Danilo
   Radivojevic. 2017. “Analysis of the electric vehicles adoption over the United
   States.” Transportation research procedia 22: 203-212.
4. Tomasz Mutrynowski. 2016. “Regulatory determinants of US automotive market
   structure–an overview.” Annals of Marketing Management & Economics 2, no. 1.
5. Alicia Puyana. 2018. “Trump politics towards Mexico. Renegotiating NAFTA while
   invocating the Monroe Doctrine1.” real-world economics review, 123.
6. Car Figures. 2020. “2020 Q1 Market Share By Manufacturer”. Car Figures
   https://carfigures.com/us-auto-market-2020-q1-manufacturer-share