Economic Principles – Microeconomics

Industry Goods
The products of the US automobile manufacturing industry are highly diverse and differentiated.
Typically, each car “make” (or brand) has many models, and it is common for each model to have several
variants (usually referred to as “trims”) (Grieco, Murry, & Yurukoglu, 2021). That said, the industry’s
products can be divided into four broad categories: cars, cross-over utility, special utility vehicles (CUVs
and SUVs), trucks, and vans. On average, 52,247 units of cars are sold annually compared to 51,553,
141,039, and 65,357 units of CUVs and SUVs, trucks, and vans, respectively. While the trucks and vans
sold in the US are overwhelmingly from US brands, significant portions of cars, CUVs, and SUVs are
from foreign brands assembled outside the United States. While cars and vans are as old as the US
automobile industry, CUVs and SUVs are relatively recent vehicle classes that were largely non-existent
in 1980.
Major Companies in this Industry
Leading companies with a market share of at least 5% include (in descending order) General
Motors (15.15%), Toyota Motor Corporation (15.09%), Ford Motor Company (12.63%), Stellantis-FCA
(11.8%), Honda Motor Company (9.8%), Hyundai Kia Auto Group (9.7%), and Nissan Motor Company
(7.21%) (Carlier, 2022). For a long time, General Motors (GM) remained the United States’ most
successful auto manufacturer. However, starting in 2004, the automaker has consistently lost its market
share while that of Toyota increased steadily, aided by its SUV models like Lexus. As a result, in 2021,
GM and Toyota effectively tied in the first position. Among foreign automakers, Asian automobile
manufacturers, including Toyota, Honda, Nissan, Hyundai, and Subaru, have proven to be the most
successful. On the other hand, European automakers have remained fringe players in the US market.
These include BMW Group, Daimler, and Mercedes.

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Demand for Automobiles during the Covid-19 Pandemic
An interesting fact about the US auto industry is that, compared to other industries, it has
recovered much faster from the effects of the Covid-19 pandemic (Hensley, Maurer, & Padhi, 2021). This
recovery can be seen fueling vehicle production and sales. In the early months of the global pandemic, the
automobile industry slammed the brakes hard. China, where the pandemic originated, was the first to
experience the effects; sales dropped by 71% in January 2020. By April of the same year, vehicle sales
dropped by close to 50% in the US and 80% in Europe. Fortunately for the industry, starting in the third
quarter of 2020, recovery in production levels started growing. Similarly, the industry, both in the US and
worldwide, has experienced a recovery in new car sales as many consumers who had shelved the decision
to buy over economic uncertainty move forward with their plans.

Describe a Macroeconomic Variable that Business Executives in Your Industry Should Monitor
A macroeconomic variable that business executives in this industry should monitor is real GDP.
This is because this variable has implications for the affordability of the industry’s products, which
demand substantial financial outlays by their nature. There is a difference between nominal GDP and real
GDP: while nominal GDP measures monetary value in absolute, current terms, real GDP means that
nominal GDP has been adjusted for inflation (The Investopedia Team, 2022). Like GDP per capita, a high
real GDP implies that consumers are better able to afford a given industry’s products. Conversely, a low
or declining real GDP suggests that most consumers may be unable to afford the industry’s products.

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Review the Provided Excel Table and Graph for Your Chosen Macroeconomic Variable
Table: US historical real GDP (2000-2019)

Graph: US historical real GDP (2000-2019)

As can be seen from the Table, over the two decades from 2000 to 2019, the United States’ real
GDP has increased from $13,131 to $ 19,073, 45%. The implication is that, even after the steady rises in
the prices of goods and services over the two decades have been taken into account, the average US
consumer is better off economically now than they were two decades ago. In other words, Americans’
incomes have grown faster than the rate of inflation. A further implication is that today more Americans
can afford to buy a car than two decades ago. As the graph illustrates, except for 2007, when there was a
sharper increase (perhaps because of the pre-financial crisis economic boom), this rise has been steady
over the years.

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Summarize How You Think This Industry Will Perform in the Future
If the rising consumer purchasing power (as implied by the steadily rising real GDP) and the speed
with which the US automobile industry has bounced back from the Covid-19-induced slowdown are
anything to go by, then the future performance of the industry can only get better. The steady rise in car
prices bodes well for the industry as it translates into growing company revenues. Indeed, from 1980 to
2018, the average manufacturer-recommended retail price (MRRP) climbed steadily: from about $17,000
in 1980 to approximately $36,000 in 2018 (Grieco et al., 2021). While most of the change in the average
price happened before 2000, the upper 25% of prices continued to climb well into the 21 st century. This
steady gain in car prices can be justified in part by the fact that cars and trucks have become bigger and
more powerful while simultaneously becoming more fuel-efficient over the years.

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Sources

1. Grieco, P. L. E., et al. (2021). The evolution of market power in the US auto industry.
   https://charliemurry.github.io/files/CarMarkups_June2021.pdf
2. Carlier, M. (2022, Jan 26). Automobile manufacturers – estimated market share in the US 2021.
   Statista https://www.statista.com/statistics/249375/us-market-share-of-selected-automobile-
   manufacturers/
3. Hensley, R., Mauerer, I., & Padhi, A. (2021, July 16). How the automotive industry is accelerating
   out of the turn. McKinsey Quarterly. https://www.mckinsey.com/industries/automotive-and-
   assembly/our-insights/how-the-automotive-industry-is-accelerating-out-of-the-turn
4. The Investopedia Team. (2022, Mar 8). What is purchasing power parity (PPP)?
   https://www.investopedia.com/updates/purchasing-power-parity-ppp/