Final - Microeconomic Analysis of General Motors PDF

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Running head: MICROECONOMIC ANALYSIS

Microeconomic Analysis of General Motors Shanna M. Rodriguez Southern New Hampshire University ECO 201

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General Motors Company One of the most successful motor companies in the United States is General Motors (GM). The goal of this research paper is to examine and suggest the microeconomic concepts, tools, and models then apply them to the General Motor (GM) business model and overall sustainability moving forward to enable decisions in the sales of their products and services. This paper will analyze supply and demand conditions, the cost of production, the price elasticity of demand, and the overall market. Many factors determine decisions, which include: resource allocation, pricing, output, and profit maximization. The conclusion in the consulting firm’s research paper will recommend to General Motors a strategic microeconomics strategy to observe and carry out. Forecasting the future is an exercise in figuring out what the possibilities could be; it is our goal also to examine GM’s history to understand where they can evolve to remain relevant today and in the future. History In 1905, William Crapo Durant led Buick motor company, and in 1908, he established General Motor Company in Detroit, Michigan. Durant successfully amassed a fortune by building horse-drawn carriages. Fascinating fact, Durant despised cars and thought they were “noisy smelly and dangerous.” (History.com, 2009). Despite his personal view, the company he built became one of the big three motor companies in America (GM, Chrysler, Ford). During the 20th century, Durant recommended 45 different car companies be bought out and consolidated into one company. However, Henry Ford partially stood in the way of Durant’s plan, which later failed because of Ford’s one car model and the substantial funds required to collect multiple companies. Ultimately, the GM board of directors forced Durant to quit, and he established a new company with the Chevrolet brothers (History.com, 2009). General Motors merchandise and services include GM automobile brands in the United States, which are Chevrolet, Cadillac, GMC, and Buick. International and domestic divisions at one time

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included Oldsmobile, Pontiac, Hummer, Saturn, and Saab. One of the largest vehicle manufacturers and dealers in the world is GM, with operations on six continents (CNN, 2020). Supply and Demand Conditions General Motors (GM) is one of the bestselling car manufactures in the world and has been so for many years because they were determined to remain competitive (Maynard, 2012). However, in that same determination, GM continues to improve its vehicles with new technology driving costs to rise as a result. In the car manufacturer world supply and demand is an essential tool to understand. GM must understand to supply the consumer with the product they demand. “The quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price” (Hubbard and O'Brien, 2020). The amount of services or goods available to the consumer is supplies. Shown below is GM’s

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revenue from FY 2013 to FY 2019 represented in billons:

(Wagner, 2020)

MICROECONOMIC ANALYSIS Over six-years, the amount of revenue remained relative year after year, although there is a clear spike between the years 2015 to 2016. Despite GM being a part of an ever-changing world, they still have maintained their revenue numbers. Overall the auto sales market is robust due to cheap and available credit, low unemployment rates, and health consumer sentiment. One significant change in trends is ride-share companies like Lyft and Uber. This trending option of transportation could impact GM product sales. Lyft and Uber will pick up an individual from almost any location and take them to their destination. The urban population prefers to use ride-share options more than the suburban communities. According to studies on ride-share usage, “In urban areas, 19 percent of users take Ubers weekly, while in rural areas it’s just 5 percent” (Shrikant, 2019). City dwellers prefer to take a Lyft or Uber instead of owning a vehicle of their own. There are many reasons for this preference, from the cost of vehicle ownership to convenience. Another trend in today’s world is the pursuit of low impact products on the environment. Fuel-efficiency, low emissions, and carbon footprints are the concern of some consumers. Many car manufactures are starting to offer vehicles that average thirty to fiftynine miles per gallon and are affordable for the average American. With gas prices being inelastic, creating an electric car option will give a consumer the best return on their investment. To meet this demand, GM is diving into the electric vehicle market. By the year 2023, GM plans to launch 20 new vehicles that will be all-electric (Eisenstein, 2019).

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(Cummings, 2017) Currently, the leader in electric vehicles manufacturing is Tesla. The above graph shows the sales of electric cars for GM and Tesla. This graph tells GM they are producing competitive quality electric vehicles that consumers want and can afford. GM sales seem to be projected to rise alongside Tesla (Cummings, 2017). Over the years, GM has dealt with many factors that can impact its supply and demand. Their production of vehicles of quality with continued deamination to perform or even outperform their competitors in conjunction with expanding into the electronic vehicle market will keep them relevant and thriving in the future. Price Elasticity of Demand “The price elasticity of demand measures how responsive quantity demanded is to changes in price” (Hubbard and O'Brien, 2020). The average price of GM vehicles is around $41, 489.00, and over the past six years, the average has not changed much (Book, 2019). In GM’s case, the price elasticity of demand can be considered elastic. Many substitutes for

MICROECONOMIC ANALYSIS GM can make the demand even more elastic. As mentioned before, GM must compete with companies such as Uber, Lyft, and Tesla. Competition with these companies is due to the consideration that vehicles from GM are not the only option. Some GM vehicles are considered luxury instead of necessity. There are growing alternatives for avenues of commuting, which does not create the need for purchasing a car. Consumers rely on big transportation companies like Uber and Lyft to take them from point A to point B. In some cases these alternatives may not be cheaper, but individuals also don’t have to worry about a car note or insurance. The average American considers buying a car is an investment because most of the time going straight out to buy a car with cash is not an option. According to a US Economy and News article, “The law of demand states that all other things being equal, the quantity bought of a good or service is a function of price. As long as nothing else changes, people will buy less of something when its price rises. They'll buy more when its price falls” (Amadeo, 2020). It is crucial for GM to continue to price their products smartly to remain a choice in the minds of consumers. Consumer responsiveness to GM price changes or discount seasons is paramount to include the affordable technology and options available to them. GM’s most significant advantage is the variety they offer to different demographics. GM’s Chevrolet brand manufactures several comparable technological vehicles for different budgets. GM’s other brands, Buick and Cadillac, offer more luxurious features that average the same price point as their competitors. GM’s competitors like Ford are always waiting in the wings if GM raises their prices too high, and the consumers begin looking to other alternatives. The price elasticity of demand directly impacts how GM will run a successful company.

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Cost of Production Automotive production requires many parts to be purchased and assembled before it is presented to the consumer. GM does a great job of analyzing the market and customer’s demands when trends are noted. The main component for GM’s vehicles is steel, which is obtained by GM at a variable cost. Steel is cheaper than aluminum, and even though it may weigh more, the durability is what GM vehicles became known for in the market. GM will produce vehicles based on what they project to become profitable. With that projection, GM will purchase raw materials based on those potential earnings. The reason simply comes down to revenue minus cost of production. Since the cost of steel and aluminum is variable and due to the consumer’s demand for fuel efficiency, GM began making vehicles with a mixture of steel and aluminum making their vehicles lighter (Schoenberger, 2018). GM’s cost of production consists of fixed and variable costs. Direct materials are variable costs such as windshields, steel, and tires. Other examples of variable costs are direct labor, utilities, rent, and insurance. For instance, during the assembly of a GM truck, steel was the primary source of its structure. This was until a change to input occurred and the implementation of aluminum started into structural areas of GM’s truck production to make it lighter, but still durable. When production requirements vary logically, one understands that production cost varies. In turn, operating expenses are fixed costs that are static and do not correlate to the production level. Fixed costs includes staff salaries, cost of facilities, and insurance. GM bases its production level versus cost. If the price is high, consumers will run, but if the price is low, consumers will buy. Therefore, an output decision utilizing marginal analysis could be made by examining the total cost of goods sold (COGS) at a given time to adapt to any potential problem, resulting in an informed decision (Hayes, 2020). COGS is the bottom line cost of conducting business and recorded as business expenses on income statements. Analyzing COGS assists managers and

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investors in estimating the bottom line. Net income will decrease if COGS increases. Hence, the effort by GM is to keep COGS low, so their net profit is higher. As seen in Figure one below, GM’s expenses are grouped under COGS, which accounts for 90% of the company’s total revenue. According to analysis by Trefis, GM has seen fluctuating revenue while its Cost of Goods Sold (as a percentage of Revenue) declined till 2017 but went back up to 90.4% of Total revenue in 2018. Due to this, the Net Income margin went down from 6.4% in 2015 to 5.4% in 2018 (Trefis, 2019). Figure 1 GM COGS

GM COGS for 2015-2019

(Trefis, 2019)

Overall Market General Motors remains constant in one of the most competitive markets out there. GM is competing with major companies such as Ford and Toyota. Bloom and Kotler (2014) risk management review stated the following: In general, the best defense for maintaining market share is a good offense—product innovation, the same strategy that works so well for the underdog. A dominant company must refuse to be content with the way things are. It has to anticipate its own obsolescence by developing new products, customer services, channels of distribution, and cost-cutting processes. (para. 28)

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Figure 2 Global market shares

Graph shows Toyota in the lead as global market share

(Wagner, 2020)

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According to fundamental analysis in terms of a United States market, GM remains the most significant market shareholder, with 17% of the industry’s total sales. Next is Toyota with 14.7% and Ford with 14.4% (Palmer, 2020). However, as seen above in figure 2, on the worldwide market, neither Ford nor GM led the market share, and as of 2019, Toyota is the largest global market share at 10.24% (Wagner, 2020). Shares of global auto market, General Motors, Ford Motor Company and the Toyota Motor Corporation are the most successful automotive manufacturers in the United States. These automotive manufactures create and produce vehicles in GM’s market. GM must maintain its strong reputation and meet the demands of the consumer.

Figure 3 GM United States market share

Graph shows market shares for GM over the past 19 years

(Wagner, 2020)

Between 2005 and 2010, there is a substantial drop in GM’s market shares (fig 3). From 2010 we can see a trend in GM’s steady decline in market shares. Over the last 19

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years, GM has lost around 10% in market shares. On the other hand, GM does possess a large portion of the market, and trends show they are one of the more prominent players in the market; however, there are new competitors on the horizon alluring the eye of the consumer. GM’s declining market shares over the last ten years could be blamed on rideshare options and competitors using new technology. Toyota is an example of new car manufacturers that are taking market shares from GM. Toyota is making vehicles that are environmentally friendly and incorporates value and luxury. GM must incorporate what market trend analysis is depicting to them and must also invest in environmentally friendly luxury vehicles at an affordable cost to the consumer. The most densely concentrated industry is the automotive industry, and there are substantial barriers to entry that will keep new competitors from entering the market. High capital investment, market acceptance, and government regulation is vital for new competitors to break into the automotive industry. GM’s vision’s statement is to become the world’s most valued automotive manufacture. GM would not be significantly impacted by new competition because they understand the competitive advantage they possess in flexibility, adaptability, and global business connections to change their core for the future. The type of market structure the automotive industry can be described as is an oligopoly. In this type of market, many large car manufactures are selling like makes and models, but with their version of available technologies and features. Utilizing the four-firm concentration ratio, the automotive firms are distinctive because of their concentration, meaning a few giant firms exert power over smaller firms making it an oligopoly market structure (Pope, 2015). For years General Motors has managed its market shares responsibly and have grown in their influence. GM has accomplished many changes to remain relevant and to stay competitive. According to a Forbes article, “GM has more excess capacity in sedans than any other domestic auto manufacturer” (Cohen, 2018).

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Recommendation In 2008 General Motors received a federal government bailout. Since exiting bankruptcy status in 2009, GM has been turning the tides and has become a profitable powerhouse. In 2017 GM revamped their models like the Cadillac XT5, GMC Acadia, and the Chevrolet Equinox into EV crossover SUVs. This change resulted in strong sales and higher profits than the previous models generated. With Chevrolet as the market leader, the company is well-positioned to leverage improvement in the macro environment due to their established market acceptance. To meet today’s elastic demand, GM’s mission statement is guiding them to earn customers for life, build brands that inspire loyalty, include technology breakthroughs, and serving communities. GM needs to change consumer’s view of their vehicles from more than a luxury, but to a necessity by providing what they demand. Consumer responsiveness is seen during the EV crossover debut in GM’s profits. GM competes with domestic, regional, and global automotive manufactures. This adds intense competition for GM to succeed in expanding their business. Even though GM is one of the most extensive manufactures by volume, Tesla is still the leader in the EV market. The recommendation to General Motors Company is to continue forward momentum in the electric vehicle market due to the success of EV crossovers in 2017. The firm has placed a foothold in hybrid electronic technology. GM’s current projection into the future is to transform its core to pivot towards the future. To stay relevant and viable, GM should be looking at incorporating new technology and finding innovative ways to reduce their COGS. General Motors Chairman and CEO, Mary Barra, said this statement in a GM journal, “We will continue to strengthen our core business and invest in the technologies that will transform the future of mobility. We’ll grow as the company offers more electric vehicles” (White, 2020).

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References Amadeo, K. (2020, February 5). The Law of Demand Explained Using Examples in the U.S. Economy. Retrieved March 28, 2020, from https://www.thebalance.com/law-ofdemand-definition-explained-examples-3305707 Bloom, P., & Kotler, P. (2014, August 1). Strategies for High Market-Share Companies. Retrieved April 5, 2020, from https://hbr.org/1975/11/strategies-for-high-marketshare-companies Book, K. B. (2019, June 3). Average New-Car Prices Up Nearly 4 Percent Year-Over-Year for May 2019, According to Kelley Blue Book. Retrieved March 28, 2020, from https://www.prnewswire.com/news-releases/average-new-car-prices-up-nearly-4percent-year-over-year-for-may-2019-according-to-kelley-blue-book-300860710.html Cohen, A. (2018, December 1). GM Must Adapt Or Die: A Lesson For U.S. Automakers.

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Retrieved April 5, 2020, from https://www.forbes.com/sites/arielcohen/2018/11/30/gm-must-adapt-or-die-a-lessonfor-u-s-automakers/#66278efc2c2d Cummings, S. (2017). Plugless: Tesla or GM, who will lose the $7500 tax credit first? Retrieved March 28, 2020, from https://www.pluglesspower.com/learn/forecastingthe-sunset-of-federal-tax-credits-for-evs/ Eisenstein, P. (2019, December 8). Detroits Big Three automakers are looking to a batterypowered future, but each is forging its own path. Retrieved from https://www.cnbc.com/2019/12/08/us-automakers-look-to-a-battery-powered-futurebut-forge-their-own-paths.html General Motors Fast Facts. (2020, January 15). Retrieved March 12, 2020, from https://www.cnn.com/2014/04/08/us/general-motors-fast-facts/index.html Hayes, A. (2020, March 16). Understanding Marginal Analysis. Retrieved April 4, 2020, from https://www.investopedia.com/terms/m/marginal-analysis.asp Horowitz, J., & Valdes-Dapena, P. (2018, June 29). GM warns tariff could force job cuts, raise cost of cars. Retrieved April 4, 2020, from https://money.cnn.com/2018/06/29/news/companies/gm-car-prices-autotariff/index.html Hubbard, G. and O'Brien, A., 2020. Microeconomics. 5th ed. [ebook] Pearson. Available at: [Accessed 27 March 2020]. Maynard, M. (2012, May 16). GM Is No. 1 In The World Again In Auto Sales. Retrieved April 15, 2020, from https://www.forbes.com/sites/michelinemaynard/2012/01/19/gmis-back-in-the-auto-sales-drivers-seat/ Palmer, B. (2020, February 24). Ford vs. General Motors: Comparing Business Models (F, GM). Retrieved April 04, 2020, from https://www.investopedia.com/articles/markets/123015/ford-vs-chevy-comparingbusiness-models-and-strategies-f-gm.asp Pope, S. (2015, May 11). The slow-moving game of oligopoly. Retrieved April 5, 2020, from https://www.tradingfloor.com/posts/the-slow-moving-game-of-oligopoly-4758622 Schoenberger, R. (2018, February 7). General Motors strategically embraces aluminium trucks. Retrieved April 4, 2020, from https://www.todaysmotorvehicles.com/article/general-motors-strategically-embracesaluminum-trucks/ Trefis. (2019). General Motors: Breakdown Of Total Expenses. Retrieved April 5, 2020, from https://dashboards.trefis.com/no-login-required/zgfgyixM/General-MotorsBreakdown-Of-Total-Expenses?fromforbesandarticle=gm191030 Wag...