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Economics 244 Spring 2017
Economics of the Automotive Industry
Monday through Friday
12:20 pm – 5:35 pm
This course is an intensive introduction to the automotive industry, focusing on the value chain from suppliers through automotive retailing. As you will learn, the value chain evolved over the past 25 years to include a wider array of players than in the past. Carmakers themselves – the Fords and Toyotas of the world – account for only a small portion of total jobs. The largest sector is automotive retail, which in the aggregate is almost twice the size of vehicle manufacturing. Within manufacturing perhaps 80% of employment is at firms that make components and automotive-specific materials.
Nevertheless the OEMs (original equipment manufacturers) play a central role. They need to develop cars in segments that people want to buy, with styles and features they want for their “drive”. To do this they need to coordinate with suppliers to integrate a wide array of components into a functioning whole, in a world where the demands for greater safety, higher fuel efficiency and lower emissions require developing new technologies. At the same time, OEMs are with few exceptions responsible for final assembly and for the manufacturing of core powertrain elements (motors and often but not always transmissions). Running factories efficiently is challenging, as consumers value variety, an enemy of smooth operations.
In addition, the sales rate varies over time. The inventory held by dealers is crucial in buffering production from demand shocks. Dealers finance the OEMs, purchasing cars as they roll off the assembly line. They manage their inventory of new and used vehicles, which is crucial to making or losing money. They both buy and sell used vehicles, remarketing some trade-ins while buying other vehicles at the auctions of Mannheim and Adesa. They arrange financing for car purchasers and sell insurance (extended warranties). They provide maintenance and repair services and wholesale parts to independent repair shops.
Suppliers, on the other had, are the key providers of new technology. They thus undertake extensive R&D, and run related component manufacturing operations. OEMs play suppliers off against one another, that is, suppliers operate in a competitive environment. Developing new technologies is crucial to maintaining profit margins. Yet they need to do this remote from final customers, and in the context of a 4-year model replacement cycle. That is, the vehicles that will launch in 2018 are largely done deals; suppliers are now deep into work on MY2019 (MY = model year) and are contracting for MY2020.
Our challenge this term is to learn about these individual pieces and how they fit together. Only by doing so can we understand the key economic and management challenges facing the industry. For example, will battery electric vehicles (BEVs), exemplified by Tesla, prove disruptive to OEMs? How will suppliers of internal combustion components such as pistons fare over the next decade? Other examples are new mobility providers such as Uber, the potential for self-driving “autonomous” cars, and the impact of the internet-based business models on automotive retailing.
Class will be discussion-intensive. We will however begin each day with snippets of news, from Automotive News First Shift and Autoline Daily. Most days we will have a core reading. You will need to have prepped that in advance. To get you writing, on certain days I will ask for a formal memo on the reading (limited to either 1 page or 2 pages). I will also ask each of you to do at least one formal presentation during the term on a publicly traded automotive company. All of this will lead up to our week in Detroit.
Three additional requirements. First, each of you will be asked to write blog posts, due by the start of class on Thursdays each week. Second, I will ask you to post journal entries for each day during our trip to Detroit, with at most a 1-2 day delay. Finally, I ask for a short paper (5-8 pages) due on the last day of the term.
We have one visiting speaker. We will meet with him for lunch, for class and again for dinner on Monday, May 1st. He loves coffee, so we will likely end up at Lexington Coffee on Washington Street at some point. Attendance at lunch and dinner is mandatory. Class topics at the end of Week I will introduce you all to downstream issues, in preparation for his visit. Mr. Ruggles has spent 40+ years in automotive retail, including managing stores in both new and used, mass market and luxury, and in consulting in the US and Japan. His current interest is in used car leasing, a combination of finance and arbitraging vehicle prices.
We have Huntley 220 reserved all afternoon. However, if we can arrange to do so, it will often be better to meet for an hour in the morning and then reassemble in the afternoon. That way we can break earlier.
Participation is primary. Failure to attend a class (“I forgot to set my alarm”) will lead directly to a lower grade. Failure to be prepared will also be obvious, and affect your grade. One reason I have been able to arrange functions in Detroit and bring speakers to campus is because previous classes have asked good questions. In a small class, you will stand out if you remain silent, as I do not lead off the discussion when we are at one or another company. Blogs, memos, presentations and the final paper count as follows:
I will generally be on campus in late morning, and available after class with a couple exceptions. In addition, my cell phone is (540) 460-6288.
You will need to sign a release form drawn up by the legal staff of the University Counsel. I will also need to have emergency contacts and health information for each of you. Those will be kept in a sealed envelope in our vehicle so that it can be accessed if necessary.
We will stay at:
Best Western Greenfield
3000 Enterprise Drive
Allen Park, MI 48101
Tel: (313) 271-1600
Please contact me with appropriate documentation if you require an academic accommodation.