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Posted on October 12th, 2012, by

The automobile industry is one of the most important industries in the world. Today, the automobile production is spread worldwide and what is more important the automobile assembling and manufacturing steadily shifts toward developing countries. In this respect, the position of traditional leaders in the car manufacturing, such as Germany, the USA, Japan and others is often challenged by developing countries, especially China, which becomes the major player in the world’s automobile market. At the same time, the development of the automobile industry has proved to be vulnerable to a significant impact of the situation in international markets. The process of globalization contributed to the close integration of production processes and cooperation between countries, while the elimination of fiscal frontiers contributed to the consistent growth of the automobile production within the last decade. In such a situation, the development of the modern automobile industry is highly dependent on the situation in international markets. In addition, it is necessary to take into consideration changes in the oil price which affect not only the fuel price but also the demand on the automobile market, to the extent that oil prices can influence the future development of the automobile industry. Obviously, the modern automobile industry keeps progressing, although the economic recession has decreased the car production worldwide, but it will not stop the ongoing progress of the automobile industry, although it can change the automobile industry consistently.

The current situation in the automobile industry

On analyzing the current situation in the automobile industry, it is necessary to take into consideration process that take place in the global economy. First of all, the process of globalization influences substantially the development of the automobile industry. In actuality, the process of globalization contributes to the emergence of free trade between countries that naturally stimulates the production of cars and their sales worldwide since largest car manufacturers got access to new markets which used to be closed because of high fiscal barriers. At the same time, the openness of the world economy increased the dependence of the automobile industry on the situation in international markets. This means that the reduction of the consumption of cars and respective drop of car sales affect manufacturers which can be located in a different part of the world. In such a way, the global automobile industry proves to be closely integrated and intertwined.

On the other hand, the process of globalization contributed to the growth of the automobile industry and rise of car production. In this respect, it is possible to refer to the table 1, which shows that the car production has increased from 39,759,847 in 1999 to 52,940,559 in 2008, while it peaked in 2007, when the car production constituted 54,920,317 vehicles (Labaton and Herszenhorn, 2008).it proves beyond a doubt that such a tremendous growth was the result of the increasing international cooperation, extension of car manufacturing worldwide and appearance of new countries, where the car manufacturing emerged.

In this respect, it is possible to speak about consistent changes in the automobile industry in terms of the car production. To put it more precisely, traditional car manufacturers, including Germany, the USA, Japan and some European countries, have started to lose their positions, while new countries, where the automobile industry used to be underdeveloped, have started to increase car production. At this point, it is possible to refer to the table 2, which reveals the fact that, in 2006, China has been ranked third after Japan and Germany among the leading car manufacturers in the world, while the USA was ranked only fourth. Obviously, the rise of the automobile industry in China was, to a significant extent determined by the process of globalization which encouraged largest car manufacturers to invest in the development of production facilities in China that was backed up by the stimulant state policies. This trend to the shift of car production and assembling from developed countries to developing ones increased steadily due to lower costs of production in developing countries compared to developed ones.

Finally, it is impossible to ignore the situation in the oil market because oil prices influence consistently the situation in the automobile industry and define its further development. In actuality, the recent rise of the oil price which reached unparalleled level and the following up drop stimulated the strategic change in the production philosophy of leading car manufacturers. In fact, the exorbitant oil prices stimulated the beginning of the production of hybrid cars, which consumed less fossil fuel or used alternative sources of energy. In this respect, it is worth mentioning Toyota, as one of the first companies that launched the mass production of hybrid vehicles, while, today, more and more companies, including such giants as Honda, BMW and others introduce hybrid vehicles and new technologies to reduce the consumption of fossil fuel. In such a context, the current crisis of largest American companies which resulted in the bankruptcy of GM and Chrysler, was to, a significant extent, provoked by the fact that their cars were not as fuel-efficient as those of their major competitors (Bunkley and Vlasic, 2008).

Shifts and price elasticity of supply and demand

The current development of the automobile industry is vulnerable to consistent changes in the production of cars worldwide and sales rates. In this respect, the change in supply and demand is very important. In actuality, the automobile industry tends to decline. Since 2007, the car production is dropping (table 1) that means that the demand on new cars decreases that naturally leads to the drop of the production and supply of new cars. Nevertheless, the largest automobile manufacturers keep progressing and they attempt to compensate the decline in demand by means of introduction of new models. At this point, it is worth mentioning the fact that since the 2000s car manufacturers introduced new models regularly, while some companies renewed models every two-three years, while restyling took place practically annually. In addition, new segments of the market were developed. For instance, SUVs emerged in the early 2000s and today these vehicles are very popular in many countries of the world (Dessler, 2004). However, the general decrease of demand cannot prevent the respective decrease of production and supply.

Positive and negative externalities

As for positive and negative externalities, the automobile industry has them both, but, in recent years negative externalities prevailed that caused a significant slowdown of the development of the automobile industry and its decline. At the same time, it is worth mentioning positive trends, such as the international market expansion of leading car manufacturers which expanded production facilities worldwide. In this regard, the dominant trend is the trend to move the assembling facilities in developing countries, where the production is gradually localized, while the development of high technologies and innovations stay the prerogative of production facilities and scientific centers located in developed countries, such as the USA, Japan, and the EU.

Nevertheless, negative externalities prevail in the contemporary automobile industry. In this respect, it is worth mentioning the high oil prices which raises the problem of the development of fuel-efficient vehicles. This problem has already proved to be irresolvable to leading US car manufacturers, GM and Chrysler. The general decline of demand also creates unfavorable conditions for the development of the automobile industry. Another serious problem is cultural barriers that may arise when the production facilities are moved to a new country, with a different cultural background. In such a situation, many companies can suffer from the decrease of effectiveness and productivity of work of employees and ineffective management style.

Wage inequality

The major reason for the shift of the production from developed countries to developing ones is the low cost of production. The latter is possible due to low costs of the local labor force since the level of wages in developing countries is consistently lower compared to the level of wages in developed countries. As a result, leading car manufacturers prefer to close plants in developed countries and develop new ones in developing countries. Today, the wage inequality persists. In this respect, it should be said that the level of wages was traditionally the highest in the USA and employees working at American car manufacturers gained more than their European and Japanese colleagues. The latter in their turn have consistently higher wages compared to employees working at car manufacturers in developing countries. In actuality, the wage gap between developed and developing countries is one of the major stimuli for the shift of production to developing countries since car manufacturers attempt to save costs by all means.

Monetary and fiscal policies

The process of globalization brought not only internationalization of the car production and expansion of car manufacturing worldwide, but it also brought totally new monetary and fiscal policies. In actuality, fiscal barriers, which traditionally protected domestic markets from expansion of foreign companies, have been eliminated. Free trade agreements encourage free trade between countries that stimulates the international market expansion conducted by leading car manufacturers. In such a situation, many countries attempt to create favorable conditions to get more foreign direct investments from the part of car manufacturers. The low fiscal pressure encourages the investment in production and construction of new manufacturing facilities, which though have been slowed down by the recent economic recession.


Thus, taking into account all above mentioned, it is possible to conclude that the development of the automobile industry is highly dependent on the current economic trends, including the situation in international markets, oil prices, fiscal and monetary policies of states and their efforts to renew protectionist policies to secure domestic car manufacturers. Nevertheless, the process of globalization defines the development of the modern car manufacturing industry. The internationalization of the automobile industry makes it practically impossible to end the international cooperation without harmful effects on leading car manufacturers. The development of the automobile industry worldwide increased the integration of the automobile industry and stimulates the increase of car production.

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