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1. Disposable income
The exchange rates play an important role for businesses exporting goods
and importing raw materials. In other words:
A depreciation (devaluation) makes exports cheaper and exporting
businesses benefit from this;
Although businesses importing raw materials face higher cost of
imports;
An appreciation makes exports more expensive and decreases
competitiveness of exporting businesses;
Although, raw materials are cheaper as a consequence of
appreciation.
1 Graph source: Avsar, V., & Turkcan, K. (2013). Exchange Rate Volatility and US Auto-Industry
Exports: A Panel Cointegration Approach. International Journal of Economics and Financial
Issues, 3(4), 773.
3. Interest rates
Interest rates are significant and dictate whether a business should expand
or withdraw. When interest rates increase, banks charge more for business
loans, that is companies need to use their earnings to pay loans while
decreasing their profits. Of course, this has consequences on the growth of
the company. In fact, businesses may earn more from new ventures to pay
for rising interests. As for customers, they will have to pay more for car
loans and this will decrease their buying power.
The trend of interest rates for vehicle loans and their demand are different
in each country, in Mexico for instance 68% of the new cars sold were
purchased using some form of financing in 20152. In USA, the growing
demand for new vehicle loans was driven on by a decrease in interest rates.
Bank rates dropped from 5.17% to 3.76% between 2010 and 2014. This
had benefited FCA because USA represents a significant share of its sales.
Freer trade enables the acquisition of greater market shares and new
opportunities for Mergers and Acquisitions (M&A), this allows companies
2 http://www.jato.com/wp-content/uploads/2016/06/JATO-Global-Car-Sales-2016-Q1.pdf
to benefit from economies of scale, economies of scope, gain profitability
and defeat rivalry.
The automotive industry is characterized by over-capacity, resulting in a
situation where weak firms often exit the economy, not only for
bankruptcy, but for acquisition purposes. When mergers take place
between companies located in different countries, national economies
become more integrated.3
The board of directors of FIAT S.p.A have approved the merger plan with
Chrysler, renaming the company FCA; the company has significantly
benefited from synergies and has promoted innovation4. Innovation has
derived from the interaction with customers starting from the product
concept phase up to the participation in virtual networks and also
contributions from suppliers, public and private institution, research
centres and universities.5
5. Unemployment trends
3 Serdar Dinc, I., & Erel, I. (2013). Economic nationalism in mergers and acquisitions. The Journal of
Finance, 68(6), 2471.
4 https://www.fcagroup.com/en-
US/media_center/press_release/2014/june/Pages/Fiat_S_p_A_approves_merger_plan_for_the_f
ormation_of_Fiat_Chrysler_Automobiles.aspx
5 https://www.fcagroup.com/en-US/innovation/Pages/open_innovation.aspx
6. Cost of raw materials
- labour
- advertising
7. Inflation Rate
Inflation rate may affect the purchasing power of customers if the increase
of prices is higher than the inflation rate. This is because inflation rate has
been stable and the trend has matched the price increase for the sector in
the past years, maintaining the real price stable over time and the same is
expected for the coming years inflation will not be a threat for the
sector and for the FCA group. During periods of increasing inflation, car
manufacturers have defended themselves by extending bill payment plans
from 24 months to 36 months7.
1) China: the market soared (+10% in 2014 and +8% in 2015) but it is
perhaps becoming too profitable, selling price will have to fall for
competition purposes.
2) United States: the market has boosted profitability and marked a 20%
fall in the workforce. There has been a growth of 4% in 2014 and 3% in
2015 a trend which has continued in the following years (17 million units
were sold).
6http://marketrealist.com/2015/02/intense-competition-leads-low-profit-margins-automakers/
7From: http://www.fcagroup.com
8
From: http://www.eulerhermes.com/mediacenter/Lists/mediacenter-documents/Economic-
Outlook-The-global-Automotive-market-Sept14.pdf
3) Japan: despite the flexible monetary policy and protectionism 94% of
Japanese cars were sold between 2014 and 2015, VAT on sales was about
5% in 2014 and 2% in 2015 and it has slightly increased in the following
years.
5) France: the market has been recovering and sales have grown by 3% in
2015. However, production has been moving offshore and is positioned
particularly in entry-level products.
10) Belgium: The market should remain stable while production faces a
chronic crisis (halved by the crisis) and there is no prospect for growth.
Regarding the relative size of total domestic credit and credit to the private
sector as percentages of GDP in low- and middle-income countries in the
World Bank's six regions, it can be observed that East Asia and the Pacific
region has provided the most domestic credit to the economy and private
sector, at 141% and 122%, respectively, of its GDP. Therefore, this item
significantly affects the FCA group, as business benefits in that area
because the population has easy access to credit to purchase new cars.
9 https://blogs.worldbank.org/opendata/data-show-rise-domestic-credit-developing-countries
called phases of business cycles. The intermediary phases are:
expansion, peak, trough and recovery are.
The line of cycle that moves above the steady growth line represents the
expansion phase of a business cycle. In the expansion phase, there is an
increase of various economic factors, such as production, employment,
output, wages, profits, demand and supply of products, and sales.
In addition, in the expansion phase, the prices of raw materials and output
increases simultaneously. In this phase, debtors are generally in good
financial condition to repay their debts; therefore, creditors lend money at
higher interest rates. This leads to an increase in the flow of money.
CONCLUSION
Items 1 2 3 4 5
Disposable income X
Foreign exchange X
rates
Interest rates X
Trade flows and X
patterns
Unemployment trends X
Cost of raw materials X
Inflation Rate X
Foreign Economic X
Trends
Taxation level and X
taxes on
products/services
Credit Availability X
Stage of business X
Cycle
Tot. 47/55
Overall, having analysed the automotive sector and assigned the scores to
each item, it may be stated that the automotive industry constitutes one of
the most important market sectors, is one of the largest sectors in terms of
revenue and is considered a bellwether of both consumer demand and the
health of the overall economy. Businesses to be successful need to be
aware of the items identified pertaining the economic factors. The items
which significantly affect the automotive industry and more specifically
the FCA group are: disposable income, interest rates Trade flows and
patterns, Inflation Rate, Foreign Economic Trends and credit availability.