Introduction:

Ford Motor Co. plans to extend no-interest loans for 2006 models as well as some cash-back and low interest financing offers on 2007 models between now and the end of the year. GM set aside roughly $250 million to cover the cost of the year end "Red Tag Sale" incentives. The company will offer up to $2,000 in discounts on many.

Market Fact:

 The two American manufactures have a huge inventory, GM has just over 1 million 2006 and 2007 vehicles in its inventory but 80 percent are 2007 models. Ford had about 652,000 vehicles in its inventory as of September 30 and has struggled to sell its trucks and SUV even at deep discounts and cut into profits.

GM’s share of the U.S. market fell to 23.5 percent from 26.9 percent a year ago, while Ford saw its overall share slip to 18.9 percent from 19.4 percent. The overall losses of the two giants were $10.6 billion last year. On the other hand we see an increase in the Asian automakers share of market: Toyota up 14%, Mazda Motor Corp. up 7.5%Hyundai's market share rose 0.4 point to 3%.Honda up 3.9% increase in sales of the Civic.

Last summer gas prices in the US hit almost $3 a gallon leading to a tremendous shift in the consumer buying habit. In GM truck sales fell 37%, Ford sales of light trucks fell 14.6%. Trucks and SUV have been the industry darling - especially of the domestic industry - for several years now it’s the main reason for this huge loss.

Analysis:

Gasoline prices can be consider  as variable cost witch is a factor in the total cost of the vehicle. Consumers are looking to reduce the operating cost of there vehicles. Increasing gasoline prices will increase the total cost . The following graph will explain the relation between total coast and variable cost.

Fixed cost

 

The increase in the gasoline price shifts the consumer to the more fuel economic vehicles.  The smaller vehicles has achieved an increase in sales for the corolla 38.7% , the civic 3.9% . the Japanese manufacturer are playing the role of substitute to height fuel consumption American cars. The lower fuel consumption of Japanese cars allows a lower operating and total cost for the consumer. The low operating cost explains the increase in sales for smaller cars.

Consequences:

Based on the fact that the two American manufacturer are loosing market share and doing losses for 6 quarters so far ; it will be a good idea to reduce the production there is no point to keep height production while the dealer ship is stacked with unsold cars. In the following graph we can see I as the initial isoquant based on  the sales forecast expected by auto manufacture. Note that this sales forecast is made at least one year later. The point X represent the least cost production level. unfortunately this level of production can not be maintained because the decrease in sales. Reducing the production level will shift us the an uneconomical production point therefore a shift has to be made in isocost line.

isoquant

Decreasing the production will shift the isoquant to curve I’ . on that curve the cost minimization concept is not achieve. 

There is two suggested way to down size the production facility . taking the decision here will need the cooperation of engineers and management. The following graph will explain the first option were we cut the labour only so we minimize the production coast.

solution1

 

The next graph represent the other option : reducing both labour and Capital , meaning the shut down of some production facility followed by lay off.

solution2

 

 Obviously the American market is moving more toward economic vehicle. The Chinese market is moving to a different direction, last year GM sales increases there by 38 % to 83%. The foreigner market can generate potential revenue for the American manufactures.

Gm and Ford have to change there marketing strategy relaying on the trucks and SUV has been proven as wrong marketing strategy. There is a need to smaller cars with higher fuel efficiency . Maybe gasoline prices are back to normal even less by $0.02 then last year , but consumer will remember the $3 per gallon for a long time.