Introduction

Why GDP and automotive industry growth are related

Economic connection
Theres a direct correlation between the size of a countrys gross domestic product, or GDP,
and its automotive industry. GDP accounts for the consumption, investments, net exports, and
government spending during a given time period. The above graph shows the number of
vehicles sold in the five largest economies in the world. In 2013, four out of the five nations
also had the worlds biggest automotive markets in terms of units sold. The only outsider is
Brazil. It sold 3.58 million units that year. Brazil even came out ahead of Germany.
Germany sold 2.95 million vehicles.
Major industry growth
Except for 2012, when growth was slow or negative, the auto industry has been expanding at
a fast pace over the past several years. The above graph shows the vehicle production rates
for the fastest-growing countries with GDP thresholds of more than $750 billion as of 2013.
Between 2009 and 2013, Chinas automotive industry had a compound annual growth rate, or
CAGR, of 18.6%. The CAGR for Indias auto industry was 16.3%. Indonesia wasnt far
behind. It had an auto industry CAGR of 15.1%. High-growth economies require better
means of transportation and faster mobility. So, more vehicles are made and sold. This
attracts more investment. Gasoline prices affect automobile purchases.
Nature of the auto industry
For a consumer, an automobile is usually the second most expensive purchase after a home. A
car is a durable good. So, a consumer can defer the purchase of a vehicle if the economy isnt
doing well. This makes the auto sector highly cyclical. The industry depends on a number of
broad-based economic indicators:

Unemployment levels
Consumer confidence
Disposable income
Credit availability

Objectives:
1)

to study Costing for automobile industry

2)

Study the Impact of Raw Materials on Automobile Industry.

3)

To analyse What Makes Nano So cost effective

Raw materials the biggest cost driver in the auto industry

Cost components

There are four major cost drivers in the production and sale of an
automobile:

Raw materials
Labour
Advertising
R&D (research and development)

Raw materials contribute about 47% to the cost of a vehicle. On average, an automobile is
47% steel, 8% iron, 8% plastic, 7% Aluminium, and 3% glass. Other materials account for
the remaining 27%. Approximately 22% of an automakers operational costs depend on steel.
So, any fluctuation in global steel prices has a direct impact on profitability. Steel billet prices
came down drastically from 15.2 euros per metric ton in 2008 to 4.8 euros per metric ton in
2013. This significantly improved manufacturers gross margins. During this period, the gross
margins increased by 200 basis points, or bps, from 15.2% to 17.2%. Traditionally,
automakers only used Aluminium for wheels, cylinder blocks, and other engine parts.
Aluminium is twice as expensive as steel. However, this trend is changing in response to
stringent fuel economy standards. The US governments Corporate Average Fuel Economy,
or CAFE, regulations require vehicles to have an average fuel consumption of 34.1 miles per
gallon, or mpg, by 2016. Vehicles are required to have an average fuel consumption of 54.5
mpg by 2025.
The shift towards Aluminium
Although its more expensive than steel, Aluminium is much lighter. It has a similar strength.
Every 10% reduction in weight improves the fuel economy by 57%. Currently, due to cost
constraints, only Premium segment carslike Tata Motors Jaguar XF and the Audi A8
have aluminium bodies. The new Ford F-150 will launch in January 2015. It will have a high
proportion of Aluminium in its makeup.
In the US, OEMs (original equipment manufacturers) employ 1.7 million people directly.
They create 1.5 million jobs indirectly. OEMs make the original parts that are used by
automakers. Suppliers and dealers support an additional 4.8 million jobs. In the automotive
industry, every $1 million increase in revenue leads to the creation of approximately ten jobs.
This ratio is larger for sectors like energy and utilities. Globally, Volkswagen employs the
most people in the auto industry. It has 570,000 employees. Toyota Motors has 340,000
employees. Its followed by General Motors. General Motors directly employs 220,000
people.

Labour costs
Labour costs vary significantly by country. A large portion of research and development, or
R&D, expense is also in the form of labour cost in the automotive industry. As a result, its
very important for companies to be able to control wages.

Traditionally, the auto industry has been in the grip of labour unions. In 1997, UAW (United
Auto Workers) members produced 86% of the vehicles manufactured in the US. The share
decreased to 54% in 2014. Production outsourcing and the creation of union-free units by
foreign manufacturers diminished labour unions bargaining power. Daimler is one
automaker that adopted these strategies. The company made its plant in Chennai, India, an
export hub for its commercial vehicles. So, how do automakers cover their huge costs? They
spend more.

Advertising is key for automotive companies

Promotional spending
The automotive industry is one of the biggest spenders when it comes to advertising. General
Motors paid out $928 million during the first half of 2014. In 2013, General Motors global
advertising expenditure was $5.5 billion. It represented 3.54% of its revenue.
In 2013, Ford spent $4.4 billion for automotive revenue of $139.37 billion. The same
year, Fiat spent $2.76 billion. It represented 3.82% of its revenue.
Toyota has become one of the top ten biggest advertising spenders in the US. The company
spent $600 million during the first half of 2014. Fiat spent $589 million during the same
period. Its the third automaker on the list of the top ten advertisers in the US.

THE KEY TO SURVIVAL IN THE AUTOMOTIVE SECTOR - R & D

The automotive industry is the worlds third largest industry in terms of research and
development, or R&D, spending. In 2013, Toyota Motors spent $8.1 billion on R&D. General
Motors spent $7.2 billion that year. For Toyota, spending a lot on research helps keep the
competition at bay. Automakers are consistently being challenged to make faster, smarter, and
more efficient vehicles. So, innovation has taken center stage. A typical high-end car has
about 70100 microprocessors executing more than 100 million lines of code. Compare this
to a Boeing 787 that has a computer that executes just 6 million lines of code. Manufacturing
cars is a complex business. It can take several years to develop a vehicle. The new Ford F150 took about five years to complete. Its roll out will take place in January 2015. The auto
industry spent more than $100 billion globally in 2013including $18 billion in the US.
According to Strategy&formerly Booz & Company99% of the industrys R&D spending
comes from the industry itself. The federal government only contributes 1% of the auto
industrys R&D spendingless than the government gives to any other industry. The auto
industry is reaping rich benefits from investing in fuel efficiency improvements.

Highest spending on Research and Development

Auto firms invest huge amounts of money in research and development. They have to
develop more fuel-efficient models to meet government regulations. In comparison to all of
the other 2013 models, Nissan and Subarus models showed the highest increases in fuel
economy. Nissan cars and trucks improved their fuel efficiency by 2.1 mpg (miles per
gallon). The fuel efficiency in Subaru vehicles grew by 1.5 mpg. Better fuel efficiency
translated into more sales for Nissan and Subaru. So far this year, Nissan and Subaru had
sales growth of 13% and 21%, respectively. The industry average is 5.9%. Mazda continues
to provide the best return per gallon at 28.1 mpg. The company clocked 7.70% growth in
2014. This is higher than the industry average. The Vanguard Consumer Discretionary ETF is
a highly diversified fund. It has holdings in 381 companies. Ford has a weight of 1.92% of
the fund. General Motors (GM) accounts for 1.53% of the fund.

TATA NANO- A Vehicle that completely stripped off unnecessary parts

TATA Nano is the cheapest car in the world. It is manufactured by TATA Motor Limited, the
largest automobile company in India. Its chairman, Mr. Ratan Tata envisions that Tata Nano
to become a Peoples car which is affordable by almost everybody. Tata Nano is scheduled
to first be launched in India on 1st April 2009 and expected to be in Indian market by July
2009. From the first moment that Tata Nano project was published, a huge buzz has been
created all over India. TATA has already sold more than 2.5 Lac Nano cars till date.
What makes Tata Nano so cheap?
Basically, by making things smaller, lighter, do away with superficial parts and change the
materials wherever possible without compromising the safety and environmental compliance.
Cost cutting features of TATA Nano:
The Nano's trunk does not open. Instead, the rear seats can be folded down to access.
It has a single windscreen wiper instead of the usual pair.
It has no power steering.
It has no ABS.
In Base model it has three lug nuts on the wheels instead of four.
It has only one side view mirror.
It has 12" wheels.
Plastic body parts joined with glue rather than welding.
A two-cylinder 623 c.c. engine

Tata initially targeted the vehicle as "the least expensive production car in the world"
aiming for a starting price of 100,000 rupees or approximately US$2000 (using exchange rate
as of 22 March 2009) 6 years ago, despite rapidly rising material prices at the time. As of
August 2008, material costs had risen from 13% to 23% over the cars development

(Source: http://www.autofocusasia.com/management/tata-nano)