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Luxury Automobile Industry
Luka Jankovic, Alexa Davis, Laila Judeh Spring 2015 AEM 4160: Strategic Pricing
Executive SummaryINDUSTRY BACKGROUND
Value/Premium Pricing1st and 2nd Degree Price
DiscriminationSecondary Market Pricing
PRICING STRATEGIES
RAW DATA ANALYSIS
The overall US automobile industry will see weakened growth throughout the rest of decade, but demand for luxury vehicles will be buoyed by an improving macro economy
The average price of standard and luxury vehicles continues to rise The luxury and sports car industry comprises of 17% of the market
Luxury automobile manufacturers utilize several pricing strategies to extract the maximum surplus from consumers
The secondary market pricing is heavily linked to high rates of depreciation
Our analysis does not show any discernable relationship between the average price paid for a luxury automobile and median income, level of education, population, or geography
There are several unobserved factors that may affect pricing strategies
Industry Background
Industry at a GlanceCar & Automobile Manufacturing in 2015
Revenue
Profit
Annual Growth 10-15Exports
Annual Growth 15-20Businesses
$107bn
$4.5bn
5.4%$57.3bn
2.5%203
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Consumer Confidence Index
Demand from new car dealers
World price of crude oil
World price of steel
Greater demand at the retail level, which is represented by car dealers, generates greater demand at the manufacturing level.
As gas prices decrease, consumers will be less sensitive to fuel-efficient vehicles, which are often from International brands.
Steel prices can be a major cost pressure, which cant be passed onto customers. Prices are expected to decrease.
The 10-Year Treasury note is tied to interest rates. As interest rates rise, demand for cars rise due to lower financing costs.
Yield on 10-Year Treasury note
Spending behavior on large purchases, like automobiles, have a positive relationship with consumer confidence.
Auto industry is international so appreciation of USD lowers export rates and industry revenues.
Trade-weighted index
Key External DriversThe automobile industry is sensitive to macroeconomic pressures
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Supply ChainThe automobile industry is heavily dependent on its suppliers
The public or car rental leasing
companies
New car dealers
Paint manufacturing Steel manufacturing Battery
manufacturing Parts manufacturing
Automobile Wholesalers
Buying Industries
Electronics manufacturing Steering manufacturing Brakes manufacturing Interior
manufacturing
Selling Industries
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Cost StructureAuto manufacturers are cutting costs to bounce back from bankruptcy
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
4%5%
77%
3%3%2%6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Value
Industry Costs (2015)
Other
Rent & Utilities
Marketing
Depreciation
Purchases
Wages
Profit
Largest percentage of costs are inputs, including engines, transmissions, etc.
Wages falling, but still large due to labor contracts and inflated salaries
Manufacturers that work with UAW Union will struggle to compete with mass-market, lower priced cars
Renewed profitability due to:
Lower labor expenses
Improved retail sales
Greater credit access
Increasing consumer confidence
International TradeNAFTA inflated trade statistics between US, Mexico and Canada
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Exports ($57.3bn) Imports ($159.8bn)
Germany, 10%
Saudi Arabia, 7%
All Others, 43%
Canada, 25%
China, 15%
Germany15%
Mexico12%
Canada29%
Japan27%
All Others17%
HIGH and INCREASING
High rate of exports to Canada due to NAFTA restrictions and location of manufacturing plants near Great Lakes
Chinas growth as export market due to rising affluence and standard of living
HIGH and INCREASING
High rate of imports from Canada and Mexico due to NAFTA restrictions
International automakers moving assembly plants to Mexico to lower labor costs
Products & Market SegmentationLuxury and sports cars only comprise 17% of the market
5%
12%
41%43%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Sports Cars Luxury Cars Compact andSubcompact
Cars
Midsize andFull-SizeSedans
Product Segmentation (2015)
11%
5%
54%
20%
12%
0%
10%
20%
30%
40%
50%
60%
RentalCompanies
Government Exports Dealers Wholesalers
Market Segmentation (2015)
17%
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Competitive Landscape
Luxury Car IndustryHighly fragmented industry driven by consumer spending and interest rates
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Industry is highly fragmented with independently owned dealerships
Luxury car dealers sell new and used vehicles, provide routine maintenance, repair and warranty services
Price is secondary to customer service, staff training programs, single-point service, low-pressure experiences
Market split between large and small companies
Large companies: offer greater vehicle variety and well-stocked lots
Small companies: offer boutique experience and individualized customer service
Product segments
Price: lower, middle, upper
Type: sedan, SUV, sport luxury, super luxury
Luxury car = vehicle costing over $30,000
Barriers to EntryThe automotive industry has high and steady barriers to entry
Competition
MEDIUM
Technology Change
HIGH
Regulation & Policy
MEDIUM
Industry Assistance
HIGH
Concentration
MEDIUM
Life Cycle Stage
MATURE
Capital Intensity
HIGH
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Internal Basis of CompetitionCompetition in automotive industry is medium and increasing
Price Fuel EconomyStyling Reliability
Each car class (compact, mid-size, etc.) has range of prices
Similar vehicles, which are marketed to different customers will be priced differently
Price varies according to personalization and higher add-ons
Automakers redesign vehicles styling every five years
Recently redesigned cars sell in higher volumes than other cars
Redesigning a vehicle is not always a profitable venture if customers prefer the outgoing model
Reliability concerns are lesser since domestic auto makers caught up to international auto makers, like Toyota and Honda
Quality control procedures and manufacturing equipment have improved among domestic companies
Consumers have shifted away from cars with low fuel economy (SUVs & trucks) towards compact and mid-size cars
Manufacturers offer environmentally friendly options, like hybrid-electric, electric & clean diesel engines
Shift from naturally aspirated engines to forced-induction engines
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
Leading Luxury Car BrandsIndustry is becoming dominated by Japanese and German brands
| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |
German-owned, manufactures premium cars under BMW, MINI and Rolls-Royce names
17 global production facilities with external partners in emerging markets (e.g. India, Thailand)
2014 unit sales = 339,738; 9.8% annual change(50% revenue from Europe, 50% from US & China)
Subsidiary of Volkswagen, manufactures premium automobiles and armor-plated security vehicles
Entering small, high-powered motor industry to acquire Ducati and launching diesel technology in N.A.
Financial services offers financing, Audi Visa Signature credit card, Liberty Mutual insurance
2014 unit sales 182,011; 15% annual change (75% revenue from Europe, 50% from US & China)
Division of Japanese-based Toyota, manufactures passenger cars, utility vehicles and sports cars
Distinguishes itself from competitors with early-adoption of hybrid technology, quality and reliability
2014 unit sales = 311,389; 13.7% annual change
German company, which symbolizes status, success and good taste; celebrated by popular culture
First mover in luxury autos in early 1900s; differentiates with variety, luxury features & safety measu
