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Luxury Automobile Industry - Cornell University · PDF fileLuxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will

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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