How Automakers Can Alter Price and Production to Maximize Profits

How Automakers Can Alter Price and Production to Maximize Profits

Today’s increasingly competitive automotive marketplace has made it necessary for car manufacturers to make the most of their advantages. Automakers have to find ways to create and sustain advantages in their production, purchasing, pricing, and placement. GM is a multinational corporation with almost 100 production facilities operating out of 26 countries. As such, they have to think up strategies that will remain effective despite the breadth of operations.

GM can ensure that they maximize their profits by focusing on two key areas. First, they need to ensure that they implement lean production. According to Hasle (2014), only car manufacturers owned by Japanese firms have actually implemented lean in the US. At the same time, carmakers need to focus on only those products that give them a good return. While a number of them have implemented ways to make their assembly process lean, few have whittled out unnecessary models. Having such an expansive production system often tempts the manufacturers into putting out an endless array of models, paying little regard to the viability of each individual line. The result is that they tend to have many cars in the same class, meaning the brands’ products cannibalize each other. Avoiding this pitfall will result in a consistent

The second intervention that automakers need to do is to find a way to handle pricing. Pricing is a key intervention, which if handled appropriately, is likely to result in positive outcomes. For GM, along with other major car manufacturers, the pressing problem has always been incentives on their prices. Automakers incentivize buyers to purchase cars through cash rebates, lease promotions, and cheap loans. They also provide dealer incentives, which are ultimately transferred to the consumers. According to the J.D. Power and Associates’ Power Information Network (PIN) report for 2012, the industry average in incentives that car manufacturers give away is 9.5 percent of the Average Transaction Price (ATP) of each vehicle. Such rebates effectively eat into the profit margins. So what can GM, and other auto manufacturers in the same predicament, do about this? The key lies in minimizing giveaways. Many companies find themselves in tempted to bring down their prices so that they match their rivals’ discounts. Car manufacturing firms that wish to remain profitable need to cut down on the incentives to ensure they make more on each vehicle.

References

Hasle, P. (2014). Lean production—an evaluation of the possibilities for an employee supportive lean practice. Human Factors and Ergonomics in Manufacturing & Service Industries, 24(1), 40-53.

J.D. Power. (2015, November 25). Data & analytics | pin navigator [Text]. Retrieved December 6, 2018, from https://www.jdpower.com/business/data-and-analytics/pin-navigator