General Motors (GM) incurs various production costs during its manufacturing process. The largest contributor of costs is that of goods sold (COGS), which accounts for 90.4% of the production expenses. Whereas the selling, general, and administrative expenses have declined since 2015, the COGS experiences seasonal fluctuations. For instance, COGS (as a percentage of total revenue) declined from 88% in 2015 to 86.5% in 2017 but rose to 90.4% in 2018 (Trefis Team, 2019). These costs affect the quality of automobiles produced in the firm. For instance, the technology of producing electric-driven vehicles differs from that of producing a diesel-driven SUV. As such the prices of e-vehicles are higher than diesel-driven.
The main determinant of profits is the market forces of demand and supply such that as prices increase, the quantity demanded decreases while quantity supplied increases, and when prices fall, quantity demanded increases but quantity supplied declines. As such, demand and supply are inversely related. Figure 1 below demonstrates how the interaction of demand and supply functions provides the equilibrium price of the market.
Figure 1. Equilibrium Determination in the Market Using Demand and Supply Functions
Production costs affect the number of automobiles to be produced and consequently the supply curve. On the other hand, the demand function is affected by consumers; income, tastes, and preferences; price of related goods; and the number of consumers in the market, among other factors. Currently, the majority of consumers demand eco-friendly vehicles. The demand for techno-savvy but environment-friendly vehicles has affected the production of General Motors (Rothaermel and Zimmer, 2014). The automobile manufacturer is forced to incorporate high-level technology in producing such vehicles resulting in an increase in production costs.
The U.S automobile market has seen an increase in the number of sellers. For instance, the market was previously controlled by GM and Ford. However by 2012, it had approximately ten automakers with the majority being foreign manufactures, such as Japan’s Toyota and Honda, Germany’s BMW and Volkswagen, and Korea’s Hyundai and Kia (Rothaermel and Zimmer, 2014). While the market may be flooded with many automakers, penetration into the market is still difficult due to strict regulations by the U.S government and the high level of technology adoption. According to Lovells (2019), a new car manufacturer must obtain an emission certificate from US Environmental Agency (EPA), vehicle-type approval, and safety certifications to be allowed to operate. Moreover, the level of technology adoption by existing automakers produces high standard vehicles; hence acts as a barrier to new automakers seeking to penetrate into the U.S market.
General Motors aims to reduce its production costs and increase sales despite stiff competition from other brands. Foremost, the firm should produce eco-friendly vehicles since they meet the current need of its consumer base to preserve the environment. The production of such vehicles is low as compared to ordinary vehicles, thus producing more such vehicles could increase the market share of the company. Secondly, GM can incorporate the “Jidoka” (Just-in-time) strategy used by Toyota to ensure production is immediately stopped in case of error detection. That way, defects are eradicated at the earliest instance hence the production cost is minimized (Bhasin, 2018). For instance, the CNN Editorial research (2020) notes that in June 2014, GM recalls 8.4 million vehicles globally over faulty ignition switches bringing the total number of recalls to 30 million in that year alone. The mentioned approach will enable the auto manufacturer to reduce the number of recalls and repairing costs. Indeed, GM must focus on reducing its production costs to achieve maximum profitability.
Bhasin, H. (2018). Marketing strategy of Toyota- Toyota marketing strategy. Strategic Marketing Articles. Retrieved from https://www.marketing91.com.marketing-strategy-toyota/
CNN Editorial Research. (2020). General Motors fast facts. CNN. Retrieved from https://cnn.3014/04/08/us/general-motors-fast-facts/index.html
Lovells, H. (2019). Automotive in the USA. Lexology. Retrieved from https://www.lexology.com.library.aspx?g=36a4cd2d-583e-4cd4-8435-cb5c8cd0eaa6
Rothaermel, F.T. & Zimmer, E. (2014). Tesla Motors (in 2013): Will sparks fly in the automobile industry? McGraw Hill Education. Retrieved from https://www.hbsp.harvard.edu/product/MH0017-PDF-ENG%3FNtt%3D%26ItemFindingMethod%3DSearch
Trefis Team. (2019). COGS driving general motors total expenses. Forbes. Retrieved from https://www.forbes.com/greatspeculation/2019/10/03/cogs-driving-general-motors-total-expenses/amp
Wanger, I. (2020). General motors- statistics & facts. Retrieved from https://www.statista.com/topics/2480/general-motors/#:~:text=In%20its%202019%20fiscal%20year,million%20vehicles%20under%20various%20brands.&text=It%20is%20estimated%20that%20the,U.S.%20dollars%20for%20the%20bailout.