Break-even point of the US domestic automobile industry

In April 2009, Ford declared no need for government assistance and claimed it had plans to reach the break-even point two years later. For the past two years, Ford has shrunk its business ahead of its major rivals, General Motors, by selling Aston Martin, Land Rover and Jaguar. Meanwhile, GM undertook a major reorganization after filing for Chapter 11 Bankruptcy. GM is temporarily owned by the US government with a majority after investing $ 57.6 billion in the company.

GM executives will reach the break-even point by 2011, according to plans presented at a parliamentary hearing. In addition, it has announced that it will cut costs by cutting 47,000 jobs, closing five more unprofitable factories and reducing debt by at least $ 18 billion from its balance. Seat. With these cost savings, the company was expected to reach a break-even point even if the US car market returned from 11.5 million to 12 million cars annually.

JD Power and Associates, a global marketing information services company, has released forecasts for the break-even point in the new automotive industry. According to Gary Diltz, senior vice president of US automotive at JD Power and Associates, cost-cutting measures such as renegotiation of contracts with unions and suppliers have reduced the break-even point for the domestic automotive industry by more than 2 million units. To do. Comparing the current industry situation with the 2010 forecast, Diltz explains why this decline was due to the significant decline in the automotive industry, which lost more than 7 million units sold between 2000 and 2009. I will. This sales volume will be $ 175 billion. With net income.

In the automobile industry, fixed costs make up the majority of total costs. The manufacturing plants, assembly lines, and technologies invested to manufacture vehicles are some of the items that form fixed costs. Compared to fixed costs, variable costs form a relatively small portion of total costs. This puts the automotive industry in jeopardy due to its high operating leverage.

The definition of operating leverage is the ratio of fixed costs to total costs. The higher the fixed cost of a company, the higher the operating leverage. For companies with high operating leverage, small changes in sales volume can make a big difference in profits. This volatility or sensitivity of profits to changes in sales volume puts the company in a dangerous position. According to the “greater risk, greater return” rule, this also means more profit if there is demand and therefore high sales volume.

In the automotive industry, fixed costs are relatively high, which reduces demand and sales during a recession, reducing the likelihood of revenue covering fixed costs and reducing the likelihood of a car company reaching a break-even point. .. Therefore, car companies will begin to reduce costs, especially fixed costs, such as closing unprofitable facilities and reducing employment. For example, GM sold an unprofitable Hummer to a Chinese company.

Automobile companies need to increase the volume of profitable vehicles and effective advertising activities so that they can sell to their customers. Increased sales volumes cover high fixed costs and help reach the break-even point. On August 6, 2009, GM needed to improve sales, said Edward Witacre Jr., the new chairman of General Motors. To do that, he said, the board may decide to launch some new cars.

Comparing the consolidated results of Ford and General Motors from Form 10-K, these two companies were submitted to the Securities and Exchange Commission (SEC) in 2008.

Ford (million)

Income: 146,277

Costs and costs: 160,949

Net Profit / Loss: (14,672)

Sales quantity: 5.532

General Motors (Million)

Income: 148,979

Costs and costs: 179,839

Net Profit / Loss: (30,860)

Sales quantity: 8.144

The break-even points for these companies can be calculated using the revenue, cost, and volume figures above.

Ford

Average price: 146,277 / 5.532 = $ 26,441

GM

Average price: 148,979 / 8.144 = $ 18,293

To cover that cost and expense, Ford had to sell: 160,949 / 26,441 = 6.08 million cars and trucks. To cover that cost and expense, General Motors had to sell: 179,839 / 18,293 = 9.83 million cars and trucks. GM and Ford had to make additional sales volumes to reach the break-even point in 2008.

Ford: 6.08-5.532 = 5.54 million

GM: 9.83-8.144 = 1,686 million