Comparison Between Soft Drink and Automotive Industry in United States

¶ … soft drink and automotive industry in United States

The consumer intensive industries whose global operations are indeed tremendously influenced by key macroeconomic indicators and more importantly, by the relationship between the linkages between these indicators, which are representations of the underlying variables from the contained data. The movement and potential movement of GDP, unemployment rate, and Inflation, along with interest rates within differing economies, the CPI and PPI, wage rates/minimum wage, the unemployment rate, and benefit packages, consumer confidence, GDP growth, inflation, and the real exchange rate, all play a critical role in how the automotive and soft drink industry address their respective markets.

U.S. GDP is the primary macroeconomic indicator that indicates aggregate economic activity for all members working nationally and internationally. Therefore, an American working in China will be counted toward the U.S. GDP and toward the Chinese Gross National Product, or GNP but not the Chinese GDP and not toward the American GNP. GDP has implications for microeconomic decision making at the firm level. As GDP indicates the level of spending within the economy, it is ostensibly a direct measure of not only consumer sentiment, but consumer means to purchase necessity goods and luxury items.

The automotive industry is of particular concern. As consumer spending declines due to inflation, which erodes the purchasing power of the consumer and causes the price of goods in the economy to rise, quantity demanded for automobiles decreases as well as the demand for luxury automobiles. Consumers decide to take public transportation or to car pool rather than purchase and operate their own auto. Inflation and the unemployment rate are causative factors in generating aggregate demand in the economy. The Phillips Curve explains the relationship between inflation and unemployment, High employment generally causes high inflation, which in turn would yield high interest rates.

According to Latruffe (2010), "The real exchange rate (RER) is a measure of international competitiveness, Brinkman (1987) explains that where the demand for currency of a competitive country is high, this strengthens the currency's exchange rate. The RER is defined as follow: RER = P (t)/p (nt) where p ( r ) is the price index of tradable commodities and p ( nt ) is the price of non-tradable ones." (Latruffe, 2010) The real exchange rate has a powerful impact on the supply chain of automotive companies, especially those automakers with rather targeted markets such as the Volvo brand.

Consumer demand for durable goods such as automobiles do reflect the function, in part, involving inflation and interest rates. As inflation increases, as does interest rates, perhaps not immediately however, in time the interest rate will be adjusted to reflect rising inflation. The reason for increasing interest rates in the economy is to enable savings into investment vehicles and into banks for lending. As interest rates rise, the appeal of saving increases, which takes money out of the economy, also known as monetary tightening.

Unemployment, GDP, and inflation are all tied through a symbiotic relationship that is not linear nor U-shaped. The dynamic function of unemployment and GDP, are primarily driven by inflation. Does unemployment drive inflation? The notion of full employment, which is a 95% employment rate and a 5% unemployment rate as the harbinger for inflation is not unfounded.

Many governments do not want full employment because too much money in the economy will drive up prices and force rates higher. However, a quantitative ease, which is loosening monetary policy via the buying back of federal debentures. This act adds money to the economy in a global fashion which means that the USD loses purchasing power relative to competitor economies via the relationship the U.S. has with these economies through the balance of payments.

According to FOREX brokerage firms (2006), "Most vehicle manufacturers usually always report sales results on the first business day of the month; Ford does not report until the third business day. As these individual results trickle out over the news wired throughout the day, diligent economists and market analysts are busy calculating running totals and applying seasonal factors to them -- the BEO supplies factors for the coming six months in advance -- in order to come up with approximations for auto truck sales rates. These figures are some of the first hard spending data for any month; comparing these derived rates to those from months and years prior is a big help when it comes to formulating a consumption forecast for the month." (FOREX brokerage firms, 2006)

FOREX brokerage firms does bring to light a critical aspect of the automotive market. The supply chain costs are a major cause of concern with regard to the operating profit and net revenue figures generated by the firm. Knowing the supply chain costs via an effective forecast can enable the firm to plan accordingly to procure the necessary metals and materials necessary to produce their signature brands.

Without proper planning, the cost of a particular brand over its production run for the model year may cost a percentage higher than should. Inflation rates across the globe do differ as does the purchasing power off currency. Therefore a U.S. based automobile manufacturer may decide to procure its steel from Brazil due to a theoretically favorable exchange rate. Inflation in Brazil would cause the currency, the real, to be inflated relative to commodities such as steel. However, the USD will have a favorable exchange rate that is favorable in addressing their supply chain concerns.

The soft drink market faces a different set of macroeconomic indicators. According to Murray (2006c), "Market size, growth rate and overall profitability are three economic indicators that can be used to evaluate the soft drink industry. The market size of this industry has been changing. Soft drink consumption has a market share of 46.8% within the non-alcoholic drink industry." (Murray, 2006c) These macroeconomic indicators are used more specifically as an industry indicator that suppositions the relative market size (Aggregate GDP), growth rate (GDP growth rate), and overall profitability. The more usual macroeconomic indicators that gauge the soft drink market include consumer prices (substitutable goods), Monetary Policy Evaluation, U.S. Dollar Exchange Rate Forecast, inflation rates, and currency exchange rates. A brand name soft drink may be only affordable to a small percentage of the population on a basis of everyday usage.