MS

Way2Wealth has recommended hold rating on Maruti Suzuki India with a target of Rs 1288,
in its January 31, 2011 research report.

“Volume growth was higher by 28.2% YoY & 5.4% QoQ, with, Domestic : Export sale ratio
at 90.6 : 9.4 as against 84.8:15.1 in Q3FY10. Factors like, a less favourable domestic product
mix, lower average selling price on account of higher discounts (INR 10.7K in Q3FY11 as
against INR 9.7K in Q3FY10 & INR 8.5K in Q2FY11), lower export realisation (lower
exports to Europe and negative impact on account of the depreciation of the Euro) impacted
its Realisation per vehicle, which, fell by 1.3% YoY and 1.5% QoQ at INR 2,80,529.”

“The company had undertaken a price action of ~1% in January, which, has not been
sufficient in absorbing the increase in the input costs. The RM/Sales ratio at 78.4%, has been
higher by 90bps, from our expectations, mainly on account of yen appreciation which
accounts for 23% of its procurement cost, higher discounts and euro depreciation. Going
forward, this would be a key variable to be monitored as commodity price inflation remains
and the company is not in a position to undertake aggressive price hikes, given the
competitive scenario in its mainstay A2 segment.”

“Among other cost components, the other expenses as a % of sales was lower by 100bps
from our expectations on account of lower exports and lower royalty payout, albeit on a QoQ
basis. A surprising move was of its employee expenses , which was significantly higher than
our expectations on account of its restructuring exercise ,which, included a one time impact
of 55bps and a recurring element of ~20bps. This impacted its operating profit per vehicle,
which, was down by ~38% YoY at INR 27,270. As a result, the OPM has decreased by
560bps YoY at 9.5% and PAT margin has contracted by 310bps at 6.0%, much below our
expectations.”

“The management has signaled an optimistic growth in volumes with its production capacity
being scaled up to 1.4mn units from April 2011. However, as passenger cars are more
susceptible to commodity price inflation and finance availability, with >65% of the sales
being financed, a sense of caution prevails in the industry. Maruti’s margins have already
peaked at 15% and is at 9.9% (9MFY11). Going forward, growth in margin would much
depend upon the company’s sales mix and the competition in the industry. On both counts,
Maruti faces a downside risk as it is Yen exposed in terms of its imports and Euro exposed in
terms of its exports. The company has not hedged its Yen position vis-à-vis USD, post
February 2011, as it expects it to depreciate. Its Euro exposure is hedged for H1FY12. On the
second count, company is facing severe competition, which limits its pricing power.”

“As a result we have downgraded our FY12E earnings by 4% at Rs 92 as against the earlier
Rs 96. At the CMP of Rs 1233.6 the stock discounts its FY11E & FY12E earnings of Rs 79.2
and Rs 92 by 15.6x and 13.4x respectively. We lower our target multiple from 15.5x to 14x,
given the intense competition in the industry and the profitability pressures the company
continues to face. We take comfort from the fact that the company is a pioneer in terms of its
distribution network with rural contribution accounting for 20% of total sales, with a Cash
Eps of INR 116. We have a HOLD on the company with our target price at Rs 1288,” says
Way2Wealth research report.

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Motilal Oswal is bullish on Maruti Suzuki India and has recommended buy rating on the
stock with a target of Rs 1655 in its January 29, 2011 research report.

“Maruti Suzuki India's 3QFY11 performance was below our expectations, with EBITDA
margin of 9.5% (v/s our estimate of 10.3%), impacted by higher discounts, and higher raw
material (RM) and staff costs. Adjusting for 55bp of full-year provisioning for increments,
EBITDA margin would have been 10%. Volumes grew 28% YoY (5.4% QoQ) to 330,687
units. Realizations declined 1.5% QoQ (~1.3% YoY), impacted by higher discounts (~60bp
QoQ impact) and lower export realizations (~1.2% YoY impact). Net revenues grew 26%
YoY to Rs 94.9 billion (v/s our estimate of Rs 95.4 billion). EBITDA margin declined by
100bp QoQ (~560bp YoY) to 9.5% (v/s our estimate of 10.3%), impacted by 100bp QoQ
(~390bp YoY) increase in RM cost (due to higher discounts and forex impact on vendor
imports) and 70bp QoQ (~60bp YoY) increase in staff cost (with ~55bp QoQ impact of
9MFY11 provisioning for increments in 3QFY11). Reported PAT at Rs 5.65 billion (v/s our
estimate of Rs 6.15 billion) declined by 18% YoY (~5.5% QoQ).”

“Maruti is preparing for 15-20% volume growth for FY12, with further debottlenecking
taking total capacity to 1.4m units by April 2011 and likely commissioning of phase-I of
0.25m capacity at Manesar by 2HFY12. It is witnessing cost inflation on RM, which would
be only partly offset by 0.8-1% average price increase taken in January 2011. We are
downgrading our consolidated EPS estimates by 3% to Rs 88.2 for FY11, by ~2.6% to Rs
104.6 for FY12 and by ~2.6% to Rs 124.4 for FY13. The stock trades at 11.8x FY12E and
9.9x FY13E consolidated EPS, and 8.9x FY12E and 7.5x FY13E CEPS. Maintain Buy with
price target of Rs 1,655 (~10x FY13E CEPS),” says Motilal Oswal research report.

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nand Rathi Securities is bullish on Maruti Suzuki India (MSIL) and has recommended buy
rating on the stock with a target of Rs 1475 in its February 1, 2011 research report.

“Maruti Suzuki India (MSIL), domestic volumes grew 23.8% yoy and 12.2% mom. Volumes
were boosted by the A2 segment, +23.8% yoy and +12.4% mom. Other key segments were
MPVs, +27.7% yoy and +2.9% mom, and A3, which also did well +32.6% yoy and +27.4%
mom. The MPV sales were boosted by ‘Eeco’, launched in Jan’10; despite the base now
kicking in, volume growth in the segment has been good."

“The discontinuation of the scrappage benefits in Europe meant that MSIL’s exports have
plateaued in the 9-13,000 per month band in the near term. In Jan, MSIL’s exports were 36%
lower yoy (and 4.5% mom) to 9,321 units. MSIL has been strengthening its presence in non-
EU markets to counter the shrinking demand in Europe, and thereby arrest the decline in its
exports. MSIL has had a good growth rate in YTD FY11, of 25.5% yoy. The residual growth
estimate ahead is 14.3%. The company is expanding its capacity to capture incremental
demand ahead. MSIL trades at 12.6x FY12e and 10.4x FY13e EPS. We recommend a Buy
for a target price of Rs 1475,” says Anand Rathi Securities research report.

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TATA

Aditya Birla Money is bearish on Tata Motors and has recommended sell rating on the stock
with a target of Rs 1025 in its February 3, 2011 research report.

“Tata Motors has given a breakdown from a Head and Shoulder pattern with the breach of its
neckline at Rs 1140. Head and Shoulder is a reversal pattern indicating that the ongoing
uptrend has now reversed. After a big Bearish Belt Hold pattern on the day of the breakdown,
Tata Motors formed an Inside day yesterday consolidating the sharp fall. Confluence of
falling trend line (joining the Head and Right shoulder) and neckline at Rs 1140 -1160 zone
are likely to pose strong resistance to prices on higher side. As long as the downward sloping
channel holds prices are likely to trade with a negative bias.”

“A breach below immediate support at 1105 would confirm the resumption of downtrend
towards Rs 1050-1040 levels. Both daily Stochastic and RSI have been declining confirming
the weakness in prices. Sell Tata Motors below Rs 1095 and then on rise to Rs 1110 for a
target of Rs 1025 with stop placed above Rs 1135 on closing basis,” says Aditya Birla Money
research report.

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Anand Rathi Securities is bullish on Tata Motors and has recommended buy rating on the
stock with a target of Rs 1543 in its February 1, 2011 research report.

“Tata Motors reported good volume growth of 15.2% yoy (and 11.8% mom) to 75,423 units
for Jan ’10, in line with expectations. While domestic volumes grew 13.3% yoy, export
growth was a strong 51% yoy.”

“Domestic M&H CVs reported 5% yoy volume growth, though mom it was 5.1% lower.
These are good figures but reflect the relatively higher base. Domestic LCVs saw sustained
volume momentum, with 17.4% yoy growth (3.2% lower mom). While the domestic UV
portfolio did well, showing 26.1% yoy growth, the domestic car sales growth was lower, at
13.4% yoy. Of these, Nano sales were 6,703 units (+68% yoy), Indica, 10,591 units (8%
lower yoy) and Indigo, 8,456 units (+17% yoy). Overall volume growth was in line with
expectations, driven by good UV and export sales. We are positiveon Tata Motors and re-
iterate our Buy on the stock for a target price of Rs 1543. Risks: lower JLR demand in
Europe, the US and China; increase in interest rates; decline in CV demand; and unfavorable
currency movements,” says Anand Rathi Securities research report.

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M&M

Angel Broking is bullish on Mahindra and Mahindra (M&M) and has recommended buy
rating on the stock with a target of Rs 794 in its February 10, 2011 research report.

“Mahindra and Mahindra (M&M) reported strong results for 3QFY2011, which were in line
with our expectations. The company’s performance was led by top-line growth owing to a
robust jump in volumes, increased average net realisation and marginal improvement in
margins. We broadly maintain our volume and earnings estimates for the company. Owing to
the recent correction in the stock price.”

“M&M reported strong 36.1% yoy (12.6% qoq) top-line growth to Rs 6,121 crore, which was
in line with our expectation and aided by a robust 32.5% yoy (11.8% qoq) jump in overall
volumes and a 2.3% yoy (2.3% qoq) increase in average net realisation. During 3QFY2011,
EBITDA margins came in 29bp ahead of our estimate at 15.1%, a jump of 20bp yoy (but
down 138bp qoq). Better product mix, higher commercial vehicle (CV) volumes, improved
operating leverage and cost-control initiatives helped the company to marginally expand its
margins. Consequently, adjusted net profit grew by 49.2% yoy to Rs 617 crore (Rs 414
crore).”

“M&M’s volume growth continues to surprise positively, supported by new product launches
such as Xylo, GIO and Maxximo. Moreover, the planned new product launches in the
passenger vehicle (PV) and commercial vehicle (CV) space are expected to help the company
in sustaining its volume momentum going ahead. We broadly maintain our volume estimates
and model in CAGR of ~11% and ~9% in utility vehicle (UV) and tractor volumes,
respectively, over FY2010–12E. At Rs 654, M&M is trading at 15.1x FY2011E and 13.8x
FY2012E standalone earnings. Owing to the recent correction in the stock price, we
recommend Buy on M&M. Our SOTP target price for M&M works out to Rs 794, wherein
its core business fetches Rs 592/share and the value of its investments works out to Rs
202/share,” says Angel Broking research report.

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IIFL is bullish on Mahindra and Mahindra (M&M) and has recommended buy rating on the
stock with a target of Rs 820 in its January 25, 2011 research report.

“Mahindra and Mahindra (M&M) has staged a sharp pullback from the support of its 100-
DMA last week. It had seen a decline from Rs 802 in first week of January 2011 to Rs 725
last week, which coincides with its 100-DMA. On the weekly chart, the stock broke out from
the downward sloping trendline with higher-thanaverage volumes, suggesting strength in the
counter and any move past Rs 795 is likely to accentuate buying momentum in the near term.
RSI too has bounced back from the support levels of 45 which favors risk reward ratio on the
bullish side. Based on above mentioned technical evidences, we recommend high risk traders
to buy the stock above Rs 795 with stop loss of Rs 785 for target of Rs 820,” says IIFL
research report.

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 HH

emkay Global Financial Services is bearish on Hero Honda Motors and has recommended
reduce rating on the stock with a target of Rs 1590 in its April 8, 2011 research report.

“Hero Honda Motors, capacity increased by debottlenecking, revised capacity stands at ~6.2
million units. There is further scope of increasing capacity. Royalty is a fixed expense to be
paid by 2014. Our est. indicates a royalty outgo of Rs 1.9 billion to Rs 2.1 billion in FY12-
FY14. Cost pressures are significant due to metal prices. 4QFY11/1QFY12 to have higher
adv. spends due to World cup/IPL. Raise FY12 vol. est. to 6.1 million units (+3.6%) and EPS
to Rs 113.8 (+3.7%). Expect FY12 DPS of Rs 68 (earlier Rs 30). Expect negative surprises
on the earnings. Current valuations (FY12e PER/EV-EBIDTA of 14.9x/10.5x) do not factor
in such risks.”

“At Rs 1,695, the stock trades at PER of 14.9 and EV/EBIDTA of 10.5 our FY12 estimates
respectively. We have upgraded our FY12 volumes and EPS by 3.6% and 3.7% respectively.
We believe that there are no major concerns for the company on the volumes front given the
superior franchise and brand equity. However, we continue to have concerns with respect to
cost pressures and clarity with respect to R&D efforts. Hence we value the company at 10%
discount to Bajaj Auto. We have valued the company at 14 PER and 9.7x EV/EBIDTA with a
target price of Rs 1,590 (up 3%). We retain our REDUCE rating on the stock as current
valuations are not factoring in the risk of negative surprises on the margins front,” says
Emkay Global Financial Services research report.

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management.Moneycontrol.com advises users to check with certified experts before taking
any investment decisions.

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Motilal Oswal is bullish on Hero Honda and has recommended buy rating on the stock with a
target of Rs 1799 in its February 2, 2011 research report.

“Hero Honda's 3QFY11 results are below estimates with EBITDA margins of 10.4% (v/s our
estimates 12.8%), EBITDA of Rs 5.3 billion (v/s our estimates Rs 6.4 billion) and PAT of Rs
4.94 billion (v/s our estimates Rs 5.4 billion), impacted by higher cost push on RM and fixed
costs.”

“EBITDA margin for the quarter was 10.4% (v/s our estimate of 12.8%), EBITDA was Rs
5.3 billion (v/s our estimate of Rs 6.4 billion) and PAT was Rs 4.94 billion (v/s our estimate
of Rs 5.4 billion), impacted by higher cost push on raw material (RM) and fixed costs.
Volumes grew 28.5% YoY (~11% QoQ) to 1.43m units and realization increased 4.4% YoY
(2.2% QoQ) to Rs 35,841/unit (v/s our estimate of Rs 35,243/unit). EBITDA margin declined
220bp QoQ (660bp YoY), impacted by 110bp QoQ (~600bp YoY) RM cost inflation and
130bp QoQ (~80bp YoY) increase in other expenses (due to provisioning for NCCD - 55bp
for 1HFY11 and 35bp for 3QFY11). Recurring PAT declined 8% YoY (~2.3% QoQ) to Rs
4.94 billion.”

“We believe that the short term focus would be on to ensure smooth transition and preparing
for exit of Honda, which could result in subdued performance in the short term. We expect
entire deal between Hero & Honda to be completed by June 2011. We have downgraded our
EPS estimates by 5.9% to Rs 113.7 for FY12 and by 6.3% to Rs 128.5 for FY13 to factor in
higher RM cost push and expenses related to business transition (higher marketing and R&D
spend). The stock trades at 13.4x FY12E EPS and 11.9x FY13E EPS. Maintain Buy with
target price of Rs 1,799 (~14x FY13E EPS),” says Motilal Oswal research report.

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BA

Aditya Birla Money is bullish on Bajaj Auto and has recommended buy rating on the stock
with a target of Rs 1482/1500 in its April 15, 2011 research report.

“Bajaj Auto, prices are in a short-term down trend from the recent high of Rs 1482 however
have given a decent bounce back after testing the 55-day EMA in Wednesday’s session.
However the intermediate-term trend (from February lows) is still up and historically any pull
back within the same seems to be getting good support at the said moving average.”

“The 14-day RSI is hovering near the equilibrium while the very short-term Stochastic
(5/3/3) has just made a bullish crossover near the oversold territory. Hence a break above
immediate resistance near Rs 1410 could signal a turn around and keep the sentiment positive
towards prior swing high of Rs 1482 and higher subsequently. Only an early close below the
support zone of Rs 1363/1351 would turn the overall sentiment weak negating the upside
potential. Buy Bajaj Auto initially above Rs 1410 and then on any dips to Rs 1400, with a
target of Rs 1482/1500 and closing stop of Rs 1363,” says Aditya Birla Money research
report.

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KRChoksey has maintained hold rating on Bajaj Auto with a target of Rs 1567 in its April 20,
2011 research report.

“Bajaj Auto is the largest exporter of two and three wheelers, founded in 1926. The brand,
Pulsar is continually dominating the Indian motorcycle market in the premium segment. Its
Discover DTSi is also a successful bike on Indian roads. Distribution network covers 50
countries with dominant presence in Sri Lanka, Bangladesh, Columbia, Guatemala, Peru,
Egypt, Iran and Indonesia. Bajaj auto has increased its focus & aligned its resources into its
core profitable businesses. The company exited the scooter segment & is strengthening its
position in the motorcycle segment through its 3 key brands Pulsar (Premium), Discover
(Executive) & Platina (economy).”

“Bajaj is market leader in the premium segment & is increasing penetration in the executive
segment. We believe Bajaj Auto’s motorcycle volumes to remain strong on the back of strong
brand equity (Pulsar & Discover), higher rural income & availability of financing. Bajaj Auto
has a dominant position in the 125+cc premium motorcycle category (high-margin segment)
and in passenger threewheelers. Also the company Exports to countries like Africa, Middle
east, & Latin America which enables the company to maintain superior margins & highest
profitability compared to the industry peers. Overall the company has healthy regional mix &
product mix that drive overall volumes & help it to sustain margins.”

“The three wheelers have contributed handsomely to the margins. The company has current
capacity to produce 1.5 million three wheelers. There is huge demand for the company’s
three wheelers in export markets largely in Africa where three wheelers are very highly under
penetrated. The only problem with three wheelers is that there is constraint for 4-stroke
engines. Majority of customer are asking for 4-stroke vehicles even form the export markets
of Africa, Sri Lanka, etc. Bajaj is planning to launch new products in the coming fiscal. The
new discover will be launched right at the start of the next fiscal in April 2011. The new
Pulsar will be launched in the coming diwali. This will be the fifth generation of the pulsar.
The new product from its acquired company, KTM, will be launched in FY12. On the whole
the company has strong plans to keep the growth momentum going in years to come.”

“We continue to maintain our positive outlook on Bajaj Auto. The company managed to
achieve operating margins of 20% even at a time when RM prices are affecting profitability
of all OEM’s. The increasing share of exports in overall volumes and strong performance
achieved by its bigger bikes continue to drive the overall profitability of the company. The
only area of concern remains the rise in prices of plastics. We expect the company to record
EPS of Rs 89.2 & Rs 90.9 in FY11 and FY12 respectively. At the CMP of Rs 1473, Bajaj
Auto is trading at 16.5x its FY11E and 16x its FY12E EPS. We value Bajaj Auto at 15.6x
FY12E earnings, arriving at a Price target of Rs 1527 per share implying an upside of 6.4%
from the current levels. We recommend “Hold” on the stock,” says KRChoksey research
report.

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Economic analysis of the automotive industry
Article Submitted by: Carolyn Kelly

Thursday, 28 January 2010

Introduction

The automobile industry is one of the most highly taxed industries in the United States. These

taxes are a combination of direct vehicle ownership deductions and other deductions

associated with fuel costs. In the year 2004, it was estimated that the automobile industry's

taxes reached a whooping twenty percent. The major reasons behind these inhibiting fiscal

polices are; a fluctuating fuel economy, a concern over green house emissions and mandatory

cots such as insurance liability. As if this is not enough, the automobile industry is also one of

the most demanding industries in terms of infrastructural developments. These external

factors do not operate in isolation, one must consider the internal issues affecting automobile

manufacturers. Companies have to deal with labor issues and these may take their toll on

overall profit margins. The essay shall examine internal and external factors affecting the

automobile industry. (Parry et al, 2006)

Shifts and price elasticity of supply and demand

The first effect of shifts in price elasticity comes from the oil dependency factor. The United

States has monopsony power as an oil importer. The effect of this is increased bidding hence

rising oil prices for all other oil importers. The high amounts of fuel consumption in the US

cause a heavy toll on the automobile industry. The latter cannot operate without the former

and any negative effects will be trickled down to the industry.

The issue of price elasticity for vehicles themselves is largely determined by the inverse

elasticity rule. According to the rule, vehicle prices are divided by elasticity of imports within
the country. This gives a rough idea of the optimum level at which import prices should be

set. (Henry, 2008)

It should be noted that there is a negative correlation between higher fuel economy and

externalities within the automobile sector. This is because they minimize gasoline demand and

consequently affect oil dependency, this goes a long way in enhancing trade within the

automobile sector.

Positive and negative effects of externalities

One of the major negative externalities is local pollution. Estimates indicate that ninety

percent of US vehicle owners use gasoline for fuel. This is a dangerous pollutant because it

emits numerous green house gases that include carbon monoxide, nitrogen dioxide and others.

One cannot ignore the health effects of such pollutants such as pulmonary functions and

asthmatic conditions. These pollutants are exclusive to the automobile industry. Given the

negative effects that emanate from the industry, both the local government and international

bodies have intervened. The US passed the Clean Air Act in the year 1970 in order to

minimize emanation of these pollutants. Automobile manufacturers have tried coming up with

new models that do not produce as much pollution as they used. Overly, local pollution is

detrimental to the automobile industry because vehicle owners have to dedicate numerous

resources to deal with it, federal governments need to regulate it and consumers will b

affected by the long term repercussions. (Bozzo, 2008)

One cannot ignore the issue of fuel dependency when discussing externalities affecting the

automobile industry. In the year 2005, it was estimated that the United States imports fifty six

percent of its fuel. Experts have asserted that this percentage may increase over the next few

years. There are three major reasons why the dependence on foreign oil within the automobile
industry cause negative effects

 It compromises US national security

 It gives the US little market power

 It makes the US vulnerable to price shocks

The US mostly sources its petroleum based fuel from the Middle Eastern region. This is one

of the most politically unstable region in the world. Consequently, the fate of oil importers is

left in the hands of such countries' dictators. The situation is further aggravated by the US's

lack of popularity in those areas. Furthermore, there is an ongoing war in one of the oil rich

nations-Iraq. These and many more reasons have caused a lot of instability in the oil sector.

This is the reason why the United States government has to spend considerable amounts on

protecting its Persian Gulf oil supplies. (Bozzo, 2008)

The issue of oil dependency is particularly detrimental to the US because it really minimizes

its foreign policies. Some of the most undemocratic governments such as Iraq may use

revenue collected from oil exports to fund insurgencies. Additionally, others use it to

minimize the rights of their citizens even further. The issue of oil dependency costs the

average American due to the trickle-down effect from governmental polices and this largely

reduces purchases within various industries. There are also a large number of effects that

come out of fluctuating oil prices in the automobile industry. The relationship between the

Gross Domestic Product and the fluctuating price of oil is negative. Consequently, industries

dependent on this product (oil) such as the automobile sector are negatively affected by this.

Many sectors have to adjust to future risks in these oil prices by keeping additional stocks.

This also affects the capital and labor requirements in the various industries thus minimizing

their overall performance.

Additionally, consumers within the automobile sector have to take into account the fuel

economies of certain vehicles. However, the cost savings achieved by these fuel saving

vehicles may have to minimized by fluctuating fuel costs. Consequently, this reduces the

competitive nature of such fuel saving products.

Contributions made by Asian economies such as China and India have also affected the

automobile industry negatively. This is largely due to the fact that these countries have large

populations. Their standard of living has improved drastically thus increasing the level of

vehicle ownership within those countries. This has a positive effect on the US automobile

sector because US manufacturers now have a solid consumer base. It is a known fact that most

US automobile manufacturers have to tackle competition from Japanese and Chinese auto

makers. Therefore, if those respective countries increase vehicle ownership, then Asian

producers need not come to the US to market their products. This leaves some gaps in the

local market that producers here can fill. (Bozzo, 2008)

Another negative externality is the issue of traffic congestion. The automobile industry is

largely responsible for traffic congestion. Statistics released in 2004 indicate the United States

looses close to sixty three billion dollars due to traffic delays. Statistics also indicate that the

demand for vehicle use has exceeded the length and availability of roads necessary to support

these vehicles. Consequently, numerous drivers have to spend so much time on the road. Time

that could have been spent engaging in nation building activities is now wasted due to these

congestions. There are numerous campaigns (especially from sustainability activists) to

minimize vehicle ownership or vehicle use. These notions have affected various industries

because potential consumers may be discouraged from purchasing certain products thus

minimizing business. Additionally, automobile manufacturers have to adjust to these notions

by creating larger capacity vehicles. Vehicles with higher seating capacity accommodate more
people and this would greatly minimize traffic congestion. Such capital adjustments cost the

automobile industry greatly.

Wage inequality in the industry

Twenty years ago, the US had one of the highest unemployment rates in the developed world.

However, in the 2000s and beyond, these numbers have drastically reduced. Some western

European countries have recorded greater levels of unemployment than the US. However, the

issue of wage inequality is still highly prevalent in the US. The automobile industry is one of

the hardest hit by this issue. The US government is largely to blame for these occurrences.

Many automobile manufacturers have the freedom to either fire or hire staff without worrying

about government intervention. Additionally, automakers in the US largely discourage their

employees from entering into collective agreements. Even those who allow their employees to

enter into collective agreements may not bother listening to their employees grievances. The

US government has also failed in its duty to set favorable minimum wages. Consequently,

employers within the automobile sector end up paying their workers unfairly. This situation

applies to the low skilled employees. (School of Industrial and Labor relations, 2007)

The US has also begun recording an increasing gap between unionized and un-unionized

employers in the automobile industry. The major disadvantage with such a discrepancy is that

is greatly minimizes employment diversity.

It should however be noted that there are increasing employment levels in the automobile

sector specifically. In the past twenty years, employment in the US automobile industry

centered around the three major automobile manufacturers. However, from the year 2003 and

beyond, other smaller automobile manufacturers are now coming into the picture,
consequently, employment levels within this industry have been dispersed evenly.

The other disturbing trend about wages in the US is the fact that most automobile

manufacturers are more interested in non unionized workers than the unionized workers. This

leads to rising inequality because workers cannot speak out for themselves. Some of the

reasons that could be causing these negative move include;

 Effects of the economy

 The need to reduce costs

 The need to improve equality of products

 Higher level of flexibility within the industry

 Low government regulation

Wage inequality in the automobile industry could also have been brought about by the issue

globalization. Most of the rising economies, especially those ones in the Asian continent have

made a paradigm shift from the centralized to decentralized labor management. Most

governments are encouraging their industries to restructure their labor management in order to

correspond to these new changes in national perspectives. These trends have trickled into the

US labor market and have been adopted by major automobile manufacturers. These global

trends are highly unfavorable to the low skilled worker yet this category is common in the

automobile industry. (Isidore, 2008)

Monetary and fiscal policies

Fuel tax prices have the largest effect on the automobile industry. Fuel taxes in the US have

been the object of discussion. The country is currently undergoing a decline in real fuel tax

rates. This is largely because of discrepancies between nominal rates and inflation.
Additionally, the above trends have been caused by improved fuel economies among

automobile users. The government has been taxing specific products such as tobacco, gasoline

and alcohol. This implies that the government can raise sufficient levels of revenue to

accommodate public spending. Consequently, the government has to raise taxes in other areas

of the economy.

The government passed the Corporate Average Fuel Economy in the year 1973. At that time,

the government required all vehicle manufacturers to ensure that they complied with new

vehicle standards. The standards mandated vehicle manufacturers to ensure that their vehicle

fleets met sales weighted fuel economies. Consequently, this brought about a higher level of

accountability; light truck standards have increased by 1.5 miles per gallon from 2005 to

2005. While the policy may have been effective over the past decade, its relevance today has

drastically reduced. This has been aggravated due to the rising fuel costs in the year 200 and

beyond. (Bunkley, 2008)

If fuel economy standards would have been aggravated, then chances are that this will

minimize oil dependence and also reduce pollution. Consequently, this goes a long way on

ensuring that the fuel consumer does not undervalue the fuel economy at nay one time.

Conclusion

The most outstanding externality in the automobile sector is fuel. The automobile sector is

highly dependent on the fuel economy. Yet the latter industry can cause negative

repercussions on the nature of US foreign policies. Additionally, it is highly susceptible to

price fluctuation. Fiscal polices have their part to play in the automobile industry. The Clean

Air Act aims at regulating the amount of emissions emanating from automobiles.

Additionally, the Corporate Average Fuel Tax aims at regulating fuel economy in relation to
vehicles. These policies have trickled down to the fuel industry but their effect may not as

positive as they were some years ago. The issue of wage inequality is highly manifested in the

automobile industry given the fact that most employers prefer unionized to non unionized

workers.