Traditional Market Structures Versus Sustainability: an inherited obstacle to change in the car industry?

Abstract:

22nd GERPISA Colloquium (Theme Number 1)
4-6 June 2014: Kyoto

Traditional Market Structures versus Sustainability:
an inherited obstacle to change in the car industry?

Dan Coffey
Senior Lecturer in Economics
Leeds University Business School
University of Leeds, Leeds, LS2 9JT
+ 44 (0) 113 3434485
Email: djc@lubs.leeds.ac.uk

Professor Carole Thornley
Chair in Employment and Public Policy
Keele University Management School
Keele, ST5 5AZ
United Kingdom
+44 (0) 01782 583608
Email: c.r.thornley@hrm.keele.ac.uk

Keywords
Car markets, parts markets, profit margins, technological change, sustainability

Abstract
This paper explores the existing organisation of markets for sales of new cars and component parts as a potential impediment to technological transformation in the auto industry. While leading commentators within Europe like Bernard Jullien have stressed the importance of an understanding of the used cars and car parts markets for assessments of the operations of new car markets – and by extension, of the selection by OEMs of which new technologies are delivered to consumers in the latest car vintages (see, for example, Jullien 2002; also Jullien and Pardi 2011) – the question of market organization for used cars and parts vis-à-vis new cars remains a comparatively understudied issue as a barrier to the emergence of more sustainable forms of automobility. But one complaint levelled from within the U.S. about sustainable vehicle technologies is that the designs incorporating breaks from conventional ICE technologies generate insufficient replacement parts to be a viable business model (see Sperling and Gordon 2009).

The approach taken in this paper is to construct a simple and analytically tractable 2-period sales model. New car sales in each period rely on the future availability of parts for prospective buyers. New cars in period one also become used cars in period two, increasing the quantitative significance over time of part sales: the accumulation of a pool of old cars increases the balance of profits made by parts sales compared with the profit earned in new car sales in each successive period. Building on this simple point the paper explores implications for a range of interconnected phenomenon:

a) the embedded quality of profit-seeking behaviour by OEMs vis-à-vis accumulated fleets of previously sold cars: the approach taken emphases the connectedness of price structures (in the sense of the gross margins generated by price-cost mark-ups) that are jointly determined for both the car (subsuming new and used cars) and parts markets as part of a single profit seeking process undertaken by OEMs.

b) the consequences of nurtured competition in which any radical departure from existing technological trajectories in the shape of non-ICE technologies must compete not only with the comparative profitability of the latest ICE vintages, but with OME profit streams projected from ongoing and future part sales made through an existing and institutionally well-supported parts market predicated on successive vintages of ICE technology.

c) the design of fiscal (tax and subsidy) measures to promote new technologies.

The main part of the paper presents its analysis using a simple geometric framework, with supporting algebra and analysis of fiscal effects presented in an appendix. It is proposed that the 2-period model can be naturally extended to multiple periods and could serve as a fruitful vehicle for simulation-modelling by OEMs and governments. The paper builds on suggestions in Coffey and Thornley (2012, 2013, 2014).

The paper is a contribution to discussions as to how specific measures targeting designated sectors can be simultaneously used to leverage positive changes in income, output and trade while advancing the cause of environmental sustainability. Some asides are also made to the question of new business models, a subject upon which a range of views are now discernible – ranging from Ceschin and Vezzoli (2010) (which builds on the theme of product service systems lease-based selling: see UNEP 2002) to Jullien and Pardi (2011) (which develops amongst other points the theme of affordability and the problems posed for consumers by the rising costs of second hand car models).

References

Ceschin, F. and Vezzoli, C. (2010) ‘The role of public policy in stimulating radical environmental impact reduction in the automotive sector: the need to focus on Product-Service System innovation’, International Journal of Automotive Technology and Management, vol 2/3

Coffey, D. and Thornley, C. (2012) ‘Low Carbon Mobility versus Private Car Ownership: towards a new business vision for the automotive world?’, Local Economy, 27(7), pp732-748, 2012

Coffey, D. and Thornley, C. (2013) ‘Nurtured Competition and Optimal Vehicle Life: a missing theme in public policy formulation for alternative vehicle technologies?’, International Journal of Automotive Technology and Management, vol. 13, no 2, pp134-154

Coffey, D, and Thornley, C. (2014) ‘Industrial Policy: a green agenda’, in D. Bailey, K. Cowling, and P.R. Tomlinson (eds) Modern Perspectives on Industrial Policy in the UK, Oxford: Oxford University Press (forthcoming)

Jullien, B. (2002) ‘Consumer vs. manufacturer or consumer vs. consumer: the implications of a usage analysis of automobile systems’, Competition and Change, 6 (1), pp113-25

Jullien, B. and Pardi, T. (2011) ‘In the name of consumer: The social construction of innovation in the European automobile industry and its political consequences’, European Review of Industrial Economics and Politics, 3

Sperling, D. and Gordon, D. (2009) Two Billion Cars: Driving Towards Sustainability, Oxford and New York: Oxford University Press

UNEP (2002) Product-service systems and sustainability: Opportunities for sustainable solutions, United Nations Environmental Programme, Paris
http://www.unep.org/resourceefficiency/Portals/24147/scp/design/pdf/pss-...