BMW Economic Analysis

Bayerische Motoren Werke (BMW) is a German automobile company first founded by Franz Josef Popp in 1916. It started up as an aircraft engine production company, but ceased producing them at the end of World War 1 due to a newly introduced treaty. BMW then shifted to producing motorcycles and motorcycle engines under the brand BMW Motorrad in 1923 (falkemark & Larsson, 2006). The first automobile ever produced was launched in 1928, called the Dixi. It was made by Automobilewerk Eisenach based on the Austin 7 as BMW bought the company and with it the rights to build a car of that design.

The Rover Group was acquired by BMW in 1994 and kept for six years before it was sold off to Phoenix Consortium and Ford because of its enormous losses. However, 1994 was also a big year for BMW as their total production was larger than that of one of their main competitors: Mercedes-Benz (Falkemark & Larsson, 2006). Years later in 2003, BMW purchased Rolls-Royce and produced its first car, followed closely by the new 5-series and 3-series introduced in 2004-2005.

Having 23 production and assembly plants in 13 different countries, BMW is now classified as one of the top three luxury car manufacturers in the world along with Audi and Mercedes-Benz (falkemark & Larsson, 2006). It can be said to have an oligopoly market structure as only a small number of firms in the industry have control over the market. Moreover, the decisions made in one firm can drastically affect the other firms as every decision made can influence its competitors. An example of this would be if Mercedes Benz modified its latest model of car to have an extra slim rim on its tyre with personal engravings. Its main competitors- Audi and BMW, would come up with another idea to be at the same, if not, higher level in order to compete with their rival. Another characteristic of an oligopoly market structure is that it will have high barriers to entry. In this case, companies would need advanced technologies, economies of scale and most importantly a company that can pass the barriers set up by the other firms that control the market. These firms do not want any other companies coming in to replace them or add to them as they could lose some of their market share (Sloman, et al., 2012).

The first part of the graph illustrates that that the demand would be relatively elastic as no competitors have raised their prices to match that of their rival company. The point after the kink in the curve states that demand is now relatively inelastic as competitors have increased their prices to compete with their rivals (Sloman, et al., 2012). Therefore, the optimum for any company would be to stop on point E as it is the equilibrium level- representing the most preferred point by the entire society.

The graph above shows the down sloping demand curve for companies with oligopoly market structures. It is said that companies who are oligopolic will not increase their prices because if they do, no matter how little, they could potentially lose a lot of customers to their competitors. Thus, when one company increases its prices, other companies maintain their lower prices in hope that customers will go to them instead, thereby giving them a bigger market share in comparison to their competitor. This does not last long however because although their prices may be slightly lower, most of the companies would have brand loyalty from their consumers, allowing them to continue having the same number of consumers no matter how much the increase the price. This means they will now gain more revenue and profit as compared to their rival companies as their prices are higher (falkemark & Larsson, 2006). The market will not stay this way for long because the other firms will soon increase their price to be more competitive to their competitors.

As BMW is considered a luxury good and not a normal good, it generally has an elastic demand (Sloman, et al., 2012). It can be proven that BMW has a relatively elastic demand because of the portion of income spent on the products and the time that has elapsed after each product is introduced. The price of a BMW product is high because of its quality and the name of the brand, therefore many people would not be able to afford the product, creating a budget line. The budget line indicates the amount of money that can be allocated for certain necessities as well as luxury goods. This means that as the income of a person changes, so does their buying habits (mankiw & taylor, 2006). If people have more money, they tend to buy more of normal and luxury goods, whereas if income decreases, so will the amount of money spent on luxury items. This is also known as the income effect. Therefore, it can be stated that demand is relatively inelastic because the number of products sold depend on a lot of external factors such as price regulations that can change rapidly in a matter of minutes.

Economies of scale are reducing the cost of production by increasing the number of products produced (Sloman, et al., 2012). Generally, it means to do things more effectively by producing a large number of the products at a time. BMW can benefit from this as their products are considered luxury goods, meaning the average cost of production would be high. By applying this concept, BMW can reduce its costs as well as increase its outputs while maintaining effectiveness. As one of the largest luxury automobile manufacturer, BMW would have their own high-grade machines and technology to help them produce their products day by day. This will also increase productivity, therefore reducing average costs according to the economies of scale. The man aim is to generate as much revenue and profit as possible for the company while keeping costs to a minimum.

If BMW want to increase their production level, they can do it two ways: short run or long run. In the short run, the only way to increase their production level is to hire more workers as it is the only thing that can be done on a short notice. Doing things in the short run does not have any permanent consequences as it can be easily undone. For example, if there are too many workers in the factory that the productivity level is decreasing, employees can be laid off to make it more efficient without any drastic changes. In the long run, BMW can think about expanding their factories or opening up new ones to accommodate the increase in demand. This is a long run production plan as it takes time, money and a large amount of investment. It is the opposite of short run as things the things that are done can’t be undone easily. The impacts of the actions may cost the company extra money and may affect their productivity level. For example, if BMW decide to expand their factory in order to accommodate the extra employees, it will cost them a lot of time and money. If all goes well, it will have a positive impact on production levels. However, if there are any problems, long run decisions are not easy to undo as they are usually done on a big scale.

 All countries experience economic problems at a certain point. Fortunately, they are always ways to get out of that situation. BMW has helped many countries stay out of their economic problems. For example, BMW sold 359,103 units in Asia, which is an increase of 27.1% in nine months alone (Pettinger, 2013). During the same period, the sales in China increased by 3.3% and 21.5% in Japan (Pettinger, 2013). This shows that BMW can solve economic problems worldwide. Exports are an important part of a country’s economy as it can help the country stay out of an economic downfall. As car exports has increased dramatically, so has the job opportunities for people. Since more cars like BMW are being imported and exported, a lot more people are needed to work in the company and factories to keep up with the demand. This means they level of unemployment would be low in the country, whilst simultaneously increasing the country’s total GDP. Moreover, when many people buy BMW cars, it helps the country’s economic growth as the money spent on the cars can be used to help the local economy. This shows that BMW has contributed to helping out the economy in a positive way (Pettinger, 2013).

In my opinion, BMW will always maintain their standards as one of the world’s leading luxury car manufacturers. BMW always seeks a way to be better than their main competitors: Audi and Mercedes-Benz which attracts more consumers to choose them over their competitors.

Reference

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falkemark, C. & Larsson, H., 2006. A company analysis. [Online]
Available at: https://gupea.ub.gu.se/bitstream/2077/3072/1/06-07-53M.pdf
[Accessed 25 October 2013].

mankiw, g. & taylor, m. p., 2006. economics. 1st ed. bedford row: Thomson Learning.

Pettinger, T., 2013. importance of exports to the economy. [Online]
Available at: http://www.economicshelp.org/blog/7164/trade/importance-of-exports-to-the-economy/
[Accessed 25 October 2013].

Sloman, j., Wride, A. & Garrett, D., 2012. Economics. 8th ed. harlow: pearson education limited.