Friday, October 26, 2012

Failure of Nissan and General Motors

Written by Ivan W.

Article based on:

This article have sparked interest into me, according to it, the sales of the electric car worldwide have shown weak starts and the situation is not improving in year 2012 despite media frenzy and the fluctuation of petrol prices. Malaysia is one of the country that have shown poor demand for electric car, from the economy update, there are currently only 11 pure electric source on the road of Malaysia which is not even 1% of the total car sales in Malaysia. Why is it this phenomena happening in Malaysia? With my basic knowledge in economics, my opinion towards the factors behind the unsuccessful product line of huge company such as Nissan and General Motors towards the sales of electric car is due to the microeconomics of Malaysia.

Firstly, what is electric car? Unlike hybrid vehicle which runs on both fuel and the power source of electric, electric car purely depends on electrical power. Due to its unique engines, it runs like our phones where charging was a must to provide sufficient electrical power to function. Unfortunately, according to the reviews of many, it is very time consuming and it could not last as long as fuel powered vehicles. Furthermore, Malaysia have yet to establish any charging station for electric cars making it a major drawback for Malaysians. According to Peter Chin, the minister of energy, green technology and water, unless Malaysia starts providing charging station on the road, until than Malaysians are not ready to accept electric cars. This is one of the factor that caused change in demand as it affects the convenience of the consumers which would shift the demand curve to the left due to the drop of quantity demanded.

The cost of electric car compared to a fuel powered car about the same size and power, the cost of the electric car is 10% higher than a fueled car and would be still be higher as the technology needed to increase the efficiency of the vehicles are getting more complicated and expensive. According to the law of demand, if others things remain the same, the higher the price of a good, the smaller the quantity demanded; thus, making the quantity demanded for electric car less due to its price. A substitution effect takes place where the price of the electric car rises, its opportunity cost rises. Fuel cars became the better substitute due to the incentive to economize on its use.

Still, there are other factors that bring changes in demand, for example the prices of related goods such as a substitute or competition, Protons and local Malaysia cars which are fueled powered vehicles are cheaper thus, people buy less of electric cars and more of the fueled cars.

Secondly, the expected future price of electric car is lower as the minister of international trade and industry, Mustapa Mohamed have announced earlier this May that the government would shows support promoting electrics cars by offering incentives to Malaysians together with 100% import duty exemption for electric vehicles below 2200 cu centimeters while stating that additional measures would be promoted in the future to further attracts demands from Malaysians. Since the expected future price of the car will falls, the opportunity cost of buying the good today is high relative to what it will be in the years to comes thus Malaysians buy less of the good now causing the demand for the goods decrease today and might increase in the future.

The preferences in Malaysian consumers have greatly affect the sales of electric cars too, with the lack of facilities such as charging station to cope with the vehicles and the trouble of hours needed just to charge up the car compared to fueled car that only takes a few minutes to refill which in turns affect the quantity demanded. Let’s not forget the urban economics where other there are still many places in Malaysia that have difficulty accessing to enough electricity to power a car. The electricity rate in Malaysia is at a constant increase due to the increasing of population that leads to the increase in usage, electricity could be considered as the complement product with the electrical vehicles, with the increase in electricity rates, the quantity demanded for electrical cars decrease. Not to mentioned it was harder to find replacement parts of an electric car as it was still a new technology in Malaysia.

From what I researched, the quantity demanded for electric cars in Malaysian is strongly affected by the opportunity cost and other influences such as preference, facilities and complement effects. To cope up with the situation, the government have imposed some aid regarding electrical cars and have hope that the future price of the cars would decrease and the quantity demanded would increase, thus there is hope that the sales of electric vehicles would be slowly improve in the future in Malaysia.

Samsung Rising Sales

Written by Ivan W.
I have always shown an interest in the iPhone battle against Samsung phones in the Smartphone market and now I will explain why Samsung profit is getting higher and why it is dominating the market. The battle has raged on ever since Apple decided to sue Samsung for damages it has caused in copying Apple’s designs. Samsung had been sued by apple for $2.5 Billion in damages in which Apple claimed that Samsung’s phones and tablets copied its devices’ behavior and appearance. Samsung also counter-claimed about $200m, saying the iPhone and iPad used its wireless 3G standard technologies, and methods for tasks such as sending a photo by email from a phone. Now this is an example of an Oligopoly, but not to be confused with a pure competition and also a study of microeconomics of product market. 

Firstly, what are an oligopoly and a pure market? It is explained in the table below: 

We can safely say that the Smartphone market is an oligopoly with Samsung and Apple being the main distributor and the rest just fighting what’s left of the market. With Samsung controlling 68 percent total share globally according to IDC and Apple controlling 17 percent of the global market. Why is Samsung dominating the market? 

Let’s go back to the basics of microeconomic and look at the demand and supply of the phones. It doesn’t take much market research to know that the Samsung SIII is cheaper than the iPhone. With iPhone 4S being priced at USD$399 for the 32 GB and Samsung SIII priced at USD$249.99 for the 32 GB as well. According to the law of demand, when price of a good drops, the quantity demanded for it will increase as shown in the movement along the demand curve: 

The vertical axis is the price of the good, while the horizontal axis is the quantity demanded. The Red line (D) is the demand curve of the Samsung SIII and it represents the amount that consumers are willing to pay at any given price. When price of a good drops or lower than its substitute, then quantity demanded of that good will increase as shown above, P1 dropped to P2 resulting in QD1 increasing to QD2. 

Focusing on the Middle Class People, this is a very basic common view of what happens in the market for any “normal” good. Now let’s look at how price changes of Samsung can affect the iPhone. Since both companies are competing in the same market, consumers can either enjoy buying the Samsung or the iPhone because both offers almost all the same features. So if price of Samsung decreases, people will buy Samsung instead of iPhone. This is known as cross elasticity of demand where price of one good can affect the other good. 

This also creates a substitution for the iPhone. Both company are competing so if price of Samsung is cheaper than the iPhone, surely consumers would go for the Samsung phones because Samsung is a substitute for iPhone but at the same time iPhone is also substitute for the Samsung so price plays a big role and affects the quantity demand of a product and this might be the reason why Samsung Sales is increasing and also surpassed iPhone as stated in the article. 

Other factor that might affect Samsung Sales is technology. This factor can cause a change in demand for the iPhone therefore making Samsung a more preferred choice over the iPhone. Nowadays the Samsung android market is taking over the apple IOS software. From what I think, when Apple introduced the Apps store a few years ago, there were too many restrictions in place and it wouldn’t approve third-party apps that mimicked functionality of existing apps. The restrictions have since eased, but you still can’t change the default apps in iOS even if the alternatives are better. For instance, hyperlinks will always open inside mobile Safari even if you find Chrome a better browser. Android on the other hand allows users to replace system stuff, like the on-screen keyboard and many more. Also the apps in the android market are almost completely free compare to iOS, who wouldn’t want free stuff? 

Now this technological advantage of Samsung has affected the demand of iPhone in the sense that people actually prefer Samsung because of its android OS compare to iOS. The demand is illustrated below: 

The Red line represents the demand curve for iPhone and the Green line is shifted to the left due to Samsung technological advancement changing the taste of consumers. When the demand curve shifts to the left, it means demand for iPhone has decreased due to many factors like technologies, when it shifts to the right; it means there is an increase in demand for iPhone. Not to be confused with Quantity demanded. The difference is that quantity demanded is when the demand is still there but people actually just buy lesser of it. 

This can also explain why Samsung Sales increased therefore increasing profit and also dominating the market. 

In my own opinion, I think Samsung is breaking record in Sales compare to iPhone because it’s cheaper and its technology is getting stronger in terms of Operating System (OS). This explained why sales are high in the article.