How the automotive industry works: OEMs, suppliers and dealers
Who does what between the steel mill and the driver, how each player makes money, the cost structure of a car, and the metrics the industry watches.
Industry brief, with a one-minute summary: Automotive and electric vehiclesKey takeaways
- A carmaker designs, assembles and brands vehicles, but buys most of the parts from suppliers and sells through dealers.
- Units sold and market share, by model and region.
- Average selling price and mix: the share of expensive models, options and trims.
- Plant utilization: cars built divided by plant capacity. Many plants need to run above roughly 70 to 80 percent to make money.
Key idea
A carmaker designs, assembles and brands vehicles, but buys most of the parts from suppliers and sells through dealers. Its profit depends on selling enough cars to cover very high fixed costs (plants and product development) and on the mix of models it sells.
- Automotive value chain
- Raw materialsSteel, aluminium, plastics, glass, rubber, battery minerals
- Suppliers (tiers)
- Tier 3 and tier 2: materials, chips, simple parts
- Tier 1: whole systems sold directly to the carmaker (brakes, seats, electronics, battery packs)
- Carmaker (OEM)Design, engineering, engines or motors, body shop, paint, final assembly, brand
- LogisticsShips, trains and trucks move finished cars to markets
- Dealers and distributorsSell new and used cars, arrange finance and insurance, service and repair
- Aftermarket and financingSpare parts, repairs, insurance, loans and leases, often through the carmaker's own finance arm
OEM means original equipment manufacturer. In the car industry it means the carmaker, such as Toyota or Maruti Suzuki.
| Player | How it makes money | Main costs | Typical profitability |
|---|---|---|---|
| Mass-market carmaker | Sells cars to dealers or directly; also finance and parts | Purchased parts and materials (the largest share), labor, R&D, plants, marketing, warranty | Operating margins often in single digits |
| Premium carmaker | Same model, but higher prices and richer options | Similar, with more spent on technology and brand | Usually higher margins than mass market |
| Tier 1 supplier | Sells systems to carmakers under multi-year contracts for each model | Materials, engineering, plants | Often lower than carmakers; squeezed on price every year |
| Dealer | Margin on new cars, plus used cars, finance commissions, service and parts | Showroom, staff, stock financing | New car sales earn little; service, parts, used cars and finance earn most of the profit |
So-what
In a dealer case, look beyond new car sales. In a carmaker case, look at volume against fixed costs, and at model mix.
Why margins are thin: a new model can cost billions to develop and the plant that builds it costs billions more. Those are fixed costs. A carmaker needs high volume on each platform (the shared set of underbody, electronics and parts that several models are built on) to spread them. When sales fall, plants run below capacity and profit falls fast. This is operating leverage.
Key metrics, in plain words
- Units sold and market share, by model and region.
- Average selling price and mix: the share of expensive models, options and trims.
- Plant utilization: cars built divided by plant capacity. Many plants need to run above roughly 70 to 80 percent to make money.
- Operating (EBIT) margin, and profit per vehicle.
- Days of inventory: how many days of sales are sitting at dealers and in ports.
- Warranty cost per vehicle: a sign of quality.
- R&D as a share of revenue.
- For electric vehicles: battery cost per kWh, range per kWh, and charging speed.
- Fleet average emissions: the average carbon dioxide per km of all cars sold, which regulators in Europe and elsewhere limit.
A car plant in Mexico has fixed costs of USD 600 million a year. Each car it builds earns a contribution (price to dealer minus variable costs) of USD 4,000. How many cars must it build each year to break even?
Where does a typical car dealer earn most of its profit?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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