A:

The automotive sector is a broad category correlated with a variety of related industries. Auto parts manufacturers and raw materials suppliers do not technically manufacture automobiles but nevertheless play a significant role in the health and viability of the automotive industry. These industries each have covariance with the automotive sector. For example, as automotive industry returns grow, auto parts manufacturer companies typically also offer increased returns to investors. While closely related, these industries do have significant differences and are impacted somewhat differently by market forces. These differences make them distinct industries with different advantages and disadvantages for investors.

Automakers experience steady growth when economies expand and consumer spending on durable goods increases. Growing demand for automobiles provides automakers with solid returns for investors. This industry is expected to grow even if U.S. spending on cars decreases because emerging market economies are likely to contribute significantly to vehicle demand. Similar industries are also likely to get a boost but are not as completely dependent on new car sales for revenue. Car parts spending increases when consumers maintain older cars by purchasing new original equipment manufacturer (OEM) and aftermarket parts. This industry may experience strong growth even when new car spending is in decline. The car parts industry is very competitive and offers a wide range of products at different prices and quality levels. Raw materials used in car production are also used in many other technologies, so this sector is also not completely dependent on automakers.

The materials industry supplies materials used by automakers such as steel, aluminum, lithium and advanced plastics. Some of these materials are raw materials removed from the Earth in mining operations, but many materials used in modern vehicles require extensive production. The automotive industry is a major client for many of the companies producing these materials. Automakers' success may boost the earnings and market values of materials companies. Other manufacturing industries, however, make extensive use of many raw materials and provide alternative demand for the materials industry when car sales decrease.

Car material changes can contribute greatly to changing profitability of the metals industry. Aluminum content in cars is increasing as of 2015, with automakers purchasing greater quantities of aluminum for vehicle production than before. Traditionally, aluminum is more expensive than steel, and many automakers use steel to create strong and durable products. However, aluminum is lighter than steel and helps increase vehicle fuel efficiency. Luxury vehicle manufacturers began using aluminum before economy automakers. Higher government standards for vehicle emissions and fuel economy have contributed to the use of aluminum. Investors should consider aluminum suppliers. As global demand for new vehicles grows, the overall demand for aluminum is expected to continue growing. Steel, a less expensive vehicle component, may also increase and may represent a strong potential opportunity for investors.

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