Managing Business in Europe: Automotive Industry in European Union - Term Paper Example

Managing Business in Europe - Automotive Industry in European Union Table of contents Introduction :page 3 2. Influence of EU's policies on Automotive Industry :page 4 3. Influence of Single European Market on Automotive Industry :page 6 4. Opportunities and threats for Automotive Industry associated with the enlargement of the European Union :page 9 5. Automotive Industry strategies for Europe :page 10 6. Conclusions :page 12 7. References :page 13 Introduction The European Union (EU) automotive market is the second-largest in the world (17.4 million), after the Asia-Pacific region (including Japan and Korea) which account for the production of around 19.3 million automobiles. The European market is highly competitive with about 40 manufacturers offering products. This is a greater number than in the other main markets (Trends and drivers of change in the European automotive industry: Mapping report, 2004, p.2). Automotive industry is one of the largest and most multinational of all industries in Europe which controls the European economy up to a great extent. Though, there are lot of prominent automobile manufacturers in Europe, majority of the production of automobiles required for the European market is outsourced. The prominent automobile manufacturers in Europe are DaimlerChrysler, Volkswagen (VW), BMW, Ford Europe, General Motors (GM) Europe, Renault, PSA (Peugeot-Citro'n), Fiat and Porsche etc. "The EU is the largest automotive production region in the world and the industry comprises 6.5 % of the manufacturing sector in the Union. Direct employment by the automotive industry stands at about 2.2 million employees, while the total employment effect (direct and indirect) is estimated to be about 12 million" (THE AUTOMOTIVE SECTOR, 2009). This report analyses; Influence of EU's policies on Automotive Industry; Influence of Single European Market or EMU on Automotive Industry; Opportunities and threats for Automotive Industry associated with the enlargement of the European Union; Automotive Industry strategies for Europe etc. Influence of EU's policies on Automotive Industry The increasingly international setting of business makes it harder and harder to establish the boundaries of a national economy or even to separate the European economy from its global context (Wallace &Young, 1997, p.3) Globalization and liberalization policies have revolutionized the who world and the business strategies were redefined in order to meet the demands of a global world by many of the organizations. Separate co-operative sectors are working in most of the parts of the world in order to exploit the possibilities opened by globalization. EU is one of such co-operation aimed at the integration of the whole European region for the collective growth. The current focus of the EU institutions is on making the EU one of the most competitive markets in the world by 2010 and ensuring stable economic growth. Efforts to this end include investment in human capital, improvements in physical infrastructure and enhancement of available network in the transportation, telecommunications and energy sectors. To counter sluggish economic conditions compounded by uncertainties due to geopolitical tensions and international terrorism, the European Commission has endorsed economic growth initiatives including European Action for Growth (Country Industry Forecast - European Union Automotive Industry, 2004) EU has implemented lot of strategies in order to encourage the automotive industries in the European region and to make the region, the world's highest automobile manufacturing region. At present the Asia-Pacific region holds this position and the EU has taken every possible measure to capture the first position. Environmental legislation and recycling legislation are some of the strategies adopted by EU in order to raise the standards of automobile manufacturing in this area. "The EU emissions standards are compulsory in all EU Member States. The current Euro IV standard must be reached by 2006. It covers emissions of CO2, N2O, and hydrocarbon particulates for both diesel and petrol engines" (Trends and drivers of change in the European automotive industry: Mapping report, 2004, p.10) Environment protection has been given maximum priority by the EU. Since automobiles are believed to be one of the prominent contributors for environment pollution, EU has adopted strict rules in this regard in order to safeguard the environment. Petroleum processing and the extensive automobiles usages are the main reasons for the rise in atmospheric temperature by the CO2 like toxic gases, liberated through the usage of automobiles and its fuel processing. Recycling legislation in EU specifies the strategies which should be adopted by the member countries, once the vehicles expires its life. Member States must set legislation increasing re-use, recycling and other forms of recovery of 'end-of-life vehicles' (ELVs) and components, and phase out certain hazardous substances by 2007. About 25% of each ELV currently goes into landfills; the target is to reduce this to below 5% by 2015. (Trends and drivers of change in the European automotive industry: Mapping report, 2004, p.10) Recycling of the exhausted vehicle is a big problems facing by most of the countries. The automobile batteries which contain lead cannot be disposed without taking proper care because of the severe problems lead can create to the environment. EU has instructed all its automobile manufacturers to take back the exhausted or expired vehicles from the customers for recycling in order to avoid problems for the automobile users in disposing it safely. Influence of Single European Market on Automotive Industry The main objective of European Union (EU) when it was first constituted as European Economic Community (EEC) was to make war impossible in Europe to by developing both a common system of law and making member state economies completely interdependent. This has been encouraged by a single market, single currency (Euro) and single monetary policies by member states (European single market, 2008) It was an established fact that unhealthy competition or clashes between two persons of the same family will be advantages to the enemies. The above fact has been realized well by EU and its member countries which resulted in the formation of EEC initially and EU later. If France and Germany or Italy and Netherlands clash for supremacy in this region, the result will be beneficial to other countries rather than the EU countries. On the other hand collective strength will effectively make the EU countries more stable and their economies will be boosted because of the free movements of goods and people between these countries. The concept of single market rest on four pillars; free movement of goods, persons, services and capital between member states; approximation of relevant laws, regulations and administrative positions between member states; EU wide competition policy administered by the commission and a system of common economic tariffs (European single market, 2008) Most of the European countries have similar culture and customs. Their social life and traits are almost similar and it is easy for the EU to integrate them under a common umbrella. Unification of civil and criminal laws along with other approximation of laws will help the EU member states immensely in strengthening the ties between them. Common economic tariffs will ensure the smooth passage of goods between these countries which is essential for the economic growth. "The European Commission estimates that the removal of national trade barriers has generated an additional 800 billion Euros in wealth for EU consumers--of which there are now over 458 million--and 2.5 million new jobs for Europe. Consumers have benefited from lower prices, higher quality goods, and a wider array of goods from which to choose" (Kurt, 2009) trade barrier removal has affected the EU society in two ways. The consumers and the unemployed people has benefitted immensely because of the EU integration. The skilled man power shortage is a major problem faced by most of the EU countries. The relaxation of rules with respect to the immigration and travel of people between EU countries has increased the suitable manpower availability across the region which resulted in reducing unemployment. The liberalization of air travel and utility markets has drastically reduced costs for consumers. The unified economic tariffs and the smooth movement of goods across the region resulted in reduction of prices and the consumers were able to get better quality products for cheaper prices. Even though the integration of EU countries has resulted in achieving lot of benefits to the European people, it has got certain disadvantages as well. The current economic crisis was a totally unexpected one for most of the countries and the crisis seems to be having more depth than anticipated. The national industries which were protected earlier before the integration process became unprotected because of the integration of the European region. Disputes began to occur here and there. A landmark case occurred in 2007, when the European Court of Justice--the highest court of the EU--ruled against the so-called "VW Law," a German law protecting Volkswagen from hostile takeovers. Since then, against the wishes of German labour unions and German politicians, Porsche has taken control of Volkswagen, purchasing over 50 percent of the German company's shares. Despite possible costs to parts of the German labour market and the imminent loss of German ownership in one of its key automotive manufacturers, the court nonetheless struck down the law, upholding the hegemony of the four freedoms--in this particular case, that of free movement of capital--and protecting the single market ideal. (Kurt, 2009) The global recess in economy has created lot of suspicions in the minds of EU states with respect to the EU's abilities in countering the threats. Some of the presidents of the member states has already announced some independent measures in order to counter the economic problems rather than the collective measures. For example, In February 2009, French President Nicholas Sarkozy expressed in an interview that he desired French automakers to build factories at home rather than abroad, singling out the Czech Republic as a foreign destination for the auto makers and their factories. (Kurt, 2009) Protection of one country's interest may not be always beneficial to other countries. It is not possible for France to open their manufacturing units in other countries in the name of EU integration alone by completely avoiding the interests of France. It is illogical for the French auto manufacturers to take heavy bailout packages form the French government and start their plants in another country even if it is a member country of EU. "Italy, too, has implemented protectionist conditions on its aid policies, promising 1.7 billion Euros to bolster its auto industry but requiring that plants remain in Italy. As is clear from the protectionist stipulations included in the French and Italian aid packages, Eastern Europe, a source of cheap labor for many companies based in Western Europe, is likely to suffer as a result of protectionist impulses in Europe" (Kurt, 2009) Opportunities and threats for Automotive Industry associated with the enlargement of the European Union "In 2007 the EU imported motor vehicles from the rest of the world with a value of more than ' 39 billion. Exports during the same time period were roughly double that amount: ' 79.9 billion" (THE AUTOMOTIVE SECTOR, 2009) The above figures clearly shows the volume of automotive business in Europe. The substantial figures of import of vehicles shows that the European people are still interested in vehicles manufactured outside of the European region because of the enhanced quality. So, the automotive industry in Europe still has much scope for improvements so that the import figures can be reduced considerably. "European new passenger car registrations fell by 7.8% to 14,712,158 units in 2008, recording the sharpest decline since 1993" (THE AUTOMOTIVE SECTOR, 2009) This is because of the global financial crisis which started in 2008. Most of the economists believe that the current crisis may last for two more years and thereafter the global economy will be back on track. In America, President Obama already put forwarded the proposal of making environment friendly fuel efficient cars for the future. "The Obama plan adds another $600 to the price of a vehicle, a senior administration official said, bringing the total cost to $1,300 by 2016" (Obama unveils mpg rule, gets broad support, 2009) EU also should think in terms of such modern cars in order to reduce the problems caused by the environment pollution and also the energy crisis. Experts believe that most of the oil producing countries already crossed their peak oil state (Peak oil is the oil produced at a time when the maximum oil production occurs globally. After the peak has reached the production may reach terminal decline). "Of the 65 largest oil producing countries in the world, up to 54 have passed their peak of production and are now in decline, including the USA in 1970, Indonesia in 1997, Australia in 2000, the UK in 1999, Norway in 2001, and Mexico in 2004" (Anderson, 2009) The current oil resources may last for maximum 40 more years and thereafter we have to find out new energy sources for the vehicles. Rapid changes in technology are forecast for the auto industry over the next 10 years. (THE AUTOMOTIVE SECTOR, 2009) As mentioned above because of the oil shortage and the increased environment pollution, automobiles cannot operate for a longer period as it does now. The changing trends of consumers based on the technological developments made it impossible for the car manufacturers to stick with their old model cars. New technologies and innovations must be incorporated in automobile industry in order to sustain it for a longer period. Though the automobiles started as a mechanical device, at present lot of electric and electronic technologies have been incorporated to them in order to increase the safety standards and also to reduce the environment problems. "Further developments are expected in the areas of brake assistance, adaptive speed control and global navigation and satellite tracking systems (THE AUTOMOTIVE SECTOR, 2009) Automotive Industry strategies for Europe Political liberalization in Eastern Europe combined with the intensely competitive west Europe market in early 1990's raised the prospect of dramatic changes in the geography of European automobile production and consumption. (Sadler et al, 2009) Japanese automobile manufacturers have raised stiff challenges both to the American and European countries because of the superior automobiles manufactured by them. "Committed to defect prevention, flexible multi-specialization of the labor force and product differentiation, the "Toyota System" was a vital part of the Japanese automotive industry's strategy for penetrating world markets" (THE AUTOMOTIVE INDUSTRY, n.d, p.230) The intrusion of Japanese automobiles into the European market should be controlled effectively by raising the standards of the vehicles manufactured in EU countries, in order to stay in the market. At present Japan raises stiff challenges to both United States and the EU as far as automobile industry is concerned. The European consumer market has started to decline over a period of last five years. The current economic crisis has increased the momentum further and the consumers are almost stayed away from the market as far as possible. Automobile industry was one of the worst affected industries because of the current crisis. Average profit margins have declined from around 10% in the 1960s to less than 5% today (EMCC dossier on the European automotive industry, 2004) The future strategies must be carefully formulated in order to stay in the market and also to bring back the customers again to the market. Mergers and acquisitions seem to be future option for automotive industries in Europe. In America the proposal for the merger between GM and Chrysler is already under way. EU also should follow such methods to sustain its positions in the global automobile manufacturing segment. Throughout its history, the automobile industry has undergone mergers and acquisitions (M&As). Recent M&As in Europe include the control of Chrysler (1998) and Mitsubishi (2000) by Daimler-Benz; the purchases of Jaguar (1989), Volvo (1999) and Land Rover (2000) by Ford; and of Seat (1986) and Skoda (1990) by Volkswagen, plus the alliance between Renault and Nissan (1999) (Trends and drivers of change in the European automotive industry: Mapping report, 2004, p.6) Conclusions Automotive industry in Europe account for the second highest, after Asia Pacific region, as far as automobile manufacturing is concerned. The single market, single currency system adopted by EU resulted in reducing the unemployment problem in this region along with ensuring quality products at affordable prices to the consumers. The smooth passage of goods and manpower between these EU states has immensely contributed to the integration and economic development of this region. But the current economic crisis was a major setback to the integration process of European Union States some of their member countries have taken independent step to counter the problems rather than going for the collective measures. France and Italy have already asked the auto manufacturers to start their new production units in their home country alone in order to avail the heavy bailout packages for them. Japanese automobile manufacturers are raising stiff challenges, not only to United States, but for the EU States as well. Mergers and Acquisition are some of the strategies adopted by major automobile manufacturers in order to stay in the market. The current economic crisis may last for two more years as per economic pundits and thereafter the global economy may be back in its growing phase. EU States should formulate strategies for exploiting the current and future opportunities collectively in automobile industry rather than individually in order to achieve the true integration process of the EU region. References 1. THE AUTOMOTIVE SECTOR, (2009), Retrieved on July 26, 2009 from http://ec.europa.eu/enterprise/automotive/pagesbackground/sectoralanalysis/index.htm 2. Country Industry Forecast - European Union Automotive Industry, (2004), Retrieved on July 26, 2009 from http://www.frost.com/prod/servlet/report-brochure.pag'id=4528-02-00-00-00 3. EMCC dossier on the European automotive industry, (2004), Retrieved on July 26, 2009 from http://www.eurofound.europa.eu/emcc/content/source/eu04017a.htm'p1=ef_publication&p2=null 4. Trends and drivers of change in the European automotive industry: Mapping report, (2004), European Foundation for the Improvement of Living and Working Conditions, Retrieved on July 26, 2009 from http://www.eurofound.europa.eu/emcc/publications/2004/ef0427en.pdf 5. Wallace Helen S., Young Alasdair R., (1997) Participation and policy-making in the European Union, Clarendon press Oxford, Retrieved on July 26, 2009 from http://books.google.com/books'hl=en&lr=&id=ZXVZGIbQ6jMC&oi=fnd&pg=PR9&dq=Influence+of+EU%E2%80%99s+policies+on+Automotive+Industry&ots=qrZAI2-p32&sig=d5USD_cnv-fVomWwOR4omAf0up0 5. European single market, (2008) Retrieved on July 26, 2009 from http://www.politics.co.uk/briefings-guides/issue-briefs/foreign-policy/european-single-market-$366685.htm 6. Kurt, Tsuo, (2009), Unity under siege: the European Single Market after the financial Crisis, Retrieved on July 26, 2009 from http://www.entrepreneur.com/tradejournals/article/200271855.html 7. Anderson, Bart, (2009), Peak Oil Primer, Retrieved on 26 July 2009 from http://www.energybulletin.net/primer.php 8. Obama unveils mpg rule, gets broad support, MSNBC.com. (2009),. Retrieved July 26, 2009 from http://www.msnbc.msn.com/id/30810514// 9. Sadler David, Swain Adam and Hudson Ray (2009), Retrieved July 26, 2009 from http://www.jstor.org/pss/20003340 10. THE AUTOMOTIVE INDUSTRY, (n.d) Retrieved July 26, 2009 from http://www.eclac.org/publicaciones/xml/2/4262/Chap4-IN98.PDF Read More