The Car Industry in the 1990s - Essay Example

Introduction The car industry enjoyed its glorious years in the 1990’s with its unprecedented expansion and soaring sales especially in the developedcountries. However, after that decade, the industry has matured and has seen deteriorating sales (Humprey, 2003, p 2). “But while mergers, spin-offs, consolidations, and record sales volume over the last five years have created unprecedented size, they have not created a sustainable model for long-term shareholder value” (Blake et al, 2003). In the face of the recent economic downturn and the other challenges that the industry faces, the remaining question is, what is the outlook for this industry? PEST Analysis Political The political factors that affect cars and car manufacturing have become one of the major impacts on the industry. Government laws and regulations had been continuously set in place as compelled by increasing concerns for the safety of the consumers and users as well as for the protection of the environment. Because of consumers’ clamour, almost every concern that cropped up over the years that relates to car, there is a corresponding bill that is passed or a regulation that is being enforced. This includes not just safety issues but also economic concerns such as the rising cost of petroleum or environmental alarm like gas emissions. Taxes, duties and subsidies also play a major part in the factors that exert themselves on the car manufacturers and the industry in general (Highfill et al, 2004). Economic The huge impact of the auto industry to the country’s economy cannot be ignored. A study revealed that the industry supports other jobs in other industries (Gale, 2004 as cited by Highfill et al, 2004). However, the industry itself is faced with so many economic challenges. At present, even if the European market could increase or decrease depending on the specific economic climate, the scenario of over capacity if the market demand is low is always a real threat. The entry also of imports is a concern to the European based car manufacturers. This is especially so because of price competition which is the prevailing competitive advantage of imports (Trends and drivers of change). The economic downturn had been one of the greatest influences in the economic aspect of this industry. A research from Uswitch.com, an independent price comparison and switching service reported in 2008 that 77% of the motorists put a halt to their plans of acquiring a new car (Ganly, 2008). The economic aspect of the automobile industry is largely affected by oil prices also. Thus, it is a very important factor in the demand for cars. An increase in prices might put a brake in their sales potential while the reverse could boost the demand for the product. (Sector futures, 2004, p2). SocioCultural The market has been consumer driven in recent years. Manufacturers would tend to look for specific consumer’s preference and pattern their strategies accordingly. Compared to the other regions, European consumers prefer novelty than practical necessity. They are more into luxury, sports and racing cars (Trends and drivers of change). Another major feature of sociocultural pertains to the rising clamour for fuel-efficient vehicles in the face of rising oil prices and mounting concern about the role of gas emissions in the talks about climate change and environmental conservation and protection (Highfill et al, 2004). Technological As the recent rapid developments in information and communications technology (ICT) have become the cornerstone of most industries technological aspects, the car industry is no exception. Many features had been added to satisfy the expectations of the consumer. These include innovations in safety precautions and environmental concerns such as cleaner and more fuel efficient vehicles and the potentials of alternative sources of fuel (Balancing conflicting pressures, p 5-6). The different challenges on economic and environmental concerns also pushed the manufacturers towards development of hybrid cars or the use of hydrogen fuel cells which are expected to be the cars of the future (Highfill et al, 2004; Gopal, 2006, pp 18-28). Impact/Uncertainty Model Significant Drivers for future developments Demand This is the most significant of all the factors since it dictates the expectation of sales and production. Given the recent economic downturn, demand drastically dropped and many reported that until the present, consumers have still put their brakes on car purchases (Legget, 2009; Haynes, 2010; More gloom for car industry, 2009). The demand for cars is also affected by the oil prices. Any movement, whether up or down would impact on the demand for cars. The emergence of the new technologies in cars including more fuel efficiency, use of alternative fuels, etc would also necessarily affect the demand of consumers for cars (European automobile industry report). Competition and Consolidation In the automobile industry, competition is fierce and it is governed by the loose oligopoly structure (Highfill et al, 2004). Because of this, the companies are always in search of strategies that will provide them their competitive advantage. The industry had been witness to the different strategies that manufacturers employ to tide them over the worst economic downturn that hit the industry in a long time. These include capacity reduction, restructuring, fixed cost streamlining and consolidation (An independent report on the future of the UK automotive industry, 2009, p 7). “Competition will lead to increasing consolidation within the industry, and demand will shift to developing countries where future production will be based (Scenarios for the automotive sector, 2004, p 8). Outsourcing The recent demand for cheaper cars pushed manufacturers to streamline their manufacturing units or result to outsourcing to achieve economies of scale. They opted to rely on their suppliers for parts to bring down the cost and subsequently, the prices of the cars. “The trend for outsourcing value in large modules or systems has gone further in Europe than in either Japan or the US” (Trends and drivers of change, p 3). Technology “In the automobile industry, transaction cost economics, and technology shifts determined the structure” (Sako as cited by Gopal, n.d., p 15). The advancement in technology and the corresponding legislations that demand passenger safety, environmental concerns and better features and attributes play a major role in the outlook of the car manufacturers’ future scenario. Thus, technology roadmaps both for more fuel efficient and environment friendly cars as well as for the safety of motorists and passengers are at the forefront of affecting the car industry. Legislation Stricter regulations about general and specific parts and functions of the car will exert pressure on the manufacturers as well as to the industry in general. Subsequent challenges are expected especially regarding passenger safety in the face of recent substandard equipments that forced the recall of many car models and brands. Increasing awareness on climate change, reducing carbon emissions as well as crash and noise legislation and regulation on advertisements exert pressure on the car industry (An Independent Report on the Future of the Automotive Industry in the UK, 2009, p 44). Capacity Especially with the recent economic downturn and the current problem of the market demand still not picking up, the main issue is over-capacity. In the long haul, this will take its toll in manufacturing plants as the implications are necessarily on the succeeding production. It also affects sales and pricing because demand is low but supply is high. Capacity could also be looked into as underutilized production capacity if manufacturing is forced to be cut off because of the interaction of demand, cost structure and exit barriers (Industry Analysis, p 97). Production Locations With the increasing competition and the pressure from demands of the market, it is becoming necessary for car manufacturers to streamline their operations including transferring to production locations with the most advantage. All these are done towards maintaining production level at cheaper cost than before (Humprey, 2003, p 9). New Entrants Many Asian car manufacturers are still setting their sights on the Europe market because of the ongoing interest and demand for compact cars even by the European market. The European models which for a long time boast of preference on luxury is slowly turning their preference to smaller cars because of some current concerns such as soaring oil prices and curbing of gas emissions (Industry analysis; Gopal, n.d., p 23). Four Scenarios High demand high degree of consolidation low degree of consolidation Low demand Scenario 1 – High demand and high degree of consolidation The demand for the smaller cheaper cars will drive the increase in demand for cars in general. The demand and the stiff competition forces higher degree of consolidation, both for manufacturers and suppliers as they aim for economies of scale to maintain the production levels. The high demand will increase the attractiveness of the industry and will encourage new entrants. But this will drive competition among the players further and many players in the industry will provide the consumers more choices and power. As previously observed in the market, the manufacturers will be driven towards consolidation in order to maintain their claim on their market and increase the barriers to entry. Consolidation, both with other companies or with suppliers will also improve production efficiency and lower down the cost. In a very competitive industry, this could prove to be a very good competitive advantage. Scenario 2 – High demand and low degree of consolidation This is the most beneficial scenario as the high demand fuels the production of more cars. With the market in the upswing, each manufacturer tries to maintain its market share by maintaining its production levels especially that there is less pressure on the manufacturers and the suppliers because of the high demand. With both the industry and its suppliers outlook towards expanding because of the increasing demand, the trend would be towards satisfying the need of the consumers. The organization has the capacity look into their core competencies and harness their strengths and advantages to gain market share. Scenario 3 – Low demand and low degree of consolidation This scenario is possible if the economic downturn continue to affect the sales of cars. The low demand will compel more cost saving measures and productivity improvements. This is the worst possible scenario as this will not only pull the sales and production down, it would also result to lower production and job cuts. The car manufacturers will look into their cost structures and production efficiency in order to survive. Downsizing could be an option as the organization will try to consolidate its resources and try to maintain a leaner frame to ride over the low demand and consequently low sales. The only goal for the manufacturer in this scenario is to save up its remaining force to rely on its restructuring to be able to make it through. Scenario 4 – Low demand and high degree of consolidation As manufacturers bear the brunt of over capacity as a result of the low demand, they will look into better consolidation in order to cut down the losses. The action is to avoid the risk of possible closure because of the slack in demand so companies will look into each other to get through the low demand phase. The usual solution to over capacity is pulling down the prices, offering discounts or other incentives just to encourage sales. Because of the probable loses with the price cuts, it will be imperative to seek consolidation with organizations that could easily share the burden with the company, the production capacity and even labour requirements. This will result to job losses, retrenchments and cost cutting measures but this is the way to survive the onslaught of the crisis. The lower costs as partner to low sales could keep the company afloat. Impact on BMW Impact on: Scenario 1 Scenario 2 Scenario 3 Scenario 4 Production increase increase decrease decrease Human resources possible increase increase job cuts job cuts Marketing strategy differentiation differentiation price cuts price cuts Market share increase maintain maintain increase The worst case scenario would be the low demand and low level of consolidation scenario. The problems and issues of this case come on top of one another. The low demand will result to over capacity and definitely, a decrease in production. With more cars and less buyers, the car manufacturers’ option is to offer discounts or sell the price at lower prices. The decrease in production plus the losses will compel the organization to trim off its cost structure which includes its workforce. Low level of consolidation could not provide the possible alternative of sharing costs and losses with either consolidating competitors or suppliers. The best case scenario is a high demand and high level of consolidation. As sales is up, production also increases. The expansion could either provide more jobs for new workers or greater flexibility for existing workers in cases of consolidation. This has also the potential to increase the market share especially that the organization is probably stronger and bigger because of the consolidation. Despite the stiff competition from existing players, the company could look into differentiation as a strategy because of its possible resulting strength as a competitor. Conclusion In the face of still a sluggish economy and the onslaught of challenges for technological innovation and environmental protection, the car industry is at a crossroads at this time. Looking into the future would require sound judgment and decision making in order to move forward to a favourable tomorrow for the industry. The interplay of the different factors acting on the car industry will direct its future. However, everything could take off from technological breakthroughs. The raising awareness on climate change and CO2 emissions, passenger safety, car efficiency, etc and the corresponding legislations exert pressure and force the industry to adapt to the demands and the environment rather than try to shape and forge its way through expansion of market and increase in sales. It is also limited by the unstable price of oil in the market. The risk of new entrant especially from the Asian car manufacturers is also a direct threat to the industry. There are four scenarios that could occur anytime in the future. The only way for the industry to get through the economic crunch and survive the crisis is through its strategic moves that it will undertake in anticipation or in response to the particular scenario. The decision for consolidation in the face of high or low demand could see through either the continuing implosion of the industry or the emergence of a more stable car industry with a stronger hold and a wider market reach, not just in the European landscape but in the global field as well. Bibliography An independent report on the future of the automotive industry in the UK. New automotive innovation and growth team (NAIGT). Available at www.berr.gov.uk/files/file51139.pdf. [Accessed 23 Mar 2010]. 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