The Future of the US Car Industry - Case Study Example

The Future of Car Industry The global economy was drastically affected due to the recent credit crisis which engulfed the whole world into its gamutof realty losses creating vacuum in the market by forcing the, once upon a time leaders of the industry, banks like Lehmann Brothers, Merrill Lynch, AIG, RBS and many others either to file for bankruptcy or enter into M&A with other companies. The affects widened into IT sector and other business including automotive industry where employees were laid off as cost cutting strategy. It is reported that US automotive industry had laid almost 90,000 workers in the year 2007 and according to Challenger Gray and Christmas, plant closures by Ford and General Motors will ripple through the economy possibly resulting in more job cuts in the coming year. (www.allbusiness.com) The world economic crisis has hit the car industry with real intensity forcing the major car companies to adopt strategies of short time working, redundancies or closures. (www.fifthinternational.org) The automotive sector is one of the largest and most multinational of all industries which is the key indicator for economic growth in regard to GDP of many countries. The car industry is important in view of its employee strength, its contribution to countries development, assets and total sales which can be known from the fact that in the year 1999, four of the top ten companies in the world included General Motors, Ford, Toyota, and Chrysler.(www.eurofound.europa.eu) The Koontz, H and Weihrich, H. (2006) stated that car industry may be indicative of how many industries become globalized making it difficult to predict the future. It is further stated that countries such as China and India will be the drivers not only of economic growth in general and car industry in particular. The Economic Intelligence Unit had predicted that 40% of the car sales will be in Asia by 2020. Jian Suan (2006) stated that in early 2000s China was a dream market for many multinational auto companies with only 24 cars per 1000 residents as compared to 700 cars per 1000 residents in United States and worldwide average of 120 cars, the China market was widely regarded as the largest growth opportunity. China reported an increase of 6% in global auto market from 4% in the year 2001 to 10% in ranked equally with Japan which reported a decrease of 1%. Carlos Gomes (2010) reported that global car sales continued to gain momentum with more than double of sales taking place in China, the world’s largest auto market. The auto sales in United States too reported an increase to annual sales of 10.8 million units from 10.4 million units in 2009. Even North American recorded a double digit growth where its automakers performed better lifting the shares of automakers from 41.2% in August 2009 to 45.6% in January 2010. As per Global Auto Report 2010, it is indicated that total car sales worldwide had increased considerably from 1990s to 2008 starting from 39.20 million units to 52.17 million units respectively. However there was slight decline in the year 2009 with car sales dipping to 50.91 million units. During the year 2009, the major decline in car sales was in North America, Eastern Europe whereas the sales in Asian market was driven by developing economies like China and India contributing 17.68 million units to the consumers. However China was the major market with 7.31 million units in Asia and United States with 10.40 million units in North America, through reported a declining growth in sales as compared to 13.19 million units in 2008 (Carlos Gomes, 2010). In regard to the United Kingdom, it was recorded in the Parliament: House of Commons (2006) that about 1.5 million passenger cars are produced every year and about 2.4 million cars are sold in the UK. Further it is also recorded that more than 70% of cars produced in UK are exported whereas the 80% of cars sold are imported which reveals that the UK factories are heavily dependent of overseas markets. The Global Auto Report, in its report, predicted total sales of 53.35 million units in the year 2010 as against 50.91 million car units in 2009. The report also states that major car sales will be driven in Asian countries contributing nearly 37% of the total sales followed by North America (26%) and Western Europe (23%) which indicates that Asian markets will dominate the world auto sales. Though the report indicates a significant increase in the car sales, markets in some countries are likely to take a dip due to economic and demographic constraints. It is further reported Canadian car and light truck purchases remained above with 19% increase and seasonal adjusted purchases annualized the 1.45 million units in January as compared to 1.49 million in 2009 which was driven by double digit declines in several imported brands (Carlos Gomes, 2010). As per the data published in Worldometer, the production of cars has been increasing significantly year on year till 2007 and there was a gradual increase in the year 2008 which may be attributed to global recession. The car production during 2008 came down to 52.9 million from 54.9 million in 2007. The European Automobile Manufacturers Association revealed data pertaining to major car producing countries which shows that EU nations lead the race with 33% of car production, followed by 20% from Japan and 10% from China. The report shows that most of the car sales have taken place in Asia which is turning out to be a major hub for car industry followed by European countries. Strengths Weaknesses Core business Global market opportunities Strategic business plans Leadership role Excellent growth rate once recession is over Highly competitive Many automobile companies have been overtaken by competition and folded Asian players are more competitive Saturated US markets Low growth rate Opportunities Threats Needs to hibernate till economic climate improve Strategic partnerships could be productive Innovation in car making could be an effective tool Innovative designing and good investments needed Asian markets in India, China are growing rapidly Fuel and energy prices impacts adversely on business Need to adapt to global cultures Trends are for smaller cars production needs to be overhauled – investments Technological changes may affect business. SWOT ANALSIS OF FORD Impact/Uncertainty Model: The car industry in the US is still in a state of doldrums. The adverse recessionary trends in the economy have affected the second largest consumer asset, after housing in a big way. For one thing, the liquidation of some large automakers in the country has lowered confidence levels for consumers. For another, credit has become dearer, forcing consumers to seek other options rather than car loans to buy, or transact in car deals. With dearer credit and companies unwilling to enter into fresh car loan deals, most consumers have shelved their desires for buying automobiles at present. Another important aspect has been uncertainties in US fuel prices. The fuel economy policies would take few years to produce desired results and tampering with them for short term gains would not be a judicious decision. Besides, fuel economy which is also a critical aspect needs to be gained, preferably by use of smaller cars having more fuel efficiencies and lesser effluents. In the US context, the preference has been for bigger, wide bodied cars and a shift in technological design seems now imperative, not only from economy but also by way of environment pollution concerns It is now necessary to consider four scenarios: The General Motors Story: GM commenced operations during 1908 and had survived the onslaughts of market effects of two world wars with aplomb. By the middle of the century it had captured a large market and nearly 60% of all US car makes and 50% global cars had GM stamped on them. But technology complacency and obduracy in not changing marketing and product strategies soon brought it to low ebb, and by the end of the 21 st Century, it was outplay by its nearest rival Ford Motors. What followed is known to all GM watchers. Financial constraints, market reversions, strong completion from global rival like Toyota – with brands like Camry and Lexus soon witnessed the doom of this great US automaker giant, mainly debts owing to them which they could not collect and owed to others which they could not pay, despite a government bailout package. The Chrysler Story: This has more or less been on the same lines of GM, perhaps a more emphatic liquidation filed under Chapter 11. Financial debts that remained even with a $25 billion government rescue package. It is however, believed that Chrysler would re-emerge stronger after the liquidation with more concerns about modern state-of-the-art production of cars to suit nano-technology markets. The Toyota story : Kiichiro Toyota has first developed the prototype of A1 model of commercial vehicle way back in 1935. That began the success story of a great automaker called Toyota. It has not looked back since then and has carved a niche of its own despite cutthroat global competition. Toyota’s success could be rightly pined on one aspect- quality in all aspects of automaking which has endured and sustained its success over its productive corporate lifetime. It rightly takes pride over a wide range of cars- Camry, Land Cruisers and a host of other popular and best seller models. The Ford Story: Ford is one of the largest automakers in the United States and its lineage of fuel efficient vehicles always keeps it in the limelight despite the string of competitors behind it. Its main achievements have been in terms of quality leadership in critical areas of fuel efficiency, safety and hazard free driving and innovative practices in designing, style and features. Today Ford commands nearly 17% of the US market share in all kinds of vehicle, for personal, commercial or industrial usage. BBC News (May 2009) reported that global car industry is in crisis with major car manufacturing leaders reporting negative growth in their financial statements. Toyota with sales of 8.97 million units for the year 2008 has reported loss of $-4.4 billion, Nissan reported $-2.3 billion loss in the same year with sales of 3.2 million unit. General Motors led the race with 8.35 million sales reporting loss of $-30.9 billion forcing the company to file for bankruptcy. (http://news.bbc.co.uk) The car industries in coming years will have to comply with policies regarding environmental issues like reduction in greenhouse gases as adopted in Kyoto Protocol by the EU Nations. The EU Commissions and car manufacturers in Europe, Japan and Korea have voluntarily entered into an agreement to reduce the carbon emissions of cars by 25% between 1995 and 2008-09 and further reduce to 120g/km by 2012. The rise in fuel prices has also been one of the major concerns recently forcing the car manufacturers to look for alternative source of energy like electrically powered vehicles and hybrid vehicles.(www.eurofound.europa.eu) The recent trends in sales of cars in European nations, the United States and the United Kingdom reveal that sales in cars is declining as compared to that of previous year whereas sales in Asian markets are increasing rapidly, thanks to the fast paced economic development in developing countries like China and India. As stated earlier by Jian Suan (2006) China is regarded as dream market for most of the multinational car manufacturing companies with promising future in the country with only 24 cars per 1000 residents making China and other Asian countries the most sought after destination to sell the cars. According to data released by China Association of Automobile Manufacturers (CAAM), it is shown that sales of passenger’s cars in China rose to 55.3 percent as compared to previous year. (www.just-auto.com) It is also pertinent to mention that car consumers in China created huge opportunities and problems by becoming the largest importer of petroleum products giving impetus to foreign countries to establish their plants in China to produce cars for domestic as well as international purpose which is also supported by low cost labor. India has also reported significant growth in its automotive sector with Indian car manufacturer Tata Motors launching no-frills car called Nano at low price equaling $2500 US dollars.( www.plunkettresearch.com) India is planned to become the third largest car market in the world after US and China as major companies are looking towards opening their plant. (www.articlesbase.com) The increasing trend of population growth in Asian countries like India and China is also favorable for the companies intending to expand their companies. Apart from the growing population, the markets are growing quickly resulting in increased wealth and the number of families that can afford car is increasing. (Mark Bursa, 2010) Thus it is assumed that most of the car industries will turn towards Asian market which is mostly driven by China, Japan and India duly supported by its increasing population. However, the influxes of new companies like Toyota, General Motors and Volkswagen in India clarifies the above assumptions. The future cars will also be changed suiting to the environmental needs as adopted by various conventions forcing the companies to produce cars with certain modifications and implications and according to the specifications of the government. References 1. A big year for auto industry layoffs, Manufacturing & Technology News, March 2007, All Business. http://www.allbusiness.com/manufacturing/3895023-1.html 2. Carlos Gomes (2010) Global Auto Report, Global Economic Research, February 26, 2010. Scoitabank Group. http://www.scotiacapital.com 3. China: Car market surges 55% in February. March 9, 2010, Just Auto, http://www.just-auto.com 4. Great Britain: Parliament: House of Commons: Trade and Industry Committee (2007) Success and failure in the UK car manufacturing industry: fourth report of session 2006-07, report, together with formal minutes, oral and written evidence, The Stationery Office, United Kingdom, p.14 5. Indian Car Industry – Glimpse of Past, Present and Future, Articles Base, http://www.articlesbase.com 6. Jian Suan (2006) China: The Next Global Auto Power? Far Eastern Economic Review, Vol.169, No. 2, DowJones, Hong Kong.P. 37-41 7. Koontz, Harold and Weihrich, Heinz (2006) Essentials of Management, Ed. 7, Tata McGrawHill, United States, p.443 8. Mark Bursa (2010) Research Analysis: China’s recession – defying automotive market, March 11, 2010, Just Auto, http://www.just-auto.com 9. Plunkett Research Ltd, Automobile Industry, www.plunkettresearch.com 10. Sector Futures, The automotive sector at crossroads, European Foundation for the Improvement of Living and Working Conditions, 2004. www.eurofound.europa.eu 11. Sector Futures, The automotive sector at crossroads, European Foundation for the Improvement of Living and Working Conditions, 2004. www.eurofound.europa.eu 12. The crisis in the global car industry: imperialism, monopoly and resistance, 5th League for the Fifth International, http://www.fifthinternational.org 13. The Global Car Industry in Crisis, BBC News, May 29, 2009. http://news.bbc.co.uk 14. Worldometers. Car Statistics www.worldometers.info/cars Read More