Business Opportunities and Threats for Bavarian Motor Works - Case Study Example

Individual Report REPORT ON BUSINESS OPPORTUNITIES AND THREATS FOR BAVARIAN MOTOR WORKS (BMW) IN THE EUROPEAN UNION SINGLE MARKET’S AUTOMOTIVE INDUSTRY Table of Contents Executive Summary 4 Introduction 5 European Union Business Environment Overview 5 Opportunities 7 Threats 9 Conclusion 11 Appendices 12 References 14 Executive Summary This report is based on a research whose objective was to analyse business operations in the European Union’s single market. For the automotive industry, the enlargement of the European Union and creation of a single market presents both opportunities and threats. Legislation and regulations have been put in place to remove or reduce trade barriers between member states and enhance cooperation between them. Bavarian Motor Works (BMW), the German car manufacturer, was the subject of the analysis with focus on how business for the reputable firm will be affected by the growth of the EU. This was further aided by a comparison with competitors in the industry and how their positioning either presents threats or opportunities. The comparisons show that BMW is well placed to take advantage of the key purpose of the existence of the single market, which is for the benefit of the half-a-billion European Union citizens. The key opportunities are seen in the need for clean energy and removal of tariffs while threats are in the form of pricing, substitutes and new entrants. It is concluded that although threats occur, BMW has significant growth opportunities in the European Union’s single market. Individual Report Introduction The single European market (SEM) is a trade bloc composed of European Union (EU) member states with the objectives of simplifying the existing rules of trade through the bringing down of barriers. The ultimate benefits are targeted at the over 500 million people and 21 million businesses of the 28 countries of the EU. It is founded on four strategic freedoms which include the free movement of labour (people), capital, goods and services between all the member states (Europe Economics 2013, p. 8). On the other hand, the Bavarian Motor Works (BMW), founded in 1916 and headquartered in Munich, Germany, is one of the largest companies in the EU and also among the leaders in the automotive industry (Kiley 2004, p. 21). The company still builds slightly over 50% of its products in Germany, but is also significantly present in the rest of the EU, which is supported by the fact that the largest export product in Germany is cars. This report on BMW will focus on the analysis of the business opportunities and threats in the context of the enlargement of the EU, which indicates that the company stands to gain significantly. European Union Business Environment Overview Before presenting the report on BMW, it is imperative to briefly describe the EU business environment and how it is affected by the EU laws, treaties and policies, since the report will be based on the EU’s enlargement. Presently, the EU is 24% of the world output, calculated in US dollars, purchasing power parity (Europe Economics 2013, p. 71). The SEM is and continues to be integrated by elimination of internal tariffs and implementing common external tariffs, creating a trading relationship that extends common interests to member states. The essence of the single market is that labour, capital, goods and services may move between member states as freely as they do within them (Berry & Hargreaves 2007, p. 83). It is established that the laws, treaties and policies made by EU member states have contributed towards a more accessible and efficient business environment in the bloc, making its competitiveness as an entity more attractive. Through the single market, the freedom of citizens to choose where to work or live has increased and they may seek employment in any member state. Likewise, businesses can also seek professionals across the EU. Consumers are also presented with a wider selection of better quality products at lower prices. The SEM has also simplified processes of setting up or expanding business across borders that were previously long and complex. This is by eliminating bureaucracy at border points, which means the political environment is conducive for foreign businesses among member states. By enhancing the SEM and thus enlarging the EU, businesses gain by increased trade volumes due to the absence of both tariff and nontariff barriers (Europe Economics 2013, p. 14). Increased trade implies more foreign competitive pressure and eventual price decreases, which is beneficial to consumers, and forcing competitors to innovate allocative and technical efficiency, both between and within companies. However, costs of enhancing the SEM include loss of trade diversion, loss of democracy or sovereignty and subsidiarity costs. Basing on the above overview, BMW strongly supports free trade and the concept of liberalising global trade further and expects existing trade barriers to be removed. Germany is a high-cost nation with limited resources, and BMW can only survive and grow in the downturn experienced in the EU automotive industry for the past few decades through getting more flexible in the bloc (Ewing 2012, p.1). The survey that informed this report established that the enlargement of the EU is the only way the flexibility necessary for growth can be achieved. The single market policies will allow BMW to operate within the member states and avail opportunities for the company to grow as it possibly can and wishes. However, there is always business uncertainty caused by changes in trade policies as is the case with the business environment in the EU, making it difficult to foresee external factors, which are opportunities and threats that may affect business strategies (Kotler, Keller & Hansen 2009, p. 74). However, BMW is among the key manufacturers of cars in the supercar and premium sectors, with a strong and reputable brand image. This presents it with a competitive advantage that has enabled it to record significant sales within the EU. Opportunities The key opportunities for BMW lie in the advent of vehicles powered by renewable energy as well as the weaknesses of a number of its major competitors. Then there is also the aspect of reduced taxes and removal of tariffs within the EU. It is also worth noting that apart from sales, BMW has not spread manufacturing plant plants within the EU, with the exception of the UK. BMW has increased its expenditure on research and development to be able to establish the viability of battery-powered as well as hybrid electric vehicles (HEVs) (Ewing 2012, p.1). Although the management at BMW is aware that HEVs will not sell in the same quantities as conventionally-powered vehicles immediately, it is a strategic move because that technology will definitely materialise. Hence, this presents the best opportunity for the company to be there when the technology is fully effective and in use, since only a few competitors, most notably Audi, are eyeing the market as ambitiously as BMW. This opportunity is made more viable by the insistence of the EU on clean energy and reduced greenhouse emissions. Further, as consumers become more aware of the need for the conservation of resources as well as legislation to curb global warming, they will most likely be motivated to accept HEVs. Another concern that presents an opportunity to BMW to develop and HEVs is the already high and increasing cost of fossil fuel. This supports the need to find alternative and affordable ways of propulsion. In so doing, BMW will be able to tap into the preferences by consumers for products that offer optimum cost of ownership and meet regulatory requirements environmentally. It was also established that BMW is one of the few businesses with enough extra resources, financially or otherwise, to diversify into new products, which further supports this opportunity. This will potentially enable the manufacturer to experience steady sales growth within few years, as it will always be able to respond to any attacks directed at them by the competition with increased level of innovation and technology as characterized by its investment in research and development. Both Peugeot Citroen and Audi have suffered significant recalls of their products at a point in time over the last 5 years, which were significantly publicised (Cadle, Paul & Turner 2011, p. 111). From the perspective of analysts as well as the targeted market, this is an indication of poor control, or the lack of it, over the quality of products and parts as well as service. Over the same period, there has not been a single incident of product recall at BMW, which can potentially boost sales. This translates directly into a large market share in revenue terms that will, eventually, enable BMW to compete with other significant players. Being one of the industry’s largest corporation, it rides on a reputation that has not been tainted by poor workmanship in its almost-a-century of existence. Most of BMW’s competitors in the EU largely target a specific and limited market (Kotler, Keller & Hansen 2009, p. 98). On the other hand, although BMW’s reputation is built on luxury cars, it also produces cars and other products for a diverse market. For example, the MINI does not necessarily target the high end market but given the opportunity of BMW, it is readily accepted as a reputable and reliable car. Further, BMW also one of the best motorcycle producers in the region, which means it has better opportunities to establish a market share through different products. Because manufacturing or assembly of vehicles will be moved to the particular member state of the target market, this presents a growth opportunity fueled by satisfying social factors. Taking these operations close to the people and employing a local workforce, BMW will be able to appeal to the local communities. For strategic purposes, the top management can be recruited from any member state depending on skills and experience, but majority of the production staff can be made up of local residents. Threats The main threats are in the form of product prices by BMW, threats of substitutes, threats of new entrants and the EU regulation and requirements relating to global warming. Within the EU, BMW is known as a luxurious and powerful brand and positioned in the range of exclusive vehicles. However, the industry is highly competitive, with the key competition coming from, Porsche, Daimler AG and Audi. This places the company firmly in the path of threats from substitutes. Although on a recovery path, the recently witnessed recessions in Europe and many other regions led to a sharp decline in the demand for vehicles, and especially luxury ones. As a car manufacturer, BMW is therefore exposed to fixed labor costs that are relatively high (Pavelec 2007, p. 114). This also means that the company’s ability to close down facilities in order to reduce fixed costs may potentially be limited. Further, sales strategies that offer price reductions, subsidised leasing and financing plans by competitors within the EU can impact on the company’s capacity to maintain its profit-making ability, both in terms of market share and per vehicle. Essentially, this affords the buyers a high bargaining power that may either force the manufacturer to reduce prices or risk losing market share to substitute products and competitors. BMW’s products are high on the cost table, and competitors usually take advantage of this. BMW may be viewed as a manufacturer capable of affording exorbitant research and development programs, but the numerous environmental requirements (see appendices) and measures within the EU may push that ability to the limit (Cadle, Paul & Turner 2011, p. 109). This is in view that in the EU bloc, BMW is up against other formidable competitors such as Renault, Porsche, Audi, Peugeot Citroen and Daimler AG, all of which are capable of creating other competitive advantages. This is after regulations by the EU were introduced affecting a broad scope of more stringent requirements, specifically related to diesel technology. Generally, the laws and regulations were founded on environmental norms that all car manufacturers were expected to fulfil in order to operate in the region. Therefore, this is a possible threat that does not necessarily come from direct competitors but rather, policy. In this perspective, political factors that will most likely affect BMW’s trading in the bloc include laws and regulations of individual members, especially relating to environmental issues associated with manufacturing; and the introduction of new schemes in the European automotive industry that favor production of high mileage vehicles. It is legally required that diesel technology alters sufficiently to accommodate for Biofuels. It is also required that by 2015, emissions of carbon dioxide be reduced in new cars to not more than 130 grams for every kilometer (Europe Economics 2013, p. 14). So far, only Audi is close to achieving the requirements fully, which means it is threatening to edge out BMW. With the opening up of the market in the EU, BMW will definitely not be the only manufacturer to take advantage of the favorable marketing conditions. This means there will also be the threat of new entrants into the market. It may be difficult for new entrants to set up assembly or manufacturing plants and build a reputation, but so long as they target a certain market and offer enough incentives, they stand significant chances of gaining market share. Conclusion It can be concluded that although BMW faces threats in venturing into the expanding EU, the policies put in place by the union present more opportunities for growth. This is further enhanced by the fact that BMW does not require to build reputation and it is also financially capable to venture into new markets. The key threats are presented by substitute products, the high prices of BMW’s products, strict regulatory measures, especially environmental ones, and other equally established and reputable competitors. Opportunities can be seen in the fact that the firm will have the chance to expand its market share, it will take advantage of the concept of clean and renewable energy as required by the EU and will be supported by the elimination of tariffs within the EU bloc. Appendices Appendix 1: Environmental regulations favourable for the automotive industry introduced between 1933 and 2011 2003 - 2011 197 1993 - 2002 51 1983 - 1992 31 1973 - 1982 14 1963 - 1972 17 1953 - 1962 4 1943 - 1952 1 1933 - 1942 2 Total 317 Total (pre 1973) 25 Total (post 1973) 292 Source: (Europe Economics 2013, p. 76). Appendix 2: GDP at purchasing power parity, 1990-2016 in US dollars. Source: (Europe Economics 2013, p. 71) The table below shows the possible benefits of four phases of economic integration. The vertical axis represents benefits and the horizontal axis represents integration. Key - CU: Custom Union, NTB: non-tariff barriers, SM: Single market, TH: total harmonization. Source: (Europe Economics 2013, p. 23) The table shows that the EU has better hourly wage dispersion than individual countries. Source: (Europe Economics 2013, p. 39) The table below shows labour productivity in the EU, which includes statistics from the automotive industry, as an indication of opportunities. Source: (Europe Economics 2013, p. 41) References Berry, E & Hargreaves, S 2007, European Union law, Oxford University Press, London. Cadle, J, Paul, D & Turner, P 2011, Business analysis techniques, The Chartered Institute for IT, London. Europe Economics, 2013, Optimal integration in the single market: a synoptic review, Europe Economics, London. Ewing, J 2012, As BMW is put to the test, its plans are years ahead, viewed 6 November 2014, http://www.nytimes.com/2012/11/23/business/global/bmw-chief-faces-big-test-of-his-strategy.html?pagewanted=all&_r=0 Kiley, D 2004, Driven: BMW, the most admired car company in the world, Wiley, New York. Kotler, P, Keller, K & Hansen, T 2009, Marketing management, Pearson, London. Pavelec, S 2007, The jet race and the second world war, Greenwood, California. Read More