Competitive Position of General Motors Europe - Case Study Example

Executive summary Due to changes in the macro-environment in Europe, the auto industry experienced upheaval. Competition was intensified due to several factors which prompted General Motors (Europe) to take initiatives. They were forced to replace their policy of mass production and tried several methods to recover like alliances and restructuring, cost reduction and layoffs. They lost their position in the auto industry as they failed to recognize the opportunities that the market presented and this allowed the Asian manufacturers to surge ahead. Finally to improve performance, they decided to integrate functions and shift production to low-cost locations. With dignity, they proposed to lay off a sizeable number of employees against incentives for early retirement. The market is sluggish and the industry is stagnant. It would still take several years for GME to recover the losses. 1. Problems and opportunities for car manufacturers in Europe during 1999 – 2004 The auto-industry in Europe experienced upheaval due to changes in the macro-environment. Europe, after the fall of Communism, was perceived as potentially medium – to long-term growth market (Financial Times, 1994b). This attracted the auto manufacturers from Asian countries who were prepared for change and could cater to this segment. The market for luxury cars had slowed down so those that entered the market with improvisations and cost-effective new models could attract the middle-segment and thus captured the market. This led to intense competition in the industry and consequently required huge investments. It became difficult to recover high costs and earn profits. This forced the automobile manufacturers to operate their plants to full capacity which proved to be a wrong strategy in due course. They followed the system of Fordism which is based on mass production and mass consumption. Lean production is based on zero buffer principle and total quality control. The over-capacity or surplus production exerted an upward pressure on costs and affected their competitiveness (The Economist, 1994). The changes in the macro-environment also caused the decline in consumer demand. Over-productivity led to blocking of capital as recession led to decreased sales. To survive the recession the automakers resorted to competitive pricing, and offering additional services. Structural overcapacity aggravated by the development of production sites in emerging markets increases competition (Tirpak & Kariozen, 2006). GM had production facilities in several emerging markets and was having surplus production. All these only intensified the competition. No improvement took place in quality and designs. There was no attention paid to the diesel models or in redesigning and restructuring the models. Because of recession and losses that automakers faced, consolidation started talking place in the industry. The European automakers lost ground to the Asian car makers who had entered the European market with better designs and enhanced features like power steering, anti-locking brakes and CD players at a much lower cost than the European car makers. They could thus increase their market share and profit margins. Other changes in the macro environment that affected the auto industry in Europe during this period were currency issues, inflexible labour laws, high insurance payments and strong unions. All these added to the problems and affected the plants of the automakers in Europe. In addition, in 2002 the European Union liberalized car dealerships. Car supermarkets only intensified the competition to the extent that the industry experienced no growth and due to competition, the companies could not even offset the costs. Amidst these problems opportunities existed which the larger manufacturers failed to recognize. Liberalization of dealerships allowed the dealers to handle more than one brand or model of a company and hence the car makers could introduce new models with enhanced features at low costs. The Asian manufacturers had capitalized on this and introduced cars for the middle segment. Lack of new designs, weak position in mid-sized-mid-market segment, high costs and over capacity were some of the reasons that led to the decline of the automotive industry in Europe. They should have searched for new sources of demand and improved relations with suppliers. By adopting the lean production technique and ‘just-in-time’ approach that Toyota follows, it would have been possible to introduce frequent changes in designs and have no surplus production. Lean production is a necessary condition for prosperity and survival in the auto industry but Rhys (2004) suggests that lean production has to be combined with appropriate scale for products that people really want. 2. Competitive position of General Motors Europe (GME) between 1999 and 2004 GME slipped from the second position to the fifth position in the auto market in a span of 5 years due to changes in the macro environment and the company not being able to respond to the challenges. Nevertheless, the company did have a competitive position which it failed to recognize. GME had production units in eight different European countries and sold its products across 45 countries in Europe. Most importantly, GM Europe operated as an independent company. The brand name was well known specially with Germany and UK being the major markets for GM products. The competitive edge could not help the company to retain profit margins and consolidation in the auto industry has been the major rule to unlocking economies of scale (Rhys, 2004). With the consolidation going on in the industry, GME too formed an alliance with Fiat SPA, an Italian manufacturer and also took over 100% ownership of Saab Automobile. Participating in strategic alliances with rivals affects the relative competitive position of the partner firms (Dussuage, Garrette, & Mitchell, 2004). This was a link alliance aimed at combining different skills and resources from each other. This strategic alliance was formed with the intention of developing new products. However, Drago (1997) contends that even though strategic alliance is a long-term, explicit contractual agreement pertaining to an exchange, alliances often fail. One of the reasons for failure is the goal incongruency in terms of the expectations of the parties to the alliance. In the case of GME, no other auto maker in Europe had such production facilities. With 20% stake in Fiat SPA, GME had ample opportunity to produce cost savings. They could not leverage the benefit or economies of scale as both SAAB and Fiat failed to meet their sales targets. This can also be attributed to the fact that mergers and acquisitions dilute the power as ownership and control of firms are shared. Research suggests that mergers and acquisitions can induce innovation which leads to higher firm and brand value (Štrach & Everett, 2006). The results have been contradictory in the case of GME. When their luxury brand markets declined, their strategic alliance with upmarket models based on mass-marketing failed to boost their premium brand – Opel’s market value. Most major multinational car manufacturers have tried to create mass-luxury cars but it invariable leads to ‘brand corrosion’, emphasize Štrach and Everett. The cost reduction strategy adopted by GME resulted in insufficient customer approach during integration. They did not look into what people really wanted and their attention was focused on the product and profits. Alliance and ultimately takeover of Saab by GME was not a wise move as Saab was not considered a luxury brand. Hence combining a mass and a niche brand resulted in GME losing on its own niche brand. GME did restructure in 2001 under the plan called “Project Olympia”. Since the major problem that they encountered was at their biggest and oldest plant belonging to the Opel unit, they concentrated their efforts in restructuring this plant. They had shut down the Luton plant when it contributed to losses but they continued investment and restructuring at the Opel unit. They initiated efforts to introduce broader range of Opel products; they downsized jobs and decreased the production capacity by 15 percent. Suffering a reputation for poor quality and lackluster design in 2001, GME invested heavily in heavy engineering and improved handling, quality and design (Business Week Online, 2006). Structural changes in the auto industry enables car producers to benefit from economies of scale as they can build more car models using the same platform (Tirpak & Kariozen, 2006). GME focused their restructuring strategy around the Opel brand. They invested in technology, they reduced costs but to meet the challenges posed by the Asian and specifically the Japanese manufacturers, this was not enough. Their assumptions about market share increases went wrong and they realized picking up market share was difficult. Almost all of their plants in Europe were under-utilized.. Despite the failure of Project Olympia and despite continued losses for four consecutive years, the Opel brand could manage a market share of 8.75 percent. While GME incurred a loss of $286 million, its rival company Ford incurred a loss of $1.1 billion during the same period. It also managed to reduce the overall losses in 2003 compared to the previous year by reducing material and structural costs. To retain the market share in Germany, their biggest market, they offered huge discounts and finance options to consumers. Since GME had production at eight different locations, it could shift its production base from Germany to low-cost Poland for its Opel Zafira. This facility was not enjoyed by most car manufacturers in Europe. Even though Ford shut down three plants in UK, GME did not shut down any of their plants although they did layoff at some of their plants. GME was trying to retain profits through cost cuts and sales growth without concentrating on restructuring. Mackintosh (2006) argues that during that period multiple restructuring and medium-term targets could have helped double profit margins but restructuring was restricted by strong labour unions. Besides, all the automakers were restructuring at the same time. Increased competition due to overcapacity forced all the carmakers to step into each others’ markets. GME was no exception. They lost their competitive edge as they failed to recognize the opportunity to come out with new models at lower prices for the middle segment. While GME was still struggling, the Asian manufacturers surged ahead. Specially Toyota made steady inroads and captured the European market. 3. Performance improving options taken or proposed by GME during this period To retain its competitive edge and to improve performance, GME took several steps during this period. In trying to bring in continuous improvement, they met with disaster. Continually pushing for gains in engineering and manufacturing efficiency can result in new sets of problems as well as reach some practical limits (Cusumano, 1992). The first attempt to recover high costs was to operate to full capacity, which resulted in disaster as it meant over production in a highly competitive market. The second attempt was to restructure the Luton and the Opel plant. They even attempted to form alliance with Fiat SPA and Saab automobiles but these ventures too did not bring in the benefits expected. GM gave 6% share in its company in exchange for 20% in Fiat and both expected to make savings through sharing but it did not bring in the benefits envisaged. Project Olympia was their next step to focus on revenue producing areas. This too did not meet with success. When all their attempts failed, restructuring in 2004 was proposed which would result in laying off 12,000 employees along with integration of operations and cost and capacity reductions. Most of the layoffs were planned at the Opel plants in Germany. This announcement led to agitations by the employees who resorted to strikes. Poorly planned layoffs can affect not only the employees who leave the company but also those who remain (Camardella, 2002). When layoffs are inevitable, and after all alternatives fail, incentives should be offered to the employees to take early retirement. In other words, when GM offered $1 billion to persuade 10,000 German workers to leave the company voluntarily, they maintained dignity during downsizing. If sensitivity is maintained in the way it is communicated to the employees, the company continues to get support from the employees that remain. They proposed to integrate many functions in the region which would help avoid duplication and increases operational efficiency. They also planned to centralize production of Opel, Saab and Vauxhall brands under the European headquarters. Integrating finance, sales and marketing may be practical but manufacturing and engineering integration could give rise to GME shifted the production of Opel Zafira from Germany to Poland, which was a strategic and timely decision to take advantage of the low labour cost in central Europe. The gross wages in the automobile sector in central Europe are still below the wages in Western Europe. The labour productivity in central Europe is growing rapidly and the combination of low wages and growing productivity supports competitiveness of the car producers in the region. In 2004, the unit labour cost in Poland was only 48.8% of the unit labour cost in Germany (Table1). Thus, their strategy formulate in 2004 is expected to bring a turn about although it would still take them a few years to recover the losses. Reference: Camardella, M. J. (2002). Legal considerations of a workforce reduction. Employment Relations Today; Autumn 2002; 29, 3; ABI/INFORM Global. pg 101 Cusumano, M. A. (1992). Japanese Technology Management: Innovations, Transferability, and the Limitations of "Lean" Production. Retreived 20 February 2008 from http://dspace-demo.mit.edu/bitstream/1721.1/2437/1/SWP-3477-26970551.pdf Drago, W. A. (1997). When strategic alliances make sense. Industrial Management & Data Systems 97/2 [1997] 53–57. http://www.proquest.com/ (accessed February 20, 2008). Dussuage, P. Garrette, B. & Mitchell, W. (2004). ASYMMETRIC PERFORMANCE: THE MARKET SHARE IMPACT OF SCALE AND LINK ALLIANCES IN THE GLOBAL AUTO INDUSTRY, Strategic Management Journal. Chichester: Jul 2004. Vol. 25, Iss. 7; pg. 701. http://www.proquest.com/ (accessed February 20, 2008). Edmondson, Gail. "GMs Turnaround in Europe; As General Motors works to stem losses in the U.S., European sales and profits are up, thanks to new models from its Opel division." Business Week Online (Dec 4, 2006): NA. British Council Journals Database. Gale. 20 Feb. 2008 Financial Times. (1994). "Western Recovery Fuels demand" March 5 Griffiths, John. "GM plans Europe cuts in drive on losses CAR MANUFACTURING." The Financial Times (Sept 22, 2004): 31. British Council Journals Database. Gale. 20 Feb. 2008 Rhys, G. (2004). Which way is the auto business headed? European Business Forum, July 1, 59-60. http://www.proquest.com/ (accessed February 20, 2008). Mackintosh, J. (2006). Objects in the mirror are closer than they appear Toyotas challenge for GMs carmaking lead symbolises the regional fissures that have opened up in the global auto industry. The US and Europe have their work cut out just trying to keep up with Asia, says James Mackintosh :[SURVEYS EDITION]. Financial Times, February 28, http://www.proquest.com/ (accessed February 21, 2008). The Economist. (1994). "And then there were seven". 5th February Tipak, M. & Kariozen, A. (2006). The Automobile Industry in Central Europe, Retrieved 20 February 2008 from http://www.imf.org/external/cee/2006/1106.pdf Tables Table 1: Unit Labour Cost in automobile industry (In % of German ULC). Source: Tirpak & Kariozen (2006). Read More