The Future of the Car Industry - Research Paper Example

The future of car industry Introduction Automobile industry is one of the fastest growing industries in the world and one of the major contributors to the economic growth. This is an industry where technology is employed in a big way. This industry is also one of the highest spenders in Research and Development. Automobile industry consists of Commercial vehicles segment, passenger cars segment and the two wheelers segment. Among them the most promising and the fastest growing one is the car industry. More than 10 million cars are sold every year all over the world. UK, Europe and US has been the greatest car markets in the world. But the trends have changed and fortunes of car companies seem to come from Asian continent these days. One major reason is that most of the developing nations in the world are in Asian Continent. Also recession has affected the developed countries to a great extend that the demand for luxury goods have fallen sharply. Some of the developed countries are still in negative growth and are also anticipating fall in the GDP in this year. This helped to turn the market direction towards Asian countries. This research aims to identify the major drivers of the industry and the future prospects of the industry. Luxury car segment, one of the fastest growing in the car industry, is taken for the purpose of the study. Asia is one of the fastest growing luxury car markets in the world. Among the Asian region, China and India are the major contributors. “Rolls-Royce said on Nov. 20 that the market for its ultra-luxury cars is picking up dramatically across Asia as the effects of the global financial crisis recede.” (Industry week, 2009) Japan is also expected to be a major market for the industry. The Britain based luxury car maker Rolls-Royce has sold around 200 cars in 2008. For German auto majors like Mercedes Benz and Audi, China is the second biggest market after Germany. “The China Association of Automobile Manufacturers said more than 13.64 million units were sold last year, an increase of 46.15% from the 9.4 million units sold in 2008.” (Mahalingam, 2010) China is going to be the biggest market for luxury cars in the future. Chinese automobile companies are mainly focussed on small car segments. But there are immense potential for luxury cars in the region. A Chinese auto company has recently acquired the renowned Hummer Brand from the troubled GM. The plan is also finalised for acquisition of Volvo Brand by Chinese Auto major Geely from troubled Ford. Mercedes Benz has said that Asia Pacific was the only region to record growth in the year 2009, by growing 14.1%. In Pakistan car industry contributes 2% of the GDP. The contribution is around 2% in India too. The car industry has also been one of the major employers in the region. Most of the car manufacturers have set up their plants in Asian countries and made these as an export hub. Thousands of workforces are being employed in these plants by the companies. With more number of players entering the market, the competition too has become very fierce. Mercedes Benz was the luxury car market leader in India since mid 2009. But recently BMW became the market leader by showing miraculous increase in the sales figure than that of Mercedes Benz. Audi is also showing a tremendous growth rate in the country. Land Rover has recently become the best selling SUV in India by recording a sales of more than hundred units which is much higher than market leaders BMW, Audi and Mercedes. Automobile industry, being a direct user of fuel is always monitored by authorities on the grounds of environmental pollution. As world over people are turning into green way of living, the challenge for automobile companies is to develop green cars that will result in much lower emission that the present situation. The industry is adopting an integrated approach by partnering with other organisations in the environmental protection space. “Automakers are constantly developing more efficient engines and drive-trains to reduce fuel consumption, and a wide range of sophisticated emissions-control technology is putting cleaner automobiles on the road everywhere.” (OICA, 2006) With the rising demand in the sector, the luxury car makers are lining up to increase their work force. Rolls Royce is the first in the league with a plan to increase their headcount by 150 new jobs. This is almost 50% increase from the existing work force of the company. Impact model The impact model is used to analyze the likely impact the critical factors will cause to the industry. Every business is affected by the environment in which it operates. These are mainly known as the external factors consisting of political, economical, socio-cultural and technical. What these factors leave for the company and industry is uncertainty. Therefore every company will have to shape and adapt their strategies according to the environment. The PEST analysis of luxury car industry shows that the most significant drivers of profitability of the industry are emission regulations, interest rates, GDP, safety features, and design of the cars. The impact of each of these factors on the sector is as follows. Emission regulations: Emission regulations of countries in this region have great impact on the luxury car industry. If cars do not meet the emission standards set by the countries, it cannot avail the tax benefits proposed by the countries. The final result would be that customer will have to pay more for the high emission cars. In order to avoid this, customers may shift to the next best alternative. Interest rates: China is heading towards an inflationary situation. In order to curb inflation, there are chances that China will raise its interest rates. Thus there is an uncertainty in this case. The higher interest rates may reduce profitability of the companies. GDP: GDP of most of the Asian countries is an important determinant of the success of luxury car sales. Except Japan, most other Asian countries will grow at a good rate. More growth of the country means more growth in the business of the country. This will result in more income for the people. Therefore GDP is one of the most important drivers of the industry. Safety features: Customers are very much concerned about safety on the move. Like emission standards, safety standards are also used by governments to regulate the car manufacturers. Even the car models that have passed some most favoured quality standards are being banned in countries like China due to safety issues. “China’s quality inspection agency has halted the import of several models made by French carmaker Renault, citing what it called “serious safety risks” and failure to meet technical standards.” (Twomey, 2009) The models probably did not meet the safety standards required by China. Therefore, car manufacturers will have to be very keen on developing safety features according to the requirements of the region. Design of the cars: Design is one of the most important drivers of the industry in the future. The taste and preferences of Asian customers seemed to be different from that of other parts of the world. Therefore, some car manufacturers have started designing cars specifically for these markets. Saab has introduced new cars and concepts in China. “The new cars and concepts have exterior contours that comport to Chinese ideas of balance, with interior colors and fabrics designed to signify status and evoke respect. The controls for entertainment and climate systems might even be moving to the back seat, because truly wealthy people don’t drive, they have drivers.” (Rosenberg, 2010) Now, based on the possible impact of factors as mentioned above, companies can take either adapt their strategies to the uncertain environment or shape the strategies for the uncertain environment. Shaping strategy can be adopted if uncertainty is high on the factors it can influence. When the uncertain factors are beyond the control of companies in the industry, adapting strategy is preferable. In the above case emission regulations, interest rates and GDP are the factors beyond the control of the company. Whereas, companies have great influence on factors like, safety features and design. Shaping strategy can be adopted in the case of uncertainty in safety features and design. Players of the industry can drive the industry change their way. Safety features: The industry players should invest heavily in the research and development activities. If a player wants to be the market leader in the industry in the future, it could think of introducing safety features that can be a benchmarked in the industry. Safety features like ABS and Airbags are already industry standards. Now the companies should not only focus on the safety of the passengers but also on enabling them for a safer drive. In other words ‘intelligent cars’ should be the future of the industry. This needs an advanced level technology using software. Thus the cars should be able to look at the safety of even people on the roads. A perfect future car should be able to instruct the driver on which direction the car should be moved in a heavy traffic. The car should be able to take decision on the road which was otherwise taken by the driver. It should correct the drivers if any wrong choice is taken by them. Design: Companies can adopt shaper strategy in design also. Luxury car is the segment where customers wish to have a lot of customisation. As of now customisation is only available on very high end models like Rolls Royce, Bentley and few others. Customisation has not actually become industry standards as of now. But definitely in future, the competitiveness of a luxury car maker will be determined by the amount of customisation it can provide to the customers. Customisation of interiors and exteriors should be given equal importance. Design customisation can also be done for each countries based on the culture and common likings of the market. This is exactly what Saab has done for its Chinese market. The car has been adapted to the Chinese culture and likings. Adapting strategy can be used for emission regulations, interest rates and GDP. Emission regulations: Asian countries are going to tighten emission regulations in the future. Most of the developing countries in Asia have recently made their commitments in the Copenhagen Summit. Therefore the companies will have to make sure that the product is highly flexible that it can be made adaptable to the emission regulations of any country without incurring much cost. The customers are also keen on owning environmental friendly cars. Interest rates and GDP: These are factors where the companies cannot do anything related to product features. But something can be done on the marketing and cost front. Car manufacturers should look more into the countries which are going to be growth drivers in the future. The answer again is China and India. Cost of manufacturing in these countries is lower compared to others. Companies should expand their distribution base in the countries. Future Scenario’s From the impact analysis in appendix 1 it can be said that Safety Features and Design of the cars are the two drivers that has maximum impact on the business in future. The following scenario’s can happen for the industry in the future. Scenario 1: Green world: This is the scenario in which the customers will prefer only those cars that are greener. Cars should lead to very low carbon emissions. Therefore, the future market is for hybrid cars. At present Hybrid cars are just in the juvenile stage. The luxury car makers can thus focus on developing greener cars using innovative technology. The companies will have to develop green cars production as their core business area. This will become an industry standard in the future. This is where R & D expenditure comes into picture. Scenario 2: Unique possession: Unique possession is the scenario in which customers will look for uniqueness in their cars. They will be ready to spend more money for cars that will be customized to their own requirements and likings. As there will be more young millionaires, the requirements will be even more sophisticated. Therefore companies will have to give more focus towards the taste and preferences of customers at regional levels and customize products to their requirements. Individual customer level customisation can also be done. Scenario 3: Safety or no entry: Safety of cars is considered equivalent to that of environmental concerns by many governments. Cars that do not meet the safety standards will not be permitted to sell in these markets. The companies should thus have to develop regional level safety features in cars so that it can establish themselves in those markets. Pedestrian safety should also be given equal importance by the companies. Intelligent car should be vision of car manufacturers for the future. Scenario 4: Millionaire World: As the disposable income of people is showing an increasing trend, the number of millionaires will also grow at a very large pace. More number of millionaires in the future will throw the market open for more number of luxury car makers. The future holds for those players who can capitalize on the timely changes in the consumer behaviour. Impact of the above scenarios on Mercedes Benz Mercedes Benz is one of the leading luxury car makers in the world. This German auto major is an early entrant in the Asian market compared to its major rivals BMW and Audi. Mercedes Benz has entered the Indian market in the 90’s. There was absolutely no competition for the company until 2005 when BMW entered the Indian market. But even after Mercedes’ years long experience in the Indian Market, by 2009 BMW became the number one luxury car maker in India in terms of sales. Better marketing, wider distribution and contemporary designs are the key factors that helped BMW to take over the market. Even Audi is growing tremendously in the Indian market. The situation is almost similar in other Asian Countries. The future holds for fuel efficient green cars and if Mercedes Benz invests heavily in developing hybrid cars it can command more market share and growth. If Mercedes Benz can provide cars that meet the design aspirations of the new age and younger millionaires, it can sustain as the market leader. The Impact of the scenarios on Mercedes Benz is analyzed in Appendix 3. The best case scenario is that Mercedes Benz will be able to satisfy the needs of the customers by investing heavily in developing hybrid and safer cars. The worst case scenario is that, Audi and BMW, the biggest competitors of Mercedes Benz develop cars that are superior to that of Mercedes’. Audi’s investment in hybrid and green cars are much higher than Mercedes and BMW. Also, Audi and BMW are able to satisfy the design aspirations of new age customers. Therefore Mercedes Benz will have to be cautious on developing cars that are superior and competent compared to that of its rivals. Conclusion This essay has particularly dealt with the luxury car market of Asia. Different strategic models were used to identify the key drivers of the industry and its future prospects. The PEST framework of the industry has shown how important the political, economical, socio-cultural and technological factors are for the industry. A micro analysis of the key drivers had shown that emission regulations, safety features, design, GDP and interest rates are key drivers of the industry. Among them, design and safety features are identified to be the key drivers of luxury car market in the future. Competition is very high in the industry. As the number of millionaires are growing in the region the demand for luxury car markets remain highly positive. The fact that the number of young millionaires are growing makes the market more challenging. Though there is great uncertainty about the industry, right strategies at the right time can pay off well in the future. A company that competes in this sector will have to consider these factors with utmost importance in order to be successful in future. Experience in the market is not a determinant of success in future. The future of luxury car market is not in the hands of the strongest player either, but with the one that are very close to the changes in the environment. Works Cited Industry week, 2009. Rolls-Royce says Luxury Car Market Growing in Asia. [Online] Available at: http://www.industryweek.com/articles/rolls-royce_says_luxury_car_market_growing_in_asia_20490.aspx [Accessed 7 March 2010] Eugene Mahalingam, 2010. Asia-Pacific region to drive demand for luxury vehicle manufacturers. [Online] Available at: http://biz.thestar.com.my/news/story.asp?file=/2010/2/20/business/5681319&sec=business [Accessed 7 March 2010] Reuters, 2010. China says to Subsidize buyers of green cars. [Online] Available at: http://www.reuters.com/article/idUSTRE5BA26X20091211 [Accessed 7 March 2010] Xinhua, 2010. Despite uncertainties, Asian economies heading towards full recovery in 2010. [Online] Available at: http://news.xinhuanet.com/english2010/indepth/2010-02/13/c_13174472.htm [Accessed 8 March 2010] David Twomey, 2009. China bans Renault Cars – City Safety Issues. [Online] Available at: http://www.caradvice.com.au/32538/china-bans-renault-cars-cites-safety-issues/ [Accessed 8 March 2010] Zach Rosenberg, 2010. Auto Designers Cater to China, a New Giant. [Online] Available at: http://www.wired.com/autopia/2010/02/automotive-design-for-china/ [Accessed 8 March 2010] OICA, 2006. The Auto Industry and The Environment. [Online] Available at: http://www.oica.net/wp-content/uploads/2007/06/oica-depliant-final.pdf [Accessed 26 March 2010] Appendix Appendix 1: Pest Analysis Political factors: Among the political factors, regulations related to environmental pollution is very crucial to the industry. Developing countries in Asia is poised to raise its emission standards to the levels of US, Europe and Japan. Therefore, regulations on the car industry will be higher in the future. More than restrictions, regulations will be in the form of duty and tax assistance. “China will subsidize sales of green vehicles in five cities selected for a pilot programme as the government steps up efforts to promote environmentally friendly vehicles in a bid to cut fuel emissions.” (Reuters, 2010) Most of the Asian countries have recently cut excise duty as well as the import duty on cars. Economic factors: GDP of most of the Asian countries is on an increasing trend. Dubai had recently announced their debt crisis. Middle East, one of the largest markets for luxury cars will see a decline in sales for some quarter. China will see an inflationary pressure for some months in the future. India will show a strong economic growth with favourable interest rates. Other than Japan, all major Asian countries are expected to record a growth rate of about 7%. Among them China and India, the major growth drivers, are expected to grow at a rate of 9% and 8% respectively in 2010. South Korea, Indonesia and Singapore are expected to show 4.6%, 5.5% and 4% respectively. Malaysia, Philippines and Thailand will show around 3% growth. Socio cultural factors: As GDP of most of the nations are on the growth track, the standard of living of the people is also improving. The number of millionaires in these regions is growing at a higher pace. Quality of higher education, especially management education, is improving in the Asian Region. With more disposable income in hands the people will spend more in this region. As the rate of young millionaires is growing, the markets for sporty and young looking cars are growing. This is a challenge for companies as they have to be very keen on the designing part. Technological factors: Technology is another most important driver of car industry. Luxury cars today are becoming technologically more advanced than that of its competitors. Safety features is one of the main concerns of customers in the Asian region. Mercedes has already introduced their ultra safety limousine, the S Guard in the Asian market. New Mercedes Benz E Class contains technology for detecting whether the driver has fallen asleep. Volvo is also betting big on the market for capitalizing on the safety needs customers. Appendix 2: Positioning of drivers Drivers Impact On Profits On Brand Image On Sustainability Emission Regulations High Medium High Interest Rates High Low Low GDP High Low Low Safety Features High High High Design of the Cars High High High Appendix 3: Organizational impact of scenarios Impact Human Resource IT Infra Marketing Strat. Market Share Green World More recruitment More investment in specified IT Infrastructure Environment oriented Marketing strategy Market share for cars other than hybrid cars will be reduced Unique Possession More skilled employees required Not much changes to be made to the IT infrastructure Personalised marketing. More customisation, more market share Safety/no entry Investment in Human resources in the R & D department More investment in IT infrastructure General advertising with core idea of safety Considerable increase in the market share Millionaire World Investment in the Human Resources at the administrative level No changes in the IT infrastructure Marketing strategy with the core theme of pride Quantum jump in the market share Impact Model Future Scenarios Read More