Automobile Industry - Assignment Example

Executive Summary This paper attempts to analyse the automobile industry with special emphasis on car manufacturing sector. The economy of a nation is indebted in huge measures to the automobile industry for its growth and development. Free trade policies opened the floodgates for many new car manufacturers which in turn led to a radical increase in competition. Analytical tools like PESTLE and Porter’s five forces have identified the major drivers of this industry. Among macro-environmental factors, technology and governmental support are the two major factors. High entry barrier lowers the threat of potential entries but rivalry among existing key players is very high. However, all key players have acquired significant amount of market share as the consumer demand is very high. The markets of China and India have tremendous potential making it lucrative for the global players. Table of Contents Executive Summary 1 Introduction 3 Analysis of Global Automobile Industry 4 PESTLE Analysis 4 Porter’s Five Forces Analysis 5 Strengths and Weakness of the Automobile Industry 6 Outlook of Global Automobile Industry 7 Conclusion 9 Reference 10 Appendices 12 Introduction The structure of automobile industry has been evolving with time. At present it is one of the largest and rapidly growing industries. Some pertinent factors are responsible for the flux that characterises this industry. Technological advancement has been hugely responsible for the growth of this industry. Continuous technological innovations in car manufacturing technique have changed the perception of consumers towards cars. The world’s leading car manufacturing companies are attempting to bring more innovation in their product development technologies. Scope and necessity of R&D in automobile industry has never been so conspicuous. Consumer expectation in this industry is determined by quality, safety, reliability and utility, and the manufactures are engaged in relentless struggle to introduce the latest technology to meet the expectations of customers (Howell, 2000). Increasing disposable income of customers has further propelled the growth. This paper will attempt to analyse the present structure and future outlook of the global automobile car manufacturing industry. For analysing the present status of this industry, various analytical models and frameworks like PESTLE, SWOT and Porter’s five forces will be used. This will be followed by a descriptive secondary research to analyse the future of the industry. Finally, the paper will conclude by summing up the entire discussion and analysing it. Analysis of Global Automobile Industry PESTLE Analysis PESTLE analysis of an industry reflects the macro-environmental factors that influence its growth and structure. PESTLE stands for political, economic, social, technological, legal and environmental. This model will analyse each of this specific factors in the light of the automobile industry. Political factors determine the legislature, tax & duty and subsidies made available to a particular industry. The government is an important determinant, since it decides the policies and regulations that govern the economy (Senter and Edmonds, 2002, p.40). Government policies in US, Japan and China have been instrumental in the growth of this industry. Economic condition of a nation is very crucial for automobile industry. The demand of automotive products in countries with strong economic conditions is always high, since its citizens have high income. The economies of scale are also very important for car manufacturers. For example, the global turmoil of 2008 affected this industry vary badly and car sales was down by 30% (Horvath, 2008). Social factors include demographic features of the existing client group. Cultural dimension encompasses consumers’ tastes and preferences. Age, education and nature of customer are significant for this industry. For example, young consumers prefer to buy well designed and high speed cars. Technology is the most vital factor in this industry. Product development and plant efficiency is heavily depended on innovations made by R&D. Increasing technology influence market competition and consumer demand. Stable legal framework of a country is helpful for automobile industry. Legal framework consists of various foreign trade and industry regulations and this is very vital for car manufacturers as it affects their profitability. Operational activity and increasing utilization of cars has adverse effects on the environment. The level of pollution has increased significantly (ACEEE, 2010). For example, in America, cars have direct effect on its green environment. Most of the Americans drive 10000 to 39,999 miles annually (appendix 1). Porter’s Five Forces Analysis Porter’s five forces analysis helps to determine the level competition existing in the industry. It analysis the five forces that influence an industry i.e. bargaining power of suppliers, customers, threat of substitute products, existing rivalry and new entrants (appendix 2). The automobile industry is very much dependent on its suppliers as they are the major source of necessary raw materials like auto parts, iron and steel, tires etc. For maintaining better quality and higher safety levels, it is important that the suppliers are chosen carefully. Therefore, the suppliers enjoy high bargaining power. However, car manufactures now enter into contracts with suppliers from different countries, which have minimized the power of suppliers. The buyers play a vital role in intensifying the competition among the existing players. Global automobile buyers have a wider level of options to choose their own brand of cars. In global automobile market, many multinational companies are present and consumers have full information regarding products and prices. Convincing buyers is very crucial and difficult as their bargaining power is quite high. Competition among existing rivals makes this industry very competitive. Major automobile companies like General Motors, Ford, Toyota, Chrysler, Honda and other multinational companies have entered new markets making it difficult for the domestic players to compete there. Competition among key players is more intense. Many companies have entered the US market and likewise the US companies have moved to other unexploited markets of the world (Bradley et al, 2005). The threat of substitute and potential entrants is quite mild in this industry. Other kinds of transportation facilities are available in the market like railways, airways and waterways. However, a personal car is needed for inter-country and local travelling. This industry has very high level of entry and exit barrier as it requires very heavy investments and technological expertise. Therefore, threat from new entrants is considerably low. However, the existing motor companies of different countries are now entering new markets. For example, Honda Motors of Japan has entered the US market and has captured significant amount of market share from General Motors and Ford. Strengths and Weakness of the Automobile Industry Analysis of strength and weaknesses of automobile industry helps to judge the structure of the industry. Major strengths and weakness are discussed below. Strengths Major players of this industry are capable of developing the market. Companies like Ford, GM, and Honda etc own a wide range of brand through which they are able to satisfy the existing consumers by offering high quality products. Availability of skilled and expert labours and employees is another major advantage. This industry is experiencing constant growth in technology. Politically, it enjoys high support as this industry makes significant contribution to economic growth. Weaknesses Increasing internal competition leads to decrease in profitability. Some companies are trying to exploit this industry to gain an upper hand. Car manufacturing business requires high level of effect management teams. Increasing competition has led the management to overlook other necessary aspects in this industry. According to Casson (1987), “the world automobile industry undoubtedly is faced with a number of global opportunities, but firms from some nations may not able to adequately respond to these opportunities as a result of their lack of strength at global level” (Rugman and Verbeke, 2005, p.216). Outlook of Global Automobile Industry In order to understand the future of automobile industry, its opportunities and challenges should also be analysed. The major challenge faced by this industry is issues pertaining to environment. Increasing number of vehicles is causing high carbon emission. This industry has been criticized for this particular reason. Companies are trying to counter it by introducing innovative technologies that keep the environment clean. In America and Europe, CO2 emission from passenger car is the highest as automobile industry in these regions are extended (Appendix 3). Car manufacturers are using technologies for bringing efficiency in various functional aspects like safety & security, emission etc (Appendix 4). Technological advancement has changed the face of the automobile sector. China is one the most attractive market for automobile. According to CAAM, (China Association of Automobile Manufacturers) “the aggregate number of production and sales of automobiles in China can reach 17 million this year” (Yanjun and Weiwei, 2010). India is also one of the favourite markets of leading car manufacturers. In 1996, many multinational car manufacturers entered India though FDI and joint ventures (Appendix 5). According to Ernst and Young, the Indian passenger car market is expected to grow by 12% per annum and “the present figure of 1.89 million units to reach 3.75 million units by 2014” (Tamil Nadu Industrial Guidance & Export Promotion Bureau, 2010). Increasing demand for cars and other vehicles has made this market very lucrative to foreign players. Car manufacturers are required to identify the potential market for organisational growth. Conclusion This paper attempts to provide a comprehensive study on global automobile sector. PESTLE analysis discloses that macro-environmental factors play a very crucial role in the development of this industry. Porter’s five forces have revealed that despite high competition, profitability in automobile sector is also high because of increased demand. Technological development is the major strength of this industry and inability of car manufacturers to identify proper opportunities is its major weaknesses. Environmental issue is the biggest challenges faced by the industry as it is responsible for the highest carbon emission. Reference ACEEE. 2010. Automobiles and the Environment. [Online]. Available at: http://www.greenercars.org/guide_environment.htm. [Accessed on October 30, 2010]. Flouris, T. G. and Oswald, S. L. 2006. Designing and executing strategy in aviation management. Ashgate Publishing, Ltd. Howell, L. J. November 2000. Innovation in the automobile industry: A new era. [Online]. Available at: http://pubs.acs.org/subscribe/archive/ci/30/i11/html/11howell.html. [Accessed on October 30, 2010]. Horvath, J. December 08, 2010. Economic Crisis or Economic Squeeze?. [Online]. Available at: http://www.heise.de/tp/r4/artikel/29/29290/1.html. [Accessed on October 30, 2010]. Krishnan, V. No date. Indian Automotive Industry: Opportunities and Challenges Posed By Recent Developments. [Pdf]. Available at: http://mit.dspace.org/bitstream/handle/1721.1/1619/Krishnan.pdf?sequence=1. [Accessed on October 31, 2010]. Marchionne, S. May 21-22, 2009. Challenges and Opportunities for the Global Automobile Industry. [Pdf]. Available at: http://www.fiatgroup.com/it-it/shai/iinfo/presentations/Documents/Fiat_Group_Rome_May22_2009.pdf. [Accessed on October 31, 2010]. Rugman, A. M. and Verbeke, A. 2005. Analysis of multinational strategic management: the selected scientific papers of Alan M. Rugman and Alain Verbeke. Edward Elgar Publishing. Senter, H. and Edmonds, J. 2002. Marketing and Selling Super Series. 4th Edition. Elsevier. Schwaller, A. E. 2004, Total Automotive Technology. 4th Edition. Cengage Learning. Tamil Nadu Industrial Guidance & Export Promotion Bureau, March 2010. Indian Economy-A Snapshot. [Pdf]. Available at: http://www.investingintamilnadu.com/files/download_files/Indian_Economy_March_2010.pdf. [Accessed on October 31, 2010]. Wyman, O. No date. A comprehensive study on innovation in the automotive industry. [Pdf]. Available at: http://www.oliverwyman.com/ow/pdf_files/CarInnovation2015_engl.pdf. [Accessed on October 31, 2010]. Yanjun and Weiwei, Octoberber 27, 2010. Transformation &upgrading boost auto sector. [Online]. Available at: http://en.ce.cn/Insight/201010/27/t20101027_21922171.shtml. [Accessed on October 31, 2010]. Appendices Appendix 1 (Source: Schwaller, 2004, Appendix 2: Porter’s Five Forces (Source: Flouris and Oswald, 2006, p.56) Appendix 3: Passenger Car CO2 Emission (Source: Marchionne, 2009) Appendix 4: Impact of megatrends on automotive innovations (Source: Wyman, n.d.) Appendix 5: New Entrants To The Indian Automotive Industry as of March 1996 (Source: Krishnan, n.d.) Read More