Global Automobile Industry - Term Paper Example

SECTION A 1. The global automobile industry is global in some sense but there are some aspects that make this particular industry less global, or more localised. Analysing the internalisation of automobile industries, the best parameter to use is the Ellis and Williams 4Cs framework. There are four sets of drivers, all of which start with C, that are needed to be analysed in assessing the globalisation potential of a certain industry. These are: customers, cost, country and competition (Ellis and Williams, 1995). Customer drivers have the following components: customer requirements; distribution; and uniform marketing. In the automobile industry, the customers of cars and other automobile products have different needs. These needs are, most of the time, affected by the purchasing power or income of each individual (Ohmae, 2000). Take the case of a high-end customer as an example: high-end customers would require cars that have a good build, lots of features and add-ons and cars that can symbolise their status. On the other hand, the first requirements or considerations of those at the lower-end of the market when they buy cars are the fuel efficiency and durability of the cars that they buy. In this case, car manufacturers are pressured to manufacture different types of cars (but not totally different, there maybe some modifications on one of the cars to suit the specific need of each target market). Analysing the automobile manufacturers, they are actually offering wide product lines to cater to these varying needs of customers. Analysing some of the product offerings of Honda may illustrate more the point. Honda offers Honda Accord to the upper market, Honda Civic to the middle class and Honda City to the lower end. In just segmenting the market according to income, Honda already has three variants of its product. Another simple example of the different features of cars that each country specifically needs is that the steering wheel of European cars are placed at the right hand position while in some Asian countries, the steering wheel is at the left. In terms of customer requirement aspect, the automobile industry is less globalise because the needs of the market has a relatively high degree of heterogeneity therefore, the company can only standardize their product offering to all major markets to some extent (not fully) (Christopher, 2003). Car companies can only standardize the some of the micro parts of their products but they cannot fully standardize their product designs. The next component of the market (or customer driver) includes the distribution drivers. The trend right now among multinational automobile companies is they set up their own centralized marketing arm (Moran, 1994). A separate unit of the company is being established by car manufacturers just to handle the marketing and/or distribution of the company’s products to different countries. Automobile manufacturers are now employing various means to make their product available to almost every part of the globe. Examples are putting up their own subsidiaries. But the most commonly adopted way of distributing products right bow is through franchising (Haberberg, 2001). In this method, the mother company gives license to different individuals or corporations in foreign countries to use the company’s brand name as well as sell its products. In terms of distribution strategies, automobile companies are employing a central marketing arm and they are employing a global distribution channel worldwide (Johnson, 2001). The last component of market drivers is uniform marketing. In terms of this aspect, automobile companies are employing a uniform marketing plan. Analysing the marketing mix of automobile companies worldwide, 4Ps are actually more of a uniform or globalise one. In terms of product, though the designs of cars offered by each company are not uniform or standard all throughout the world, most of the parts that make up these cars or automobiles are standardized or uniformly made (to achieve efficiency) (Kotler, 2006). In pricing aspect, most automobile companies adopt a single pricing strategy. Though the price of each item may vary in different countries, these are because of the different factors such as transportation costs (it is cheaper to transport products to some countries than in others), taxes, etc. but the main point is, they are employing the same pricing strategy, and sometimes, their pricing strategy is part of their grand strategy, like the strategy of DaimlerChrysler, specifically, Mercedes Benz. The grand strategy of MB is cost leadership, that is, their cars are the most expensive ones and they are known because of it because this cost leadership is being backed up with their excellent quality cars. In every country where they decide to market their product, they are employing this strategy. The advertising (promotion) strategies of automobile companies are also standardized worldwide. The advertisements of the car companies are the same anywhere in the world. They are also communicating the same message. And lastly, as mentioned a while ago, in terms of distributing their product, they have a central marketing force that handles all the distribution and/or marketing of their products. The next set of drivers that determine the globalisation of a particular industry includes the cost drivers. Cost drivers are: new product development, scale economies and transport costs (Grant, 2004). In cars, research and development is very expensive. Before a company can develop a new product, it takes year before they can perfect it. And a considerable amount of money is spent on research and development. Otherwise, if automobile companies do not invest in their R&D, they are heading into a great deal of trouble, like lost sales because of obsolete products. Also there is a risk that the products developed by the R&D department will not fit the market’s taste. Considering all these factors, there is a great pressure on automobile manufacturers to enter the global market so as to compensate the costs that they are spending on research and development. They need a larger market for their product to compensate the costs spent by the company on R&D and other expenses. Another pressure to globalisation is scale economies. This pressure is one of the forces that pushed automobile companies to enter the global market. Scale economies are difficult to achieve in the automobile industry (Rickard, 2007). The minimum efficient scale in automobile manufacturing is relatively high. Of course, companies would want to produce at the lowest cost possible so they want to achieve economies of scale. But they need a market that will absorb what they produce and a way to achieve it is to expand market through globalisation. Car companies need to target more market so as to increase the probabilities that all their products will be sold. Another factor that discourages globalisation is the transport cost. But in the automobile industry, transport is not seen as a hindrance because cars are high value products. The transport cost needed to travel one car from one country to another is highly compensated by the value of the car itself. Thus, this aspect did not prevent car companies to go global. Country drivers can also affect the amount of globalisation a particular industry can employ. Country drivers are trade policies, technical standards and cultural and regulatory barriers (Slack, 2004). When it comes to automobile industry, there are no strict trade policies and technical standards as well as cultural and regulatory barriers that apply to this particular industry, except maybe for the increasing concern for the environment that encouraged governments to pass bills and laws about the use of bio-fuel. Car companies need to abide by the bio-fuel acts and bills of each specific country where they are selling their products. The last set of drivers is the competitive drivers. These include competitive interdependence and new entry competition. Competitive interdependence offers a great deal of benefits to car companies and right now the trend is, automobile companies’ partnerships and alliances are increasing (Thompson, 2005). Because the incentive to combine with ‘competitors’ as well as other players in the market is high. Because of the high investment needed for the R&D as well as marketing automobile products, the incentive to share this cost with others is very encouraging. And also, the threat of competition among large car manufacturers had urged the companies in this industry to widen their market. But this particular industry, automobile industry, the threat of new entry competition is very low because of the high capital requirement in establishing a car company. This encouraged more the globalisation of companies in the industry because of lower possible local competition at each region or area (Kotler, 2003). To illustrate the extent of globalisation of the automobile industry using the four C drivers, refer to the following table: Table 1. Summary of Industry Drivers for the Automobile Industry Globalisation Industry Drivers Localisation High Medium Low Low Medium High Customer Drivers 1. Customer Requirements 2. Distribution 3. Marketing Cost Drivers 1. New Product Development 2. Scale Economies 3. Transport Costs Country Drivers 1. Trade Policies 2. Technical Standards 3. Cultural/Regulatory Barriers Competitive Drivers 1. Competitive Interdependence 2. Entry of New Competitors According to the above table, most of the forces in the automobile industry contribute or encourage globalisation of the industry. Though there are some forces that encourage/favour localisation, these are only weak forces, compared to the forces towards globalisation. By just observing the trend and the current situation in the automobile industry, one can indeed tell that the industry is a globalise one. The market for cars is already almost one global market and the way car companies approach and see the market is just one global customer. Also, the current trends in the automobile industry are really towards globalisation, like mass production; globalisation of production, that is, parts are manufactured at places where cheap labours are and these are standardized; and mass marketing. The approach of car companies in marketing is selling nationally instead of locally. 2. The four components of the Diamond Framework are: Factor Conditions; Related and Supporting Industries; Demand Conditions; and Firm Strategy, Structure and Rivalry (Porter, 1998). Factor Conditions. One of the factors that contributed to the success of General Motors Corporation as a multinational enterprise includes factor conditions. The factor conditions that USA that contributed to the success of General Motors Corporation as a multinational enterprise include: companies in America like General Motors has enough access to capital that they can use to fund any of their expansion or internalization moves; America’s technology, which are more advanced compared to other countries, contributed a lot to the innovativeness of GM to cater specific demands/needs of each individuals from different countries; sophisticated software and advanced research and development helped in the manufacture of new and excellent product designs; and people in America are skilled, resourceful and the raw materials for automobile manufacturing are readily available in the area, that is, automobile companies like GM can easily access them. Firm Strategy, Structure and Rivalry. The existence of fierce competitors of GM like Ford Motor Company energized GM to be more aggressive in grabbing new markets and be more innovative in their marketing strategies. The threat of competition comes not only from American car manufacturers but also manufacturers outside USA like Japan, who pose a great threat to GM because these companies are very efficient, innovative, and at the same time, creative in formulating strategies that fit the global market. The entry of new competitors like Japanese car manufacturers had contributed to the zealousness of GM to devise plans and effective strategies to compete in the global market (Daft, 2003). These companies/competitors – Americans and non-Americans alike – could steal GM’s market share anytime if GM will not be fast enough to guard its position in the market. These competitors had wakened GM to be more innovative and to perform better. Demand Conditions. Individuals from different countries look for a specific or unique specification in the cars that they buy. Each country/individual across countries has different needs in a car. For a company that aims to succeed in the global/international market, it should satisfy these specific needs. The differences in preferences and needs of different countries in cars and automobile products had driven GM to innovate, change and modify the designs of the products that they offer to each country and to each market segment. GM had strengthened its research and development arm to develop new products that suit the varying needs and preferences of its customers. Also, the tastes of customers change as time goes by, so GM was also pressured to be more zealous in their innovative moves and they need to change their strategies, products as well as organizational structure to adapt to the changes in the environment, specifically, the change in customer’s preferences. Related and Supporting Industries. Another factor that contributed to the success of GM as a multinational enterprise is the existence of related and supporting companies and industries to automobile companies such as General Motors. America has its own steel industry and there are lots of companies that manufacture automotive parts that had given GM easy access to raw materials and other supplies GM needed to produce their products. 3. The first formal internalisation move of General Motors Corporation is its establishment of General Motors Export Company, the marketing arm of GM that handles its sales in other countries, outside United States of America and Canada. But before the establishment of General Motors Export Company, GM was already offering their products to countries outside US, though they still do not have a formal marketing arm then. Before doing any internalisation moves, GM first established a strong manufacturing base in the US, started in Michigan, through acquiring existing and potential competitors to the company. The first acquisition of GM after Buick Motor Company was Cadillac. GM acquired Cadillac because it was still a struggling company then but has a very great potential. Under Billy Durant’s leadership, Cadillac’s profits grew exponentially and the profit from its operations was funds used by GM to acquire more companies. One of the factors that triggered GM to go international was the threat posed by Ford Motor Company, also a growing automobile company then. Durant, GM’s president planned to buy out Ford but bankers turned down his request for loans. Also, before entering the international market, GM first strengthened its R&D, as well as promoted innovation within the company (extended to each business units). GM created a centralized testing and research laboratory and technical department to serve all constituent companies. GM adopted both acquisition strategies and internal expansion as growth strategies. The existing acquired business units of GM continued to develop new products (innovation), its marketing force became more fierce in its marketing strategies, at the same time, the then aggressive, Durant, continued GMs conquest of other companies. The next strategy that GM had adopted was a combination of diversification strategies, that is, GM acquired businesses that are targeted to other market and they also acquired businesses that are different from automobiles/cars. As an example, GM purchased interest in SamSon Sieve-Grip Tractor Co. of Stockton California, a farm equipment business. Eventually, GM acquired the remaining interests of the company. Next, GM purchased Frigidaire Corp., a company manufacturing electric ice box. Then they also ventured into airplane manufacturing through purchasing Dayton Wright Company (but later the company was liquidated). General Motors started to establish a manufacturing base in other countries. They started at Europe. GM acquired Vauxhall Motors, Ltd. of Luton, England, then they opened a manufacturing facility in Buenos Aires, Argentina but this was later on liquidated and they formed a joint venture CIADEA, instead. The joint company was named GM de Argentina S.A. GM began to build warehouses, established assembly plants and organized sales offices in strategic places around the world. They had also adopted backward integration (acquisition of suppliers) when they acquired Brown-Lipe-Chapin, a supplier of differential gears for GM cars. GM adopted this strategy so they can have more control over their supplies, in both quality and quantity aspects. The next move of GM was they had penetrated the South African market through forming General Motors South African (Pty.) Limited (GMSA), a wholly owned subsidiary. This had marked the start of GM building subsidiaries. Though GM was actively seeking growth externally (acquisitions, joint venture, etc.), GM was still growing internally, through constant innovation, that is developing new products and improving their existing products. The succeeding growth/internalization strategies of GM were mergers as well as joint ventures. Then, GM started to establish a market and manufacturing base in Asia through acquiring Capital Motors Assembly Corp. in Tampioca and they had also established General Motors Overseas Operations (GMOO) to handle all vehicle manufacturing and marketing of GM products outside USA and Canada. GM also formed joint ventures with companies in Iran and South Korea. To centralize the designing, engineering as well as manufacture, sales and service of all GM trucks, buses and vans throughout the world, GM established GM’s Worldwide Truck and Bus Group. This was done by GM to achieve efficiency. GM had also ventured into manufacturing robots. They had a joint-venture with Fanuc Ltd. of Japan to form GM Fanuc (GMF) Robotics Corp. This is basically a US-based company that aims to design, manufacture and sell robotics system. GM also ventured in data processing and telecommunications companies because this industry was starting to boom then. They had acquired the leading data processing and telecommunication company in the world, Electronic Data Systems Corporation (EDS). To be able to serve more effectively the needs of the environment, especially the market, GM aimed to make its the organization a learning organization. GM had established GM University to take care of the training and development of its employees. GM had also formed strategic alliances and partnerships with different companies like Shell Hydrogen, a division of Shell Oil and FedEx. GM had partnered with Shell to develop a real-life demonstration of hydrogen fuel cells and fuelling infrastructure technology. Though GM was continuously acquiring, merging and establishing plants all over the world, it had not lost its focus on continuous improvement and innovation. GM also looks for trend in the market and the management always makes sure that the strategies that they adopt fit with what the environment (market) demands. Currently, the focus of GM’s research and development are developing hybrid cars and fuel efficient cars. The key to the success of GM’s internalisation was adopting the right strategies at the right time, detecting signals from the environment and timely response to the need of the market. The real key to the success of internalisation moves of GM is the way they make and implement strategies. Also the aggressiveness of the management also contributed to the success. Though GM’s focus seems to be external because of its uncontrollable acquisition, merger and joint ventures and other expansion activities, the main ingredient still lies on its focus on internal growth and development. GM had not lost its focus on the customer. It always aims to satisfy what the customers want through continuously improving product designs and services. It focused on improving its internal strengths and core competencies to serve the customers well. SECTION B 1. It was said that one of the factors that contributed to the success of Czech Republic’s economy is the massive inflow of Foreign Direct Investments and the increasing role of companies under foreign control. It was claimed that Czech Republic was one of the most successful transition economies in attracting foreign direct investments. The location of Czech Republic is very strategic because it is located at the centre of Europe and it has a good to the established markets both in the eastern and western sides (Daft, 2003). This is one of the factors that attract investments to come in to the country. Other factors are the high quality infrastructure of the country (though some of the improvements in the infrastructure may also be the product of increased investment in the country), the workforce of the country are very productive at the same time skilled because a large percentage of the students in the country are actually graduates of science and other technical fields and research and development cost in the country is relatively cheaper. Some of the observed multinational companies that had set up a base in the country are Panasonic, Honeywell, Motorola and Mercedes-Benz. The country particularly attracts investments from automobile companies because of the R&D benefits this country offers. And as we all know, a bulk of investments in automobile companies are allotted in R&D. the actual percentage of FDI inflows from 2005 to 2006 is illustrated at Table 2. Table 2. FDI Inflows in 2005-2006. CZK billion Share (%) 2005 2006 2005 2006 Total 263.2 110.4 100 100 Manufacturing 44.3 26.8 16.8 33.3 -automotive industry 3.8 12.7 1.4 11.5 Services 211.8 72.4 80.2 66.6 -trade 15.1 28.4 5.7 25.7 -transport and telecommunications 118.9 1.1 45.2 1.0 -banking and finance 31.2 22.5 11.9 20.4 Based from Table 2, a bulk of the FDI inflows are in the services sector, specifically in the transport and telecommunications sector. This could be attributed to the large tourism sector of the country. Next is the manufacturing sector and the automotive industry contributes about 11.5% in the total FDI inflows of the country. Banking and finance also cover a large portion of the FDI inflows but there is a significant decrease from 2005 to 2006. A possible reason for this is that the growth of the market for this particular sector is slow and the market is slowly being saturated. As I have observed during the trip, there are a lot of banks all over the place. Almost all bank companies have branches in the country. 2. During the past decade, Czech Republic had been implementing strategies or moves to strengthen its economy. As part of the Eurozone, it is expected that it should become, really, more or less stable. It happened but the very good thing with Czech Republic is that they even had surpassed the economic performance of some other members of the Eurozone. When Czech Republic joined the EU in 2004, its economic performance was not so good compared to the countries adjacent to it. Based on the different economic parameters, like GDP, inflation rate, interest rate, etc., Czech Republic always has the least value, therefore, the poorest performer. But when it joined the European Union, three years ago, Czech Republic had adopted a fiscal and monetary policy that aims to align its macroeconomic conditions with the other members of the European Union. Since then, the economic condition of the country had improved significantly. Right now, Czech Republic has a developed economy with a very high per capita GDP. Czech Republic is now one of the most stable and prosperous countries of the post-Communist states (Strickland and Thompson, 2003). Analysing the current situation of Czech Republic right now, the success of this country can be attributed to several factors. The government of this country, particularly the leaders are very good at making effective laws and are also good at implementing them. The business sector was a priority and this had contributed a lot to the economic growth of Czech. Other factors that contributed to this success of the country are: the entry to the European Union, which had (in a way) encouraged investments to come into the country, the privatisation and restructuring of the major banks in the country and the growth-friendly macroeconomic policies of the country (De Wit, 2004). Another factor that contributed to the economic success of Czech is its tourism. Czech government had developed several tourist spots in the country and now, these places are flowing in substantial money to the country’s economy. According to statistics, the income generated by the country from tourism alone makes up 5.5% of the country’s GNP and 9.3% of the overall export earning. Czech Republic has several centres of tourist activity and one of them was the place that we had visited, the historic city of Prague. I had observed that even Asians visit this worth-seeing city. The tourists that visit this place are not only Europeans, even those living at the other side of the globe, they travel half of the earth just to see this historic place. Visitors to this place will definitely observe the rich culture of this place, particularly its love for puppetry and marionette. BIBLIOGRAPHY Daft, Richard L. (2003). 6th edition. Management. Thomson Southwestern: Singapore Kotler, Philip. (2003). 11th edition. Marketing Management. Pearson Education, Inc.: New Jersey, USA. Strickland, A. J. and Arthur Thompson. (2003). 13th edition. Strategic Management: Concepts and Cases. Irwin McGraw-Hill: United States of America. Ellis, J. R. and David Williams. (1995). International Business Strategy. Financial Times/ Pitman Publishing. UK. Ohmae, Kinichi. (2000). The Invisible Continent: Global Strategy in the New Economy. Harper Business. United States of America. Moran, R.T. and John Reisenberger. (1994). Global Challenge: Building the New Worldwide Enterprise. 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