Auto-Industry Development Issues - Essay Example

?Autoindustry Introduction The massive earthquake of Japan followed by the tsunami had made it to the headlines for the massive damage caused to the country. However the effect of this destruction will even cross the national territories. The United States automobile industry is to a large extent, reliant on Japan for the components of the car. Many of the car companies and component exporting companies in Japan have been devastated by the successive natural disasters and it could take a while before the production and exporting of these companies are reinstated to their former capacity. According to reports the worst hit company of the several Japanese car companies is the Nissan and their luxury car unit Infiniti. Apart from that there are other renowned companies like Toyota, Mitsubishi, Honda and Suzuki had to close down their factories due to several problems like damage and lack of supply. Many people are optimistic that delivery and shortage of supply of cars from Japan may give a window of opportunity for the domestic manufacturers in the United States market. However this may be hard to achieve because most of the United States car manufacturers are dependent on the Japanese car component manufacturing industries. As a result of the disaster in Japan the global supply chain of the automobile industry have been disrupted. As a result there will be a delay in the delivery of the cars and even the prices of the cars in the US automobile market may rise in the recent years. Japan was a significant exporter of car components, essentially the electrical components to the US automobile companies. Companies like Ford manufacturing hybrid cars used to import the hybrid batteries for their cars from the Japanese company Sanyo. Though Sanyo has not been severely affected by the chain of disasters, the companies that supply their components to Sanyo have been affected. Therefore the supply chain has been destroyed (Rall). Japan is the third largest producer of car component for the US automobile industry after Germany and the domestic car component manufacturers. Year Percentage of Parts Import Percentage of Total Parts Market Value of Automotive part imported (in million dollars) 2000 23.2 5.1 14,535 2001 23.0 5.0 13,150 2002 21.0 4.9 13,498 2003 19.7 4.5 13,745 2004 20.2 5.1 15,494 2005 19.4 5.3 16,448 2006 17.6 4.8 15,377 2007 16.1 4.8 14,757 2008 16.2 5.1 13,486 2009 - - 8,774 (U.S. Department of Commerce, 67) The United States car manufacturing companies are dependent on the Japanese car component manufacturing companies for both the original equipments and the after parts. The original equipments are the components that are required at the factories for producing the cars. The after parts are the components that are used to replace the old components in a used car. The table shows that Japan has a significant share in the United States car component market. However there is significant drop in the value of import of car parts from Japan to United States in the year 2009. However that drop is due to a fall in demand for new cars in the United States market as an effect of the recession that plagued the country. However, the proportion of import of car parts is consistent with the previous trend. Therefore we can conclude about the dependence of the United States automobile industry on the Japanese Original equipment and after part manufacturing industry. Any adverse effect on the latter market will lead to a supply shortage in the United States automobile industry. The trade balance of car components of United States with Japan has also negative value in the considered period with the highest being 13,017 million dollars deficit in 2007. In United States the top 3 domestic companies have been the General Motors, Ford, and the Chrysler Group. They have been named as the Big Three by the industry. However their share of the car market has decreased significantly from 73.5% in 1995 to about 57% in 2005. In July 2006 Toyota had more sales than the previous second ranking Ford. Similarly Honda had more sales than the Chrysler Group. In the same year the share of US automobile companies in the domestic market fell to 52% while those of the Asian car makers rose to 41%. The figures can be explained by the growing perception of the American consumes that the foreign cars had a better design. In July 2006 Fords manufactured 15.9% of the cars and light trucks while their Japanese competitor Toyota produced 16.2%. The United States automobile industry has been describes as an oligopolistic industry. The Detroit based car manufacturer has increased the prices of the cars even in times of low demand. This shows the oligopolistic nature of the market where the pricing strategy is mostly decided by the General Motors who have assumed the role of the market leader. In the large car market the General Motors act as the clear market leader, in the small car market there is no clear leader (Luger 45). One of the most important sources of oligopoly is the barrier to entry. The obstruction to entry may be of different types including government law, patent rights. The United States automobile market has oligopolistic characters and there are several government regulations that help the oligopolistic firms of the industry. Barriers to Entry During the 1970’s the foreign automakers started penetrating the US market. The competition was particularly intense for the fuel-efficient car segment and the biggest challenge came from the Japanese automakers whose share of the market rose from 14.5% in 1978 to 21% in 1980. As a result the US government started a protectionist policy for the industry on 1st April 1981 with a voluntary restrain by Japan on car import (Luger 45; US Custom’s Service, 57). As a result the increase in price of Japanese cars was higher. Federal Motor Vehicle Safety Standard Federal Motor Vehicle Safety Standard is a general rule that must be obeyed by all the imported motor cars both light and heavy and imported original equipments and after parts at the time of manufacturing. For the imported cars these standards are regarding safety, bumper and prevention of theft standards. There are clauses like installing child restraint anchorage and proper wind shields that abide by the AGRESS system. Inspections are conducted on these vehicles at the time of entry to check the certificate of standards. Unlike the certification policy followed by different countries, the United States government follows a self certification policy by the companies. In the certificate the companies declare that the vehicles have been engineered and tested by the company to meet the US standards. Along with the standards for safety there were also standards for fuel economy and efficiency. However the industry experts have pointed out that the implementation of fuel efficiency and safety standards lead to the use of material which are highly expensive. The cars imported from the foreign countries and also the original equipments and after parts have to abide by this standard. As a result the price of the cars in the US markets are much higher than the price in the international markets. To implement such measures the prices of the cars have been increased. As a result of these standards the import of car components by the international car manufacturers has been restricted. This has also led to the distortion of the internal market and promoted the oligopoly of the domestic manufacturers in the United States car market (US Custom’s Service, 57). EPA Pollution Control The Environment Pollution Agency (EPA) has enforced a number of measures to reduce the impact of pollution by the industries as well as the vehicles. The EPA pollution control extends for the light duty vehicles as well as the light duty trucks. The cars imported into the United States have to abide by these standards. There are also pollution control standards for the converted vehicles. However the top American companies have a considerable influence on the EPA. As a result they can set standards of pollution control according to their advantage (EPA) Background of the Top Firms in the Industry The United States automobile industry had been dominated by the top three companies which are the General Motors, Ford, and the Chrysler till the 1960s. Gradually from 1970 onwards the foreign companies started penetrating the United States automobile markets and by 1980 there were a large number of automakers including foreign and domestic firms. With the onset of globalization the geographically distant markets became integrated and the US automakers started facing competition from the foreign auto companies from Japan, Korea, and elsewhere (Allen 46). General Motor The General Motor Company established in 1908 soon acquired seven companies by the end of 1909 and many more auto companies were acquired later. Many of the famous brands acquired by GM are Cadillac, Chevrolet and Pontiac. General Motors is the biggest automobile manufacturing company of the world. In 2004 it accounted for 14.5% of the automobiles manufactured globally. However in the recent years the company has faced a lot of problems which has been reflected in their stock prices and credit ratings. However they have adopted a number of strategies including their high labor cost, exploring the markets of India and China and emphasizing on the hybrid vehicles for the US markets (Bradley et. al 9). Ford Founded in 1903, the Ford Motor Company was a pioneer in having a moving assembly line for auto production. They first successfully produced massive number of cars. The company’s portfolio boasts of a number of big brands. There are brands like Aston-Martin, Jaguar, Volvo, and Land Rover. Ford had the second highest cars sold in 2003 after GM. However even Ford faced similar kinds of problems like GM and that got reflected in their credit rating. As a result Ford took a restructuring policy of their organization and production facilities that was aimed at becoming more cost efficient and removing the over capacity present in their system (Bradley et. al). Honda Honda Motor Company was founded in 1946. Though they started their production with motorcycles, soon they expanded their production into cars. The companies’ competency lies in the production of fuel efficient and low emission vehicles. The company also has a range of hybrid vehicles. The company sixth highest seller of automobiles globally and they have their production units in almost 12 countries. The company has also shown a fast and steady rate of growth. The company has pledged their commitment in developing more fuel efficient cars for their consumers. In the United States they are marketing their car with a special focus on the young generations to create a loyal customer base (Bradley et. al). Toyota The Japanese company Toyota was founded in 1937 as a public sector enterprise. In the Unites States automobile market the company has shown very good performance. In 1984 the company entered collaborated with General Motors to form the NUMMI. They have a very strong global presence and ranks third globally. The different brands under Toyota are Toyota, Hino, Scion, and Lexus. The passenger cars, SUVs and the light trucks from the company had found immense popularity among the United States consumers. The management structure of Toyota is highly efficient and it is based on streamlined production and no wastage. The company had constantly developed their technology to stay ahead in the race. In their factories unlike Ford or GM, the company had relied heavily on the automatic systems of production. The company has spread their production unit to the various parts of the world and they have targeted many of the countries including the advanced and the emerging countries also the New Industrialized Countries (Bradley et. al). Hyundai Hyundai Motor Company was set up in 1967. It is a Korean company. The company acquired a major stake in Kia in 1998 and. The main concentration of the company is improvement of quality design and manufacturing the automobiles. In 2004 the company went into a tie up with the Japanese automobile giant Honda. Over the years the performance of the Hyundai cars has been appreciated by a large number of companies. The company has expanded heavily in the international market in the recent years. it has also successfully established the manufacturing units in various part of the world including North America, India China and Turkey. There are Hyundai development centers in many developed countries like Japan and in the countries of Europe. (Bradley et al) Mergers One of the strategies employed by the automakers to gain a higher market share is to go for mergers. There are other advantages of a merger like better access to foreign technology and achieving economies of scale. Chrysler merged with Damsler-Benz. General Motors purchased stakes in Avis and National, Ford purchased Hertz. Similarly GM and Toyota joined hands to form New United Motor Manufacturing Inc. The initial car was a Toyota Corrolla which was sold in the market as Chevrolet Nova by General Motors. There was also the merger between Renault and Nissan in 1999 (Automotive Mergers and Acquisitions). The big three companies in the United States automobile industry had traditionally perceived the small car segment as a low profit sector. However the domestic consumers had a high demand for the small cars. The foreign automobiles company made huge profit from this sector. As a result the domestic companies started to manufacture small cars. However they could not meet up the demand and the import rate was still high. The companies started to import their cars from the foreign markets and sell them under their brand. There was also a rise in the number of joint venture plants in North America. The foreign companies also started their plants in United States. Honda started their operation in Ohio and Ontario, Toyota in Ontario and Kentucky and Nissan in Tennessee. As a result there was a huge rise in the competition in the US automobile industry. One of the methods devised by the US automakers to face the stiff competition was to enter in joint ventures, mergers, and acquisitions (Luger 45). Government Policy The United States government had always taken a proactive role in the development of their automobile industry because it generates a large amount of employment. Even in the times of crisis the US government had helped the domestic automakers to get through their crisis. General Motor was bailed out by the government. The Chrysler LLC was also helped after they filed for bankruptcy. The total cost of the bailout package was $62 billion. The GM accounted assets of $82 billion and their liabilities were $ 172 billion (Nanto 86). The merger between GM and Toyota was protested by the other automakers. However the FTC still rules in favor of the merger. In 1984 the majority in the Federal Trade Commission voted that the joint ventures between the large American and Japanese automakers will lead to better competition. According to them this will benefit the consumers by developing the small car market. There would also be considerable price benefit for the consumers in spite of the import quotas on the Japanese cars. It would also lead to cost efficiency for the domestic manufacturers like General Motors. Any other method of production would definitely cost more. Another significant benefit of joint ventures between Japanese and American companies is that it will help the domestic car companies to learn about the advanced technology of the Japanese automakers. All this measures will lead to an efficient and competitive market for the United States automobile industry (Luger 45). Market Share and Customers’ Expectations At present, mid-size cars dominate the car market scene in the US. But the growth figures in the adjacent column give us a fair idea of the changing trend. The small-car segment has been the only one to register a positive growth this month, compared to May, 2010. Of late, with the surge in gasoline prices, the demand for small fuel efficient cars has been fast growing. And this trend is expected to sustain. Trying to ride the high tide at its best are the emperors of the small car segment, the South Asian automakers. No longer is the small car a poor man’s car. From features like heated rear seats - available in Hyundai Elantra - to Voice-activated navigation, Bluetooth phone connections and built-in iPod docks that come with the New Honda Civic model, these car makers are on a rollercoaster ride to innovate, invent, and to outsmart the market. The new small cars are fuel-efficient, as per need of the hour, technology savvy, and epitomize luxury, albeit in a compact form (White). The chart below gives the sales figures for May, 2011 and the change in sales between the current year-to-date (YTD) and previous YTD. Top 20 vehicles, current month's sales   May 2011 % Chg from May '10 YTD 2011 % Chg from YTD 2010 Ford F - Series PU 42,399 -15.0 214,461   10.6 Chevrolet Silverado PU 28,409 -15.7 150,206   10.6 Chevrolet Malibu 25,600 17.9 99,046   13.1 Nissan Altima 25,525 16.3 112,308   16.8 Ford Fusion 24,666 10.2 110,878   19.5 Ford Escape 23,140 20.5 100,333   20.2 Hyundai Sonata 22,754 7.4 96,370   34.8 Chevrolet Cruze 22,711 0.0 98,076   0.0 Ford Focus 22,303 31.7 76,639   2.7 Dodge Ram PU 20,117 16.3 90,536   31.2 Hyundai Elantra 20,006 104.5 83,309   92.3 Toyota Camry / Solara 18,830 -35.7 126,094   0.2 Honda Civic 18,341 -35.6 110,086   2.8 Chevrolet Equinox 17,587 33.9 77,884   40.3 Honda Accord 17,018 -38.9 111,393   Toyota Corolla / Matrix 16,985 -37.0 117,875   Chevrolet Impala 16,707 -19.0 87,319   16.4 Volkswagen Jetta 16,671 58.6 74,646   61.7 Honda CR-V 16,307 -8.5 95,423   34.7 Ford Explorer 13,318 134.6 55,401   120.2 (Motor Intelligence: U.S. Light Vehicle Delivery Sales - May 2011) Ford cars have accounted for 29% of the total sales in May, 2011, followed by General Motors’ Chevrolet. But Hyundai, which is ranked 4th in terms of sales figures for the given month, with its Elantra has showcased a stunning growth in sales of 104.5 % (month-to-month comparison) and 92.3 % (YTD’s comparison). With gasoline prices expected to raise further, cars like Elantra are expected to be placed high on consumer’s demand list (White). Pursuing customers’ aspirations for tools and gadgets inside their cars to help them stay connected to online media on the road, auto makers are trying their best to accessorize their latest models with all such technology savvy tools. But at the same time the US government, viewing the latest fad as “technological distractions” on the road leading to “threat to safety”, is trying its best to influence manufacturers to discourage this trend. There are attempts being made to convince auto executives to use advertising money for creation of public-service announcements reminding motorists to fend off distractions, such as mobile phones and concentrate on the roads (White). Residual Value Along with a surge in demand for small cars, used cars are also facing raising demands. The earthquake in Japan and the on-going aftereffects of recession are being held responsible for the sudden spurt in demand for used cars, and the resultant record hike in their prices witnessed in April, 2011. The popularity that Sports- Utility-vehicles once enjoyed in this segment, leading to high residual values, has been now usurped by more fuel efficient cars, thanks once again to high crude oil prices. “Green” Cars & Govt. Incentives Common sense would compel one to believe that high crude oil prices is most likely to make manufacturers produce alternate energy and hybrid cars in millions to capture the growing market. But somehow, hybrid cars have not caught up as fast as expected. One of the reasons could be the slightly high prices that they come for, dampening consumer enthusiasm to buy these. In fact reports show that prior to recession the demand for Toyota Prius – the most popular in this section- had witnessed a 10 fold increase, from 3 % in summer 2005 to 30% in summer 2006. With various curbs on expenditure post-recession this segment again faced a dampened demand (Allen 46). The US Federal has also changed its stance with regard to support to hybrid cars. The legislators have moved on to the latest “clean technology” on the block – plug-in hybrids and electronic cars.The purchasers of green electric vehicles are now eligible for up to $7,500 at the federal level, plus a $2,000 credit for charging equipment installation, plus state-based incentives (of $5,000 in California) (Hybrid Cars Tax Credits: Incentive Fade Into Memory). Durability of Imports vis-a-vis Domestic Cars As per a recent quality survey conducted on durability of cars sold in the US market, Toyota cars emerged as the most dependable among all the mainstream brands, with the least number of problems recorded per 100 cars. Close behind is the home ground rival Honda, followed by Ford. Ford happened to be the only domestic brand among the foreign brands of Toyota, Honda and Hyundai, to have fared well in the durability quotient in this study (Blackburn). Common Practices Advertising& Promotion Recession had prompted almost all industries worldwide to curb their expenditure, and advertising expenditure experienced maximum curtailments. But the data on advertising expenditure show that there has been a 10.6% growth in ad expenses in the year 2010. Of the top 20 companies with highest advertising expenses, six belong to the automobile sector (The Marketing Data Box). US advertising expenditure also experienced a hike of 6.5 % in which, the automobile sector was a major contributor (Hoffman).Television has emerged as the most popular media for advertising but internet is fast becoming popular as an alternative. Car companies are also opting for alternative methods of customer awareness which would not only create awareness about driving and safety issues but would also enhance the manufacturer’s goodwill among the consumers. As desired by the USA Transportation department and National Highway Traffic Safety Administration, Subaru and now BMW AG have agreed to release some of their advertising money to make public service announcements (White). Warranty, Services & Parts Companies like Toyota, which are famous for the rigorous standards they maintain in production, provide Limited Warranty coverage to their customers. The warranties are basically of three types: i) Vehicle Warranty ii) Hybrid warranty iii) Toyota certified Used Vehicle Warranty Apart from these, Accessories Warranty and Roadside Assistance and Transportation Assistance in case of vehicles being kept for overnight repairs are also provided (Warranty Coverage). The General Motors have come up with a 5 years 1, 00,000 Powertrain warranty for every Chevrolet, Cadillac, GMC, and Buick Cars. Apart from this, they also provide Roadside Assistance and Limited warranty coverage (Owner Benefits: Warranty). Almost all the latest models of cars come with Bluetooth compatibility and i-pod/ MP3 player compatibility. The car manufacturers provide full assistance with regard to these parts and accessories as competition becomes more and more stiff and key to success increasingly lie not just in sales but complete customer satisfaction. Cash for Clunker Policy The Cash for Clunker policy is an action by the Federal government to implement the Consumer Assistance to recycle and Save (CARS) program. The program announced that all the consumers would receive a monetary credit worth $3500 to $4500 for changing their old vehicle to a new and more fuel- efficient vehicle. The National Highway Traffic Safety Administration (NHTSA) was given the role of monitoring the program. One of the objectives of the program was to boost the economy and the other was to encourage the sale of fuel efficient cars. Though the program helped to boost the economy, its impact on the car sales cannot be conclusively derived (Clowers). Tax Credit and Stickers of Department of Motor Vehicle The government wanted to encourage the use of eco-friendly and fuel efficient hybrid cars. Therefore they gave a tax credit to the hybrid car owners. Apart from that the California legislature distributed stickers that allowed the cars with at least 45 miles per gallon an access to the High Occupancy vehicle lanes. As a result the sales of the foreign hybrid cars by Toyota and Honda had a boost in the initial days. Many people bought these cars not for a concern towards the environment but to gain the privileges (Overview Charts). Conclusion The paper therefore discusses the manifold changes and the behavior of the automotive industry in US especially in the last few years. The paper begins by emphasizing upon the interdependency of US and Japanese markets with respect to the automotive market. Over the last few years there has been a rise in the Asian automobile manufacturers or car makers. This has led to a fall in share of US automobile market which reflects the interactions of an oligopolistic industry. However the safety measures undertaken by the Federal Motor Vehicle Safety Standard and EPA pollution control measures have played a significant role in posing barriers to entry of other firms in the market. The small cars with new innovative features show a noteworthy rise in trend. This is essentially owing to fuel efficiency of these cars coupled with the provision of luxury and technology friendliness. However the hybrid and eco friendly car market would require some incentives from the government. Advertising has been extensive in this industry despite the overall cut in advertising expense across other industries of the world. References 1. Rall, Patrick, US Auto Industry hit by supplier shortages in wake of Japanese Tsunami, Torque News, March 14, 2011, June 3, 2011, from: http://www.torquenews.com/106/us-auto-industry-hit-supplier-shortages-wake-japanese-tsunami 2. 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