The Major General Environment Developments that Impinge Upon the European Automotive Industry - Essay Example

The Major General Environment Developments that Impinge Upon the European Automotive Industry Introduction: The European automotive manufacturer is located in a region that has the second highest customer of automobiles. In 2002, 17.4 millions were manufactured in Europe alone out of the global total of 59 million units (EMCC, 2004). It is the second most competitive region in automotive industry after the US and Asia-Pacific including Japan and Korea. Further Europe has highly evolved manufacturing facilities with automobiles constituting 36% of the total manufacturing of Europe. Of the five major automobile giants General Motors, Toyota Ford, Daimler-Benz, and Volkswagen, the last two are indigenous to Europe but all have a strong European presence with a number of smaller groups adding to the competition. GM markets its products under popular brand names of Opel and Vauxhall. The Ford Europe has staged major acquisitions in Europe by buying Land Rover, Aston Martin, and Volvo, Jaguar. Ford was the first US company to set up its manufacturing base in Europe as far back as 1920. Volkswagen, the German manufacturer is the most aggressive of all the European companies having acquired brands like Skoda, Bentley, Lamborghini, Audi, Buggati, and Seat. Since the early twentieth century European car manufacturers enjoyed the competitive advantage due to their location. Europe accounted for maximum percentage of consumers while it also has the largest number of manufacturers. However, it faced the first trans-continental threats first from the US car majors like Ford, GM in the early twentieth century and then from the highly efficient Japanese cars in the 70s. The environmental problems affecting the Competitive advantage can be categorised as Political, Economic, Sociological, Technological, and Demographic. Political: Europe is an economically integrated region of 27 countries. The industries have to conform to near equality in trade laws and manufacturing standards especially the emission standards of the European Union. European Commission, for example wants to do away with the rigid system of national car dealers (Madslien). Besides, the European Union the companies may have to conform to the rules and regulations made from time to time by the respective governments they operate in. Since dismantling of the Communist regimes in the Warsaw Pact countries, a large East European market has opened up for the European manufacturer. Due to advantage provided by a common culture and proximate culture, the European automotive manufactures were quick to capitalise on it. Companies like Volkswagen, Ford Europe, DaimlerBenz, and PeugetCitroen have set up manufacturing facilities in East Europe. Since a large number of European countries are landlocked road has been the preferred mode for surface transport. Europe enjoys a near peaceful political environment that makes automotive companies worldwide to seek their market share. On the other hand, democracy and political activism is high, that makes the manufacturer face strident workforce who demand higher pays, emoluments and less working hours. However the commitments of the European Union to environment sustaining legislation can push up the car price 1,500 euros ($2,157) to 3,000 euros (Singh quoted by Kanter). Economic: Europe is the economic powerhouse of the world. It has the highest per capita income in the world. There is a near equitable distribution of wealth amongst the people, the people of different of countries of Europe, and the countries of Europe. Europe enjoys the best living standards in the world and as such more people are in the group that can afford to own cars. The technology, trade and commerce have been on a upward spiral which has made road transport a preferred choice. Landlocked European countries have a lot of intra-continental movement that requires automotive units in large numbers. Profits per vehicle have lowered from 10% to 5 % and manufacturers rely on higher production volumes to meet their manufacturing and infrastructural cost. Europe has to keep on its pace of economic development and avoid stagnation or a downturn for healthy prospects of car industry. “For key to car sales is a healthy economy. And vice versa.” (Madslien). Sociological: Car ever since its inception was associated with affluence. Though with proliferation of economies, affluence associated with ‘the car’ has vanished, but the society can be dichotomised on their use of an economy or a luxury car. By the middle of the twentieth century, big and luxury cars like Mercedes, BMW, and Rolls Royce came to be associated with high social status. These cars now enjoy a prestigious status all over the world. Cars like Volkswagen, Fiat, Volvo, Peugeot and Skoda are identified with the common people. Non-European international companies too realise these market distinctions and compete with the local manufacturers in these segments. Compact cars made by GM, Fiat and Renault with low energy consumption are favoured by the ordinary European. These cars have an intense competition from the Korean and Japanese manufacturers like Hyundai, Suzuki, and Honda. The European customer is highly educated and is highly aware of his consumer rights. The companies have to conform to strictest standards of safety and reliability to satisfy the requirements of an ever demanding customer. Technological: European automotive manufacturers are locked in a battle of technology within themselves and with manufactures from US, and Asia to produce technologically superior, more electronically controlled safe automobiles with lower emissions. Cars plying in Europe have to conform to Euro IV norms that restrict the emission of Co2 to 150 gms per kilometre. Initiatives to make eco-friendly automotives in Hybrid category that run on alternate fuels are also on. Almost all manufacturers are spending considerable part of their revenues in R & D to develop low cost eco-friendly vehicles. The vehicle manufacturers are dependant upon very efficient supply chains for automotive spare parts that span different continents. The manufacturing technologies have to be constantly upgraded to meet emissions norms and quality. As per latest move of the manufacturers have been asked to cut the emission of 160gms a kilometre, to 140 gms within 2008. “Compliance will cost producers an average of ($4,314) for each car to pay for efficiency-enhancing technologies”(Kanter). At the other end of technology, companies are slugging it hard to convert an increasing number of mechanical parts in an automobile to electronic units. Electronic parts are more durable, efficient and less cost intensive. Demographic: Since Germany, UK, France and Italy have the highest population in Europe automotive components have marketing thrust in these countries. Russia also having high population, though with less density, has the presence of almost all European majors looking for their share of customer base. Companies like Volkswagen and Ford Europe have been quick to capitalise on the low-cost and high customer base 2. Analyse fully the competitive environment of the car manufacturers in Europe. What does it tell you about the competitive forces? Threat of new entrants, Bargaining power of suppliers, bargaining power of buyers, Threat of substitute products or services. European car market is one of the fiercely competed turfs in the world. Europe’s automobile manufacturing is as old as the industry itself. Beginning, in the late nineteenth century, the two world wars sent the automobile manufacturing into a literal overdrive. Post-WWII, as winds of liberalised trade atmosphere swept the West Europe, automobile industry grew from strength to strength witnessing a small downturn during the oil crisis of 70s. On the other hand the East Europe under Soviet dominance got caught in time wrap and automobile industry couldn’t develop under socialist ideals. After lifting of the ‘iron curtain’ the automobile industry concentrated in the west moved to fill the vacant competitive ground in the east. We analyse the current competitive environment. Threat of New Entrants. There is no perceptible threat of new entrants in the European markets all major automobile manufacturers are already competing in the field. However, some large and outsized companies and their plants with capacities lying utilised can be taken over by marginal or small automobile players to add to the already existing competition. Bargaining Power of Buyers The European vehicle industry is highly competitive thus ensuring a high bargaining power for the buyer. The buyer has a choice to buy not only cars manufactured in Europe but also those manufactured in Japan and US. The cheap Japanese cars are biggest challenge to the European manufacturer as their price is within reach of the low earning European customer. The middle or higher income group may prefer the same cars for low running cost, fuel efficiency and emission norms. As the European trade and commerce is open to the world players in the era of globalisation the buyer remains in a win-win situation. It is, however, in the luxury segment that the customer can’t display much bargaining power with manufacturers like DaimlerBenz, BMW, and Ferrari charging the customers exorbitant rates. The luxury models of GM Europe, Ford Europe, or Toyota have not come off good in challenging the European luxury class in its own turf. Bargaining power of suppliers OEM manufacturers are trying to locate in the low-cost East European countries like Romania, Poland, Czech Republic, Hungary and Russia. Recently, due to the low cost of manufacture, lesser wages and proximity advantage, a spate of investments by automotive manufacturers have been done in non-EU Russia. In Russia the supplier do not have to conform to tough EU rules and regulations while they can maintain their supply chains to big groups like Volkswagen, GM, and Ford. Suppliers are well entrenched in the Aachen region of Germany from where they have easy access to R&D facilities and main buyers groups that have headquarters located in nearby cities. Delphi Auto Systems, Guardian Industry, DuPont, Goodyear, Robert Bosch, Fraunhofer, and AFL Stribel. The suppliers have strategically based themselves in Bavaria, Nuremberg, Bologona, and Aachen (Germany), Cardiff (UK), and Luxemburg from where they maintain a strategic control over the supply chains to manufacturing plants located in Belgium, Italy, Germany, UK and France. The suppliers have network with a host of research facilities and institutions to provide more innovative technological solutions to maintain their bargaining position with the automobile manufacturers. The bargaining power of these units largely comes from high end technology and expertise they have developed over years of manufacture of specialised items. Labour and manufacturing costs are the biggest constraint for the supplier in striking out bargains in the highly competitive European automobile market. The traditional North American suppliers of US majors Ford, Chrysler and GM have moved their operations with their buyers into Europe lately. US manufacturers of automotive products have also staged major acquisitions. Despite their advantages of location enjoyed by the European supplier it is subjected to fierce competition from US and Asian suppliers. The greatest competition to the European car manufacturers is from Japanese ‘lean manufactured’ products that have higher product life, are competitively priced and have lower running cost. However European suppliers have the strength of their sound network and technological advantage. Threat of substitute products or services. The European automobile market always remains vulnerable to alternative and products and services. The well-laid out rail network of Europe does take away a large share in surface transport of goods. Shipping is a good and a cost effective option to connect the north European countries to the southern countries. The automobiles manufactured in Europe have to vie with more effective and lean Japanese products. Yet another major threat to the automobile market can come from some obscure manufacturer who comes out with a Hydrogen or electric driven vehicle. Since the oil prices are rising and the fuel reserves are depleting at an unprecedented scale such an eventuality cannot be ruled out. 3. Consider the possible key trends and events in the global automotive industry and the levels of uncertainty for the industry for the period 2008-2015. Also, assess what this might mean for European car manufacturers in the future. The most important impacts that the European car manufacturers are likely to undergo will be that created by decreasing fuel reserves of the world, the pressures to curb global warming by controlling green house gases and evaporation of trade barriers. The European Commission has literally served a warning on automobile manufacturers to abide by the Kyoto Protocol. “The industry’s decade-old promises to meet emissions reduction targets voluntarily had not yielded the desired results, making the tougher action necessary” (Dimas quoted by Kanter, 2007). Decreasing fuel reserves in the world are adversely affecting the fuel production due to which petroleum rates are always on the upwards spiral. Companies are experimenting on hybrid vehicles that can run on both conventional and non-conventional fuels. But hybrid vehicles have not gained popularity due to their high costs and low viability. Companies may find time running out for them in providing the customer with a viable option of using non bio-fuel consuming vehicle in a commercially acceptable range. In face of non-availability of such a vehicle, the customer will show more preference for the cheap Korean, Japanese, Chinese or Indian vehicles. The sales of Asian manufactured cars can leap frog in the coming decade. Alternately, European manufacturers will also have to shift base or source larger number of cheaply manufactured by reliable components. In the face of rising concern for global warming, the brand prestige associated with high end luxury cars like Mercedes, Bentley, Audi, and Rolls Royce can decrease and people would prefer to go for more eco and pocket friendly vehicles. It is highly unlikely that technical and legal exigencies will allow bulky and luxurious vehicles to cruise along at the current speed. The future definitely belongs to the mid-sized and compact cars for their utilitarian benefits, economy and eco-friendliness. Since global warming is not on the wane, high fuel guzzling vehicles can also face a blanket ban on their usage. “There is now little doubt that in only a few years’ time European carmakers will have to meet the world’s strictest CO2-emission standards (Simonds).” With the research on an electric car being already in progress in Switzerland, the manufacturers may have to put these projects in a fast forward mode. In cities with dense population the public transport like buses, sky trains and tube trains will get an impetus thus decreasing the sales of passenger cars. Automobile industry is also likely to shift its base from the high cost west Europe to the low cost east Europe. “Facing tighter margins and continuous needs to be closer to market, automobile manufacturers in Europe continue to seek out low-cost locations while maintaining a stronghold in traditional markets.” (Thuermer) 4. How do you think car manufacturers can become more efficient? Construct a Porter's value chain model for a traditional mass production medium size car manufacturer and show changes that would provide greater efficiency. Also, discuss the options that might be open to managers concerning the functions within the company to give customers added value. The primary model of Value Chain for a medium size car manufacturer based on Porter’s models holds the following elements: 1. Inbound Logistics (IL) 2. Operations (OP) 3. Outbound Logistics (OL) 4. Marketing and Sales (MS) 5. Service (SE) Porter’s Traditional Model Inbound Logistics: This step consists of sourcing of raw material and control of inventory. Operations: At this stage the input materials are value added through a set of operations to produce the desired goods. Outbound Logistics: This stage involves supply of the finished goods to the customer. Marketing and Sales: Marketing and Sales involves putting into use effective channels for the customer to buy the product. Service: Providing maintenance and repair facilities. Suggested Porter’s Model for a Mid-Size Car Manufacturer: A Mid-Size Medium manufacturer should follow lean manufacturing techniques adopted by the Japanese. These would include cost-cutting by adoption of cheaper production processes, opting for alternate products and maintenance of optimum inventory levels by adopting concepts like Just-in -time (JIT). The products in Inbound Logistics can be sourced from the competitive Asian markets. The managers can also identification unproductive job activities and cut them around to enhance the productivity model of the company. Further, the Operations (Assembly line) can be smooth aligned with the Marketing and Sales (MS) to manufacture a particular model of car according to the requirements of the market. A dynamic interface between the Marketing and Sales cell and Operations of the company can ensure that a particular model is manufactured in the right number so that the company has to maintain minimum inventory levels of the Outbound Logistics. In times to come, customers can want customised vehicles on basis of kinds of fuels used to the use they will be put to. Optimum inventory levels in the Inbound Logistics and Outbound Logistics will ensure that only the limited capital will be blocked in the manufacturing environment, which can be used for Research and Development activities to enhance customer satisfaction. The managers can also outsource non-core activities that should be outsourced to a location outside of the European Union to take advantage of cheaper labour and savings on cost. All steps in the value chain can be further made productive through efficient knowledge management at the outsourced centres. All such activities can be identified from Porter’s Inbound Logistics cell to Servicing and outsourced. This can result in knowledge management, productivity enhancement and cost cutting to give the competitive advantage over rivals by decreasing the cost of manufacturing. In an environment where the buyer has tremendous bargaining power, efficient utilisation of resources and assets can result in savings of manufacturing which can be used to attract the customer. References Simonds, David (2007). Collision course, “Economist Website” Accessed Jan 15th 2007 http://www.economist.com/business/displaystory.cfm?story_id=10342303 Thuermer, Karen E. (2005) Automobile Manufacturers Move Fast in Europe’s Widely Expanding Landscape, “Expansion Management Website” Accessed Jan 15th 2007, http://www.expansionmanagement.com/smo/newsviewer/default.asp?cmd=articledetail&articleid=16331&st=3 Wells, P. (2000), Analysis; europe’s car industry, “The BBC Website” Accessed Jan 15th 2007, http://news.bbc.co.uk/2/hi/business/746306.stm EMCC(2004), Trends and drivers of change in the european automotive industry: mapping report, Accessed Jan 15th 2007, http://www.eurofound.europa.eu/emcc/publications/2004/ef0427en.pdf Strategic Management (n.d), The value chain, “Quick MBA website” Accessed Jan 15th 2007, http://www.quickmba.com/strategy/value-chain/ Madslien, J (2002), Squeeze ahead for Europe's car market, “The BBC Website) Accessed Jan 15th 2007, http://news.bbc.co.uk/2/hi/business/1755764.stm Kanter, James (2007), Europe proposes binding limits on auto emissions, “The New York Times Website, Accessed Jan 15th 2007, http://www.nytimes.com/2007/12/20/business/20emissions.html?_r=1&oref=slogin Euro Auto Trends (n.d) Accessed Jan 15th 2007, http://www.euroautotrends.com/ Read More