Australian Automotive Industry - Assignment Example

 Australian Automotive Industry Introduction Australian Automotive Industry is one of the major manufacturing sectors of Australia. The history of Australian Automotive Industry could be traced back to 1890s when Harry A. Tarrant invented one of the first petrol driven car which was converted into fully enclosed body car designs. Not only the automotive industry succeeded in developing car designs and models locally but also local importers were able to acquire cars from the UK and US which provided Australian a new way of transport and living on a large scale. The establishment of Australian Motoring Association in 1903 and its role in forming an alliance to protect the interests of local manufacturers led to the government imposing custom duty on import of foreign cars. As motorists pioneers’ vision to get car manufacturing into mass production was realized in 1909 the Australian Automotive industry switched into the next gear where it was able to cut its costs down and it received immense boost in sales after the first world. Heavy investments poured into the sector helping it to emerge as one of the successful manufacturing sectors of Australia. Due to the continual successive periods for this industry the participants decided to form Australian Automotive Association (AAA) in 1926 which was aimed at providing a platform for the industry to voice their interests and also to provide strong linkage between car manufacturers and associated industries. Recovering from great depression in 1930s the Australian Automotive Industry has evolved to become one of the major players in the car manufacturing globally and presently Australia is amongst the only 15 countries which are able to transform a concept of developing cars to its actual production. The automotive sector is a major source of employment and investment in research and development. With companies like Toyota, Ford, Holden and Mitsubishi having their production sites in Australia and more than 200 component firms producing components for the car manufacturing industry the Australian Automotive Industry is all set for competing at international level. In addition to these companies there are additional 500 small businesses associated with providing tooling and specialized services to the industry. The entire supply chain is based on strong interrelationship between all participants. Moreover, several foreign vehicle brands are imported by different dealer companies. The Australian Automotive Industry is fast growing with an average growth rate of 3.0% since 2004 and even in 2009 despite of the poor economic conditions the industry posted 2.5% increase. According to latest survey by Australian Bureau of Statistics there are 15.6 million cars on Australian roads with highest growth in motorcycles over the period 2004-09 (ABS, 2009). The estimation of demand for vehicles could be made from the fact that there are 720 motors vehicles per 1,000 Australian residents which is very high (ABS, 2009). Most common fuel used for motor vehicles engines is unleaded petrol with very little emphasis on alternate energies. For a complete overview of the industry analysis see Appendix I. Australian Automotive Industry could be analyzed for external forces using PESTLE analysis which is framework that categorizes external forces as political, economic, social, technological, legal and environmental. The analysis would formulate basis for determining the present status of the Australian Automotive Industry and challenges it is facing which could affect its future potential. Overall, it would help in determining the scope and ability of the industry to compete both locally and internationally against existing competitive forces and new entrants from China and India. The following sections would present detailed discussion on the identified external forces based upon arguments supporting or against the Australian along with academic literature to assist better understanding. Political & Legal Elements Political and legal factors pertaining to the environment within which organizations operate are surely going to impact the strategies and overall financial position. These factors could include the policies adopted by the government, change in government and any legal issues concerning the entire industry or a particular major player of the industry. The impact is industry wide and has profound implications for all participants (Williams & Green, 1997). The Australian Automotive Industry remained under protection by the government in terms of high trade tariff on import of foreign cars into the country. However, with the acceptance of WTO and as an active member of the treaty the government allowed trade barriers to be removed and the local industry came at par with the international brands. This has been negatively viewed by the industry as it is considered to be putting great pressure on the local industry which is already facing tougher market conditions and stronger exchange rate of the Australian currency making it all less favorable for local manufacturers to compete with imported vehicles. However, the government has realized the potential negative impact of its trade policy on the automobile industry and the Prime Minister Mr. Rudd laid out the government’s commitment to make the industry abreast with the international competitors. In his words the commitment of the government could be presented as: “If we want the Australian car industry to prosper, we have to make it stronger - more innovative, more productive, more competitive and more export-focused. That’s what A New Car Plan for a Greener Future aims to do,” (The Motor Report, 2008). The Australian government has also enforced tax breaks which pushed up sales of automobiles in December 2009 which could be seen as the move by the Australian government to induce greater sales and cash for local car manufacturers (McDonald, 2010). Economical Element The Australian Automobile Industry has been growing at a steady pace over the last 5 years however the overall position of local automobile industry is considered weakening due to unrestricted import of foreign manufactured vehicles, unfavorable currency exchange rate, rise in interest rates and overall weak consumer sentiment in view of the global financial crisis which is still prevailing in major economies of the world. The economic conditions related to the financial factors which prevail both internal and external of the company or industry affecting its sustainability and profitability (Williams & Green, 1997, p. 161). The market sentiments are down at present due to the economic uncertainties in the Australian economy. The impact is profound on all sub segments of the automobile industry. The most impact of the weakening business activity in the country could be seen in the demand for light, medium and heavy trucks. Demand for these is mostly driven from the economic activity generated in different sectors which are soarly affected by the spill over effect of financial crisis in major western economies. A major downward drift was observed in the international automobile industry when two big US car manufacturing companies that are Chrysler and GM filled for bankcruptcy in 2009 and as restructuring of these companies is underway involving cut back of business operations the competition in the automobile industry is surely going to become more intensified (DataMonitor, 2009). The car manufacturing in Australia is dominated by four companies and it is widely argued that the faith of the Asutralian automobile industry surely depends upon the financial position of the parent companies residing in other countries (The Motor Report, 2008). General lower demand for new vehicles is likely to affect companies ability to remain profitable and invest in research and development to meet market expectations. Due to the government’s decision to reduce tariffs on the import of foreign automobiles as a result of its trade policy the local industry is faced with tougher market conditions. The automobile industry is viewed as the one which is low switching costs and consumers provoked by the perceptions of poor economic conditions to continue in the medium term are seeking low costs vehicles. Moreover, the rising trend in the interest rates of Australia analysts warns of its impact on the demand for vehicles by consumers (Gover, 2010). The exchange rate of Australian Dollar (AUD) to US$ has also risen sharply from 0.762 in 2005 (DataMonitor, 2009) to 0.917 (XE, 2010) as of 20 Jan 2010 which is suggesting cheaper imports and lesser returns for local manufacturers from exports. Socio Cultural Element The socio cultural environment covers different elements of human life which affect a buying decision. These elements could include way of living, income level, peer group influences, fashion, beliefs etc (Henry, 2008). The Australian consumer culture is very much influenced by the values shared amongst Australian consumers. They had share a belief for very long to make Australian products and buy Australian products which has also helped the Australian automobile industry to grow in sales and size. However, with the Australian government signing FTAs with other countries the import of automobiles has quadruple over the last 15 years or so which is affecting the local production and investment by the Australian manufacturers (Simpson, 2009). Another recent behavioral change amongst the Australian drivers has been the emphasis on car sharing in Australia and it has raised concerns for car manufacturing companies which view this change in attitude driven from the environmental concerns of consumers as inversely related to their plans of expansion. The oil price hike has also led to this shift in attitude especially amongst office goers who are increasingly pooling cars to cut down their fuel expenses. The raise of environmental concerns on international level has also been observed amongst Australian consumers and this is the reason that the Australian manufacturers are investing into plans for developing technologies which are environment friendly and use alternate fuels to cut back on carbon dioxide emissions (Simpson, 2009). The internal marketing culture also affects business’s ability to enter into international markets. Companies need to take into account the local culture and its essential ingredients such as Language, Religion, Values and Attitudes, Education, Social Organizations, Technology and Material Culture, Law and Politics and Aesthetics prevailing in the international markets which could help them in developing and marketing products which suits their tastes and attitudes (Terpstra & Sarathy, 2000). The PPP of international markets can be hindrance to the Australian car manufacturers who are faced with higher costs compare to the regional players and there is apparent tendency of consumers to purchase low price vehicles (Perner, 2010). Technological Element Technological changes are major drivers of the all kinds of industries and not restricted to the manufacturing and development industries. The rate of obsolscence is crucial to determine the need of investment in any industry and the frequency to shift to newer technologies. It has been suggested that those companies which are able to respond to the changing technologies better than their competitors are able to gain more market share and hence greater profitability (Henry, 2008, p. 57 ). The Australian Automobile Industry is considered to be below par of the industry standards common in the western industries when comparison is made for its spending into research and development. Innovation is considered to be the most important element of economic growth whether it is related to the development of a new product or improving the existing product or process automobile designing and development (Giovanni et al., 1998). Riemen & Marceau (2001) suggested that the Australian automobile industry has become highly competitive and more export oriented which implies that the companies need to invest more in R&D to make a place for themselves in the realm of international manufacturers. Australian automobile manufacturers do invest capital in research and development however their input is far less than their competitors in the region and they rely much more on innovation from their parents companies. Also components manufacturers have been observed to be reluctant on carrying out R&D expenditures. This situation has allowed new entrants to enter the Australian with better products and solutions which is further saturating the local market. The Automotive Competitive Investment Scheme (ACIS) offers credits to those component manufacturers which invest in R&D programs however the actual target has not been achieved so far because of the lower tariffs discouraging such investments that add to the costs of production (Automotive Review Secretariat , 2008). The R&D investment in the Australian automobile manufacturing sector remains above its other industries. However, upon review of the report by Automotive Review Secretariat (2008) it could be highlighted the R&D investment has flattened out over the last few years. Several reasons have been put forward in this report for the apparent decline in this investment. These include the increased competition from international car manufacturers which have greater market accessibility due to their lower costs and are able to generate large funds for R&D which makes it difficult for Australian companies to compete. The Australian government’s contribution and assistance in R&D funding has remained low which is very much needed for local manufacturers to compete in low tariffs regime. The Australian government has announced support to the automobile industry by promising $6.2 billion over the next 13 years which includes a major proportion of funds allocated to the research and development projects. These projects not only focus on the improving the existing designs but also to introduce alternative energy vehicles which have recently experienced great demand and sales (The Motor Report, 2008). By February 2010 Toyota Australia expects to launch its first hybrid Camry car in manufactured in Australia (Toyota, 2010) which would surely open up opportunities for Australian manufacturers in the international markets. International Element The Australian Automotive Industry is facing greater challenges on the international level in terms of intense competition emerging from the regional markets, high costs of production and unfavorable exchange rate phenomenon. Developing an international business strategy can be very complex and time consuming process and the outcome of a business decision pertaining to the international market is highly uncertain as the understanding of the target market and basis of economic conditions is difficult to ascertain with complete certainty. However, by adopting a globalize approach to businesses they can actually achieve efficiency, reduce risks and formulate capabilities for future development (Prakash & Hart, 2000, p. 176). The Australian Automotive Industry is faced with increased competition from its nearest competitors such as Chinese, ASEAN and Indian manufacturers. The Australian Automotive Industry is viewed to be vulnerable to competition from the Chinese manufacturers in particular. The Asian automobile industry has been growing rapidly aspired by increase in the local demand and also due to the level of saturation in the western markets allowing manufacturers from Asian markets to capture market share. These companies have access to cheaper resources including labor and materials that has allowed them to manufacture low cost vehicles which have immense demand from untapped international markets of Africa and South America. Dr. Kevin Baker in his research set out the challenges which a weaker automotive industry such as that of Australia can face from the Chinese manufacturers. The Australian industry has already begun to feel the pressures from the growth observed in China. The Chinese manufacturers are aiming to enter the Australian market which could have devastating impact on the Australian market which is not able to cut its costs down and the Chinese exchange rate paradox makes it impossible to keep the barriers high for the import of Chinese cars. Baker suggested that in order to balance the wage differences in China and Australia the Australian government could make use Wage Equalization Theory (WET) to impose charge on import of Chinese vehicles which would bring their cost of import somewhat in comparison to the cost of motor vehicles produced in Australia. However, the actual realization of the extent of import is yet to be observed fully (Baker, 2008). The Australian automobile and component manufacturers have sought greater market accessibility outside Australia however there have been numerous issues which have not allowed Australian companies to benefit from the opportunities in other markets. These issues relate to over protectionism of local automobile industries in different countries including China. Furthermore, countries induce foreign direct investment rather than allowing import of foreign manufactured vehicles into their market by offering attractive investment incentives. A recent report by Automotive Review Secretariat of Australia put forward some useful suggestions for the government to assist the Australian Automotive Industry in gaining much wider access to international markets. These included bilateral dialogues with other countries to allow greater trade and signing free trade agreements so that automobile and components manufacturers can have better accesibility to regional markets close to Australia (2008).   Conclusion The above analysis suggests that the Australian Automotive Industry although has a small domestic market but its market value has a major proportion in the regional markets. The industry remains one of the major contributors to the Australian economy and employs a large work force throughout the supply chain. The industry has evolved significantly over the years however in the recent economic climate the industry is faced with greater challenges to maintain its positioning both in the local market and also internationally. The industry seeks out accessibility to international markets however exports are being hurdled due to over protectionism in targets markets and unfavorable costs factors making the Australian vehicles less attractive. The Australian government has set out its plans to support the industry which is deemed important for allowing additional funds as competition intensifies. The industry needs to focus on its research and development activities in order to face competition from countries like China and Thailand. Innovation through R&D is one way which can allow Australian manufacturers to justify their high costs of manufacturing. The government of Australia and AAA needs to develop strategies which could help the industry to not only sustain in the domestic market but also find opportunities in other countries. With new entrants making their way into tougher markets the Australian government needs to rethink its monetary policy and trade policy which is already putting extra burden on the local manufacturers and customers. The projections for the new car sales remain strong till 2014 however the external forces are surely going to affect the achievability of those targets (DataMonitor, 2009) for which local industry participants need to plan ahead and invest in better and efficient designs. References ABS. (2005, January 21). Australia's automotive industry. Retrieved January 18, 2010, from Australian Bureau of Statistics: http://www.abs.gov.au/AUSSTATS/ABS@.NSF/Previousproducts/1301.0Feature%20Article252005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view= ABS. (2009, November 17). Motor Vehicle Census, Australia, 31 Mar 2009 . Retrieved January 18, 2010, from Australian Bureau of Statistics: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/9309.0Main+Features131%20Mar%202009?OpenDocument Automotive Review Secretariat . (2008). Review of Australian Automotive Industry. Canberra: Automotive Review Secretariat . Baker, K. (2008). THe Australian Automotive Industry Under Threat From China and the Currency Imbalance Problem. Sydney: UNSW. Cars.com.au. (2008). History of the Car in Australia 1890's -1960's . Retrieved January 18, 2010, from Cars.com.au: http://www.cars.com.au/the-boot/australian-car-history.html DataMonitor. (2009). Light trucks in Australia. Sydney: DataMonitor. DataMonitor. (2009). New Cars in Australia. Sydney: DataMonitor. Giovanni, D., Christopher, F., Richard, N., & Gerard, S. L. (1998). Technical Change and Economic Theory. London: Pinter Publishers. Gover, P. (2010, January 7). A high five in car sales . Retrieved January 20, 2010, from Herald Sun: http://www.heraldsun.com.au/business/a-high-five-in-car-sales/story-e6frfh4f-1225816875172 Henry, A. (2008). Understanding Strategic Management . New York: Oxford University Press. McDonald, S. (2010, January 6). Australia Car Sales Jump to Record in December, Review Reports . Retrieved January 24, 2010, from Bloomberg: http://www.bloomberg.com/apps/news?pid=20601081&sid=acH.lP3.0UN8 Perner, L. (2010). The Global Market Place. Retrieved January 24, 2010, from University of South Carolina: http://www.consumerpsychologist.com/international_marketing.html Prakash, A., & Hart, J. A. (2000). Responding to globalization . New York: Routledge . Riemen, S., & Marceau, J. (2001). Running on Empty? Innovation in the Australian Automotive Industry. France: Université Devry Vald' Essonne. Simpson, C. M. (2009). Cars, Climates and Subjectivity: Car Sharing and Resisting Hegemonic Automobile Culture? AJournal of Media and Culture , 12 (4), [Online]. Terpstra, V., & Sarathy, R. (2000). International Marketing. Hinsdale: Dryden Press. The Motor Report. (2008, November 10). Rudd Responds To Bracks Review: Pledges $6.2 Billion In Assistance To Australian Automotive Industry. Retrieved January 20, 2010, from The Motor Report: http://www.themotorreport.com.au/11954/rudd-responds-to-bracks-review-pledges-62-billion-in-assistance-to-australian-automotive-industry/ Thompson, J. L., & Martin, F. (2005). Strategic management: awareness and change. New York: Cengage Learning EMEA. Toyota. (2010). Hybrid Camry. Retrieved January 20, 2010, from Toyota: http://www.toyota.com.au/hybrid-camry.html Williams, T., & Green, A. (1997). The business approach to training . Surrey: Gower Publishing, Ltd . XE. (2010, January 20). Universal Currency Converter Results . Retrieved January 20, 2010, from XE- Universal Currency Converter: http://www.xe.com/ucc/convert.cgi?Amount=1&From=AUD&To=USD&image.x=36&image.y=14 Appendix I: Type of vehicle, Percent change - Between census years 2004 and 2009 Source: (ABS, 2009) Motor vehicle fleet by population (a), State/territory of registration Read More