Automotive Industry Analysis - Research Paper Example

& Industry Analysis  Outline I. Historical Overview of the automotive industry II. Recent events that have significantly affected the structure of the industry III. Industry Analysis a. The degree of rivalry b. Threats of substitutes c. Barrier to entry d. Buyer and supplier power IV. Intra-Industry Analysis  V. The Future of the Industry  Historical Overview of the automotive industry Various innovations influence the evolution of the automotive industry such as fuel, vehicle machinery, manufacturing practices and societal transformation. Other influences outside the industry include changes in the markets, changes in business structures and suppliers. Tichy (20-23) describes that the major evolution in the automotive industry is the introduction of the engine. The development was after the discovery of energy carrying means that include new fuels, and steam used in the 1700s. The new fuels in the 1800s included gas and gasoline. Later in 1876, there was the introduction of 4-stroke engine that involves the internal burning of gasoline fuels. In the same year, in Europe and America, there was an establishment of the first motor vehicle. In early 1900, the automobile industry introduced new technologies such as steering wheel and an accelerator. These two facilitated the growth of the industry, as vehicles became easier to operate. In the same years, societal developments occurred in America where they would provide a foundation for the production of automobiles. The government also introduced driver’s licenses and issued them to citizens. They opened many service stations and car sales improved with planned time payments. Many models were introduced in the same year, such as Ford and other designs, where cars assumed another appearance. In the 1910s, societal development, as well as technologies, improved significantly. This facilitated the introduction of new methods of manufacturing and improved business strategies. Choudhury (1) shows that in the US, the roads were safe for users after the introduction of traffic rights and road signs. In 1913, Henry Ford launched his assembly line that facilitated mass production of vehicles, therefore, gaining the economies of scale. The renowned assembly line of Ford had the mass production idea process where they operated through compatible and ordinary parts. The workers making these vehicles started moving to other companies and merged with, for instance, GM that bought Chevrolet. According to Darlington (1), during the 1920s, there were more improvements of social infrastructure, development of various practices, designs and more companies merged with other automobile companies, for example, Ford merged with Lincoln and Chrysler later merging with Dodge. The US government and Bureau of Public Roads also introduced a Bill that facilitated completion of various road projects and formulating of national road system policies. There was also development in manufacturing where there were improved practices leading to the accessing of and assembling satisfactory cars according to customers’ needs. The companies that manufacture automobiles, such as Ford, focused upon the production of one type of model while others, such as GM, took on product variety as a new production strategy providing various models. This strategy helped in increasing the market share of the company by about 20 percent reducing the competitors’ market share. In 1930s, the industry saw the development of several brands of vehicles from different companies. The new trend was also felt in consumer preferences where most of them distinguished the European and American markets. Consumers in the US market liked comfortable and large cars while those in Europe preferred smaller and economical cars. In the same years, companies such as GM continued to use their competitive strategy of producing a variety of models and it increased its market share against Ford that was losing customers. During the World War of 1940s, the industry closed down the production of citizens’ vehicles in favor of production of military vehicles and military hardware. After the war, most European and Asian-Pacific countries’ economy reduced. This called for more development in the industry such as an introduction of various business strategies, for example, Toyota Company employed the use of Just In Time (JIT) strategy in its manufacturing. There was no change of designs just after the war since the companies had to recover the loss that occurred during the war. The time during1950s and 1960s saw the introduction of more technologies and innovation. These included the use of fiberglass bodies. They also manufactured cars that consumed higher density ratio fuels that enabled the developers in calming the growing interest for many consumers who preferred look, comfort and feel of the vehicle. The various designs introduced were persuaded by the growing safety and environmental regulations imposed by the government. There was also the standardization of speed limits, seat belts, heating and aeration features. There was the introduction of numerous stricter environmental regulations in 1970s. This facilitated the production of vehicles emitting low carbon, for example, catalytic converters. Cars from Japan with same features of fuel efficiency, such as Japanese Honda Civic, entered the US market (Pearlstein 1). The automotive industry in the US lost its market share in 1980s to foreign vehicles of higher quality, fuel efficient and affordable. In response to the loss, the US market adopted Japanese strategies, such as JIT, in their manufacturing process. This helped in improving the quality of the automobile though it did not bridge the gap linking the competitor. In 1980s, there was another significant model in the nature of manufacturing. This is because automakers all over the world would assemble vehicles. This trend continued in the 1990s where companies started merging with other multinationals, and this resulted to global expansion in the industry. This increased product offering, new markets and lowered costs (Wood 1-2). These developments also came along with the internet explosion, as consumers were able to access vehicle information more easily. Consumers using the internet wanted a personalized vehicle that had features such as reliability, affordable and obtainable quickly. They also preferred environmental friendly vehicles and, therefore, the development of hybrid vehicles from Japan. In this decade, the industry has experienced increased sophistication. Consumers are also more empowered forcing automakers in identifying new specialized markets, for example, in the US where the market is flooded and has different customer bases. The other current trend in the industry is the penetration of new markets, for example, in Latin America and Southeast Asia. This has facilitated the development of production facilities and formation of global association and strategic partnerships with other foreign automakers. The China new market seems to be more promising (Pearlstein 1). Recent events that have significantly affected the structure of the industry Recent events have affected the structure of the automotive industry, for example, Toyota Company has had difficulty in dealing with political institutions. This is due to the increased government policies. Bonsor and Grabianowski (3) describe that in terms of the legal influence, the Toyota Company has had various directives and regulations. Such regulations include areas such as competition law, consumer protection law, taxations and emissions. The company, therefore, introduced a system of local suppliers who will help to cope with the increasing legal needs necessary to ensure national integration. Other events that have affected the structure of the industry include changes in technology. The industry has increasingly developed its technological systems. The industry, for example, builds around million cars in a week, and since this is, a complex product mass production becomes difficult. It, therefore, has to use manufacturing technology that assists in production of high volumes. The industry, however, has not fully exploited the potential for developing coordination skills and emotional sensitivities. Improved automobile technology is necessary as it reduces energy starvation and, therefore, is not affected by the changing oil prices (Bonsor and Grabianowski 2). Industry Analysis  The Five forces introduced by Michael Porter include the degree of rivalry, threat of substitutes, buyer power, barriers to entry and supplier power. They explain industry performance and the sources of competitive advantage in the industry.  The degree of rivalry Regardless of the increased concentration rations experienced in the US market showing a lower rate of competition in the industry, there is intense rivalry in both US and global automotive industry. Wood (1-2) shows the US automotive industry including Ford, GM and Chrysler has gone global as the global companies compete in the US, for example, Toyota and Honda from Japan entered the US market and focus in increasing their market share. One factor intensifying the rivalry in the market is the diversity of cultures and philosophies. There is slow market growth in the US and Western Europe and; therefore, companies have to fight aggressively to improve their market share. However, there is potential and rapid growth in other nations such as China and India. These markets have been booming due to the rapid industrialization, and most companies are taking advantage of opportunities to improve their profit. The other factor increasing the rivalry in the market is the high fixed cost of vehicle manufacturing and the low switching costs for customers who wish to change their models. Threats of substitutes According to Moore (210-213), there is moderately calm threat of substitutes in the industry. Despite the numerous forms of transportation in the market, none of them offers the same convenience, effectiveness, liberty as well as the value they get from automobiles. There are also higher switching costs in changing the form of transport, for example, from a car to train due to less convenience and efficiency. There exist essential social and cultural issues that do not enable some people from owning their personal cars. Not all nations are spread out like the US, and people may be limited by factors such as race, class or religion from owning personal cars. However, the global automotive industry is working on the issue to ensure that this situation does not persist. The industry aims at mass productions of cars worldwide. This is by ensuring that people with the ability and means of owning a car and those living in a geographical area with effective infrastructure in terms of fuel stations and roads may own vehicles of their own (Wood 1-2). Barriers to Entry There are considerable barriers in entering the automotive industry. This is because it is too expensive for a new company to enter into the market. It is not easy to afford the starting capital needed to form a manufacturing company and to achieve minimum resourceful amount. The facilities needed in the automotive industry are also specialized and, therefore, in case of failure of the business, it is difficult to reestablish. However, some of the recognized companies in other nations are entering the market through partnership or merging. Moore (210-213) explains that the barriers to entry are low, for example, in 1980s, the US invited the Japanese into the market once the automakers in the US failed to produce low price quality vehicles. The large companies have also entered the foreign markets through various levels of success. However, barriers to entry exist in new markets such as in Asia, South America and Africa unless a domestic introduction with potential to compete with global firms. Buyer and supplier power Between the industry and the suppliers, the power rests with the industry. This is because the industry has powerful buyers who have the ability of dictating terms of sale to suppliers. Tichy (20-23) shows the factors leading to powerful buyers in the industry include lack of an impressive production of companies that manufacture automotive with the leading manufacturers in the US having about 90 percent of shipment value and value added. The second reason is that vehicle parts such as mufflers, belts and filters are standardized and only used in vehicles. The third reason is the occurrence of a backward incorporation, for example, in 2005 where Ford purchased Visteon that dealt in making automotive parts. The relationship between the power of buyers and the industry, more power rests with the consumers. This is because of the standardized nature of vehicles produced and low switching costs for choosing a preferred brand. The automotive industry, however, remains slightly powerful where there is a large customer base as compared to producer ratio. Intra-Industry Analysis  Efficiency in production plays a major part in the industry, for example, Toyota has improved production through various innovative operational strategies. Ellis and McCracken (1) show these include the use of JIT and Total Quality Management (TQM). The Toyota Company’s current strategies also include optimizing their capital on investment in order to transfer technology more effectively. The manufacturing and the material handling processes will be removed from their original use and factories will be equipped and designed using other consulting engineering firms. Car manufacturers will then focus on forming strategies of being competitive in the market since competition will be rigorous. More attention will be focused in profit making processes and marketing. Largest producers have well-planned cost structures within the industry, as high costs are related to inefficient production and distribution strategies. According to Pearlstein (1), the major players in the industry include GM and Ford. These two are market leaders in terms of production because of improved management strategies. Competitors in the industry are well positioned in the industry. They use different strategies, for example, the value chain analysis to determine global strategies that would give the firm a competitive advantage. The Toyota Company faces a tight competition from other automobile companies. This is because of the increasing market competition and due to threats of new entrants, for example, the increasing markets from South Korea and China. The other threat that the company is exposed to is the risk of movement, for example, costs of resources that the company uses. These include steel, glass and fuel (Hanson et al. 77-79). The firm’s resources include human resources and physical resources. In human resources, the Toyota Company directly employs about 38, 000 employees from North America because of the large investments in the area which is more than 16 billion dollars. Hanson et al. (77-79) show in 2005, the Toyota Company produced about 14.8 million vehicles and in the total amount of sale were about 39.2 million vehicles. The purchased parts, raw materials and components in total were 26.1 billion. Numerous dealers in North America enable the firm to grow and achieve the company’s goals. The physical resources of the Toyota Company include all the factories that the company has around the world. The manufacturing and assembling plants are present in Japan, Australia, Poland, Turkey, South Africa, the UK, the US and many other countries. The Future of the Industry  Given industry and intra-industry analysis, the researcher’s opinion is that there is more to come in the future for the industry. This is because there are more trends arising, more opportunities available, for example, to people interested in franchising. The maintenance of cars, repairs and services are regular and, therefore, will be in demand given that people maintain old cars or buy new ones. With the introduction of the green movement, the industry will now focus on buying environmental friendly and fuel sufficient vehicles. Ellis and McCracken (1) explain that as the small market matures in the future, more demand rests on services from a business that understands catering for specific types of vehicles. The general trends in the industry show the next step, and evolving in meeting the new challenges. Kurczewski (1) describes that the trends include global expansion, distributed competition in the market, conglomeration in mature markets, increased environmental regulation and energy constraints and increased operational efficiency. The researcher of this paper predicts that the future trends in industry performance will also involve more franchise. Potential business owners that have an interest in the industry should venture into a franchise as it gives a good opportunity for all. This is because it provides a significant opportunity in the market that is untapped such as provision of auto transmission, accessories, car rentals and auto repairs. Works Cited Bonsor, Kevin and Ed Grabianowski. How Gas Prices Work. 2005. 2-3, Web. 5 October 2012, http://www.howstuffworks.com/gasprice.htm Choudhury, S. Ford set to start production of small car in India, 2009, Web. 5 October 2012, http://online.wsj.com/article/SB125197825802282897.html Darlington, Jose Hector. GM to make India small car hub, 2009, Web. 5 October 2012, http://www.mydigitalfc.com/companies/gm-make-india-small-car-hub-733 Ellis, Michael and Jeffrey McCracken. Harbour Report: U.S. automakers boost factories' productivity. 2005, Web. 5 October 2012, http://www.freep.com/money/autonews/harbour3e_20050603.htm Hanson, D, Dowling, P, Hitt, M, Ireland, R & Hoskissson, R. Strategic management, Competitiveness and globalization, 3 ed. Pacific Rim: Melbourne, 2008. 77-79. Kurczewski, Nick. More cars are coming from India, 2009, Web. 5 October 2012, Moore, H. Creating public value, Strategic management in government, Cambridge: Harvard University Press, 2010. 210-213. Pearlstein, Steven. “Big Three Lumbering Toward Failure”. 2005, Web. 5 October 2012, http://www.washingtonpost.com/wp-dyn/articles/A64666-2005Mar24.html Tichy, N. Managing strategic change, technical, political, and cultural dynamics, New York: John Wiley, 2003. 20-23. Wood, John, Gary Long and David Morehouse. Long-Term World Oil Supply Scenarios. 2004.1-2, Web. 5 October 2012, http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/oilsupply04.html Read More