Understanding of the Automobile Industry - Case Study Example

 The Automobile Industry Introduction Cars have become the most important form of transport since their widespread use after the Second World War. In the last century, the were considered to be the most important invention since they have affected more lives and have changed the world in more ways than any other invention such as computers, the internet, mobile phones or any other piece of technology. However, it must be noted that automobiles do not exist in a vacuum and there is an extensive and expansive global industry which supports this essential method of transport. Therefore an understanding of this industry is very important for any student of business, politics and even sociology. The Structure of the Industry The automobile industry is a textbook example of an industry where economies of scale pay a very important role. While there may be dozens of players around the world who produce, support and work with the industry, there are only a few producers who can claim to have a significant share of the market. Similarly, even though cars are produced in almost every developing and developed nation, only a few countries contribute in a significant manner to the global car production and consumption statistics. This can be attributed to the fact that the first automobiles were produced and developed soon after the industrial revolution by countries that had the required infrastructure and engineering skills. For example, the first steam powered three wheeler was built in France in 1769 and the first internal combustion engine was built in Belgium while the Germans made the predecessor of the modern car in 1885. Ford started his assembly line plans in 1896 and the mass production of motor vehicles was created as an established industry (Baki, 2004). In the modern world, there are just a few companies who define the overall structure of the automobile industry. They are: GM, Ford, Daimler-Chrysler, BMW, VW, Volvo, Toyota, Mazda, Mitsubishi and Nissan. These companies also formed an industry alliance which is called the Alliance of Automobile Manufacturers. In the last two decades, the industry has seen a spike in mergers and acquisitions which has consolidated many different brands of cars under the same company (Raisch and Zimmerman, 2006). Very recently, technology and innovation has come to the forefront of car manufacturing since the pervasive nature of technology has motivated car producers to accept it as a given focus. Current Challenges For the present companies in the automobile industry, there are several different challenges which must be addressed. The first and most important challenge is the continued profitability of the company in an environment where competition from equally advanced and competitive players is always a threat. In addition to that, smaller players from countries like China and Malaysia e.g. Proton are working hard to become big players by resisting takeovers and competing in similar segments of the market. Worldwide, competition has also driven consumer’s expectations about performance, styling, technological innovation, comfort levels as well as reliability upwards while the expectations of costs have been going downward. International agreements like the WTO and local trade associations mean that giant car manufacturers can produce cars in one country where labour and services are cheap and sell them in another where labour may be more expensive. In fact, the process of global sourcing and international business is directly and most visibly connected to the automobile industry (Baki et. al., 2004). This means that current producers are continually challenged to find ways in which they can lower costs while increasing the attractiveness of their products for various market segments. Even in the current scenario, industry experts expect that there will be few car manufacturers left in the world in a few decades (Raisch and Zimmerman, 2006). The rest will either close down, be absorbed by other companies or simply cease production due to losses. It must be noted that car manufacturing and the industry itself affects millions of people around the world therefore the closing of a production plant or even the change of the location of a production plant can have serious political and economic consequences which are also a public relations challenge for the current players (Baki, 2004). Perhaps the most important challenge for the automobile industry and the larger players in the industry is getting to grips with new technology. The challenge does not come from automotive technology but from other areas of technology like digital communications. For example, J.D Power and Associates studied nearly 30,000 car buyers in 2002 to discover that more than half the buyers look at the internet before making a buying decision about a car. Additionally nearly 90% of car buyers visit the car manufacturer’s website to get a better idea about the look and feel of the car. Therefore, the use of technology in this area is an essential requirement for car manufactures of today (Baki et. al., 2004). The current players would do well to learn the lessons taught by retailers like Wal-Mart and other industrial giants who have learnt to optimise their supply chains with the use of technology. This use of technology is more important for car manufacturers since increased efficiency of the supply chain would mean reduced costs, increased productivity and improved cost figures. These things would in turn lead to greater profitability. Of course they might not directly connect with political or social challenges but they might help in improving the solutions which can be given. This is because the automobile industry as a whole has come under a lot of pressure from environmentalists, governments as well as special interest groups to reduce carbon emissions and the creation of greenhouse gasses which result from the use of their product. At the same time, vehicles form the basis of our civilisations since ambulances, fire engines and even the engines for air planes would not function without the products made by car manufacturers. There is a very delicate balance between the requirements of the economy and the requirements of the environment and things like hybrid engines and alternative fuel cars can help this balance from a technological standpoint (Stein, 2004). Toyota and Honda for example, are Japanese manufacturers who have been very successful with their hybrid engines since they can work with the present fuel and supply networks around the world. A car running off hydrogen alone is difficult to sell since there are not too many operational hydrogen pumps in the country. Similarly, cars running on solar power or pure electric power come with their own technical challenges even though they may be cheaper to run than other cars. Key Factors for Success & Threats and Opportunities It seems that the most important factor for success in the automobile industry is the profitability of a company which can be maintained by taking a manifold approach to both the production and the sales process. The first step for any company in the automobile industry would be to set their own houses in order by establishing their production facilities in low cost countries. Locations like China, India and even Pakistan can offer facilities for production where the labour costs are comparatively low and the end product quality remains high (RBSC, 2006). In fact, the opportunity for obtaining the low costs comes with the threat that a company would also experience the negative effects of outsourced production. In many cases, proper training, established manufacturing procedures and company guidelines can tackle these problems but for some situations i.e. the design and evaluation of the product itself, it might be better to conduct these exercises in the home office (RBSC, 2006). Similarly, the future successful motor company will have a global supply network for parts and other equipment to get the most benefit in terms of cost and production efficiencies. At the same time, this brings the threat of failing suppliers and individuals who may not be able to produce a quality product. In these cases, a company would do well to look into multiple suppliers with excess capacities to handle the requirements of the company (RBSC, 2006). Successful companies would also realise that technology is a friend of the car manufacturer and not something which should be taken out of lower end cars. In fact, it is perhaps more advantageous to put some technological innovations available in high end cars in low end cars since it ads a lot of value for the person who is seeking a small car but still looking for creature comforts and amenities (Harbour, 2001). Additionally, by producing and sourcing more of the same technology a company would also gain economies of scale that reduce costs of the technology. Moreover, carrying the same DNA in terms of technology would bring some form of standardisation to the entire production line-up which would be extremely beneficial to both the buyers and sellers of the car (Harbour, 2001). Not to mention, maintenance of the mechanical object would be simplified if repairpersons and service providers understood that certain parts and components have been standardised across the production line (RBSC, 2006). Finally, any company who is currently in the automotive industry or plans to enter into the automotive industry must understand that good business practices and continued customer support/services are very important in ensuring that a relationship can be established with the customer base. Without having such an established, loyal and comfortable base of customers no company can hope to continue for long in this competitive business. New Entrants I do not consider the automotive industry to be an easy one to enter. First of all, it is a prime example of how economies of scale and costs to entry act as a barrier to entry for new manufacturers and it is unlikely that too many companies in the world would have the finances to take on the giants in the industry. However, I think that entering into the market as a niche producer of super luxury, super utility or super cars for that matter might be possible. Even then, a company would need to establish itself as a brand over time and custom produce cars until they could get to a point where mass production is possible. Companies like Porsche, Ferrari, and Lamborghini are all ancient names but they do not sell as many cars as Honda, Toyota or Ford. On the other hand, a company could position itself as a regional or local car manufacturer and limit itself to a particular country or region. In both cases, the investment would probably be a lot less than the required amount of money to compete with General Motors. Again, even if the company positions itself as a player in the niche market, it must stand out from amongst the crowd by giving some innovation, technological marvel or another unique selling point which makes it better than the rest. There are plenty of fast cars in the world, but manufacturers like Ferrari and Lamborghini dominate the scene for super cars. Similarly, Maybach, Rolls Royce and Bentley are names which are synonymous with luxury and opulence. Therefore, for any new entrant into the market, the situation can quickly become very bleak if they do not offer something which is tremendously better than what the established companies are already offering to the public. Then again, maybe something like a super economical car which does not need any fuel whatsoever is the answer for a new entrant but I feel that such things may remain nothing more than dreams. Word Count: 2,010 Works Cited Baki, M. et. al. 2004, Automotive Industry Analysis - GM, DaimlerChrysler, Toyota, Ford, Honda. AcademicMind.com, [Online] Available at: http://www.academicmind.com/scholarlypapers/business/management/2004-11-000aaa-automotive-industry-analysis.html Harbour, R. 2001. Small-Car profit strategies. Automotive Industries, vol. 181. no. 1, pp 13-15 Raisch, S. and Zimmerman, A. 2006. Changing Fortunes. University of St. Gallen. RBSC (Roland Berger Strategy Consultants). 2006, Six Key Purchasing Trends in the Global Automotive Industry. RolandBerger.com [Online] Available at: http://www.rolandberger.com/expertise/en/html/publications/2006-01-11-Six_key_purchasing_trends.html Stein, J. 2004. GM plans to launch 2 hybrids in China, Automotive News, vol. 79, no. 6116, pp. 16-17. Wikipedia. 2006, Automaker. Wikipedia.org, [Online] Available at: http://en.wikipedia.org/wiki/Automaker Read More