Global Automobile Car Manufacturing Industry - Essay Example

Global Automobile Car manufacturing industry Executive Summary The analysis focuses on studying the global car manufacturing industry with respect to its structure and trends. The industry has been analyzed using the PESTLE, Porter’s five forces models and numerical data. Based on the analysis, we have concluded that under present circumstances, this is not a very lucrative sector to compete in. The report also looks at the key success factors that can help in driving performance in this industry. Introduction Henry Ford made America a leader in car manufacturing by developing the first car in 1986 and later developing the assembly line technique for mass production (Highfill et. al 2004). This dominant position was captured by Japanese manufacturers, in the later years of the 19th century, by providing more efficient and low cost cars using the ‘lean’ production systems. Over the years the car manufacturing has evolved a lot, with companies trying all means (including mergers and acquisitions) to reduce manufacturing costs and increasing efficiencies. The production bases of most manufacturers are shifting from developed economies to low cost Asian economies which are also providing them with huge customer base on account of their high economic growth. The 2009 financial crisis has further reduced demand in US and Europe. To save the industry, governments doled out huge packages and today they hold stakes in these firms. For example, US government holds 8% stake in Chrysler (sub5zero.com, 2010). Current trends in auto industry PESTLE analysis Political This industry is greatly impacted by the government regulations. For example, there have been a number of emission norms set by the US government to address the environment concerns. Similarly the European countries have also been passing emission norms (Euro 1, 2 and so on) which the car manufacturers have to comply with. The emerging markets have also started passing such regulations. Besides these emission norms, governments also pass mileage per gallon laws and passenger safety laws. Economic Car industry is highly sensitive to the economic scenario of a country or an individual. A car is seen more as a status symbol than as a requirement. Hence the consumers are likely to postpone their buying decision in case of financial crisis. A study by Frost & Sullivan (2010) shows that “in general recessions in this industry last for two to three years”. As per data trends (appendix fig. 1), the low demand resulting from the 2009 crisis will also follow similar trend. The study also shows that demand in key global markets has gone down by 14% on account of the crisis (appendix fig.4). The industry also has very deep impact on the economies of the countries that have so far dominated the car manufacturing markets. For example, “in the US, for every autoworker, there are seven other jobs created in other industries” (Highfill et. al 2004). Socio-cultural As mentioned earlier, a car is seen as a product that boosts ones image. Hence, the customers are willing to pay even high price for a brand that helps them show off their wealth. But there are some others who expect value for the money in terms of better efficiency and low emissions. Technology Technology is a very important aspect of car manufacturing. Today the consumers are very demanding as far as technology is concerned. Thus, the auto companies need to keep investing heavily in R&D. It is expected that by 2015, 25% of the vehicles will be high technology cars (Frost and Sullivan 2010). In 2008 only 11% cars fell under this category. Looking at the graphs in appendix fig.6, we can see that America and Europe will be the major drivers of this trend. Another face of technology, the internet, is also playing a very vital role in auto manufacturing industry. Today, the consumer can look at the various options available to him and compare them sitting at home. The buyer has thus become more choosy and demanding. Legal Different countries require different legal requirements to be fulfilled for manufacturing as well as using vehicles. For example, some countries tax second ownership of a car. Such legal requirements impact sales. Environmental Carbon-dioxide emission from vehicles is today the biggest polluter and responsible for green house effect. Thus, both the governments and the manufacturers are looking for alternative green technology. Another reason for this is the depleting oil reserves. Thus, the companies are investing heavily on technologies of the future which are hybrid cars or electric cars and so on. These are heavy capital investments. Conclusions Globalization has today become a key survival tactic of most car manufacturing companies. Thus, most of them get key components manufactured in various low-cost countries and assemble them at the manufacturing site which might be another low cost location. Another trend has been to find more specialized markets within the saturated markets with diverse customer base (Bradley et. al 2005). The 2009 financial crisis had a very negative impact on auto sales (Appendix fig.4). All the developed economies, except for Germany, showed a negative growth in sales. However, a study of the various trends shows that the current low demand from developed economies will be boosted by an increase in demand from emerging markets economies (appendix fig.2). One disturbing trend of this crisis has been overcapacity of 25-30% (appendix fig.3). A very interesting fact brought out by the study is “the expected shift in consumer preference towards niche segment over conventional designs”. This would require continuous innovations in design besides the technology. Critical success factors for the industry Porter’s five forces analysis Degree of rivalry This is very high as American and European markets have matured. This is further intensified by low switching costs. The capital costs are also very high and there are any manufacturers available for similar products. Threat of substitutes This is not very high for this industry because there are not many substitutes available for cars. Only substitutes could be public transport or two wheelers and the last option could be walking. None of them would be preferable if a customer has specific needs for a car. Bargaining power of buyers Buyer bargaining power is pretty high due to low switching costs. Bargaining power of suppliers This is in the industry’s favor as there are many suppliers. Hence, they do not have much bargaining power. Also, most of the car manufacturers are very big as compared to the suppliers. Threat of new entrants This is very low due to high barriers to entry. One barrier is the high capital cost and the second is the difficulty of reaching economies of scale. As only old entrants can reach economies of scale due to existing setup, it becomes difficult for new entrant to reach those levels. Conclusions Looking at the various analyses we can conclude that the industry is highly competitive and matured. In the current situation, emerging markets are the only sales boosters for the industry, but here again there is tough competition, with all the companies running for their share. “Critical success factors are the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization” (Rockart 1979). Following are the critical success factors for auto industry. R&D The most important fact for success in this industry is technological innovation. With the governments becoming more active auto industry players, it will be impossible to do business if the emission and other technological norms of the various countries are not adhered to (wallstreetpit 2010). Hence, companies need to invest in technologies of the future which are pollution free and energy efficient. This is mainly because energy and environmental policies will be responsible for molding the future of companies in this industry (wallstreetpit 2010). Even today, innovation and product differentiation are driving the industry. As per studies, mergers in a fragmented industry increase the scope of innovation (Hashmi and Biesebroeck 2009). Since, this industry is already concentrated, further consolidation could lead to reduced innovation. However, emerging markets provide a great scope for further consolidation and hence innovation. Low production cost Keeping low costs is the second critical success factor. Though the companies are shifting production bases to low cost countries to achieve price advantages, they are finding it difficult to develop supplier network. A strong supplier network with the ability to quickly adapt to the changing technological requirements is essential for the future success of the industry. Though today, low cost production bases have become critical success factors for this industry, the future success lies in the ability to set up a high tech supplier base. Adaptability to regional preferences Customers today have become very choosy. Thus, it becomes vital to understand their preferences before launching new models. A model that works in one country may not be preferred in the other. As the companies are becoming global, they need to quickly come up with alternatives for niche segments. For example, Ford bounced back in December 2009, after the crisis year of 2008, when it came up with new designs of its Taurus, Fusion and Escape models (wallstreetpit 2010). Depth of production Today, only 30% of the parts are made by the car manufacturers themselves (oliverwyman.com 2006). Though many companies have gone for mergers to get the synergistic effects, this will not work for the future. More self reliance in future will be a key to success. References Bradley, D., Bruns, M., Fleming, A., Ling, J., Margolin, L and Roman, F, 2005, Automotive Industry Analysis, viewed on October 20, 2010 http://www.academicmind.com/unpublishedpapers/business/management/2004-11-000aaa-automotive-industry-analysis.html Frost and Sullivan, 2010, Key trends in Global Auto-Component Industry and its Implications on Regional Players, viewed on October 20, 2010. http://pdfcast.org/pdf/key-trends-in-global-auto-component-industry Hashmi, A.R. and Biesebroeck, J.V., 2009, Market structure and innovation: A dynamic analysis of the global automobile industry, viewed on October 20, 2010 http://www.ftc.gov/be/workshops/microeconomics/2009/docs/vanbiese.pdf Highfill, H., Baki, M., Copus, S., Green, M., Smith, J and Whineland, M, 2004, Automotive Industry Analysis - GM, DaimlerChrysler, Toyota, Ford, Honda, viewed on October 20, 2010. http://www.academicmind.com/unpublishedpapers/business/management/2004-11-000aaa-automotive-industry-analysis.html oliverwyman.com, 2006, Oliver Wyman strategy monitor for the automobile industry – Success factors for the future – Auto makers seek a decisive competitive advantage, viewed on October 21, 2010 http://www.oliverwyman.com/ow/pdf_files/PR_en_Automotive_Strategie_Monitor_dig_cr.pdf Rockart, J.F, 1979, Chief Executives define their own data needs, Harvard Business review. sub5zero.com, 2010, Report: US & Global Auto Industry - 2010 State of the Union, viewed on October 21, 2010 http://www.sub5zero.com/featured/report-us-international-auto-industry-2010-state-union-scorecard wallstreetpit, 2010, Auto Industry Outlook and Review, viewed on October 20, 2010 http://wallstreetpit.com/35121-auto-industry-outlook-and-review-july-2010 Appendix Figure 1* Figure 2* Figure 3* Figure 4* Figure 5* Figure 6* *Figures from Frost and Sullivan 2010 Read More