US Automotive Industry: Policy Overview and Recent History - Research Paper Example

ECONOMIC RESEARCH PAPER ECON600 Research Project 2 ………………….. Executive Summary The US automotiveindustry has long been both the pillar and great beneficiary of American economic growth and development. This robust industry, but has changed dramatically in recent years since the U.S ‘Big Three’ motor vehicle companies- General Motors, Ford and Chrysler- produced the overwhelming majority of vehicles sold in the U.S and employed more than one million Americans in manufacturing motor vehicles, equipments and parts (Cooney and Yacobucci, 2007, p. 1). The very recent economic-profiles of the U.S automotive industry have shown that major players are experiencing market failure and this will have a devastating impact on the US economy. This piece of research paper is an attempt to present a strategic analysis of US automotive industry by using Porter’s Five Forces model, which is one of the best strategic analysis widely used to measure and assess the competitive position of a company within its industry. This research paper presents a brief outline of the US automotive industry-profile and addresses five forces in detail, they are competition rivalry, threats of new-entrants and substitutes and bargaining power of suppliers and buyers. Introduction to the US automotive Industry Industry Definition The US automotive industry includes all those firms and their activities involved in designing, developing and manufacturing of motor vehicles and major components like engines, bodies but excluding tires, batteries and fuels (Automotive Industry, 2010). The main US automotive marketers are Big-Three- (GM, Ford and Chrysler), Navistar International Corporation and Paccar Inc. Industry Profile and Structure There are currently many structural issues in the US automotive industry which in turn foreign auto-marketers have been able to take advantages and gain greater competitive advantages too. Datamonitor (2009) found that these issues include greater dependency on cheap oil, preference for building big cars, under-emphasis on fuel efficiency and excess capacity and legacy costs (p. 5). The recent economic turmoil and increasing oil price have eventually led the Big-Three to experience such structural issues. General Motors, one of the largest auto-manufacturer in the word, traces its root back to 1908, headquartered in Detroit. With various brands like Buick, Cadillac, Chevrolet and GMC, it manufactures a wide range of cars, trucks and auto-parts (Company Profile, 2010). It employs more than 200,000 people throughout its businesses in more than 120 countries. in very recent years, GM has experienced significant financial crisis that has threatened its market feasibility (General Motors Company Profile, 2010). The sales of General Motors in 2009 has been accounted to be slashed by 45% in 2008 and experienced 25-year low in its annual sales rate. Ford, one of the largest auto-manufacturer, designs, manufacturers and markets cars, truck and auto-parts mainly through its brands Ford, Mercury, Volvo and Lincoln. Ford provides retail and wholesale financing too, including purchasing retail installment sale and retail lease arrangements from both individual and corporate customers. Ford’s major market is from North America, as accounted to be half of it total sales, even though it has around 90 large plants around the world. Lavrinc (2008) reported that the future of Ford’ RWD vehicles, due to a number of economic factor like financial turmoil and increasing fuel price, is uncertain. Chrysler International Corporation, one of the Big-Three players, designs, manufacturers and sells vehicles in more than 120 countries through wholly-owned subsidiaries and independent market-dealers. Chrysler has recently filed a petition for reorganization under chapter 11 in the US Bankruptcy Court of New York and this was later recognized as Chapter 11 liquidation on April this year. Ford, after it has survived Chapter 11 bankruptcy reorganization in 2009, it has made significant position strategies for an automotive resurrection by entering in to strategic-alliance with Fiat (Chrysler Group LLC company Profile, 2010). Future Outlook It has been reported that due to various factors like growing unemployment and increasing fuel-price, demand for car and other vehicles is declining and it will have devastating impact on the future of automotive industry and the economy as a whole. US. Auto sales in the last August has been the worst for 28 years. Increasing bankruptcies will be a very significant factor that will dramatically impact the slowing demand for cars and vehicles (Bloomberg News, 2010). Porter’s Five Force Strategy Analysis of the US automotive Industry Porter’s Five-force analysis is one of the most widely used industry strategic analysis and is considered to be an effective competition-measurement tool that helps determine the levels of competitions, internal and external environment of the industry and the effectiveness of strategies implemented firms in the industry. Porter’s five force model highlights the basic concept that the business environment is broad, but still, it is largely influenced by its industry, mainly through the five forces, that are competitive rivalry, power of suppliers, power of buyers, threat of new entrants and threat of substitutes (Porter, 1998a, p. 3). Porter (1998b) emphasized that the rule of competition is embodied in the above mentioned five competition forces. The collective strengths of these five marketing forces determines the ability of firms in an industry to generate profits, and earn rate of return on investment in excess of the cost of capital (p. 4). As Porter (1998b) noted, the five-forces framework allows a company to see the complexity and identify the factors that are highly critical to the competition in the industry and also to recognize strategic factors and innovative elements that impact the profitability as well (p. 7). The five-force strategy analysis of US automotive Industry 1-Threats of New-Entrants Potential new entrants are often blocked by the cost or difficulty of entering a market (Kurtz, MacKenzie and Snow, 2009, p. 56) and thus seems to be low-threat on the existing firms in the industry. When it comes to automotive industry, potential new entrants is generally a very low threat due to that a company planning to start an automotive manufacturing requires heavy upfront capital requirement and strong brand equity. These are some of the very essential elements that a firm requires to successfully market its products. With no heavy capital requirements and strong brand equity, it cannot reach potential customers. Due to these factors, the potential threat of new entrants seems to be very low in automotive industry. Automotive as well as automobile industry requires advanced technology and huge spending on updating the technology. The present day auto-industry is keep on focusing on newer technologies in order to bring major positive changes and more attractive less costly vehicles to the customers. For a firm to enter in to this industry, it requires such huge spending and many financial as well as legal requirements and therefore this threat seems to be relatively lower. 2-Threat of Substitute Products As Kurtz, MacKenzie and Snow (2009) noted, when customers have an opportunity to replace a company’s products with goods from another firm or industry, the company’s market needs to take newer strategies to gain competitive advantage as substitute products-availability, often, drive companies out of the business (p. 57). In car industry, there are varieties of cars that almost look similar and people may prefer switching between cars. Differentiation is thus an important element that a firm within the industry can help gain a competitive advantage. Similarly, some people may prefer luxury-motor bikes to cars. Due to these factors, there are potential threats of substitute products in the automotive industry. 3- Bargaining Power of Suppliers Customers are today more powerful and they are most likely to influence the strategy of a firm. When it comes to the US automotive industry, customers wield significant power in taking busying decision of cars no matter they buy single or more than one for their personal or family use, and they are able to use bargaining power. People with a motive to own luxury or sports car are likely to use less bargaining power in comparison to those who buy vehicles for general use. 4- Bargaining power of suppliers Suppliers have significant bargaining power Kurtz, MacKenzie and Snow, 2009, p. 57). For instance, if Ford has only one supplier from New York, this supplier will have more bargaining power on the company. Currently in the US auto-market, there are many suppliers for auto-parts, components and accessories. Bargaining power of suppliers in the US automotive industry thus seems to be relatively a lower threat. 5- Competitive Rivalry The above four forces show how severe is the competition between firms within the automotive industry. In almost all countries, the automotive industry is very competitive. The US automotive industry is very competitive and there is fierce competition between the Big-Three. Product differentiation and innovation are some of the major factors that fuel the competition among the auto-companies in the US. Conclusion This piece of research paper has described the present business environment of the US automotive industry and has pinpointed major significant factors that determine the future profitability of firms within the industry. This paper has given a brief strategy analysis of the US automotive industry, by using five forces model and has discussed five forces- that are competition rivalry, potential threat of new entrants and substitutes and bargaining power of suppliers and buyers. References Automotive industry, (2010), In Encyclopædia Britannica. Retrieved December 20, 2010, from Encyclopedia Britannica Online: http://www.britannica.com/EBchecked/topic/45050/automotive-industry Bloomberg News, 2010, Global Auto Industry Outlook Dims as U.S., China Markets Slow, Bloomberg News, Retrieved December 20, 2010 from http://www.businessweek.com/news/2010-09-09/global-auto-industry-outlook-dims-as-u-s-china-markets-slow.html Chrysler Group LLC company Profile, 2010, Chrysler Group LLC company Profile, Industry Centre, Auto Manufacturer, Major, Retrieved December 20, 2010, from http://biz.yahoo.com/ic/10/10334.html Company Profile (2010), Company Profile, gm.com, Retrieved December 20, 2010 from http://www.gm.com/corporate/about/company.jsp Cooney, S and Yacobucci, B.D (2007), U.S. automotive industry: policy overview and recent history, Illustrated edition, Nova Publishers Datamonitor (2009), Feature Analysis: Will Obama "change" the fortunes of the US automotive industry?, MarketWatch: Automotive, Datamonitor General Motors Company Profile (2010), General Motors-Company Company Profile, Industry Centre, Auto Manufactures, Major, Yahoo Finance, Retrieved December 20, 2010 from http://biz.yahoo.com/ic/10/10640.html Kurtz, D.L, MacKenzie, H. F and Snow, K (2009), Contemporary Marketing, Second edition, Cengage Learning Lavrinc, D (2008), Uncertain future for Fords RWD vehicles, more EcoBoost on the way, autoblog.com, Retrieved December 20, 2010 from http://www.autoblog.com/2008/07/14/uncertain-future-for-fords-rwd-vehicles-more-ecoboost-on-the-w/ Porter, M. E (1998a), Competitive strategy: techniques for analyzing industries and competitors: with a new introduction, Illustrated edition, Simon and Schuster Porter, M. E (1998b), Competitive advantage: creating and sustaining superior performance : with a new introduction, Illustrated edition, Simon and Schuster Read More