Production and Operational Management in the Auto Industry - Term Paper Example

? Topic: Production and Operational Management in the auto Industry Focusing GM vs FORD vs Foreign Auto Makers. Submitted Submitted by: Submittedon: 29 June 2011 Present Day US Auto Industry Termed as the Big Three, Ford, GM and Chrysler are the world renowned US auto makers that were once the sole dominating powers over the US Auto Industry. These Automotive giants ruled not only the automotive industry of the US but also the world over for decades. Specially the first two, GM and Ford were commonly understood as Big names in automotive production. Their names had for long been considered as status symbols. They even had a great deal of say in the political sector of USA. Their political power was due to a fact that had been narrated by the CBC News article in the following words: “The L.A. Times recently calculated that since 1990, the auto industry as a whole has donated $100 million US to Republicans and $34 million to Democrats.” From the year 1951 to the year 2007 Ford had been ranked third in all the automotive manufacturers of the world. After maintaining this position for fifty six years the company lost its position worldwide. It, however, still remained at third position in the US auto industry. The recent times have however depicted a recession of Ford and GM in their native country’s automobile industry. This recession has given space to foreign automobile manufacturers to establish their position by introducing their models in the industry. Currently these foreign automotive industrialists are leading the industry. BACKGROUND OF THE PROBLEM. Ford and GM were the largest vehicle producing giants in USA once. They assisted their country’s economy massively by producing generous revenue and benefit packages for labor. Ford and GM held their importance in the US automobile industry not only because of their size but also because of their business volume. Their loosing of their stature, however, was owing to a number of reasons. Those reasons can be summarized as follows: This meant that a major number of operations in them were distributed into unions or rather termed as being “Unionized”. This led to a rising labor cost that incurred to these industrial giants. The labor costs of their international emerging counterparts were however very less as they did not practice unionization. Even the counterparts that had their manufacturing units in the US did not face the said problem. (Van Praet, 2008). WHY THE RECESSION? A number of issues led to the downfall of Ford and GM along with other US automobile manufacturers. Quality Compromised Among various issues was that of the maintenance of Quality by these giants. Stephen Robbins (2009) mentions their carelessness and compromise in the maintenance of their products in his book ‘Management’ in the following words: “U.S. car industry is often used as a classic example of what can go wrong when managers focus solely on trying to keep costs down. In the late 1970s, GM, Ford, and Chrysler built products that many consumers rejected...... When the costs of rejects, repairing shoddy work, product recalls, and expensive controls to identify quality problems were considered, U.S. manufacturers actually were less productive than many foreign competitors. The Japanese demonstrated that it was possible for the highest-quality manufacturers to be among the lowest-cost producers. American manufacturers in the car and other industries soon realized the importance of TQM and implemented many of its basic components.” (Robbins, 2009) The above statement clearly highlights how the erroneous strategy of leading automobile manufacturing giants of USA gave room to their foreign counterparts. Even though they learned their lesson and tried to improve on their mistakes but it was too late then. The market shares that they once lost were not repairable. So was the inclusion of these counterparts in the industry. Retailers knew they had equally better options to go for and that too often at lesser costs. Product SUV’s have been a major strength of the American Automobile manufacturers. Adored and adopted world over the SUV’s had been soaring in demand ever since their introduction. The sales of the much acclaimed Sports Utility Vehicles reached their peak in the year 1990. Their popularity has however decreased since then though not at a very rapid rate. The emphasis of the US car makers remained on big SUV’s as they were their specialty and not much attention was paid to sedans or other smaller vehicles. Ever since the Japanese originated automobile manufacturers introduced their goods into the market since the early 2000, the sales of SUV’s had been going down. The remaining setback to their sales was imposed when gasoline prices started surging since the year 2005 onwards. The year 2008 saw that gasoline prices had reached $4/gallon. Since large vehicles consumed more gasoline its rising cost resulted in the decrease of SUV sales by 29 per cent. The Japanese competitors did not get worried with the rising gasoline prices as they excelled in the making of smaller and fuel efficient vehicles. It was also that within the same time period Japan was working on gasoline – electronic hybrids. Labour Labor was an enormous reason why GM and Ford lost their market share. A major number of operations in the automotive industry of GM and Ford were distributed into unions or rather termed as being “Unionized”. This led to a rising labor cost that incurred to these industrial giants. The labor costs of their international emerging counterparts were however very less as they did not practice unionization. Even the counterparts that had their manufacturing units in the US did not face the said problem. (Van Praet, 2008). Another clue to the downfall was related to the incentive that General Motors gave its employees. One of the incentives was the backup and maintenance of insurance health plan for the employees, their families and old employees who had retired. This ethical gesture however resulted in incurring of massive costs that were never lesser than a double digit figure each year. Figure 1: In January 2006, Ford announced it was cutting as many as 30,000 jobs and closing 14 plants, including the Windsor: , Ont., casting plant. (Carlos Osorio/Associated Press file photo) General Motors attempted to make a pact with the unions that worked for them. According to this pact GM was allowed by its Unions to cut down its expenditure that incurred each year on the health sector. The Japanese competing automakers had no such issues as dependency on unions etc. They took clear edge over GM and Ford’s policies by staying away from unionized structure and getting their work done by young American workers. These well constructed policies in turn gave them clear cost advantage over the US Manufacturers. The productivity of labor that worked for the US automobile giants and their foreign competitors differed. According to CBC News, “The 2005 Harbor Report estimated that Toyota's lead in labor productivity amounted to a cost advantage of $350 to $500 US per vehicle over North American manufacturers.” GM VS FORD VS FOREIGN AUTOMAKERS Ford vs GM: The context The competition based contention between Ford and General Motors is seen as the biggest and oldest rivalry in the history of American business arena. Billions of dollars were spent by these giants on the production of better models and on their marketing campaigns. Both the automobile giants had witnessed a lot of problems in their century long competitive association. The rise in oil prices, reduction in demand for the bigger cars, the incursion of Japanese car makers to steal the local market, the recession, downsizing etc. were among few of the memories of hard times. The year 2009 crisis badly affected the big three automotive manufacturers of America including Chrysler. The governmental cushion given in the form of bailout plan made it possible for the automotive sector to survive. The General Motors then showed a much awaited mild inclination in its profits, while Ford just survived. Despite all odds the race between the two automobile giants is still on. History The General Motors came into being in Michigan in 1908. This was exactly five years after Ford was founded in Detroit. It was since then that both the manufacturers tried to beat each other in terms of market share, annual profit and market capitalization. Ford enjoyed the market leadership till the late 1920s, then in 1980s and again in 1990s for very short intervals of time. General Motors remained ahead most of the times though with the pinching presence of Ford. Current status Presently, under the leadership of new CEO Dan Ankerson, the downsized, light weight and swifter GM is ready to take up new challenges. With the inclusion of young blood and aggressive ambitions, the GM is set up for producing better automobiles and for acquiring bigger sales volume. The ever cautious, focused and smart Ford with a 20% increase (Taylor, 2011) in share price in the current year is in the race under the supervision of CEO Alan Mulally. Future analysis The analysts’ perspective for this battle ground is different though. They don’t see this inclination as a durable effect. To them, due to extra ordinary marketing expenses and rival bounded policies, an overall damage to American car market is yet again expected. They term the outsiders as real competitors for both the giants and according to their viewpoint both the companies have to change their positions for survival against the intruders. The experts termed the market as merit based. This meant that the best consumer product would win irrespective of the fact that whether it was local or imported. At the end of year 2010 GM’s market share was 19.6% while Ford’s was 16.6%. According to the figures of May 2011 (Table 1), these values currently are 20.8% and 18% respectively for GM and Ford. According to these figures The Ford is closing in on GM. The analysts have different opinions forecasting the rest of the year’s performance. Some predict a downfall in the market share of GM with the end of its incentive based schemes while others see a stable edge of GM over Ford till the end of the year due to the validity of its products. Some experts are in favor of stable pricing of Ford and termed it as a discipline in the automobile market. To them the higher oil prices would disturb the sale of Ford pickups but if the ‘Ford Focus’ gets a click in the market the odds may turn towards GM. The Foreign Auto Makers: Current issues The current market share of the big three American car manufacturers for light cars as per the end of May 2011 is given to be 49.7%. The rest is enjoyed by the foreign cars manufacturers. The Table 1 depicts the figures. Table 1. Percentage Market Share of Automotive Manufacturers in America Car Market for May 2011. (Source: www.motorintelligence.com) . Manufacturer GM Ford Chrysler Toyota Honda Nisssan Hyundai Mazda Mitsubishi Kia Suzuki Mercedez Subaru Volvo VW Audi BMW Porsche Others Share in % 20.80 18.00 10.90 10.20 8.50 7.20 5.60 1.70 0.70 4.50 1.90 1.90 0.20 0.70 2.80 1.00 1.90 0.30 1.20 Figure 2: The percentage share of local and foreign automakers in American Market The current situation shows a tentative stability after the crisis of 2009. Sales figure is expected to be 14m this year as compared to low 10m two years ago. The $60 billion bailout plans from the American government and the relaxation in debts by filing bankruptcy gave the American car industry a temporary sigh of relief. The pressure is still there and the major share in the light vehicle market is still enjoyed by the foreign car makers. Out of the big three the GM showed profits but the rest of the two that are Chrysler and Ford are barely surviving. The European ventures of GM and Ford are losing profits. In the opinion of experts and analysts the signs for the future don’t seem healthy. The factors that intensify the misery are told to be several. The global demand for American cars is lesser than the production capacity. During the hard times the government schemes supported the car manufacturers by encouraging people to buy bigger cars. Those schemes are not there now. The fuel prices are likely to be increased in future, which in turn would demand fuel efficient small cars. The associated profit of small cars is always small. Bigger cars bigger profit paradigm is likely to get hurt due to this fact. Another reason told for the likely hood of increased demand of small cars is the higher proportion of old age population in future. The social impact would thus affect the car market as old people tend to achieve basic objectives mostly. The powerful engine, joy drive and luxury cars usually remain the youth’s concerns. The China Factor China with its strong and surplus car manufacturing capacity poses a great threat to the businesses in the rest of the world. This two edged sword is cutting the profits of the western manufacturers on both sides. On one hand the lethal production capacity is a potential danger, while and on the other hand the use of big luxury models produced by the western manufacturers is likely to reduce to 30%. The reason for this is the governmental restriction of limiting the number of cars in cities by the Chinese government. The Chinese car manufacturers, who would also get affected by the same restriction, will definitely try to explore the markets beyond the borders. The proposed solution: The car manufacturers in experts’ opinion would have to associate the production to retail (on demand production) in order to minimize the cost of holding stock. This would be a simple strategy for increasing the profits. This scheme would result in another set of problems that would be even harder to handle. A chance of losing the market share due to late delivery is one of the potential hazards. WHAT THE FUTURE HOLDS The future is inclined towards the production of fuel efficient vehicles. This segment working under the US Automotive Giants is referred to as CUV’s or Car-Based Crossover Vehicles. Economist Carlos Gomes from Scotiabank, refers to this new area of production as good news for the American Auto industry. The sixty percent market share that the Japanese foreign auto makers possess poses to be a continued threat to the US Giants. The latter need to revamp their brand lay out and also reinitiate their old dealer network. Their remaining plants and products also need a boost. CBC News quotes that the future products of Ford Include a gas/electric Fusion hybrid, a Mercury Milan hybrid and increased the efficiency of its vehicles overall. GM has pioneered new battery technology for its Chevy Volt and come up with a fuel cell-powered concept car called the Chevy Equinox. (CBC News, 2009) CONCLUSION Assessing the above mentioned state of USA Based automobile makers and the competition that they get from their Asia based competitor it can very well be said that Ford and GM should forget the differences between them and should work upon their survival techniques. Among these techniques might be the recognition and production of new products, efficient planning, and reduced number of employees. Over a few years these strategies might bring fruit. (CBC News, 2008) REFERENCES Taylor A. (2011, March 23). GM vs Ford: The Hundred-Year War. CNN Money, A service of CNN, Fortune and Money. Retrieved from http://money.cnn.com/2011/03/22/autos/gm_ford_war.fortune/index.htm ‘The Wall Street Journal’ (2011, June 1). Market Data: Auto Sales. The Wall Street Journal. Retrieved from http://online.wsj.com/mdc/public/page/2_3022-autosales.html ‘The Economist’. (2011, January 13). Car Industry: Danger Ahead. The Economist. Retrieved from http://www.economist.com/node/17902719. ‘The Economist’. (2011, January 13). A Crowded Car Industry: From Big Three to Magnificent Seven. The Economist. Retrieved from http://www.economist.com/node/17902837 ‘The Good Car Guy’. (2011, June 9). Small Car Sales, Mid Size Car Sales and Large Car Sales in America, May 2011. Good Car Bad Car: Auto Review, Analysis, Stats and Opinions. Retrieved from http://www.goodcarbadcar.net/2011/06/small-midsize-large-car-sales-america.html. Dunne J., (2009, October 1). Who Killed The American Car? Nobody!. Popular Mechanics. Retrieved from http://www.popularmechanics.com/cars/news/4220155. ‘CBC News’. (2009, May 8). The Used-To-Be Big Three. CBC News. Retrieved from: http://www.cbc.ca/news/business/story/2009/02/17/f-bigthreeupdate.html REFERENCES Robbins P. S., Coulter M. (2009). Management, 10/E. (n.a.). Prentice Hall. Read More