The Automobile Industry
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. They have become a part of our daily lives and help us continue our existence and provide us with the services which are required for civilisation.
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. Along with an understanding of the relevant issues of the automobile industry, it is also important to understand what can be done and what is being done by the players in the market to overcome these issues.
Fundamentally, 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 (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 (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.
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 ( 2004).
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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 (2004).
For example, BMW is a global brand and it has to position itself according to the global market requirements for high end cars. In many places, the demand for luxury cars may not be as significant as others and since BMW is primarily a manufacturer of luxury cars, it should consider making inroads into areas like China and the Asia Pacific region where market growth is expected to boom in the coming years.
Moreover, economic competition for BMW is rather difficult since it competes more on the idea of luxury and style which is often much better than the other producers in the market. However, for markets where the buyers are seeking to economise on their cars, the MINI brand can work quite well if the market segmentation is handled effectively ( 2001). Additionally, cars running on alternative fuels such as hydrogen and cars running with hybrid engines can also be created for markets where there is an adequate support network for both.
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 ( 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 significant public relations challenge for the current players ( 2004).
Perhaps the most structural 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 (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 (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.
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 (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 ( 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 ( 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 (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 ( 2001). Not to mention, maintenance of the mechanical object would be simplified if repairpersons and service providers at all locations of the company understood that certain parts and components have been standardised across the production line ( 2006).
Any company who is currently in the automotive industry or plans to enter into the automotive industry must understand that good business practices in relation to outsourcing and continued customer support/services for all locations where the company operates 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.
Outsourcing can also be done with the setup and launch of a new production facility which always requires careful planning and a complete analysis of the given situation before any move is made towards the establishment of an automobile production plant. The external environment in some cases can be slightly hostile since some localities may be opposed to the pollution levels or tax breaks given to such plants. Additionally, HR related problems may also be faced by the company due to the lack of local availability of key players or highly skilled labour which is needed for automobile production today.
Despite these problems, a company can handle all of their issues if they plan the new plant carefully and HR from other locations within the same country or from other countries as outside consultants. Similarly, local partnerships and strategic alliances can also help improve relationships with local communities which would eventually be beneficial for all parties rather than create an air of hostility. Additionally, automobile producers can also be advised to keep a continual check on the progress of the situation for their outsourcing needs at least during the early stages of the development and operations of the plant.
Since a new plant requires key decisions to be made on a daily basis, it is highly recommended that one or more of the board members with top decision making powers be delegated to work onsite until the plant is stable enough to be managed as a day to day operations by delegated individuals. This would be a temporary move and would only be necessary until the board itself decided that a delegated authority could now handle the operations of the automobile production plant.
The strongest recommendation goes for a board member who has had a certain level of experience in operations management, PR, or recruitment in relation to outsourcing since all of these departments would need a heavy presence at the new plant during the time it is being setup and while it is operating with a skeleton crew. As more members are added to the plant as layered middle managers, senior managers or higher executives, the requirement for the presence of a board member is diminished as duties can be delegated and passed on to those individuals (2005).
Outsourcing can also be a considered politically as a socio-cultural factor which can hurt or help the position of a company. However, with effective placement of their production plants a company can acquire a global image instead of being considered a German car maker, a French producer or an American car manufacturer. Effective use of outsourcing can help companies such as BMW to use the repute for German car making as a given in the car industry ( 2006). With outsourcing a company can gain the advantage of being a global brand while maintaining the image associated with the home country.
The Structure of the Industry
The strategic importance of the automobile industry makes it a perfect case to examine how different factors interact to bring about broader changes in the organizational structure of the automobile industry in America. In order to survive and maximize profits, auto makers must comply with structural rules or the “who-gets-what” rules in the automobile industry. Structural rules are derived from production technologies (hard and soft technologies) that are successful in producing cars efficiently (1986).
Automotive is a complex product, which consists of over 10,000 parts and requires multiple and complex processes for its manufacture. Mass production proved successful in efficiently producing automobiles, which explains that for almost seven decades, it determined the structural rules for the automobile industry.
The automotive industry is not 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. This is because establishing a niche in the market where everyone else is factory producing their cars could be one of the only ways in which brand differentiation can be established.
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 a global player like General Motors.
The structure of the industry can also be affected by legal implications since the laws concerning automobiles are certainly putting pressure on the industry to produce cars which run cleaner, are more fuel efficient and follow other requirements as per the laws laid down in the country. Internationally, some countries are more car manufacturer friendly than others but for the most part, in the coming future the legal environment will get tighter for the entire car industry. All manufacturers have to watch out for such laws coming into place and comply with them to the maximum extent in order to prevent fines or lawsuits from the government or civil unions.
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.
It is not likely that the structure of the automobile industry will change significantly in the coming years since over the last fifty years the industry has shown a trend of mergers, acquisitions and expansion of the same players towards new markets. Smaller players will likely be taken over in time by others and as the industry develops, the automobile industry itself may move towards being transportation services providers when alternative fuels and modern technology becomes more economical than petrol or other fuels which are currently being used by the majority of cars.
Market Concentration of Automobile Industry
Industrial organization economists typically include measures of market concentration in their analysis of market performance in order to capture some of the difficulties that firms in an industry will encounter if they attempt to collude. More directly, concentration measures how large the largest firms have become relative to the whole industry. This will be, in part, a function of the stringency of antitrust enforcement policies such as merger regulation and monopolization restrictions. Since the competition in the automobile industry are too stiff, market concentration in these industries can be considered as powerful and strong. The major competitors for this kind of market include General Motors, Honda, Nissan, Toyota, DaimlerChrysler, Hyundai, Maruti Udyog, Shanghai AIC, and Volkswagen. These industries have been able to compete well in the market place all over the world.
Accordingly, it can be noted that there has been an increase in the number of industries selling cars in matured markets like Germany, Japan and United States. Figure 1 presents an analysis of passenger vehicle sales in the mentioned countries according to Hefindahl Index market of concentration.
It is said that the Herfindahl index would result to zero if the market share was evenly distributed among the manufacturers of automobiles. Moreover, the index will be equal to the number of manufacturers if a single company had been able to have a 100% national market share. Hence, the lower the index, it is considered to be in a more diverse market. In the figure below, it shows a across-the-board raise in market diversity in Japan, United States and Germany, prevailing the cause of the heightened and increasing competitive pressure that automobile industries have been facing in terms of home market. Germany has long been considered to have a diverse automobile market because of the interpenetration of European automobile markets by the European automobile industry as well as the existence of American Industries.
However, the strong sales of the Japanese automobile industry have brought the index down further since the later part of the 80s. On the contrary, the sales of Japanese automobile industries have increased the competitive pressure in the United States during the early 80s. And in Japan, the market diversity increase has been achieved from the success of smaller Japanese automobile manufacturers and the decline of the dominance of Nissan and Toyota as they hollow out local production by alternating exports with domestic production in European nations and North America.
For the automobile industry, the trend for market concentration has gone beyond every target market would imagine. In some automobile industry like those based in the United States, a few assemblers divided up the domestic market into segments. They made comfortable profits by selling a few car models in each and sitting on stable life cycles and secure price markups. From time to time, the assemblers introduced cosmetic changes in product design and styling, which they buffed up with marketing and advertising. More importantly, they got away with fat and easy profits by manipulating short-term atomistic price competition among their parts and components vendors.
The profits were so fat and easy; in fact, these auto makers did not mind imports chipping them away a bit beginning in the late 1950s. It was not until after the foreign brands had taken away more than one quarter of the American market following two oil shocks that they started to look around for ways to revitalize their past competitiveness (1990).
With its market power, however, the United States was able to bargain time for American auto builders to make improvements, With its market power, however, the United States was able to bargain time for American auto builders to make improvements, particularly by soliciting voluntary export restraints from Japanese car makers. Initially, the American assemblers sought to obtain this objective by pouring money and technology into it. But continued problems in quality and costs compelled them to look beyond procedural changes and at the critical impact of structural relations on competitiveness in products and manufacturing processes (1986). They had to move away from antagonistic and uncertain relations with their vendors and build long-term teamwork, directing the vendors to compete in product design and process superiority like the Japanese, who had now transplanted production to this country, lengthening the contract period, and adjusting the criteria of vendor selection as well as working together to improve quality and cost competitiveness (1991).
In the automobile industry, teamwork was adapted by Toyota as early as the 1930s to support its self-help approach to market entry and technological development in competition with Nissan which had followed a strategy of technology transfer (1985). Toyota enlarged its corporate identification circle by first including the parts makers in its neighborhood of Nagoya as members of the Toyota group. It offered long-term contracts to those who collaborated in quality improvement and product specialization. It also used its market power to discipline them when it saw fit. The assembler formalized supplier cooperative associations, started initially by the parts makers, as a voice mechanism to guide and support competition among the suppliers and as a forum for them to discuss problems, share information and find solutions.
These contrasted with the market competition which Nissan was pursuing, like most other Japanese manufacturing houses of the day (1991). Toyota continued with the teamwork approach to competitiveness, both in-house and with the suppliers in its group, when it shifted from truck to small car production from the early 1950s onwards. It implemented procedural improvements according to the suggestions of certain American experts ( 1986) while integrating them with the fundamental changes it was introducing in the production process to develop a system capable of handling production on a smaller scale yet in greater variety than built into the imported manufacturing process, one that could genuinely meet the requirements of domestic consumer markets.
In conclusion, I feel that the automobile is quite an interesting one to watch because of the nature of the industry and the historical background associated with the rivalries between various companies. However, I believe that the future of the industry leads towards cooperation and sharing of information as more companies realise how they can benefit collectively rather than be in constant negative competition against each other.