Macro-Environment and Industrial Factors Affecting the Motor Car Manufacturers
I. Executive Summary
Macro- and industrial environment factors that are affecting the performance of major players in the industry focus on the economic and environmental factors. However, these two factors have a great impact on the perception and behaviors of the customers, therefore creating social changes, which will later on impact legislation and political entities. It had been found out that the global financial crisis affect the buying behavior of the customers, because customer tend to buy important things. On the other hand, due to the growing awareness of people towards health and the environment, people tend to substitute motor cars with more environmental- and health-friendly mode of transportation including walking and cycling, and public transportation, which not only help to save money in gas, lessen air pollution, but also push people to be physically active. Above all, the growing competition and the different governmental standards and regulations serve as primary barriers to new entrants.
Table of Contents
TOC \o “1-3” \h \z \u I. Executive Summary
III. Background of the Industry
- Macro-Environment Analysis
- Industry Analysis
- Threats of New Entrants
- Bargaining Power of Buyers
- Bargaining Power of Suppliers
- Threats of Substitutes
- Rivalry among Existing Firms
Appendix A: Automotive Industry and the Economy of the World
Appendix B: 2007 Car Production Statistics
Appendix C: Direct Employment in Automotive Industry
Automotive industry is considered as one of the largest industries in the world which affects performances of nations and the lives of individuals in economic, environmental and social way. This is because it helped different countries to produce jobs, thus increase revenue by tax. On the other hand, it changes how people travel. On the other hand, even though the said industry is already established and mature, it is also affected by the different environmental and industrial factors, primarily the issue of global financial crisis, because it primarily affect the buying behavior of the customers. Aside from that, the major players in the industry are focusing on the different environmental factors including the issue of global warming and the growing popularity of hybrid cars.
This paper will tackle the different factors that are connected to the macro- and industrial environment of the said industry by using information gathered from online and offline resources such as books, journal articles, magazine and newspapers. The author also used information from different reports of different organizations that are directly and indirectly connected with the industry. Online libraries were also used in order to speed up the process of gathering data and information. In order to analyze the said entire environment in which the industry is situated, PESTLE analysis and Porter’s Five Forces model were used.
III. Background of the Industry
The automobile industry of the world made over 60 million cars, vans, trucks and buses in 2005. These vehicles are vital to the working of the global economy, as well as to the wellbeing of the citizens of the world. The said industry contributes to the global turnover by €1.9 trillion. Thus, it the motor car manufacturing as a country, then it would be the sixth largest economy in the world (see Appendix A) (OICA, 2006). This is because the global automobile industry enables to produce a total of 73,152,696 cars in 2007, showing 5.7% increase (2007 Production Statistics, 2007) (See Appendix B).
Thus, building 77 million vehicles requires the employment of more than 8 million people in the world in direct manner in order to make the vehicles and parts that go into them. It corresponds to the 5% of the total manufacturing employment in the world. Aside from that, there are also 50 million people who earn their living from cars, trucks, buses and coaches (See Appendix C) (OICA, 2006).
USA, Japan, China, Germany and South Korea are the top car manufacturing nations in the world. While, among the 5, USA is considered as the largest producer and consumer of motor cars that account for 6.6 millions direct and spin-off jobs, which represents more or less 10% of the $10 trillion US economy. Furthermore, the primary motor cars manufacturing regions in the world are Northeastern United States and the Southern Great Lakes Regions, together with the Northwestern Europe, Western Russia, Ukraine and Japan. The European Union (EU) has the largest automotive production regions in the world including the UK, Rhine-Ruhr River Valley, Upper Rhine, Alsace, Lorraine region and the Po Valley in Italy (Automotive Industry – Industry Overview). In 2012, the global automobile industry is forecast to have a total volume of 118.5 million units, showing an increase of 37.5% since 2007 (Global Automobiles, 2008).
There 5 important players in the industry which are: Toyota, General Motors, Ford Motor, Volkswagen and Daimler Chrysler. These companies have their presence in almost all countries in the world, which enables them to invest on different facilities that will help to improve and maintain their position in the market (Automotive Industry – Industry Overview). The study of Datamonitor (2008) showed that in 2007, Toyota Motor Corporation lead the market with a total of 15% global sales, followed by Ford Motor Company with 125 value share (see Appendix D).
IV. Macro-Environment Analysis
The macro-environment consists of the broader set of forces that have an impact on the company which include economic, demographic, technological, political, legal, social and cultural factors. These factors combined will create non-controllable elements which are important in order to focus on strategic movement (Wilson & Gilligan, 2005, 129). Fortunately, there are tools which can be used in order to analyze the macro-environment including the PESTLE analysis which help to identify forces in the macro-environment which affect the business. This tool focuses on examining Political, Economic, Socio-cultural, Technological, Legislative and Ecological aspects of the wider environment (Partridge & Sinclair-Hunt, 1997, 77).
Table SEQ Table \* ARABIC 1 PESTLE Analysis – Car Manufacturers Industry
|· European Union Policy;
· Free Trade Union (FTA);
· North American Free Trade Agreement (NAFTA);
· Unfair trade relationship with Korea and Japan; and
· support from the government.
· global financial crisis; and
· increasing competition.
|· brand image;
· lower income distribution; and
· growing knowledge of people towards health and environmental issues.
· increasing pressure on research funding;
· communication and the Internet;
· access to technology; and
· licensing, patents and intellectual property issues.
|· international and national:
o employment law;
o health and safety law; and
o environmental law.
|· international and national environmental regulations;
· implementation of ISO 14001;
· corporate social responsibility; and
Political factors focus on different actions by local and national administrations and political parties, together with the international bodies including European Unions and World Trade Organization (Harberg & Rieple, 2008). The EU implements its industrial policy towards the industry including the internal market, competition policy, research and development policy, external trade policy and environment policy. In support, EU is implementing EU Whole Vehicle Type-Approval (WVTA) system which focuses on harmonization of technical requirements on motor vehicles. In order to manage fair competition, EU promotes industrial cooperation in order to assist small suppliers of motor vehicle components under the Regulation (EC) No. 1475/95. Thus, help the research and development process of motor car manufacturers by Sixth Framework Programme (2002 – 2006), and the industry will be supported by Seventh Framework Programme (2007 – 2013) in critical events and challenges of the future. Above all, EU focused on the external policy by protecting the automobile market and improving the access to the third countries on the import system (Györffi, 2006).
It is also important to focus on NAFTA which focus on the relationship of Mexico, Canada and the US. The said agreement allows the US to export its motor cars to Mexico and Canada, thus increase the market for American motor cars (Raver, 2006). Therefore, it has a great impact on the operation of Korean and Japanese manufacturers.
FTA is another factor to be considered because it enables motor car manufacturers to have a free trade and fair access to market. However, it is important to consider that even though, FTA is ruling in different countries, Europe and the US is having different problems regarding their motor car trade relationship with Korea which include anti-import bias, unfair regulations and certification; unfair tariff and tax structure; limited financial services and manipulation of currency. Although the country is somewhat open with the foreign motor car brands, the government and industry officials are launching regular public campaigns about using foreign cars that has a great impact on national pride, thus result to slow down or stop of sales of foreign cars. Aside from that, the country is maintaining an 8% tariff on automotive passenger car, consider as high compare with 2.7% of other countries. Above all, just like Japan, the government is gaining competitive advantage by unfair manner by controlling the currency markets to weaken the value of their currency against the dollar (Collins, 2006).
Globalization has a great impact on the performance of players in the industry. Primarily, it can help companies to save time, money and effort. During the last decades, in order to meet the growing demands for advanced technology, GM has recruited a rich blend of international talents, with engineers and scientists from different countries, which help to create a bubbling cauldron of exciting ideas that GM is applying to the development of their product, technology and business innovations (Hsu, 2002). Another impact of globalization is outsourcing which become a common in automotive industry (Lepeak, 2008). Currently, more and more companies are outsourcing in China and India because of low labor cost. As a matter of fact, an engineer costing $4,000/month in the US will only cost $500 in China (Zhang).
Increasing competition is also important factors because the market is offering almost the same products and just vary in some factors such as the design and motor. To add more pressure, global financial crisis is helping to increase competition in the market. As the global stock market decline, the confident of the consumer to buy things is also decreasing. In 2008, all of the carmakers in the USA had showed decline in sales: GM (16%), Toyota (32%), Ford (34%), Honda (23%) (KMPG, 2008). In connection, GM, the leading US car makers asked for bailout which was granted by the US Federal government, at the same time, the company announced to cut costs and capital spending while raining funds by the sale of their assets. Daewoo, a subsidiary of GM had announced to close its factories in Korea temporarily, which will be followed by cutting jobs in Argentina, Poland. Another subsidiary of GM, Opel, asked for more public support from the German Government. Ford is also planning to shut down its operation in Berdaux, France because of poor sales from October 2008 to mid-January 2009. French automaker, PSA also stopped its production in China, Spain and France, temporarily, while Renault plans to reduce jobs in Europe (UNCTAD, 2009).
Brand image plays an important role in the decision of the customers in choosing the auto car brands they will buy. It can be seen on the effort of different Japanese companies towards activities and tools to improve qualities, particularly Six Sigma. Furthermore, going back to the issue of global financial crisis, it has a great impact on the social and behavioral aspect of the customers. Because there are a huge number of people who loses their job and other financial sources, they tend to save or use it in more important things.
On the other hand, motor cars are also connected with the health aspect. As of now, there are different health organization that are motivating people to walk as a perfect form of exercise, thus making sure that people are physically active. This is further affected by the improving public transportation facilities in different countries, including those developing countries.
On the other hand, people are becoming aware of the negative impact of energy consumption in our environment, particularly regarding the popular issue of global warming. People are focusing on things that will help them to save the environment, thus the emergence of hybrid cars is becoming popular. Furthermore, seeking gas relief, Americans are turning to hybrid cars, which is combination of traditional internal combustion engines with electric ones. It also helps to lessen heavy traffic pressure and decrease bloated pollution levels (Singleton, 2004).
The automotive industry is focusing on research funding in order to give emphasis on innovation which enables them to maintain their competitive advantage. Aside from that, it is being affected by the maturity of the technologies that are being applied. This is important because technology is evolving in just one blink of an eye. The internet can help both the internal and external customers of the company, primarily in terms of communication. It helps employees of the company to communicate with each other, therefore enables them to centralize the any time and any place.
On the other hand, it is important to consider the issue of fraud and theft of intellectual property. According to the report of Frost & Sullivan shows that the process of sharing of supplier has complicated the protection of privacy including the design of the products, which is an important aspect of intellectual property law. As a result in 2005, experts estimated that there were about $11.53 billion earned via counterfeit vehicle parts and components, and it is forecasted to increase up to $44.74 billion in 2011 (IHS, 2006).
Above all, the use of robotics in assembling and manufacturing motor cars is also important. In the Japanese automotive industry, the application of robots can be group into arc wielding, spot wielding, loading and unloading, assembling, material handling, foundry, press, painting and other activities (Yagi, 2002).
There are different international and national laws which are being implemented regarding the aspect of employment, safety and health and environmental. Because the automotive industry is considered as matured, and involved in global manufacturing and marketing, it is important to consider the different factors which are connected on local laws. Thus, it is important to focus on the different local and national standards in handling human resource, safety procedures and waste management.
Above all, it is important to focus on the different organizations who are involved in the local settings such as employee union and other non-governmental organizations.
As a result of the social factors affecting the mentality of people towards the environment, the industry is focusing on the different processes which will enable them to ensure safety of nature and safety of individual’s health. This is also one of the primary reasons why most of automotive companies are focusing on green production. As part of the global standard, ISO 14001 pertains on the process of how the activities of organization can affect the environment throughout the life of its products (Johnson, Sun, & Johnson, 2007). It also pertains on the social responsibilities of the company.
V. Industry Analysis
Analysis at the industry level focuses on the overall attractiveness of operating in a selected industry and the relative position of a company versus its competitors in the industry. Porter’s Five Forces Model is considered as one of the most important and applied method for conducting industry analysis (Evans & Bishop, 2001).
Figure SEQ Figure \* ARABIC 1 Porter’s Five Forces Model – The Automotive Industry
A. Threats of New Entrants
Threats of new entrants are moderate because entry to the automotive industry is unlikely to be successful on a small scale because huge amount of capital is needed in order to set-up large-scale production plants. Aside from that, factors including difficulty in accessing distribution channels are a problem because dealers and distributors tend to stock well-established branded automobiles as an answer to the demand of the consumers. Aside from that, top players in the market, including the 5 stated in this paper hold licenses to use numerous patents, copyrights and trademarks which focus on engineering and technical expertise to maintain their competitive advantage through innovations. In addition, there are different governmental standards and regulations that are connected to safety, fuel economy, emissions control, noise control, vehicle recycling, substance of concern, engines and equipment manufactured for sale in the world. Above all, manufacturing and other assembly facilities are subject to different stringent standards which regulate air emissions, water discharges and waste management (Datamonitor, 2008).
B. Bargaining Power of Buyers
Buyers in the automotive industry are commonly large companies with a vital financial power. Therefore, they can be authorized dealer for a number of manufactures and they can make large purchases and put pressure on market players in order to reduce prices. However, the brand strength or the image of the brands weaken the buyer power, because the leading car manufacturer have already established their relationship with the customers, thus, buyers are more likely to enter into different contracts with specific manufacturers to meet the demand of the customers, at the same time, increase sales. Aside from that, there are number of market players that have integrated forward into retailing, which put pressures on buyers (Datamonitor, 2008).
C. Bargaining Power of Suppliers
Inputs to the global automobiles market include a variety of raw materials, assembled and semi-assembled components, energy, freight and transportation. On the other hand, suppliers have a strong power over the industry because the suppliers, which are commonly large companies, are not dependent on the automotive industry but operate in a diverse market. In addition, the power of supplier is being strengthened because the automotive industry requires raw materials of high quality. However, this is complemented because motor car manufacturers does not focus on one suppliers, thus reliance to suppliers keep to minimum by using wide range of companies as their suppliers (Datamonitor, 2008).
D. Threats of Substitutes
The presence of used car market is a threatening player in the new cars market. As a matter of fact, the volume of used car sold had exceeded that of the new cars market. However, this lessens because most of car manufacturers are focusing on producing affordable new cars. On the other hand, with connection with the awareness of environmental issues, people tend to substitute automobiles for more environmentally friendly forms of transport such as walking, cycling and even public transportation. However, the said substitute is unlikely to happen on a large scale or to become a complete substitute for automobile, thus it does not have that much impact on the industry (Datamonitor, 2008).
Furthermore, hybrid is growing in terms of sales, however market players play a vital role in the said green market (Datamonitor, 2008), therefore, making the threat of substitute low.
E. Rivalry among Existing Firms
It is important to consider that the global automobiles industry is highly concentrated with the top three players in the industry, which holds 40% of the entire market value. Competition is increasing and intensifying because different developed and newly developed countries such as Japan and Korea are starting to compete in the global market. Aside from that, most of car manufacturers are now ramping in terms of production which put pressures on their rivals. Besides, the industry is becoming consolidated because increase in raw material cost resulted to increase in production costs and put pressure on the players in the market (Datamonitor, 2008). Therefore the rivalry in the industry is strong.
After analyzing the information gathered, it had been found out that the industry is facing problems because of the current financial crisis. Customers tend to save money and stop buying cars for the future. As a result, the sale of automobile is forecasted to decline. On the other hand, because of the said financial crisis, people tend to go for second-hand cars, cycling, walking and transportation. However, the said factors do not have a long-lasting and strong impact because of the current effort of major players in the industry including introduction of affordable and reliable cars in the market. Furthermore, most of companies are also focusing on green market, which enables them to manufacture and sell hybrid cars, as an answer to the concerns of the customer towards the different environment issues.
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Appendix A: Automotive Industry and the Economy of the World
|(2004 or latest available figures)|
|(In Million)||Turnover||Investments||Public Revenue|
|* gross productive value ** gross fixed capital formation|
Source: (OICA, 2006)
Appendix B: 2007 Car Production Statistics
|Country||Cars||Commercial Vehicles||Total||% Change|
Source: (2007 Production Statistics, 2007)
Appendix C: Direct Employment in Automotive Industry
|Grand Total (39 countries only)||8,397,451|
Appendix D: Market Share
|Toyota Motor Corporation||15%|
|Ford Motor Company||12%|
|General Motors Corporation||11.40%|
Source: (Global Automobiles, 2008)