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Introduction
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 (Baki, 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 (Raisch
and Zimmerman, 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.
Competitive
Challenges
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 (Baki et. al., 2004).
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 (Baki et. al., 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 (Harbour,
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 (Raisch and Zimmerman,
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 (Baki et. al., 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 (Baki et. al., 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 (Stein, 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.
Outsourcing
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 (RBSC, 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 (RBSC,
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 (RBSC, 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 (Harbour, 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 (Harbour, 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 (RBSC, 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
(Maurer, 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 (Wikipedia, 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 (Porter,
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 (Helper 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 (Deming 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 (Cusumano and Takeishi 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 (Cusumano 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 (Smitka 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 (
Deming 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.
Conclusion
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.
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