INTRODUCTION
This paper explores and evaluates the global car industry, specifically its structure and the latest issues that concern it. The aim of this paper is to be able to determine the strengths and weaknesses of the industry, particularly barriers to entry and exits, and the different companies that dominate the industry, the differences between the European, Japanese and American car industry, and many more. The aim of this paper is to have an overview of the industry, to be able to determine the political, economic, social and technological factors that affect it, and to give a sound conclusion that would create an overall picture of the industry’s structure.
The Complexity of the Car Industry
According to Fine et al (1996), “The automobile is one of the most complex consumer products in existence. The automotive manufacturing process serves as the “moment of truth” for the entire design, development, supply chain, and manufacturing process”. Compared to other industries, developers and workers in the car industry have to be extra meticulous in the development process of every project. Fine et al (1996) stated that if the parts do not fit when the manufacturer attempts to put them together, the system has a defect that must be tracked down and eliminated. Thus, auto companies focus a great deal of attention on understanding and improving the manufacturing process.
The industry is also divided into three broad types of manufacturers, namely: high volume, full-ranged producers; specialist producers; and niche producers (Nieuwenhuis and Wells, 2003). The first type is typified by Ford, VW, Fiat, Toyota, Nissan and GM. These companies are in the centre of the market, producing at the highest volumes and lowest prices with a range of general purpose cars of various sizes and capabilities to appeal to the broad mass of consumers (Nieuwenhuis and Wells, 2003). These compete on the basis of cost reduction. On the other hand, the second one is typified by Mercedes, Volvo, Audi, BMW and Lancia. These companies occupy the upper market reaches, with larger or higher performance cars that demand higher prices. They compete on the basis of differentiation and cost recovery, offering a compromise between exclusivity, quality and utility. Finally, the niche types are typified by Lotus, Alpine, TVR and Ferrari. Such companies offer exclusivity and extremes of performance, particularly in sports cars, but often at the cost of uneven quality, limited practicality and considerable financial burden (Nieuwenhuis and Wells, 2003).
The industry is also being shaped by two of the biggest byproducts of globalization – that is, mergers and acquisitions; and direct investment in non-domestic locations (so-called Foreign Direct Investment or FDI). Furthermore, supplies can also be complicated. Without an adequate supply chain plan, a car company might crumple and lose a huge amount of money (Nieuwenhuis and Wells, 2003). Vehicles are comprised of many individual components (such as aluminium radiator cooling fins), aggregated up into sub-systems (such as radiator assemblies) or systems (such as the cooling system including pipes, controls, sensors, etc.). Thus, the competitiveness of a car company in terms of supplies is shaped by: vehicle manufacturers’ sourcing strategies; cost, weight and size reduction pressures; globalisation: following the vehicle manufacturers wherever they may go; localisation: putting satellite plants alongside vehicle assembly plants; and modularisation: putting together complex sub-assemblies.
The European Auto Industry
Of the triad markets in the car manufacturing industry (Japan, Europe, and US), the European is the largest and most competitive, but within Europe there are variations. For instance, in the north-western area, new car demand is virtually static and replacement demand predominates. In Southern and Mediterranean Europe, where car density per head of population is much lower, growth prospects are considered more floating as incomes rise (Donnelly, Mellahi and Morris, 2002). On the other hand, former communist areas of Europe, or the Eastern part, have been perceived as a potentially medium-to long-term growth market (Financial Times, 1994).
Market demand in Europe runs at between 16 and 17 million vehicles a year (The Economist, 1994, from Donnelly et al, 2002). However, between them are surplus capacity of approximately 2 to 3 million vehicles a year which exerts upwards pressure on costs and affects their competitiveness with the Americans and Japanese in world markets (The Economist, 1994 from Donnelly et al, 2002).
On the other hand, the EU automotive industry had a trade surplus of over 30 billion Euros with about 40 percent of exports in 1999, mainly vehicles, going to the USA. Imports from the USA are mainly parts and accessories (Graham, 2004). A number of the New Member States in Eastern Europe, notably Hungary, the Czech Republic and Poland have emerged in recent years as significant producers (Graham, 2004). However, Germany and France are the two most dominating producers in EU, and Germany is world’s third largest producer after the USA and Japan, producing over 5 million vehicles a year (Graham, 2004). As the home of DaimlerChrysler, the German car industry employs about three quarters of a million people. Next is France, employing about 7 percent of the workforce, making 3 million vehicles per year (Graham, 2004).
The car market in Europe has entered restructuring in the early 1990s. Hancke (1998) stated that European car markets are slowly reaching a level of saturation in the nineties comparable to what the US car markets have known since the mid-1970s. But despite the structural weakness of demand, car manufacturers have continued to increase their production capacity and the result is currently an estimated excess capacity in Europe of the order of 25-30% (Hancke, 1998).
The car market in Europe is essentially divided between private buyers (consumers) and the fleet buyers (customers), which specialize in providing a range of company and general hire cars for their clients. Private buyers will buy their cars from franchised dealers who exclusively sell one brand of car and therefore the manufacturer exercises great control over dealers since he can remove franchise should it not perform to the manufacturer’s expectations. In return for the franchise, a dealer must offer a good aftercare service, to honor the warranties (typically 3 years) that are guaranteed be the manufacturer (Key Note, 2002).
Due to the increasing competitiveness in the fleet market and the demands for price reductions from fleet buyers this segment has become less lucrative for car manufacturers despite the high volume they absorb. Therefore the private car market gained in importance (Key Note, 2002).
Car manufacturers make extensive use of advertising to constantly project the image of their brand and models. ‘In general, customer loyalty to a particular brand is fickle, so buyers can be influenced by image as well as price and specification (Key Note, 2002). Advertising has increased by 6.5% in Europe since 2000.
AdLINK Europe (2002) stated that more than 15 million vehicles are sold in Western Europe every year, making automotive the most important industry in Europe. All carmakers are struggling for market shares in this important region. The competition in the continent is fierce, with Volkswagen leading the manufacturing share in 2002 and DaimlerChrysler in the eighth place but nonetheless still dominating BMW, Korea and others (see Figure 1).
Currently, the Car Manufacturing Industry is being seen as one of the most important industries in Europe. It is a major contributor to value-added as it account for about 3% of the European Union’s GDP and for about 7% of the Union’s total manufacturing output, which makes the automotive industry a major wealth generator in Europe (European Commission, 2005). The total value added produced of the motor vehicle industry in the EU-15 was about €114 billion in 2002. Aside from that, the industry provides work for more than 2 million Europeans and supports an additional 10 million indirect jobs in both large companies and SMEs (7% of total European manufacturing employment) (EU, 2005). It is also a leading investor in R&D, leading contributor to trade, and an important source of fiscal revenues (EU, 2005).
The United States Auto Industry
The background of the US auto industry is much exposed than that of the European as they rank second next to Japan in terms of manufacturing. Foreign and domestic auto makers sold nearly 17 million new cars and light trucks in the U.S. in 1999, which were up from 15.54 million units in 1998. It generated estimated retail sales of more than 0 billion – a record year for the industry (Everett, 2000). Furthermore, passenger vehicle sales in the U.S. had averaged 14.3 million units per year, from 1990 to 1998 (see Table 1).
There are six companies that led the manufacture of passenger vehicles in the U.S. – DaimlerChrysler, General Motors and Ford. Together, they are also known as the ‘The Big Three’ (Everett, 2000). The other three are Japanese based, which are Toyota, Honda, and Nissan. The three produced a large portion of the cars sold in the U.S. in North American assembly plants (Everett, 2000). This shows the weakness of the European car market in the US. The mentioned six basically accounted for 87% of all new vehicles sold (see Table 2). The remaining was basically from non-US firms and they are not necessarily European but could be new auto manufacturing companies from Korea and Malaysia.
As can be observed from the data presented above, General Motors is dominating the sales of car and light trucks from 1995 to 1999. It is followed by Ford and Chrysler. Clearly, the Big Three in the United States dominate their own turf as the Japanese and the European manufacturers rank paces behind them.
Like in Europe, the Big Three in America is major source of income and employment. The Car industry also contributes to trade and promoted R&D (Fine et al, 1996).
The Japanese Car Industry
Japan is one of the countries that have the largest exports of automobiles throughout the world. A leader in car manufacturing in terms of volume, the Japanese car companies have experienced stagnation within the level of 4.5 million units since 1997, but has slowly recovered in 2004. Real GDP could well show a growth rate of 4% for that year as a whole, mainly driven by exports (Gottschling and Heymann, 2004). In 2003, exports increased by 1.7% from their high level of 4 million passenger cars in 2002. Due to strong economic growth in Asia, Japan’s exports have flourished since 2001. Also, consumers in Western Europe have developed a strong appetite for Japanese cars recently, as new models have attracted more attention than ever (Gottschling and Heymann, 2004).
PESTEL Analysis
Political Analysis
The manufacturing industry is different today than that of the pre-informational technology and globalization age. Communication is faster today and collaboration of different industries is easy. The government is one of the many that benefits in this evolving information age. The State itself is an agent of globalization, furthering certain processes of this emerging new economic order through, for example, policies intended to attract and retain investment. For instance in Europe, the European Commission is concerned with the performances of European car manufacturers. It can be remembered that in 1992, the European Commission reached an agreement with the Japanese government about the gradual lifting of import restrictions on Japanese cars until the year 2000 (Dankbaar, 1996). Thus, the European Commission has ordered an investigation into the training needs of the European automotive industry, which also involved an analysis of training projects supported by the European Commission under the FORCE programme on continuous training (Dankbaar, 1996).
In America, the government is also collaborating with industries to improve competitiveness. Fine and Lefrance (1996) stated that the Big 3 automakers were working with the federal government in a cooperative, precompetitive research effort called the Partnership for a New Generation of Vehicles (PNGV). The public/private partnership aims to strengthen U.S. global competitiveness, preserve American jobs, reduce our country’s dependence on foreign oil, and improve the environment.
Currently, one of the politically involved governmental bodies in the global automotive industry is the United Nations. The UN currently regulates the manufacturing industry with the Global Compact (DaimlerChrysler, 2000). It is basically a move in-tune with the changes brought by globalization, and is based on nine key principles drawn from the Universal Declaration of Human Rights, the International Labor Organization’s fundamental principles on rights at work, and the Rio Principles on environment and development. The nine principles are human rights, labor and environment oriented.
Basically, politics are involved in regulating the operations of the auto industry. For instance, in the United States and Europe, there is a growing concern regarding the relationship of mobility with economic development, safety and environmental concerns (Fine and Lafrance, 1996). One example of this is in the UK where there are government incentives aimed at reducing the usage of cars, e.g. tax increases and fuel prices increases. With this is the presence of congestion charges. Congestion charge is £5 daily to help get London moving (Anonymous, 2004). On the other hand, the U.S. auto regulations tend to focus on new cars to achieve social objectives. They believe that old cars or ‘clunkers’ increase urban air pollution. It is estimated that less than 10 percent of the vehicles are producing 75 percent of the pollution (Fine and Lafrance, 1996).
Economic Analysis
The economic condition of the auto industry during the time of merger of Daimler-Benz and Chrysler varies, depending on the country. Fine and Lefrance (1996) stated that average time to market or “lead time” of U.S. automakers has fallen from about 61 months to about 52 months – below the Japanese average during that time, which actually increased from 45 to 55 months from the late 1980s to the early 1990s. As a result, U.S. companies can now compete with the Japanese in product development. Lead time may already be significantly faster at Chrysler than at many of the Japanese companies. But then, American manufacturers’ competitive disadvantage in model mix complexity creates a barrier to their ability to compete in product diversity (Fine and Lefrance, 1996).
Another issue is the continuous rise of car price. The continuous rise in price of new cars is an ominous trend for all automakers (Fine and Lefrance, 1996). Fine and Lefrance (1996) cited from the National Automobile Dealers Association, that the average new-vehicle transaction price has soared from ,850 to ,200 since 1981. Furthermore, there has been also a change in consumer preference. For instance, consumers now prefer safety (e.g., airbags, antilock brake systems) with amenities (e.g., air conditioners, powerful engines, power steering, and compact disc players) over vehicles whose primary appeal is size and interior space (Fine and Lefrance, 1996). They stressed that factors influencing customer choices are performance, suitability to personal needs, and family lifestyle, safety, comfort, and appearance (Fine and Lefrance, 1996).
Social Analysis
Society during the mid-nineties was pretty much in the early days of IT and globalization. Different issues are being discussed easily through the use of the internet which has led to the development of diverse changes in the behavior of the citizens. As mentioned, people start to change their preferences towards vehicles due perhaps to the issues that underlined them. In Europe for example, specifically in UK, it has been reported that more than 400,000 Londoners have abandoned their cars in favour of traveling each day by public transport (Clark, 2004). Although it has been known that people in the UK like using cars, certain policies can affect the behavior of the consumers as it can break the British’ love affair with their cars (Clark, 2004). Moreover, according to Clark, car travel in London has fallen by 4% or 400,000 trips daily since 1999 (Clark, 2004).
Technological Analysis
There was also a stiff competition in technology during the nineties. There was an increase in the use of electronic components. Virtually every aspect of driving a modern high-end automobile is controlled by electronics – acceleration, braking, seating, security, entertainment, navigation, driver information, crash protection, steering, etc. Furthermore, the automotive infrastructure – traffic control and guides, law enforcement, toll assessment, and the like, rely increasingly on electronic controls (Fine and Lefrance, 1996). In addition, there was also the increasing demand of competing in business with the use of Information Technologies.
Environmental Analysis
Environmental issues in the car manufacturing company have always been related with pollution. The Environmental Defense (2005) stated that cars and light trucks, which include sport utility vehicles, pickups and most minivans, emit more than 300 million tons of carbon into the atmosphere each year in the United States. There were demands to produce zero-emission and weight reduced vehicles to resolve environmental problems (Fine and Lefrance, 1996). There was also an increase in vehicle recycling to prevent old vehicles from polluting visually the community (Fine and Lefrance, 1996).
Legal Analysis
Basically, the legal issues in the car manufacturing industry are mostly related with the environmental issues. Car manufacturing must basically meet the safety, environment and business standard demands of international and domestic regulations. The merger, and later, the acquisition of Daimler-Benz on Chrysler even undergone legal procedures. Some legal accounts, on the other hand, have been made to regulate for economic purposes such as anti-competitive state laws in the US (Consumer Federation of America, 2001).
Conclusion
The global car industry is a complex one and is both horizontally and vertically diverse. It is basically dominated by three groups of manufacturing giants – European manufacturers, Japanese manufacturers, and American manufacturers. Although there has been a recent emergence of manufacturing from Korea, China, and Latin Countries, the three countries mentioned above still dominate the competition. Further, it is being divided by three different manufacturing types. Basically, there are those who produce mass volumes, there are those who focus on specializations, and there are those who target niche markets. Supplies can also be complex since the industry affects many niche markets related to it, such as automobile parts, fuels and many more. Production can be another issue since it takes a year or more to produce a new model. Added to this difficulty are the changing regulations of car production, such as in issues of safety and reliability. There are also technological, political and environmental concerns that companies have to consider, all of which has added to the complexity of the whole process of car manufacturing.
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