What are the most important characteristics of the global environment in the automobile industry, especially those opportunities and threats faced by the top players in the industry? Why so?
If a list was made of the top economic sectors with the greatest influence on the American economy, one could make a strong argument for including the automotive industry. A prime example of the validity of that claim was evinced when “durable goods, such as cars, made up over 90% of the spike in consumption at the end of 2001.“ (Wolkomir 34) Since consumer spending is now the prime indicator of the state of our economy, the success of our auto industry is very important to the future of our economy.
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In the last few years, many were quick to dismiss stalwarts of the Old Economy. In light of the astronomical growth of the “New Economy” technology sector in the late 1990’s, the auto industry seemed to be filled with lumbering, corporate behemoths. With the recent crash of the technology sector, the automotive industry is again in the spotlight, along with many other manufacturing industries.
Even though sales have been up recently, the automotive industry still faces many challenges. These challenges must be overcome in order to ensure the survival of the industry’s major players. In this paper I will discuss what GM, Ford, Daimler-Chrysler, Toyota, and the remaining handful of smaller manufacturers must do in order to stay on top in the future. Each one of these companies is faced with its own unique strengths, weaknesses, opportunities and threats that must be properly addressed.
As a whole though, they all face similar issues. I will address those issues in this paper. If any one of these companies is not careful to handle these issues in the coming years, then it stands the chance of being absorbed by another company or going under. I will attempt to outline the future of this industry in general, and what several of the major corporations involved must do to stay on top of the game or survive.
There are literally thousands of elements that are involved in shaping the future of an automotive firm. For the sake of simplicity and brevity, I have tried to divide it into four different areas: product, market, manufacturing, and economics. Each one of these major areas has several influencing elements that will shape the automotive corporations of the future. The first area that I will address is product. Under product the following subject areas are included: product development and product marketing. Product is crucial to an automotive company because it defines the company.
The VW “bug”, the Chevrolet Corvette, the Mazda RX-7, a Chevy or Ford pickup, a Cadillac sedan, the Jeep-whether a specific model or a vehicle series, these vehicles and many others have defined companies reputations and made for explosive profit growth. A unique car design or excellent brand recognition can make or break an automotive company. An example of the significance of product recognition can be found in the recent efforts of Cadillac to restore its former image. A recent article in Business Week explained it as follows, “Lately, GM stock, up 22% for the year, is even showing up on Wall Street buy lists. But pickups and sport-utility vehicles can only go so far.
GM cannot remain the world’s preeminent carmaker without a viable luxury car.” Cadillac represents GM’s luxury sedan line. In light of recent explosive SUV sales, foreign luxury lines have replaced the American luxury sedan. As gas prices rise, American consumers invariably will turn away from gas-guzzling SUV’s and towards sedans. If GM wants to again dominate car sales, they will need a luxury line. In addition, there is an even more important reason for GM needing to have a line of luxury cars again. “It’s not just a gold-plated image that’s at stake.
Without a strong Cadillac leading the way, GM will have trouble revving up Caddy-era profit margins again. In a profit-challenged industry, an entry-level luxury car can earn an automaker $3,000, compared with $500 for a midsize sedan. Top-of-the-line SUVs and sedans haul in $15,000 a pop. That’s why Ford has built up a luxury stable that includes Jaguar, Volvo, and Land Rover.” (Christenza 60) In this case, having a strong-selling line of vehicles can restore not only the Cadillac name, but GM’s profits in an area where it was previously under-performing.
Another element of the product that will shape future products is technological change. Every year automakers use different technologies in the form of new materials, new production techniques, and new drive train technology. This is part of their ongoing effort to make a better vehicle, a more efficient vehicle, a faster vehicle, a vehicle that handles and brakes better, and a vehicle that is cheaper to make.
What is unique about the current state of technological change in the industry is that vehicles are about change in a way that they haven’t seen for almost a century. In the next five to ten years, all of the manufacturers will be utilizing a hybrid (Toyota, Honda, Chrysler, Ford, VW), fuel cell (GM, Chrysler, Ford), and electric power plants (electric will not be implemented through until battery technology improves greatly).
The traditional four-stroke combustion design will probably continue for some time, but a radical change is in store for the industry, as these alternative power plants will make up the majority of the manufacturer’s product line-up. The pressures to move to alternative power plants come from several sources.
The government has passed and will continue to pass legislation that defines how efficient a car must be and how much of an automaker’s fleet must be low emissions vehicles. Just recently, Congress is even considering legislation that offers incentives for alternative fuel vehicles. “The House energy bill includes tax credits ranging from $250 to $4,500 for consumers who buy automobiles powered by the hybrid engines and other technologies.
The incentives would help offset the higher costs of such vehicles, two of which, the Toyota Prius and the Honda Insight, are already on the market.” (Goisher A1) More importantly, consumers seem to be ready to accept alternative energy cars.
The conflicting demands being placed upon the automobile today are unprecedented in their scope and number. Individuals as citizens may call upon governments to pursue the control of automotive emissions and fuel economy and to alleviate problems of traffic congestion. Yet as consumers, they may purchase large SUVs with poor gas mileage and oppose fuel taxes that would lessen automotive use. The government continues to change fuel efficiency standards and offer incentives to manufacturers who provide alternative power plant cars.
Automakers are trying to address both sets of customer requirements, typically through green initiatives that are independent of their ongoing product and operational activities. Yet the automaker that can persuasively link their current green strategies to a future vision of sustainability, from a competitive, environmental, and economic development perspective, may enjoy a strong advantage in both corporate reputation and consumer attractiveness.
Opportunities certainly exist. New drive train technology, by disrupting the dominant vehicle design, may spur product innovation and create openings for new entrants. New lightweight materials can lessen the tradeoffs associated with green vehicles. The green goals of recycling vehicle content and minimizing the environmental impact of manufacturing are beginning to affect automaker decisions. (LePree 34)
While opportunities abound, the costs of moving beyond current industry product architecture and infrastructure are huge and the technological uncertainties are high. If hybrid drive trains win widespread acceptance, the commercial prospects for more radical technologies like fuel cells may be impaired. New materials pose their own dilemmas with respect to cost and product performance. Planning for end-of-life recycling of vehicles often conflicts with other trends in vehicle design and technological innovation. Finally, the outlines of a mobility business model are still unclear. Figuring out how best to preserve the bottom line and still go green will be the major strategic battleground in auto’s New Economy.
Even as bold new plans are formulated for cars of the future the industry has to determine who these vehicles will be designed and marketed to. Any automaker will admit that they would like to have the next “world car.” A world car is loosely defined as a model that has universal appeal in most if not all markets and a high-profit margin. A world car takes advantage of the globalization of resources within a firm, modularization of parts and manufacturing techniques, and it also utilizes outsourcing in component and vehicle manufacturing.
On the other hand, automakers still have to consider how much of their resources should they devote to the needs of specific geographic markets. North American buyers, although appreciative of an inexpensive and highly fuel-efficient vehicle, tend to shy away from the generic look and smaller size that is traditionally associated with a world car. While some may argue that the American market is saturated (and in some ways, it is compared to most Asiatic countries, for example), it still obviously has a huge market of buyers as evinced by our sustained market of new car buyers.
As new drive trains are developed, each automaker will have to make a decision. They will need to consider whether or not to launch these power plants in smaller (and easier to develop) platforms, or should they try and make them work in larger utility vehicles and sedans?
As important as product and market development is, manufacturing is also very important. The two most important elements of manufacturing are (1) the OEM-supplier interface, where suppliers get the goods needed to the OEM for vehicle manufacturing and (2) the internal manufacturing operations of the OEM, where the primary focus is on the design and assembly of vehicles.
As the industry enters the 21st century, the traditional automotive business model will be constantly challenged and revamped as components are modularized and manufacturing techniques undergo changes to make them both more efficient and worker-friendly.
The auto industry now faces the same pressures to reconfigure the supply chain that has transformed the faster-clock speed high technology industries. Automakers are increasingly reliant upon large and sophisticated Tier One suppliers (suppliers that deal directly with the manufacturer) that take on design and logistics responsibilities and make investments in capital equipment and advanced technology development.
Alliances among automakers and with firms outside the industry are increasingly common too (i.e. NUMMI, Mistubishi/Daimler Chrysler, etc.) as the costs of developing new technologies and of serving global markets strain the resources of even the largest firms.
It is readily becoming a reality that manufacturers have to place a constant demand on their suppliers to continually cut costs. This is a very difficult situation, as manufacturers simultaneously must outsource more and more of the production process. If they continue to pressure suppliers to cut costs, they stand a chance of losing them. Some manufacturers, such as Honda and Toyota realize the reality of the situation and have made efforts to maintain relationships with their suppliers. In a recent article in Ward’s Auto World, this unique approach was discussed. “It is the OEM-supplier interface component of the business model, however, that demonstrates the greatest differences between the domestics and Honda and Toyota. At no time during the past 15 years, except for the Tom Stallkamp era at Chrysler, has any domestic OEM acted with as much concern for maintaining good supplier relations as having Honda and Toyota.”
The way this approach is carried out as detailed as follows, “The initial emphasis on quality when selecting suppliers carries over to the manner by which Honda and Toyota work with their suppliers . . . Honda and Toyota expect their suppliers to be around long-term. And if the supplier is not performing as expected, Honda and Toyota will work with the company to get its costs down or improve quality – whatever it takes to make the supplier’s goods competitive.”
On the supplier’s end, this may seem like the ideal situation in which your only client is just as interested in your profit margin as you are. This relationship does not come with a price though, more often than not it actually allows the automaker to exert more cost-cutting pressures. “Still, our studies found that Honda and Toyota carry out all of their supplier interface activities while applying considerable price reduction pressure on parts makers.” (Henke 48)
On a manufacturing level, collaboration is the key to survival in the next economy. Automakers must be prepared to leverage relationships with suppliers, distributors, technology alliance partners, and customers more intensively. Only those firms that skillfully develop and manage the capabilities of this extended enterprise will thrive. Each company is on its own quest for a unique advantage in the industry’s new economic geography.
Economic geography is really what will determine the paths taken by automakers in the years to come. Oil shortages and price raises can force an early hand on hybrid/fuel cell/electric development and implementation. If an automaker is not ready, then they could suffer, as competitors who started their R&D earlier, will have faster product delivery.
Again, economics will determine success and failure as automakers address such questions as, “Will the car market continue to erode in favor of segment-blurring hybrids (hybrid hydrogen fuel-cell vehicles such as the Ford Focus FCV)?” (Birch) and “What happens to all existing models if and when fuel cell power trains break into the market?”
The answers to these questions, and other similar questions, involve massive manufacturing and financial commitments. To understand why economics so crucial, one must simply refer to the bottom line. Where are the customers? Where will they be next year? What do they want? What do we have to overcome to deliver that product before our competitors? How can we deliver it with the highest profit margin possible? The first company that can provide all the right answers to those questions is the winner.
Birch, Stuart. “Ford’s Focus on the Fuel Cell.” http://www.sae.org/automag/features/fordfc/
Christenza, John. “Can GM Save an Icon?” Business Week. April 8, 2002: 60.
Goisher, Steven. “Administration Shifts Strategy On Auto Fuels.” The New York Times. 9 Jan. 2002: pA1(N) col 2.
Henke, John. “It’s Not the Business Model.” Ward’s Auto World. March 2002: 48.
LePree, Joy. “A ‘Greener’ Ride.” Product Design & Development. Sept. 2001: 34.
Wolkomir, Richard. “Yo-ho-ho!” The Economist.21 Feb. 2002: 42.
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