report- automobile industry

MANAGING BUSINESS IN GLOBAL CONTEXT

LB 5203

INDUSTRY ANALYSIS

AUTOMOBILE INDUSTRY

SUBMITTED TO : MR. KRISHNA RAJULU

SUBMITTED BY:

NEHA SINGH : 12678847

MUKIL BASKER : 12668294

HEMANTH KUMAR : 12686543

MOHAMMED SHAMEER : 12668924

REPORT ON AUTOMOBILE INDUSTRY

INTRODUCTION:

The year 1885 marked the birth of the automobile industry, which later became much

more successful than the manufacturing industry over the last 20 years and the most

important industry in the world. The Automobile Revolution began at around the same time,

and it is when the technology to produce and operate cars is already possessed by the

Europeans and North Americans. But earlier in the 18th century, there was already a long

series of efforts to combine the steam engine and the road wagons in some parts of the United

States, Italy, France and Britain. It was in the 1890 that the process of uniting the technology,

the manufacturing ability and the potential market in order to sell motorcars occurred in

France and in Germany.

The first boom of the industry, however, happened a few years later, specifically from

1895 to 1908. France dominated the young industry during the first boom, being the leading

producer and exporter of automobile at the time. One of the reasons for the French

dominance for most of the early car manufacturing days is the hesitation of the other

industrial nations to participate in it. A minor economic recession in between the years 1907

and 1908 became the turning point for the industry, as Britain and Germany overtook

France’s lead by growing at a faster rate than the latter and breaking away from France’s

shadow. The United States, likewise, took the challenge of revolutionary innovations in order

to satisfy the mass markets they found. By 1985, most of the cars produced around the world

came from Germany (Benz) and France (Panhard ET Levassor and Peugeot). In the course of

the revolution of the automobile industry, a shift in its clientele, its labour force, its strategy

and structure is ever apparent. Cars originally catered only to the urban upper classes, but in

the course of developing cheaper and more efficient ways in manufacturing them, which

resulted to the manufacturer’s ability for mass production, the scope of market extended even

to the general populace. What once was a status symbol for the affluent now became a

necessity, as cars proved to be one of the most convenient means of transportation available

the world over.

pg. 1


MICRO-ENVIRONMENT ANALYSIS:

Porters Five Model:

Michael Porter identified five forces that influence an industry. These forces are: (1)

degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5)

supplier power. Like other industries operating under free market, capitalistic systems,

viewing the automotive industry through the lens of Porter’s Five Forces can be helpful in

understanding the forces at play.

pg. 2

INDUSTRY RIVALRY

VERY HIGH

POTENTIAL ENTRANTS

LOW

BUYER POWER

LOW

THREAT OF SUBSTITUTES

HIGH

SUPPLIER POWER

LOW


Degree of Rivalry:

The competition in the automobile industry is very high. There are many big players

in this industry all around the globe. Due to heavy competition each company has to slash

their prices, implement many ad campaigns, etc. each company is in a verge to develop their

products and provide many new innovations to their products thus improving their innovation

and profitability. The rivalry among the automobile industry can be seen all over the world in

almost every nation like japan, Korea, India, china, the U.S, Germany, Italy, France and

many more, among almost all the automobile manufacturers. The intensity of the competitive

rivalry is very high because each customer planning to buy a car has many options with many

numbers of players in the industry allowing the companies to lower their profit to survive in

the heavy competition. Thus the intensity of the competitive rivalry is very high.

Threat of Substitutes:

Threat of substitutes to the automobile industry is not so high. There are many forms

of transportation other than automobiles are available, but no other forms of transportation

offer the convenience or the independence or neither the value offered by automobiles. Many

alternatives to the automobiles like train are less expensive than the operation and

maintenance cost of an automobile but it the convenience and the independence offered by an

automobile cannot be obtained in other forms. In urban areas where the total area and the

density of population is very less, there are some other alternatives to the automobiles like

walking, cycle, etc. these forms of substitute to the automobile can be very less expensive

than automobile and whereas it can offer the independence and convenience which we can

obtain in automobiles, so in urban areas automobiles are not preferred. Thus threat of

substitutes to the automobile industry is low.

Barriers to Entry:

This threat is a very low threat to an automobile industry. Some of the factors, which

are to be considered for this industry, are there are many barriers to the entry like a huge

capital is required for an new entrant as it costs a lot to build an automobile manufacturing

unit, brand quality as an new entrant cannot gain a brand image as the existing company,

there will be many legal and government issues like the emission policy, etc. the new entrant

must be capable of distributing the product to all markets. Thus the threat of new entrants to

the automobile industry is very low.

pg. 3


Bargaining power of buyer:

The bargaining power of the customers depends on the market in which the firm

operates. For example the bargaining power of the customers in the U.S is very high and is

favorable to the customers so getting a car in the U.S market is very easy and so there will be

a lot of customers for an automobile industry, whereas the bargaining power of the customers

in Singapore is very low and is favorable to the industry thus getting a car in Singapore is not

so easy and so the number of customers in Singapore will be less. Thus the bargaining power

of the customers depends on the market.

Bargaining power of suppliers:

Suppliers to an automobile industry include tire manufacturers; the electronic parts

manufacturers, etc. The bargaining power of the suppliers is very low because each supplier

rely on particular automobile manufacturers to buy their products but whereas, the

automobile manufacturers have many different options to choose their suppliers based on

their quality. The automobile manufacturers can change their suppliers if they would like to,

for example Toyota has 10 suppliers in the U.S alone. Thus the threat of suppliers to the

automobile industry is very low.

The automotive industry is a dynamic place. With the forces above at play, and with

history as a guide, it is safe to say that the automotive industry will continue to change,

evolve, and adapt.

pg. 4


MACRO-ENVIRONMENT ANALYSIS:

PEST Analysis:

Political:

Observers will see a continuing progression in the ruinous steps which have forced

the industry into a socio-politico-economic corner. Whether this is related to flat demand or

to the industry's creation of an ever-wider range of vehicles that many buyers seem to care

little about, there is a problem. The industry is likewise linked closely to the policies of

governments, the earnings of banks. Little wonder then that so many emerging countries are

keen to develop an auto sector or that there is such a political pressure to protect it in the

developed countries. The world's vehicle industry is currently dominated by little more than a

handful of firms, each wielding colossal financial, emotional and political power. The

industry's approach to dealing with political institutions has not always been brilliant. It tends

to be good on technical issues, although it has not always fully presented the longer-term

options, in order to make the choices and their implications clear.

pg. 5

POLITICAL FACTORS

ECONOMIC FACTORS

SOCIAL FACTORS

TECHNOLOGICAL FACTORS


Economic:

For much of the developed world, and increasingly fro the developing world, the

automotive industry is a pillar industry, a flag of economic progress. Without an automotive

industry, it is impossible to develop an efficient steel business, a plastic industry or a glass

sector - other central foundations of economic progress. The automotive industry has been a

core industry, a unique economic phenomenon, which has dominated the twentieth century.

However, the industry now suffers from a series of structural schisms and has become riddled

with contradictions and economic discontinuities. For the capital markets and the finance

sector, it has lost a lot of its significance, as a result of ever declining profits and stagnant

sales. The proliferation of products means that it has become hopelessly wasteful of

economic resources. While all these and more sound like a very gloomy assessment of such a

vast economic phenomenon, the industry is not in the end despondent. A different future is

possible for the industry, a highly desirable one.

Social:

The world's automotive industry affects the society as a whole. It employs millions of

people directly, tens of millions indirectly. Its products have transformed society, bringing

undreamed-of levels of mobility, changing the ways people live and work. The social value

of the additional mobility that this industry brings involves the value of the people being able

to commute over longer distances easily, among many others. For most of its existence the

motor industry has been a model of social discipline and control and it is not just that the auto

sector offers a ‘pillar' of something else. There are, on the other hand, particular social issues

to address in many developing countries, often those that are the result of an undertone of

religious faith. The automotive industry has the role to play in helping develop the mobility

of such countries and it can be achieved at an acceptable social cost of the country is prepared

to learn the necessary lessons from those who have travelled this route before it, and to make

the necessary investments.

pg. 6


Technological:

The automotive industry works on a scale so awesome and has an influence so vast

that it is often difficult to see. The level and diversity of technologies that it must deploy are

increasing, which imposes both new investment burdens and new uncertainties and risks.

Roughly a million new cars and trucks are built around the world each week - they are easily

the most complex products of their kind to be mass-produced in such volumes. The industry

uses manufacturing technology that is the cutting edge of science. But still, the potential for

developing coordination skills, intellectual capabilities and emotional sensitivities through

electronic technologies remain far from fully exploited. There are numerous additional near-

term technological opportunities to adapt the automobile to changing energy availability. The

possibilities suggest that automotive technology is unexpectedly robust and provides a

powerful defence against energy starvation even if the real price of oil climbs steadily during

the next couple of decades.

pg. 7


COMPETITOR ANALYSIS:

The automotive industry is facing new and pressing challenges. Globalization,

individualizations, digitalization and increasing competition are pressing the face of the

industry. In addition, increasing safety requirements and voluntary environmental

commitments by the automotive industry have also contributed to the changes ahead. Size is

no longer a guarantee of success. Only those companies that find new ways to create value

will prosper in the future.

The global automotive industry is subjected to a range of factors that are increasing

complexity and influencing the economic options available to automobile manufacturers. The

majority of these factors interacts with one another and has strong interdependencies.

However, some of these factors are market-induced and, consequently, cannot be influenced

directly by the automobile manufacturers. These factors include:

Globalization, regionalization and market convergence.

Increasingly diversified consumer aggregate patterns of behaviour.

Accelerated modification and diversification of the product portfolio.

Pervasion of automobiles with digital technology.

Increased pressure for innovation and flexibility in development and

manufacturing.

The auto makers must take decisive steps to differentiate themselves from their competitors. In this regard there are five key areas for action:

Depth of production: Depth of production is a key issue for auto makers, now and in the

future. In the past, nearly all the auto makers moved to outsource the production of key

components, so as to reduce their own depth of production. Today, the auto makers

themselves produce only 30% of an automobile’s value, on average. While the Europeans

have largely chosen to rely on outsourcing, the Asian manufacturers have done quite well

with their global joint ventures. The re-integration of specific components makes sense if that

promises competitive and cost advantages. On average, automotive suppliers are generating

gross profits of 5% to 7% on their production activities, while the profit margins of auto

makers on the assembly and sales of new vehicles are often less than 1%. The hoped-for

synergies of the big mergers of recent years, including GM, Ford, Fiat and DaimlerChrysler,

have not fully materialized.

pg. 8


Innovation management: It is increasingly difficult for the auto makers to develop ground-

breaking, brand-specific innovations. They have already handed over much authoritative

expertise in research and development to the automotive suppliers, which work for all auto

makers equally. The result is a “socialization of innovation,” which does not generate specific

advantages for individual brands. The traditional relationship between auto makers and

automotive suppliers is no longer adequate. The auto makers will either have to establish

closer, more exclusive relationships with their suppliers or make the necessary investments to

re-establish their own innovation capacities, in order to counter these dependencies. For

example “Toyota’s current lead on the hybrid engine may prove to be decisive”. “Most of the

technologically leading companies that are working to develop hybrid drives belong to

Toyota or are controlled by Toyota.” Therefore, the European auto makers should take steps

now to make sure they are not left out of the next technology revolution, the fuel-cell vehicle.

Control over the point of sale: Because technologies are becoming increasingly

interchangeable, automobile brands need to be differentiated in other ways. Despite the

growing trend of direct sales, the car dealership will continue to be the most important

interface with customers for the foreseeable future. Thus, auto makers need to provide more

targeted support to dealers in their efforts to reinforce brand loyalty. To this end, they should

come out with general offers tailored to specific target groups, manage discounts in an

optimal manner and implement the measures stipulated by the manufacturers and the

wholesalers. Until now, auto makers are able to exert direct influence on sales only in their

own sales outlets, but not in most car dealerships. Consequently, they have lost strategic

control over their customers.

Downstream business: The overall profits generated by the auto makers are derived from a

combination of sources: new vehicle sales, financial and mobility services, auto service and

replacement parts and used vehicle sales. These days, auto makers generate a full 80% of

their profits on so-called downstream business. Thus, one of the great challenges facing auto

makers today is to realign their business models to achieve a greater emphasis on downstream

activities. Auto makers are under attack from smaller, non-affiliated competitors in the most

lucrative business segments like financing and replacement parts. The auto makers need to

act quickly if they wish to protect their dominant positions in these areas.

pg. 9


Organization management: Every company in the automobile industry is struggling with

the effects of rising complexity. The big auto brands are represented in all the markets of the

world. To accommodate the increasing diversity of customer segments, they need to produce

a wider variety of models. That requires complex corporate structures which are, by their

nature, unwieldy and inflexible. The management challenges facing the big auto makers call

for a specialized management culture tailored to the company’s particular situation. For

example “The Toyota model only works at Toyota. Every company needs to refine its

management culture in order to be more competitive and responsive.” The European auto

makers may want to consider a higher degree of delegation and decentralized responsibility,

coupled with flatter hierarchies.

COMPETITIVE ADVANTAGE:

pg. 10


Industry forces Differentiator Cost leadership Focus

Rivalry High brand image and

value can be tough

rivals.

Low price and better

efficiency can be a rival.

Rivals cannot compete

against focus

differentiation need of

customers.

Substitutes The more customized

your product the more

low threat of substitute.

Low cost products will

avoid substitutes.

Specialized products

can defend the

substitutes.

Entry barriers New entrants will not

be successful as the

brand value or image

will not satisfy the

customer.

New entrants are highly

impossible because of

high capital investment

and their products cannot

be low.

Build on the

competitive advantage

to make it efficient than

the competitors and new

entrants.

Buyer power Buyers have the power

to choose from

alternatives but the

features, technologies

and comfort differs.

Price cannot be lowered

based on the buyer.

Large buyer have less

power to negotiate if

few alternatives

Supplier power Ability to pass on

supplier price increase

to customers

If the supplier is cost

effective then should

protect him.

Concentrate on the

particular supplier as

they are powerful.

pg. 11


ECONOMIC TREDNS AND CHANGES:

After the horrors of 2008, by mid-2011 the global auto industry was looking in much

better shape, with a number of radical new trends driving both sales and vehicle development.

The incorporation of new technologies, from composite body materials to dual-drive power

systems (electric plus gasoline), and enhanced safety features are seen as driving a

competitive edge for manufacturers. At the same time, alliances between manufacturers and

major component providers are seen as the solution to the changing business model being

forced on OEMs by low margins and intense competition. The industry has come a long way

from the depths of the global crash, the nadir of which saw the three giant US car makers

having to go cap in hand to the government for bailout funding.

Mature-market manufacturers have had to rethink their approach to compete for

market share in emerging markets, while emerging-market players, which do not have the

same cost-heavy, unionized structures as, say, the big three US manufacturers, have done

much better in selling into mature markets. One of the major strategies of mature-market car

manufacturers has been to move manufacturing and assembly to lower-cost locations. In the

Americas, this has meant moving manufacturing from Detroit to Mexico. In Europe, it has

meant moving from established markets to factories in the new accession countries in central

and Eastern Europe. Asian manufacturers, such as the South Korean companies Hyundai and

Kia, have been able to grow sales not just in Asia but in mature markets as well.

In 2011, the trend of shifting the entire automotive sector towards more

environmentally friendly vehicles and sustainable lifecycle manufacturing, with an emphasis

on reuse and recycling of materials continues to strengthen. One positive in the downturn was

the way many Western countries adopted schemes to encourage consumers to dump old, fuel-

inefficient vehicles for new models which produce much less pollution. This development

marked the beginning of the upturn for the Western car industry, though sales of hybrid, dual

power train vehicles are still in their infancy.

The biggest driver for increased automotive transactions in 2011 is the strategic value

that Mergers & Acquisitions can bring to address key issues facing automotive companies.

These include:

• Broadening geographic footprint,

• Increasing market share,

pg. 12


• Diversifying the customer base,

• Bolstering technology capabilities; and

• Increasing exposure to growth-oriented market trends like vehicle electrification,

infotainment, and CO2 reduction. Companies will again have to consider Mergers &

Acquisitions as an option in their toolbox of strategic options, and will also have to consider

how competitors’ Mergers & Acquisitions actions may impact their competitive position.

Moving forward, winning automotive companies will be those who 1) capture

profitable growth, and 2) achieve concentration of scale and expertise in the specific product

or sectors in which they compete. These actions which are dependent on Mergers &

Acquisitions to achieve can convey competitive advantage to automotive companies facing a

brutal competitive environment. Companies which successfully achieve strategic

consolidation may be able to: profitably grow faster than the market; achieve a scale and cost

advantage; afford the R&D necessary for innovation and differentiation; afford globalization;

reduce competitive intensity to a sustainable level; and create sustainable returns.

pg. 13


KEY STRATEGIES:

The most important question is how a company can remain competitive in the face of

the turbulent transformations taking place in the automotive industry. The key to success lies

in being focused, responsive, variable and resilient, which can be accomplished by

converting to an on demand company. Adaptively to an ever changing environment has

become the core business demand, requiring problem-solving tools and methods to be

identified, selected and implemented quickly. Focused, responsive, variable and resilient are

different behaviours required to become more adaptable behaviours whose features

correspond with the exigencies of the business objective. A car manufacturer has seven major

strategies to be followed to remain competitive in the market. They are as follows:

• Brand management – Brand management strategies help make companies more focused

and able to differentiate its products from the competition.

• Customer relationship management – Customer relationship management (CRM) helps a

company become focused on customer requirements and wishes and responsive to changes in

aggregate patterns of customer behaviour.

• Core competency management – Core competency management allows a company to

focus on its internal strengths and become more variable and resilience by entering into

strategic partnerships with suppliers with competencies in new technologies or niche

operations.

• Software management – Software management is a key to making a company focused on

software standardization and strategic partnerships, which, in turn, help the company to

become variable and resilient.

• Quality management – Quality management (QM) will, by becoming a cross functional

and cross-company concept over the whole value-add chain; help ensure that companies grow

their maturity in resilience.

pg. 14


• Product development management – Managing product development together with a

focus on broadening competencies in new technologies will help enable organization to

become more variable by the optimization of collaborative engineering. Increased resilience

can be achieved by standardized processes and the extended use of virtual testing.

Decentralized and regionalized development activities will help to increase responsiveness to

customers’ desires.

• Expansion management – Management of expansion into new geographies and cultures

require that are focused on the requirements in these new markets and responsive to changing

market conditions and requirements.

pg. 15


ANSOFF MATRIX:

Market Penetration:

Here we market our existing products to our existing customers. With this approach,

you’re trying to sell more of the same things to the same people. This means increasing our

revenue by, for example, promoting the product, repositioning the brand, and so on.

However, the product is not altered and we do not seek any new customers. When it comes to

Automobile Industry it is very important because all the manufacturers come up with new

feature, technology in the new models they launch. They also come up with new promotions

during the New Year, Christmas seasons.

pg. 16


Product Development:

This is a new product to be marketed to our existing customers. Here we develop and

innovate new product offerings to replace existing ones or extend our product by producing

different variants or packaging existing products in new ways. Such products are then

marketed to our existing customers. In Automobile industry products are differentiated and

scale and learning effects are important to production, the timely introduction of a successful

new product may yield gains in market share, profit margins, and productivity and the stakes

are not trivial. For example, TOYOTA Company always seeks for new technology to

increase its vehicle fuel efficiency. This improvement helps TOYOTA to be more

competitive than others. As the result, TOYOTA Company gain more sales by selling hybrid

vehicle as it helps to reduce pollution to environment as well.

Market Development:

Here we market our existing product range in a new market. This means that the

product remains the same, but it is marketed to a new audience. Exporting the product or

marketing it in a new region is examples of market development. For example Toyota was

very successful in Japan. Then they entered the U.S market and became one of the world's

biggest carmaker. Now Toyota is a benchmark example of a company with excellent strategic

alignment.

Diversification:

This is where we market completely new products to new customers. The automotive

industry today clearly shows that major car manufacturers around the world are trying to

stand out big and strong in the global market today. With higher percentage of penetration

into the global market there are only few major car companies who succeed in monopolizing

the entire industry with their aim, concept, and strategies. Major players are Toyota and

Volkswagen.

pg. 17


REFERENCES:

1. Accenture, United Nations Global Impact, 2011, Towards a New Era of

Sustainability in the Automotive Industry

http://www.accenture.com/us-en/Pages/insight-ungc-automotive-industry-

report-summary.aspx

2. Frost & Sullivan, 2010, Key Trends in Global Auto-component Industry and its

implications on Regional Player

3. Herbert K. Tay, Achieving competitive differentiation: the challenge for

automakers

http://proautoconsultores.net/pt/acheiving_competitive_s.pdf

4. KPMG International, KPMG’s Global Automotive Executive Survey 2011

5. MacDuffie, J.P. 2009. PowerPoint presentation: “The global auto industry

crisis: Looking back and ahead”. Presented at ILO Research Roundtable,

Geneva.z

6. Oliver Wymen, Towards a New Era of Sustainability in the Automotive

Industry

http://www.oliverwyman.com/pdf_files/

9_en_PR_Future_automotive_industry_structure_-_FAST_study.pdf

7. Sasha Bank, November 2010, Current and Future Trends in the Automotive

Industry

http://www.oracle.com/us/corporate/profit/opinion/102910-banks-190918.html

8. The Economist, ‘Thinking outside the car’, October, 2010

9. Advance Business Consulting, The Rise of Toyota

http://www.advancebusinessconsulting.com/advance!/strategic-alignment/

strategic-alignment-business-cases/the-rise-of-toyota.aspx

pg. 18

http://www.advancebusinessconsulting.com/advance!/strategic-alignment/strategic-alignment-business-cases/the-rise-of-toyota.aspx

http://www.advancebusinessconsulting.com/advance!/strategic-alignment/strategic-alignment-business-cases/the-rise-of-toyota.aspx

http://www.oracle.com/us/corporate/profit/opinion/102910-banks-190918.html

http://www.oliverwyman.com/pdf_files/9_en_PR_Future_automotive_industry_structure_-_FAST_study.pdf

http://www.oliverwyman.com/pdf_files/9_en_PR_Future_automotive_industry_structure_-_FAST_study.pdf

http://proautoconsultores.net/pt/acheiving_competitive_s.pdf

http://www.accenture.com/us-en/Pages/insight-ungc-automotive-industry-report-summary.aspx

http://www.accenture.com/us-en/Pages/insight-ungc-automotive-industry-report-summary.aspx

report- automobile industry

Documents

european auto makers

automotive industry http

auto makers

major strategies

remain competitive

automotive industry

economic progress

strategic partnerships