Essay, Pages 6 (1423 words)
Changes in the structure of the auto industry The 1965-1972 automobile industry was a low competitive environment, and as a consequence was a profitable industry. Indeed, during this period: ?Industry rivalry was rather low: ?The automotive market was fragmented into separate national markets and the primary concern of manufacturers was their domestic sales. As a consequence only a few competitor were disputing each market. ?The supply was meeting the demand in a correct manner: the production could provide the number of vehicles bought each year, without a major over-capacity.
As a consequence, fixed costs were “under control”; no manufacturer was trying to gain market share in order to spread fixed costs over sales volume. ?Car models were much more differentiated that during the 2000’s. Several technologies were used in the various models available. As a consequence, models were considered as more unique by customer, hence a weaker tendency to switch between manufacturers. ?Suppliers power was almost inexistent, as manufacturer were much “vertical integrated”, to reduce costs and increase flexibility.
Oil price was not a concern, with barrel under $15 during the whole period (expressed in 2006 US $). With no environmental concern, the substitution threat was very low. ?Low competition in national market and high capital costs were mainly responsible for the low threat of new entrant in each local market. Moreover markets were far from being global, notably due to the transportation problems, which were on the verge to be solved : becoming global would have required at that time to completely reinvent the production process, as shipping components would have been excessively complex.
Between 1972 and the beginning of the 2000’s, the world automobile market has faced a major upheaval, which primarily is due to one major phenomenon: “globalization”. The GATT and other international agreement have provided a framework for global trades, including the automobile industry. Moreover the slow growth rates of the industry provided incentives for manufacturer to look for new markets. This resulted in a major shift in the industry structure: ?The competition intensified during the period, The introduction of completely new manufacturers of market that used to be stable: the new production, management and transportation methods gave a boost to the competition atmosphere. ?Excess capacities were added during the 80’s and 90’s, when Japanese companies tried to enter foreign markets (and most notably the US), resulting in high fixed costs that had to be covered. This high fixed costs problem was reinforced by the rising new models development costs. ?Car model standardization induces less differentiation, hence an easier customer switch between manufacturers.
Moreover the fact markets have globally the same structure among different countries (luxury car/SUV/salient/low-cost cars) make it easy to compete around the world. ?Consumers have been requiring more “esthetic” personalization, requiring more flexibility in the manufacturing technology. That has reduced the benefits of economies of scale. ?New entrants have appeared and are still threatening to enter. Despite the major capital requirements to enter the automobile industry, several new competitors have emerged on each market segment during the last 40 years.
On the one hand, developing countries have created national manufacturers, often protected by their own legislation before deciding to go global. On the other hand, existing multinational do have the cash required to enter new segment market, as the SUV example shows. ?The suppliers bargaining power has had a tendency to rise, and more and more manufactured decided to outsource the component manufacturing. This is reinforced by the fact that several component supplies have become as big as automotive manufacturers. Buyers have never been so well informed about models, performance, security concerns and innovation. As a consequence, major manufacturer have to constantly integrate new technologies into their cars, resulting in major costs. The automobile industry has undergone major changes in 40 years. The major increase in competition due to globalization, the industry structural changes and consumer evolution has made it much more difficult to generate profit. 2. Next 5 years structure changes?
Observing the current automobile industry, one can try to predict some major trends that will characterize the future market. Competition will probably intensify above the current level, with several emerging countries on the verge of entering the world market (e. g. Tata Motors from India and Chery Automotive Company from China – see ). As a consequence, new major plants will probably being built by those new competitors, to provide the market with their own model, while existing leader will go on building their own on growing markets.
So excess capacity will last. The price on war resulting will probably induce industry concentration, which will be divided into two different categories: on the one hand, one can predict mergers and acquisition, as it has existed until now, resulting in fewer competitors. On the other hand, closing of brands owned by international companies are likely to happen, because their profitability plummeted due in particular to lack of investment . From the customer point of view, several trends are to be noticed.
First customer all over the world will become more and more concerned about environment. This problem along with the high oil price will force manufacturer to develop models consuming less gasoil, or using alternative energy sources. As a consequence, new model development prices are likely to get higher that now, requiring major investment. Second selling model to developing countries and lowering purchasing power in the western countries will provide incentive the develop new small and cheap models. 3. Future profits?
As a consequence, it is likely that the industry will be less profitable during the next 5 years: intense price competition, heavy investment, major flexibility required by customers’ changing demand and personalization requirement will force manufacturer to lower their costs and profit as much as possible. 4. Successful companies As seen above, future leaders on the automobile industry will have to be: ?Able to face major investment costs, with available cash flow and not suffering from major high production costs, including for example the healthcare and retirement problem the 3 major US manufacturers are facing. Able to reduce prices as much as possible, by offshoring, reducing wages, automation and innovation in production management. ?Able to flexibly adapt their models to the demand. That requires production adaptation as well as deep understanding of the local markets, notably through a strong retail network. However, the evolution of transportation conditions and wages in developing countries (see ) will provide incentives for “near shoring”. Companies from BRIC countries will not as a consequence benefit from better costs conditions on their own countries, despite the developing costs will be under control.
Moreover, developing an efficient retail network within 5 year is very strong challenge. To conclude, the companies that are likely to succeed on the world automobile industry during the next 5 years are production efficient and huge companies, which have already entered the major world markets and solved their major cost issues. 5. Ford solutions Where considering the three majors key points exposed above answering question 4, it can be deduced that Ford will have to face important issues to keep its position on the international automobile industry, especially with the new entrant threats.
As a consequence, one major issue that Ford will have to address is the healthcare and retirements plans that lie in its balance sheet, and degrade its capacity to invest. Some great negotiation will unions will consequently have to occur. General Motors show a path during the year 2008 that could be used by Ford as well. As pressure on costs will still be prevalent, Ford will have to adapt its production tool. Some great effort on flexibility will have to be made, to be able to quickly react to the customer changing needs.
May new factories need to be built, they should be placed near shore their target market. This strategy will allow cost reduction as well as adaptations to the local markets, which always show some important differences even if the market structure is often the same. To reduce costs, Ford will probably have to reduce its brands portfolio (for example to 3 or 4 brands in the US), to cover the whole industry market while lowering developing model costs and keeping fixed costs under control.
Finally, one important point would be to get more important control over distribution channel, as it is a greater profitable industry that the manufacturer industry. Moreover, it appears from some analysis (see ) that the added value is mostly located into that area: customer can feel the differentiation there rather than on the pure manufactory area.