Automobiles Markets Problems Over the Last Two Years

Forewords

The automobile industry is one of the industries that have been witnessed to have undergone and unmatched transition in the recent few years. The industry has so far hugely grown in size and vibrancy thus making the extremely enormous and highly competitive industry that can be seen in present days. From the time that Henry Ford (the founder of present day strong house in the automobile industry (Ford) created his début car model and which was later on perfected by Alfred Sloan, the vehicle industry or rather the automobile industry has undergone a remarkable 8 decades of unprecedented growth in size and competitiveness, characterized by innovativeness, marketing, and war of competitive strategy. Ideally, many automobile companies that have ensued since then battles for market leadership and supremacy over rivals. Being in the growth stage of the market cycle, the automobiles industry continues to undergo massive transformation even to date, marked by high rate growth and market expansion (Marie, 2008: Para 3). According the latter, the competition and transition of the industry is not merely steered only by the company’s normal operations, but by the way players in the industry attempt to differentiate themselves for competitive advantage.

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Over the last eighty years of the automobile industry transition, survival, market leadership supremacy as well as competitive advantage by specific players have been steered mainly by first mover advantage and vastness in capital and plants, economies of scale and supremacy in market share. In the last one decade however, the increasing competitiveness; the latter of which is escalating even more by the day from the effects of globalization has seen instigated change in competitive strategy leading to high degree of research and development, inventiveness and innovativeness and high level of differentiation in the car manufacturing and marketing of cars. Also, leading competitors have at time integrated to form joint venture and amalgamation to acquire monopolistic power in the vehicle markets (Automotive news, 2007: Para 4). In effect, the integrations have seen the US automobile market shrink in the number of automobile company from the high of 27 companies in the early 1990s to around six major players presently.

Consequently, the global automobile industry is characterized by unmatched customer value that they deliver in terms of car quality, styles, and differentiation steered by the ever intensifying competition, which continues to grow steadily in fierceness every other day (Marie, 2008: Para 4). As a result, automobile industry is typically characterized by products that are much more superior in quality and reliable than the vehicles that were being produced only a few years ago by the same industry, particularly with regard to their economy in use, safety of the user, improved functionality as well as the vehicles performance ratings (McParland, 2008 Para 6). Going by the fact that the industry has in the last years been undergoing this transitions and steady improvement in customer value delivery in terms continuous improvement via the value chain, it may appear that the future of the industry depends on how well they handle the challenges that threatens to curtail the ability of the players in the vehicle manufacturing and marketing to continue with the value chain addition that is critical for sustenance and continued existence. This paper therefore provides a detailed insight on the present and potential challenges that face the automobile markets, their implication on both the present and future of the industry as well as the solutions that have been or can be applied to offset the challenges to guarantee a bright future for the industry as a whole.

Facts about automobile Industry

The automobile industry is an industry that is generally involved in the designing, developing, processing, marketing, and virtual selling of motor vehicle and automobiles in the entire global markets. Empirically, the industry produced and dispatched to the world markets close to a billion automobiles by the end of last year (2008). According to statistics released, the global automobile industry produced well over seventy million automobiles both cars and commercial vehicle in the fiscal year 2008 (Little, 2009). Although this represented a slight reduction in productivity of the industry in fact by 1.9 million relative to the number of motor vehicles that the global automobile industry released to the world markets in 2007 (perhaps due to the effect of the 2007-2008 automobile industry crisis coupled with the global economic downturn (Marie, 2008), statistics revealed that the industry had significantly grown in size and productivity over the years. According to the report therefore, the global automobile industry sold approximately 71.9 new motor vehicles in the entire world markets in 2007. Statistics revealed that in the 2007 automobile sales, the Europe was the major market for automobiles accounting for 31.7% of the sales, followed by the Asian pacific accounting for 29.8% of the sales, United States of American and Canada which accounted for 26.98%, Latin America 0.06%, middles east 0.03% and Africa contributing a mere 0.019% of the automobile markets in 2007. According to the report however massive increase in automobile markets relative to the previous years was greatly exhibited in Russia, Brazil, India and China among the major markets for motor vehicles, whereas there was a great extent of market stagnation and limited growth in Latin America and Japan’s automobile markets in 2007. Similarly, all evidence from empirical surveys on the automobile industry points out that the demand for automobiles continues to increases across many parts of the world an implication that the vehicle markets continues to grow. For instance, according to Anonymous (2009) -The global auto industry-business exchange-, it was revealed that in 2008, close to a quarter a billion vehicles were already in use in the United States of America relative to 217 million vehicles that were reported to be in use in US as at 2007. Similarly, the number of vehicle that were approximated to be in use in the entire globe in 2008 was approaching a billion including cars and light tracks relative representing close to 12.7 % increase up from 806 million according to 2007 approximations; the later of which were believed to consume more than a quarter a trillion gallons of gasoline and diesels in fuel annually.

Currently the key participants and competitors in the global automobiles industry includes, Ford Honda, Nissan, BMW, Volvo, Fiat Volkswagen PSA Renault, Toyota DCX and the General Motors. According to Morgan Stanley survey (2008) that sought to find out the respective market share, it revealed that General motors was leading in terms of market share taking approximately 15.2% of the global automobile market followed closely by Ford with 13.7%, DCX 10.1% Volkswagen 9.8%, Toyota, 9.1%, fiat 5.2%, Nissan and Honda, 5.1%, PSA, 4.1%, Renault 4%, BMW, 2.3%, and Volvo trailing with 1.5 %. However, even those companies that have in the past been seen as minnows in the industry have of late come out competitively and strongly to create a mark in the industry putting the strongholds on theory told and leading to the escalation of the rivalry in the industry. Consequently, the industry is currently characterized by unprecedented battle of strategy, innovativeness, research and development that is greatly supported by the advancing technology and its application in automobile manufacturing for optimum efficiency and effectiveness in delivery of customer value (Marie, 2008: Para 5).

Fig: Table showing automobile companies’ respective market share in the global vehicle markets

Company % Global Market Share
General Motors 15.2
Ford 13.7
DCX 10.1
Volkswagen 9.8
Toyota 9.1
Fiat 5.2
Nissan 5.1
Honda 5.1
PSA 4.1
Renault 4.0
BMW 2.3
Volvo 1.5

Source: Morgan Stanley Dean Witter; Booz·Allen & Hamilton analysis, 2008

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Problems facing the automobile markets

Irrespective of the current status of the automobile industry including the transformation, increasing consumer value delivery, advancing technology and expanding vehicles markets, the present and the future of the industry is presented with many problems and challenges that indeed needs immediate attention to guarantee a bright future for the industry. Mainly, the challenges are presented by the dynamisms of the PESTEL and external environment as well as the ever-changing consumer tastes and expectation in terms of the overall value delivered (Marie, 2008: Para 7). While presenting the challenges facing the automobile markets therefore this paper refrains from making conclusion on the future of the automobile industry but tries to seek solutions and measures that can be instituted to offset the challenges or mitigate the negative effect that such problem could have to the industry as a whole either in present or in future. Among the major challenges that the industry is faced with includes, the effects of the 2008-2009 automobile industry crisis, the global economic recession and it resultant effects on the industry, the effects of globalization and market liberalization, the ever increasing need for product differentiation, complex vehicles development processes, the supply chain restructuring, and the marketing and distribution challenges.

Globalization

As a matter of fact, 18 out of the 20 major automobile manufacturing companies have their roots and main plants located in North America, western Europe and Japan and the regions contributes close to 90% of the world automobiles output to the global vehicle markets. Ideally, these regions are ether in or near maturity stage thus providing limited room and opportunity for any further growth in demand for automobiles and markets; the latter of which has seen the participants reorient their focus to the emerging and unexploited markets in search for ideal growth opportunities. In fact, some markets examples of Japan have in the recent past been reporting negative growth in automobile market growth prompting Japan based company like Toyota to seek markets diversification elsewhere to guarantee the company future (Marie, 2008: Para 8).

As facilitated by the present globalization and liberalization, the participants from the North America, Europe, and Japan have diversified their operations both in terms of automobile manufacturing and marketing to the emerging markets particularly in Latin America, North and South Asia, China, India, Eastern Europe, and Russia. In most of these markets, the average growth in automobile markets has been approximated at a rate that is twice as much of that of an average industry, particularly in the next one decade. The rush by the companies to set up motor vehicle manufacturing industries, backed by globalization is likely to compromise the first mover advantages by the local auto-firms and the already established automobile companies in these regions. This greatly threatens their survival by inflicting a further blow to the already lean returns by the companies especially if the trickling in companies is strong in terms of competitiveness. Irrespective of the danger which companies presents themselves in by clogging in seemingly unexploited markets, most of the automobile firms are more willing to make entry and claim a part of the market share too many of which would mean reduced profitability or even failed survival if all goes to the worst (Marie, 2008: Para 8).

Logically, it is the economics of the globalization and the problems that it causes that threaten both the present and the future of the motor industry. Furthermore, the effects of globalization are both expensive particularly in matters regarding the alteration of the value chain to conform to the marked demands; the later of which is critical for the company or subsidiaries survival in the global market (Birch, 2009:10). Consequently, as the automobile companies compete for market share and supremacy in the international platform, they have to trade off the need for profitability as well as overstrain their production capacity. In addition, competition between the international automobile industries and the local ones, the conflicts between international business laws and local laws as well as the economic bailouts that is necessitated by the ensuing financial crises particularly among the local fire greatly disrupts the autonomous operations of the vehicle markets. These factors often leads to low profitability and at times loses in the industry thus leading to situation of unsuitable rationalization of the industry the latter of which may be particularly challenging for the participants and policy makers (Marie, 2008: Para 9).

Increasing need for products differentiation

The transition in the automobile industry particularly in the last one decade has seen the industry develop unprecedented competition and which continues to grow even more in present days. Similarly, the customers for automobile are becoming more and more sophisticated. In the same way the competition for such customers is steadily intensifying since the customers/ buyers bargaining power is increasing continuously as more and more automotive companies enters the market with a promise of delivering high value in cars and other automobiles (Marie, 2008: Para 8). As a result, the automobile industry today has been flooded with very many car products that exhibit a high degree of homogeneity in functionality and performance. In order to create a point of uniqueness, maximize the company’s car demand market share as well as meeting the ever changing consumer tastes and preferences while fully utilizing the organizational capacity, the vehicle marketing environment has greatly necessitated a lot of products differentiation as a basic tool for competitiveness.

Generally, meeting the market needs in products by an organization at a given point in time is the key to survival failure of which would have disastrous results for the organization. Effective differentiation of product is as a result of clear understanding of the customers needs and wants the latter which is a rather challenging affair. In the automobile industry however, marketers undertake the process of vehicle differentiation from two perspectives. The first perspective presents an approach via which the company carries out market surveys, consumer clinics and gathering consumer data to ascertain the needs of the customer with a believe that such can adequately offer a clear basis of differentiation i.e. the left hand approach. On the other hand, the right hand approach which is more spontaneous, takes the marketers judgment in coming up with an exceptional combination of both functionality and the emotional appeal to the customers with an aim of creating additional demand for the cars thus increasing sales typically known as the right hand approach to differentiation. The underlying principle in this form of differentiation therefore is to make the product particularly exceptional and more attractive while reducing rejecting of the same by the market. Differentiation, unlike standardization is extremely expensive thus inflicting additional cost in terms of dollars and time since it also make the car manufacturing processes lengthy and complex (Marie, 2008: Para 8). Furthermore, whichever form differentiation takes, the company has to balance between differentiating its automobile products and maintenance of identity both of which may come with dire repercussions on the company if not well administered.

Complex vehicles development processes

Ideally, vehicles are products that are typically costly and risky to develop both in terms of monetary expenses and time investment. Also, the industry is experiencing increasing cost of production and marketing as a result of the dynamics of the economic environment; the latter of which have greatly underscored their gains and presents a daunting challenge to the automobile manufacturers’ future (Birch, 2009:9). Consequently, the costs involved in the designing, development, engineering, manufacturing and marketing a new car product/ model has of late soared to highs of millions of dollars, with many of the automobile companies opting for “try and cut” manufacturing model in an attempt to reduce it. This has been proven to be effective in creating key crossing point details both in the archetype and in the trail phase. In this move, the automobile manufacturers’ aim at reducing time and cost for the vehicles development, while coming up with products that deliver the highest market value to customers to maximize the company return and effectively respond to the ever dynamic automobile market needs. In reaction to the complexity of the vehicle development challenge, the participants in the vehicle manufacturing industry have been over the years pursued a commonization as well as derivative approach, which are believed to have in one way or another escalated the challenge rather that offering an ideal solution for the same (Anonymous, 2009: para7). For instance, the players in the United States have been sharing vehicles components and structures to support their brands of vehicles; a strategy that has been criticized and faulted as having the potential of making the parent company loose identity, confusing the customer as well as causing hostile response from them. According to Anonymous (2009: para7), what happened to both the General Motors and Ford in the 1970s and early 80s tell it about the challenge and risk of pursuing a communization objective. For instance, brand such as Oldsmobile, mercury as well as Plymouth have been cited in Tierney (2009: 8) as examples of companies that lost their identity and almost got written off by the parent company while pursuing a commonization goal. There are therefore two main challenges in use of commonization and derivative approach in the attempt to ease the automotive product development. First, the company faces problem in identifying ways of differentiating the components of products particularly where customers care less about the differences while maintaining the focus and significance of establishing and maintaining brand identity. Also, the automotive manufacturers face a daunting task in the endeavor to reduce costs for a purpose of making differentiation within their means/ affordable (Tierney, 2009: 9). The most ideal solution in this case and which greatly presents potential in its usability and effectiveness for the industry is outsourcing- according to (Brooke, 2009:34)- in which companies gets the services of fast-cycle systems engineering development process from providers from without the company, form strategic relationships with suppliers in order to share costs and searches for manufacturing experience to support products differentiation while keeping products development costs to the minimum (Automotive news, 2007: Para 12). However, even outsourcing is rendered an ineffective solution to the product development complexity in circumstances where the company has no effective system engineering systems in place. Furthermore, automobile companies have as a result of ensuing competition and need to maximize market share participants in the automobile industries have been forced to alter their supply chain via formation of vertical integration and strategic relationships with supply’s all with an objective of increasing efficiency. An automobile company that is not in a position to or unwilling to alter its supply chain for conformity is likely to face an uphill task competing with the rest in the industry the later which has a disastrous effect.

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The automobile crisis 2008-2009

This is financial downturn that basically affected the Asian and the European automobile manufacturing industry and whose effects negatively affected the US and Canada automobile manufacturing industry as well, perhaps due to the role of the automotive product trade agreement (Austen, 2009, para2). The root of the problem-and which was attributed to the skyrocketing fuel prices that and which were connected to the global energy crisis of 2003 led to great reduction in vibrancy of the motor vehicle industry leading to great reduction in the sale of Sporting Utility Vehicles (Birch, 2009:18). According to the latter, this crisis caught the major participants in the automobile industry unawares since they had concentrated mainly on the production of SUV at the expense of fuel –efficient models thus there was a drastic reduction in motor vehicle sales since customers opted for fuel efficient models. For instance, in 2008 the Japan’s Toyota as well as Ford general motor and Chrysler realized a two digit reduction in June’s sales (Baumgarten, 2009).

In reaction to the crises that had escalated to critical situation in 2008 characterized by credit crisis and skyrocketing costs of raw materials, automotive manufacturers reacted by devising and applying creative marketing strategy; particularly in Asia Europe and North America and other parts of the world to appeal to customer and perhaps turn around the deterioration situations characterized by steadily declining sales of automobile. The combination of the crises and the global economic crisis that had set in early in 2006 worsened the situation and caused an unprecedented panic among the vehicles manufacturer including the strong participants characteristically referred to as the big three i.e. General motors, Fords and Chrysler as well as the equally strong Toyota (Bunkley, 2009:15). These companies were also forced to introduce huge prices reductions in form of discounts thus culminating to losses. As a result of the crisis, bailouts in large sums of money were necessitated including $4 billion US government bailout for Chrysler (Nguyen, Para 8), while some companies closed subsidiaries or shrunk their production capacity in failed bail out attempts. The aftermaths of the crises are still being felt among the global automobile companies as some have not yet returned to full gear profitability. The crises therefore coupled with future unpredictability of the economic environment keeps participants in the automotive industry only hoping for the best and expecting the worst out of possible economic downturns.

Conclusion

In conclusion, the global automobile industry is presented with great challenges that threaten its future ranging from the economies of globalization to the unpredictability of PESTEL Environment. They include but not limited to globalization challenges, competition, increasing customer expectation on values delivered and increasing need for product development, complexity of the product development, need for supply chain restructuring for efficiency and competitiveness, increasing difficulty in marketing and distribution among other challenges embedded the dynamisms of the marketing environment.

Reference List

Anonymous, 2009. Chrysler files for bankruptcy, Fiat develop plan: AFP news. Web.

Automotive news. 2007. Guide to global automaker partnerships. msxi.nl. Web.

Anonymous, 2009. The global auto industry-business exchange: BX home. Web.

Austen, I., 2008. Canada Agrees to Its Own Auto Bailout. The New York Times. Web.

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Baumgarten, S., 2009. Global auto sales to drop 13% in 2009, US down 24% – Moody’s:ICIS.com. Web.

Birch, S., 2009. Diesel or gasoline hybrids? Automotive Engineering International, Warrendale: Vol. 117, Iss. 4; p. 18

Bunkley, N., 2009. Despite $1.4 billion loss, Ford says it won’t need aid Automaker reports ‘strong progress’ in cutting costs and debt. International Herald Tribune, Paris: p. 15

Brooke, L., 2009. Meeting the technology challenge, Automotive Engineering International. Warrendale. Vol. 117, Iss. 9; p. 34

Little, Arthur D., 2009. Global automobile industry repositioning itself. Business Wire. Web.

Marie, S., 2008. The Global Auto Industry: New Cars, Old Problems. [email protected]. Web.

McParland, K., 2008. Kelly McParland: Stop the revolution, the CAW wants to get off. National Post. Web.

Nguyen, L., 2008. Canadian taxpayers and auto union butt heads over bailout. Canwest News Service. Web.

Tierney, C., 2009. Challenges seen amid flash; Tougher market expected for U.S. in Europe, Detroit News. Detroit, Mich. p7 -10

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