Automotive Industry. Fiat and General Motors Alliance

Outline

This paper is a case study on Fiat and General Motors. The paper focuses on an alliance entered by the two companies in the year 2000, the crisis that arose, and how they resolved the crisis. The paper adds on the automobile industry giving the general trends and what the industry is experiencing. The paper also looks at the two companies through SWOT analysis. Finally, the paper analyses the industry using PESTLE analysis and the 5 porter’s analysis factors.

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Introduction

General Motors Corporation is the second-largest car manufacturer after Toyota. The company also engages in financial and insurance services. General Motors (GM) has its head office in Detroit, Michigan State. GM has over 350 facilities in about 36 countries. Its major market is in North America and the USA. Fiat is an Italian vehicle manufacturer, also engaged in publishing, communication and industrial ventures. Fiat headquarter are in Turin Italy. It was founded by the Agnelli family who owns about 30% of the company.

GM and Fiat have in the past had a crisis over a business fusion. In 2000, Fiat entered to deal with GM, where GM bought a 20% stake in the Fiat auto industry in exchange for 5% in GM. Fiat was experiencing a market share decline in Europe and South America and therefore required a strategic partner for it to utilize its facilities optimally. The deal bound GM to purchase the remaining shares of Fiat after four years at a fair market value. The deal had the sole purpose of cost-saving and cost reduction through a joint venture. This would have reinforced GM against competition from Toyota, and help the Italian Fiat from a financial crisis. The alliance had the prospect to increase value for both companies’ shareholders through vital synergies in most favorable activities, efficient financial platform, and sharing of technologies across the automobiles (Chorafas 2008).

Mergers and alliances in the ’90s were common. Their aim varied depending on the situation at hand. They responded by: establishing production plants in emerging markets while they target the local market. They concentrated on widening their product range in order to satisfy divergent customers while they acquire a market position. They aimed at achieving cost-saving benefits through joint purchasing and constituent sharing, joint and outsourcing of production activities. In addition, they targeted better risk management by spreading risk through transferring production activities to suppliers.

The alliance between GM and Fiat took different perspective years after its establishment. Fiat was faced with a number of threats since 2001 after the September attack. The rise in the cost of steel, emerging competition from Asian car manufactures and currency imbalance caused Fiat to incur enormous losses in sales. Fiat’s Europe and Italian markets were on a decline while the factories were utilized at 70% of their capacity. Fiat went further into crisis since the southern market was also declining. From the year 2001 Fiat made operating losses and increased its debts. Fiat started to receive pressure from its creditor especially the banks. It planned to carry out a right issue in 2005 in order to reduce the debt and sell some of its assets. Fiat approached GM to exercise the option of buying the remaining 80%. GM was not in opposition since it had to pay for its pension obligations. GM later incurred heavy losses thereby eliminating the chances of saving Fiat. In 2003, Fiat was advanced credit by its parent company and started a restructuring process. The restructuring changed Fiat’s ownership composition rendering GM’s share reduced to 10%. The restructuring bore some fruits with Fiat recording some profits. GM made claims that the alliance of 2000 was invalid on the basis that Fiat had entered into some partnership which was against the spirit of the deal. To counteract this, Fiat defended itself and gave the option of a legal standoff between the two. The option of selling out the remaining portion to GM took a twist by GM opting to make monetary compensation instead of exercising its option. However, the Agnelli family felt that selling out Fiat to a foreign-based GM would be like selling out an Italian heritage (Chorafas 2008).

In Feb 2005, GM decided to pay $2 billion to Fiat in order to end the five-year dispute and avoid a legal battle. It was resolved that the joint venture company be dissolved and GM had to regain the property that it had contributed during the formation of the alliance. The two would continue to hold joint copyright ownership of the various diesel ventures done together. The joint purchasing venture was also to be wound up and a 50-50 ownership of a venture in Poland.

External analysis

The automobile industry where GM and Fiat are involved has other major competitors within their markets. In Europe, vehicle production is concentrated in a few countries like Italy, Germany with 45%, France with 17%, Italy where Fiat is based with 7%, Spain with 7% and Sweden with 6%. The total production of these countries accounts for around 90% of the European market. GM and other vehicle manufacturers account for the remainder 10%. GM has the largest market share in North America. GM’s competitors in the North Americas are Ford Motor, Daimler Chrysler though it has eventually been bought by Fiat, Toyota, Honda, Renault, Hyundai and Suzuki among others (Baker 2007).

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The automobile industry has over the years continued to generate economic rejuvenation to other sectors. The effect of demand in this industry has a direct significant impact on the other related sectors. In the case of an increase in automobile demand, a significant similar effect is registered in the other sectors. The sectors that automobile impacts on are steel production and metal fabrication industry, specialized manufacturing industry and rubber industry. The service sector is also not left out since a link is established between the two. The financial sector, information, and technology sector, research and development, trade and customs as well as transport sector are some of the service fields which benefit from the automobile industry.

The automobile industry has a variation in the vehicle manufacturers ranging from multinational to medium-sized companies. The market share has Europe leading with 42%, eastern Asia with 35%, and America with 21% of the world’s vehicle production (Chorafas 2008). Toyota is the topmost among manufacturers as from the year 2008, closely followed by General Motors as well as Volkswagen, Ford, Honda and Fiat. The automobile industry has a variety of suppliers who are concentrated in the United Kingdom, Japan, Germany, France and Italy.

The automobile industry has been experiencing tremendous growth and development. Over the previous years, there has been a notable formation of alliances and mergers. The 2008 financial meltdown has greatly affected the composition of various manufacturers and products. The mergers have helped some auto groups to penetrate and acquire new markets. All over the years, the number of manufacturers has decreased either as a result of alliances or mergers.

Competition in the automobile industry has developed from regional level to international level. New markets have been established, others have been saturated while others have generally stagnated. Economically, growing countries and developing countries have been cited as the most viable. For example, China has emerged as the best market due to its tremendously growing economy.

Competition in the international market has increased over the years but most manufacturers dominate their regions in terms of market share. American brands dominate the American market share, Japanese and Korean brands follow while German brands take the third share.

Consumers or vehicle buyers have also been significant since they are the target of the auto industry. Consumers have had different preferences depending on comfort, social and economic factors affecting them. This has lead to the establishment of different brands and models. Consumers have been found to have a common behavior when it comes to making their first choice of the vehicle they buy. They have been found to have a great affiliation to brand originating from their market. Customers are satisfied and have greater trust in products manufactured in their countries. This customer’s behavior has worked to the advantage of some manufacturers and against others.

The automobile industry has been experiencing pressure for technological innovations. High sales have been recorded among brands that enable cost savings through efficient utilization of fuel. Technologies developed over three years have shifted focus from effective utilization of fuel to the use of alternative fuel. Venturing alternative fuel is proving to be vital since in the near future demand for petroleum products will overcome production. The establishment of high-speed trains has negatively affected the automobile industry by lowering sales. People have been opting to use public transport over personal vehicles due to the trains’ high speed and low cost for transport.

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Internal analysis GM

GM can be internally analyzed by looking at its internal core competencies. One key competency is a worldwide Facilities Group (WFG) whose main business is to avail manufacturing facilities for vehicle producers that are marketed by GM. WFG carries out facilities and utility management, environmental services and implementing key projects. GM has achieved products reputation; this has been achieved through a thorough quality control policy as evidenced by a decrease in recall and legal cases due to negligence.

GM has been successful so far due to various strengths. GM has utilized economies of scale through its large-scale operation, and this has been backed up by a large number of GM dealers. GM has over the years practiced outsourcing which has enabled cost-saving and quality has been improved. GM has benefited in business growth due to emergencies of new markets in Asia and South America. GM has been carrying out aggressive and highly funded research and development in product engineering and design. GM reorganized its pricing strategy in order to achieve an incentive to its customers. GM has embraced new leadership, by instilling a brilliant strategy culture in its management. GM is the sole engineering organization thus establishing an edge above its competitors. GM has over the years entered into alliances and partnerships; they have enabled it to penetrate new markets and benefited from the joint ventures as well as reducing risk. GM has over the years embraced economic and environmental concerns thereby acquiring the highest market share in the United States.

GM has had a number of weaknesses. It has experienced diminishing publication from the press and analysts. The pension debt has increased over the years as a result of an increase in its workforce. Increase in the cost of healthcare for both its workforce and the retired. It has an aging workforce thereby affecting its production efficiency. Numerous product recalls due to errors inherent in them. GM has had poor financial capacity and strategy leading to bankruptcy and losses. GM has experienced the production of low-quality products in its foreign ventures as well as unstable suppliers who at times fail to meet its demand.

GM has enormous opportunities that it can use to overcome its weaknesses. There is expected to be an upsurge in demand for energy-efficient vehicles. GM can tap new talents in innovation and design to achieve high-quality standards. GM can reposition its models through product differentiation and enhance consumer’s confidence in its product by building products reputation. GM can capitalize on manufacturing in states where pension and healthcare requirements are low in order to minimize inherent liabilities. GM can strike new deals and ventures with its major competitors in order to increase its market leverage. GM can enter into an agreement with other industry players and the federal government in improving its financial status.

GM is faced with various threats like the rising cost of materials and unstable Dollar price fluctuation against other hard currencies. GM is experiencing increased competition from the rival manufacturer Toyota penetrating its major market. GM experiences uniform legislation requirements in foreign markets thereby limiting some of its products in certain markets. GM has been threatened by the production of superior products by competitors resulting in to decline in its products (Hoover’s 2007).

Internal analyses Fiat

Fiat has a sturdy historical background thereby attaching a strong value to its products. Fiat has a new management team after the exit of the Agnelli family in executive management. Fiat has factories abroad which assist it in minimizing transport costs. Fiat has a reputation in the production of small-size vehicles. Fiat has an excellent highly qualified team of expatriates and equipped research centers. Fiat has other brands that are strong and reminiscent like Alfa Romeo, Lancia and Ferrari. Fiat has been able to meet European environmental standards.

Fiat has over the years had some weaknesses in the management policy, the advertisement of its products focused on immaterial things like price discount instead of focusing on the engineering innovation and capabilities. Fiat failed to focus on consumers changing needs. Instead, it focused on availing o world-class cars to the customers who had varied needs ranging from economic, efficiency to functionality. Fiat was not sensitive to the plight of its workers in times of recession resulting in massive layoffs. Fiat has experienced a bad brand identity its logo had not changed over years and hardly any person really knows what Fiat stands for. Fiat concentrated much on gaining benefits from economies of scale through bulk production this resulted in high opportunity costs on the excess product stocks. Fiat has greatly been hit by the disadvantages of outsourcing due to poor coordination and high dependency. Fiat has not spearheaded in coming up with superior models, Fiat has not experienced strong demand from its Italian market, Italian customers over the years have changed their preference to other manufacturers (Chorafas 2008).

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Fiat has an opportunity to penetrate developing economies markets. Fiat can redesign some of its old brands to fit the current user requirements. Fiat can establish factories in countries where labor costs, pension and healthcare for its workers are relatively low. Fiat can also concentrate on the enhancement of new technologies that are environmentally friendly and are cost-effective.

Fiat faces threat in case new regulations are established, as this may call for the application of new costly technologies. Fiat is threatened to incur losses in the future as a result of the underutilization of its resources arising from a decline in demand. Fiat is threatened by many superior products especially Toyota thereby rendering its current brand less competitive.

PESTLE analysis is also known as PEST analysis, standing for political, economic, social and technological analysis. The automobile industry has been affected politically through various political and security events. The September 11 terrorist attack in New York had some shake-up of the industry. The war in Iraq had an impact on the industry’s economic growth due to changes in prices of crude oil. Vehicles and petroleum products are complementary goods, the purchase of a car will automatically lead to the purchase of fuel. The rises in the price of oil lead to a decline in demand for vehicles especially in developing countries and among the low-income earners.

Fiat and GM have been experiencing social pressure from the international community regarding the environment. The automobile industry has been contributing to an increase in the emit ion of greenhouse gases like carbon dioxide and hydrogen sulfide. These gases have been contributing to an environmental phenomenon known as global warming. A solution to the emit ion of these gases has been identified as the efficient utilization of fuel. A lot of research has been done on environmentally friendly technologies that can be utilized in order to curb carbon dioxide production (Baker 2007)

Technological innovations continue to be ventured by Fiat and GM. An electric car is the latest technological innovation being witnessed. Technology is the alternative to gas-powered vehicles. It has numerous advantages ranging from cost-effectiveness to being environmentally friendly.

Porter’s five forces analysis focuses on industry analysis and business strategy development. The auto industry receives threats from subtitle products. Hybrid electric vehicles have threatened the current fuel vehicles. Hybrid electric vehicles use both combustion technology as well as electric motor technology in the storage of energy. They are less pollutant and utilize fuel more efficiently than just fuel vehicles.

The automobile industry is receiving a threat of entry from new competitors. Innovation has been established as the major dominant reason enhancing new entrance. In some markets like China, the government policy greatly encourages local vehicle manufacturing. In this market, there has been an emergence of new competitors like FAW China. The new entrance has been attributed to absolute cost advantages, government incentives and sunk cost (Baker 2007).

The auto industry has also been experiencing a moderate intensity of competitive rivalry. The industry has seen the number of competitors reduce as a result of mergers and acquisitions taking place. The industry growth has dwindled over the previous years due to the global economic meltdown. The industry has experienced major growth barriers due to bankruptcy as experienced by Gm and Daimler Chrysler.

The bargaining power of customers has also taken a center stage in the automobile industry. Firms in this industry have benefited a lot by producing products matching customer’s quality standards. The customer base has increased tremendously over the years. The different market segment has had different behavior, the lower market segment has shown greater sensitivity in price sensitivity unlike quality and performance sensitivity in the upper market segment. With the increased use of the internet and information technology customers have boosted their awareness and more information has been availed.

The automobile industry has been affected by the factors affecting its suppliers. Suppliers have passed on the increase in burden arising from the increase in raw material prices and increasing energy costs. The bargaining power of suppliers in substitute inputs has been lowered, substitutes for petroleum fuel have been established as alcohol and hydrogen.

Finally, the automobile industry has established customer-driven requirements as to safety, efficiency in fuel consumption and pricing. A regulatory requirement has all focused on workers’ plight in pension and healthcare as well as environmental concerns in order to avert global warming. Technological requirements have varied from superior models, use of alternative fuel, to the use of fuel-electric hybrid.

Reference

Alejo José G. Sison 2008, Corporate governance and ethics: an Aristotelian perspective, Edward Elgar Publishing, New York.

Dimitris N. Chorafas 2008, Introduction to Derivative Financial Instruments: Options, Futures, Forwards. McGraw-Hill Professional, New York.

Kevin Baker 2007, Economic tsunami: China’s car industry will sweep away western car makers, Rosenberg Publishing, Sydney.

Hoover’s, 2007, Hoover’s Handbook of World Business, University of California, San Diego.

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