Global Restructuring and the Auto Industry, Case Study Example

The housing industry within the United States crashed because they many of the banks gave customers risk loans, even though they were aware that many were not able to pay it back. Eventually, the debt built up and trickled down into the automobile industry which put the economy into a recession. The automobile industry was hit hard because, many saw their automobiles as the second biggest purchase after buying homes. Each purchase is primarily made through financing loans through a bank. The impact to both the automobile industry and the housing industry impacted economies from around the world who sold and bought cars. According to the case study, “Many long-established companies, including General Motors (GM), Chrysler, and Toyota, sought government aid to help them survive the downturn.” (Hill, 2009) Specifically the global automobile industry in 2009 faced several economic challenges, in which using the Porters Five Forces Model will illustrate the profitability and intensity during that time. This impact produced a substantial risk of entry in the industry.

Porters Five Forces Model

Looking at the level of risk of entry to the market for competitors, during the economic crisis in 2009, there were considerably high entry barriers, in which weakened the overall industry. The automobile industry is, usually, consolidated to only a few exclusive foreign and American automakers. Due to the market consolidation, the few automakers have the competitive advantage in establishing or influencing the fixed costs for automobiles throughout the world. During this economic downturn, there were two seismic shifts in which impact the demand and supply of the global automobile industry. According to the case study, demand imploded in most developed nations, however growth in some developed nations such as China, continued to grow. “Experts predict could become the world’s biggest automobile market sometime between 2016 and 2020.” (Hill, 2009) Toyota excelled during the recession because they implemented the lean strategy and JIT, Just-in-time, in which permitted Toyota to streamline their production and lower their costs. They are consistently looking to cost costs, and be more innovative in their approach in staying ahead of the competition.

Other barriers to entry were and still is the regulations imposed by the government. When the economic crisis hit in 2008, and carried over to 2009, cars were pressured to ask for federal aid and loans to survive the economy. Many companies that were inefficient were allowed to remain in business, and continue to discriminate with producers that were efficient, and weren’t able to receive the same support from their local governments. However, many smaller companies were able to use their local governments as a springboard in launching to expand their global reach. “These included Tata Motors of India, which purchased Jaguar and Land Rover from Ford in 2008, and China’s Geely, which, in mid-2009, was reportedly bidding for General Motor’s Saab unit and Ford’s Volvo subsidiary, both of which were based in Sweden.” (Hill, 2009) The demand for automobiles respectively declined within the past decades, and, as a result, many smaller competitors are trying to enter the market that is steadily working to increase its profitability.

Rivalry in the Industry

Within this force, it is particularly strong as the cost conditions currently impact the demand and the exit barriers which are high in the industry.  There is a high fixed cost in the automobile industry, which is dependent on the high sales volumes to spread the costs. This is seen in the costs to develop new car models, and recouped with fixed costs, and, “required to selling cars without a major update for four years and sometimes as long as seven years.” (Hill, 2009) Many of the smaller industries were taken advantage of the economic downturn, especially automakers in India, Brazil, and China. The market has become increasingly fragmented as more and more manufacturers are updating models frequently, shortening the product life cycles, facing competitive pressures to keep up with consumer demands.

Bargaining Power of Suppliers and Buyers

Recently in the automobile industry, it was highly vertically integrated but has changed. Many manufacturers in the automobile industry, they produced most using in-house producers, and what they couldn’t do use a competitive bidding system for other parts. The in-house suppliers cater to a diverse group of consumers and have been sold off. While most enter into long-term contracts with suppliers, suppliers have the power to produce different modules. The incentive is so that manufacturers don’t have to take part in the bidding system, and the suppliers are responsible for quality control. The manufacturers can get out of contracts if they feel the quality is poor, and have suppliers placed closer to their manufacturing plants to implement lean strategies for the inventory systems. These systems give buyers more power to exert more control over the suppliers.  This provides weak bargaining power of suppliers and more power to buyers.

Consumer Bargaining Power

The suppliers’ bargaining power is weak, compared to the consumer buying power which has grown stronger since the economic crisis. Within the automobile industry, consumers now have the choice of numerous brands at their disposal. Consumers can choose from efficient and affordable cars that are available, as the economic crisis impacted disposal income. This is seen in the impact of high gas prices, which made manufactures create models that were more fuel efficiency, ability to run faster, and more safety. The consumer bargaining power is also strong because it creates fierce competition in the industry, strengthen their bargaining power due to the negative impact of the automobile industry.  Hyundai and Kia in South Korea have increased their manufacturing output of to match the consumer demand on more cost efficient automobiles. The stronger consumer bargaining power decreases the profitability of the automobile industry.

Threat to Substitutes

“In an effort to improve this end of the value chain, the automobile companies have been trying to reduce the time between ordering and delivery.” (Hill, 2009)  Since many of the larger manufacturers in the industry failed and had to depend on the handouts from governments, many of the smaller producers used aid from their local governments to gain global appeal. Companies such as Tata’s from India, Geely from China, and others that have acquired established companies such as Land Rover and Jaguar to take the place of American automakers. Many smaller manufacturers that had to compete with GM, Ford, Toyota, and other large companies, which have now been able to offer consumers more cost efficient automobiles. The threat to competition is strong, although the risk to new entry is low.

Part II

In the most recent ten years, the automobile industry has seen the most indeterminate times in its history. As the case study would show, one of the notable strategic imperatives that put forth this defense deserving of study concerns the path in which various organizations have reacted to the test. The introductory methods utilized in the automobile business included large scale manufacture and moderateness. Different changes on the planet, for example, a financial emergency and expanded expenses of oil have prompted appropriation of new systems. This article dissects the 2009 worldwide automobile industry case regarding Porters five powers model.Changes in the industry are impacted by several factors. (Davis, 2014) Automobile speaks to one of the helpful method for transportation in the current world. With the impacts of globalization, the opposition inside the business has expanded a few times. General engines, Chrysler and Ford got to be predominant in the North America showcase in the 1960s. By 1970s, new contestants, for example, Volkswagen and Toyota started to toss their weights in the business. Generous changes in economies and oil costs from 2008 have brought about diverse implications that have continued presently. (Garret, 2014) Many of the competitors have gotten a sizable advantage as many of the established manufacturers were impacted by the economic crisis. The ailing car industry forced the government to step in. “However, the gap has narrowed substantially in recent years as American-owned producers have worked to improve their productivity by implementing improved manufacturing techniques based on Toyota’s,” (Hill, 2009) Many of the automakers have tried to mimic Toyota’s manufacturer’s production to build to order as many have tried to improve on their inventory turns by implementing a lean production.

Since many suppliers are now dependent on the buyer’s input, and have developed more supplier’s relationships in which they entered into Tier 1 contracts. They have put more importance on producing more component parts to get up with the increased consumer demand.  According to the case study, “The rise of foreign competitors in the United States market has been attributed to a number of factors, including better designs and more fuel-efficient offerings.” (Hill, 2009) Since the industry is highly fragmented, the automakers can taut suppliers’ relationships, and keep the component prices low, which increases their profitability. (Bailey, de Ruyter, Michie, and Tyler 2010) This also provides a strategic imperative for manufacturers to develop parts cheaper, and suppliers can customize the parts to the buyer’s liking. With the change or a shift in the automobile industry has provided more competition from foreign markets, the national auto industry will continue to grow to meet consumer demand.

References

Bailey, David, de Ruyter, Alex, Michie, Jonathan, Tyler, Peter. (2010). Global restructuring and the auto industry. Cambridge J Regions Econ Soc. 3 (3): 311-318. Retrieved from http://cjres.oxfordjournals.org/content/3/3/311.full

Davis, Marc. (2014). How The U.S. Automobile Industry Has Changed. Investopedia. Retrieved from http://www.investopedia.com/articles/pf/12/auto-industry.asp

Garret, Jerry. (2014). For the Auto Industry, a Showcase for Change. NY Times. Retrieved from http://www.nytimes.com/2014/04/15/automobiles/autoshow/for-the-auto-industry-a-showcase-for-change.html?_r=0

Hill, Charles, Jones, Gareth. (2009). “The Global Automobile Industry in 2009.” Essentials of Strategic Management. 3^rd Edition. Canada; South-Western Cengage Learning.