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The world automobile industry had experienced near constant growth through to the mid-180's. The transition from horse carriages to automobiles brought about uncertainty over the development of the product during the industry's infant years. As the automobile evolved, demand for automobiles soared at different points in time throughout the world. However, depressed demand eventuated two decades ago after the saturated markets of North America, Europe and Japan. This consequently left industry profitability at a recession. The reasons to why such an occurrence was brought about are explained below.
Porter's Five Forces
Threat of Substitutes
The competition of substitutes has remained calm within the industry (Grant, 18). In the absence of close substitutes for a product, consumers usually will not react to price increases and switch to substitutes (Grant, 00). Consumers' reasons for demand for an automobile can differ. Fundamentally, motor vehicles serve the purpose to deliver passengers from the departing location to a particular destination. Grant (00) says, "the more complex the needs being fulfilled by the product… the lower the extent of substitution by customers on the basis of price differences". If the intent is solely transportation needs, such a need can be simply satisfied by the substitutes of public transport. On the other hand, more complex needs, such as consumers desiring a more flexible, comfortable, and personal means of transportation, decrease consumers' propensity to switch to substitutes.
Threat of Entry
New entrants in an industry intensify competition in their respective markets. However, they are usually disadvantaged in respect to competing at the competitive level (Grant, 000). Established manufacturers can hold several abilities gained from survival in the industry that entrants cannot instantly acquire, and these further create barriers to entry into the industry.
It is estimated that over four million vehicles should be produced per year to qualify as a low-cost producer in the automobile industry (Grant, 00). "Economies of scale remains an essential determinant for cost-efficient production, and that without it, high levels of flexibility alone cannot translate into world competitive production" (Husan, 17). The inability refrained most potential new entrants from entering the industry with the exception of Proton (Malaysia) and Maruti (India). Settled in protected markets with acquisition to licenses and support from its government, permits access to required technology and designs of automobiles. This enhanced their ability to produce at low-cost and reduced the distance from established manufacturers.
As a result of increased competition, established manufacturers' absolute cost advantages are important and valuable. From experience and early existence in the industry, manufacturers have acquired cost-specific knowledge to drive low-cost production. Though producing at low-cost, product differentiation throughout the market is also important.
Rivalry Between Established Firms
Competing on innovation and cost reduction, established manufacturers created a strong wave of increased competition. As a result of merges, acquisitions, and alike strategic relationships between manufacturers, of small- and medium-sized producers, the industry became more concentrated. Many manufacturers internationally expanding caused greater import activity and construction of foreign plants to accommodate for the foreign market's demand and drive for low-cost (Grant, 18) and to exploit factors that aid research and development (Kuemmerle, 1).
Competing in a sole market may not earn profitable returns; therefore manufacturers decide to participate in other markets. Manufacturers diversifying into numerous segments of the industry caused the number of competitors in national markets to substantially increase. This increase in competition was dangerous for producers who compete predominantly domestically, as they become more pressured by global rivals (Grant, 000), and are often acquired by larger manufacturers as a result, or with other alliances formed.
For its competitiveness, manufacturers standardised designs and technologies of vehicles. This led to great similarity in products between competitors, increasing the difficulty to differentiate for consumers. Inability to differentiate can increase consumers' propensity to switch brands if they are price insensitive.
The fall in industry profitability was affected by the imbalance between demand and capacity of automobiles. Excess capacity in depressed demand conditions led offerings of price reductions in attempt to disseminate costs over a larger scale of sales. Over-investment in production facilities induced greater capacity, where it grew faster than demand. Substantial exit barriers appeared due to the relative costs to free excess capacity.
Bargaining Power of Buyers
In the output market, relative economic power of buyers is dependent on their sensitivity to price and relative bargaining power. The merge of manufacturing designs and technologies inflicted a low degree of differentiation in automobiles, creating a greater tendency for consumers to switch suppliers of automobiles on the basis on price. The cost of losing a consumer to a supplier in the industry is relatively great when the number of buyers in the market is small (Grant, 00). As a result, the strength of bargaining power of buyers in markets of the industry increased, with the greater proportion of value generated from the transaction residing in the buyers.
There are additional buyers in the automobile industry other than those who consume vehicles for use. Retailers, that manufacturers distribute their products to, also act as buyers. Given that retailers are the only 'homes' of manufacturers' products and that there are merely any other accommodations to access the market, their capabilities to negotiate price and to execute specific commands have strengthened their bargaining power against suppliers.
Bargaining Power of Suppliers
Manufacturers play the role of buyers when acquiring vehicle components to produce their products from their suppliers. Manufacturers abandoned backward integration to production and tended towards the Japanese way of production. That is, manufacturers established long run relationships with a particular number of suppliers, creating symbiotic strategic alliances where there is an interdependence between car makers to control suppliers (Banerji & Sambhorya, 18). However, ultimately these suppliers were able to elevated their size and power capabilities. Technology development, being brought about by component suppliers (Grant, 18), has allowed greater power in negotiation and bargaining in their position. Powerful suppliers increasing prices decrease manufacturers profits and/or drive manufacturers to draw more attention on the suppliers rather than their own needs (Cummings & Worley, 001).
The above competitive pressures of Porter's Five Forces (Grant, 00) provide judgment on the levels of competition and profitability within the industry. Profitability levels were reduced mainly due to the intense rivalry between established manufacturers and the increased power of buyers and suppliers in the industry. Additionally, international expansion of manufacturing companies found fierce competition in national markets, threatening domestic competitors. These occurrences affect the future prospects of the automobile industry. Predictions towards this will differ depending on the time period the forecast is made upon.
Predictions on the Industry Future
It is predicted that rivalry between competitors in the industry is to continue into the future. National markets of competitors are becoming more concentrated, increasing the difficulty for individual manufacturers to capture market share. This would cause fight for market position and in affect, drive price cuts, decreasing profit margins. A firm gaining some form of competitive advantage is beneficial and important to survive and perform well in the industry. One is cost advantage. Worldwide outsourcing, many to lower-cost locations, produces lower-cost development that new entrants are incapable of and simultaneously, forms a higher barrier to tempted entrants.
Excess capacity occurred due to decreased demand and over-investments in manufacturing facilities in the industry. Potential for market growth is said to appear within the next ten years in Eastern Europe, Russia, China, India, and Latin America. Excess capacity will persist and possibly surface as a major problem if this phenomenon does not occur. Demand was also likely to drop in Japan, Southeast Asia and North America (Grant, 000). With slowing demand also caused by the durability of vehicles and the continuous innovation of designs and technologies, the control between excess capacity and demand will be difficult.
The bargaining power of both buyers and suppliers are predicted to strengthen. Manufacturers, being largely dependent on suppliers for their production efficiencies and quality, were "unconcerned about losing control over production and technology so long as they could control marketing and distribution" (Grant, 000). Furthermore, as mentioned previously, technology development occurred through suppliers. These developments enhanced manufacturers' production efforts and therefore, they have seemed to delegate certain decision-making to suppliers.
The foreseeing of buyers also having greater bargaining power originates from minimal product differentiation of manufacturers' vehicles. Similarities in products force manufacturers to apply other marketing strategies to appeal to its market. Buyers in society, compared to many years ago, are exposed to more information about products. Educated buyers learn to expect certain features as standard in the product and, furthermore, their expectations towards the product also rise (Czinkota, 000). Manufacturers strive to meet buyer expectations and therefore, lose certain power to their consumers.
Key Success Factors of the Industry
Despite the fact that overall profitability in the automobile industry has declined, it does not signify that all individual manufacturers are performing equally not well. There are reasons to why some manufacturers are performing better than others in the same industry. Some manufacturers may have access to certain resources and perform activities in such a way that permits them to exceed competitors. These elements that drive their performance are sometimes known as key success factors, factors in the market environment that determine a company's ability to survive and thrive in that market (Grant, 00). They are key success factors when manufacturers end up supplying the product of customers' and when they can survive competition. This proceeds on to identification of key success factors of manufacturers at competitive positions in the industry.
The ability to be a low-cost manufacturer in the intense market creates competitive advantage. Producing at low cost requires manufacturers to attend to several different aspects of an automobile manufacturer's value chain the activities of the manufacturer's separated into a sequential chain (Grant, 00). Segments of the chain, from supplies of components and materials to the dealer and customer support, allow closer discussion of cost-reduction in the industry.
Many manufacturers now acquire their components by means of outsourcing throughout the world. Not only does this induce lower cost to manufacturers, but it also offers opportunities for them to focus, and possibly specialise, in fewer activities in the value chain. Bramorski et al. (000) notes that "Manufacturers no longer compete based entirely on their own strengths…Instead, they compete based on strengths of the entire value chain involving their own organization and their suppliers". For instance, manufacturers concentrate on specialisation in new product development to produce better vehicles in attempt for greater market share.
The adoption of Just-in-time (JIT) manufacturing systems reduces inventory holdings and hence, reduces the costs incurred in the process. Applying such a system lowers carrying costs and investments in inventory. Each is retrieved and pulled from downstream when and only when it is required to replenish vacancies upstream. JIT systems enforce long-term relationships with few suppliers. Consequently, costs are furthered reduced by trust and confidence that suppliers will deliver defect-free, quality components (Davis, Aquilano & Chase, 1).
Mergers, joint ventures and alliances are also seen as a factor consolidating the competitive advantage to success in the industry (Passernard & Kleiner, 000). Such relationships permit exploitation of companies' core competences (Wild, Wild & Han, 001). By doing so, manufacturers reduce research and development (R&D), production and/or distribution costs. Manufacturers have also used this strategic move to get a foothold in a new geographical market. A successful example is a joint venture between Japan's Suzuki Motor Corporation and the government-supported Maruti in India (Grant, 000). Their initial production of small-engine cars extended to light trucks and now, the manufacturer from the Maruti-Suzuki joint venture is successfully the leader in its market.
Manufacturers grasp the essence of the approach to low-cost production, but put considerable investment into new product development (NPD). NPD has transpired into a very important and valuable capability that a manufacturer can possess in the last decade (Grant, 000). This enable manufacturers to differentiate their products, and in a market where products are growing increasingly similar, NPD is a critical factor to success. For instance, Japanese manufacturers have been successful with NPD, and by the 10's, their advantage over other manufacturers was shorter NPD times in the industry (Grant, 000). Japanese manufacturers attained higher positions within their markets with the access to certain resources and capabilities.
To survive and succeed in the near future, manufacturers must be able to access the above crucial resources and capabilities. That is, low-cost production, the foresight of possible partnerships to exploit opportunities, and NPD, pursuing product differentiation. Successful firms of the industry have thrived in these respects and, simultaneously, distanced away from competition that were not yet able to obtain such skills.
Regardless of the market that manufacturing firms compete in, the most successful in the industry will be those who are able to supply products that meet customer expectations, who understand the drivers of performance success and acquire and exploit these tools to compete. Those who are also able to internationally expand into national markets and compete at a global level see potential for striving in the industry. National markets are becoming more concentrated and competition is continuously increasing. Despite the fact that this might drive down profitability levels, manufacturers seek to survive before they can succeed. Manufacturers only focusing on one geographical market in the industry lack the international diversity and will be beaten by those expanding internationally into their target market (Grant, 000).
In understanding this, it is predicted that the established, experienced Japanese firms, such as Toyota, will continue to come through in the industry. Know-how to low production cost, superior quality and shorter production times is a primary competitive advantage, leading to more efficient competitiveness in their market(s). U.S. and European manufacturers acknowledged the effectiveness of such components and learned to adapt to these practices (Grant, 000). These firms, such as the new Daimler-Chrysler, are also recognised as potential successes. Those manufacturing firms who acknowledge these elements and incorporate these into their practices will have a brighter outlook in the near-future years.
In summary, the decline in profitability of the automobile industry was brought about by several structural trends. The fierce competition between rivals and internationalisation caused exits and strategic relationships to form in order to survive. The increasing power of buyers and suppliers in the industry oppositely weakened the strength of manufacturers and that product differentiation had become an important issue in the markets. These phenomena are believed to persist, to a certain degree, into the future, bypassing the possibility that the Daimler-Chrysler merge may induce a phase of consolidation in the industry (Grant, 000). Industry movement is dependent on demand in the markets, and if demand persists downwards, the ability to control excess capacity will be increasingly difficult. However, the future of the automobile industry cannot be guaranteed solely on the basis of past trends. Unexpected events can occur and impact the industry in unpredictable ways.
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