This problem will not find an easy solution. As well as increasing their capacity, producers are rationalising their production apparatus especially in the current phase of restructuring (1998-2003), while governments are helping national industries with subsidies, aids and new car premiums. The macro-economic regime associated with the introduction of the Euro is very likely to perpetuate the current low-growth situation.
Little relief is therefore to be expected from that side.
Additionally, because every producer is more or less in the same situation,
the increased search for cost competitiveness will continue to drive up labour productivity and thus contribute to the problem, by creating ever more excess capacity.
Responses by the Car Manufacturers
Management responded to the crisis with two strategies. I am only going to mention one because the other is irrelevant to this assignment.
The first, following the publication of the IMVP-MIT1 report consisted of a relentless drive to reduce production costs. This entailed a generalised introduction of lean production and cost reduction programs. In some countries where the crisis hit earlier, such as France, this process was more or less established by the late 1980s, whereas others, especially the German and British industries who had been immune to the crisis of the early 1980s, were hit surprisingly hard by the crisis of the 1990s and were forced to introduce new production methods rapidly.
This micro-economic strategy, in turn, was predicated upon the introduction of new concepts of product development that allowed for a reorganisation of links with suppliers. Increasingly parts and processes were standardised, and cars were seen as collections of interchangeable modules. Quality management standards through-out the entire European car industry are a necessity for meeting the new supplier policies. In any combination of forward, global and single sourcing a success.
The result was that many car manufacturers were able to start a slow but radical re-organisation of their product line-up, in which they were forced to increase volume through a downward extension of their product range
In other words, car manufacturers entered new, relatively lower value-added market segments, such as, for example, the VW Polo & Lupo and the Renault Twingo; and even the high-end manufacturers have gradually moved downward in the market segments: for example, Mercedes C-Class & A-Class, as well as the Swatch; the BMW 316; and the Volvo 4-series.
RESTRUCTURING OF THE CAR INDUSTRY IN THE UK
During the last century, the car has transformed the lives of people in developed countries, providing a new degree of freedom and new opportunities for work and leisure. For advanced manufacturing economies, a healthy motor sector is of vital importance. Leading car manufacturers have become global entities.4
Manufacturer Share of world car market
General Motors 22.8%
Ford 16.8%
Volkswagen 9.4%
Toyota 9.2%
Nissan/Renault 8.7%
DaimlerChrysler 8.3%
Refer to article:
Article 6
These figures prove the high concentration ratios that are the reasons for
re-structuring.
World-wide, the motor industry has the capacity to produce around 71m vehicles of all types a year. European over-capacity is estimated to be 20% to 30%. This mismatch is driving rapid reorganisation of the industry and consolidation. An overview of the car industry was published in ‘The World in 2000’and included the following extracts:
“It will be a bruising year for car companies, which are still the mainstay of manufacturing industry in most countries: a time of profitless prosperity. And as car companies go, so may go many others. They will have to cope both with a normal cyclical downturn in the market in most countries, and with the need to reinvent themselves. Most companies think the market will fall in 2000, putting further pressure on their slim profit margins. Tight credit and high interest rates have wrecked the car market as the government struggles to stabilise the economy after the crisis that began in 1998. Only DainlerChrysler and Volkswagen are making decent profits. General Motors and Ford are barely making money on their huge European sales. Fiat is actually losing money. All this will get worse in 2000. Growing consumer resistance to high prices in Britain (estimated to be about a fifth higher than continental markets) is spurring the European Commission to scrutinise
“block exemption”5.
When the exemption expires in 2002, it is unlikely to be renewed. So expect car prices in Europe to edge down, especially as the Euro promotes transparency and makes for a regional single market. In Britain both Volkswagen and Ford, faced with customers waiting for prices to fall, have had to promise to reimburse customers for any cuts that take place after their purchase.”
What this quote means is that in this industry a lot is going to happen. Mergers can be expected to mop up excess capacity: the merger of Daimler and Chrysler has already triggered Renault’s fusion with Nissan and Ford’s purchase of Volvo
The UK Government has been under increasing attack in the last year for their failure to help the UK car industry. Problems at Rover and the cessation of Fiesta production at Dagenham have led to intense criticism for the Government’s policy on EMU membership – in particular the current strong pound vs. the Euro. The affect on the car industry has certainly been catastrophic; job losses at Rover, Ford and at several major companies in the supply chain. In order to correct some of these problems the government should consider some of the following
- Entering the EMU
- Reviewing its policy of allowing the Bank of England to set interest rates
- Reviewing the lax labour laws that allow workers to be sacked more quickly/cheaply in the UK compared to the rest of Europe.
- Intervene in the markets
These are just some of the options that a Government transport minister would need to consider in developing an appropriate legislative and advisory framework for the car industry for 2005.
As we look to the future, the Government will seek to preserve these objectives, but will also look to recognise various factors that are becoming increasingly apparent for the car industry. Factors that effect the competitive environment of the car industry that happen in the external environment.
A PEST analysis allows some of these to be highlighted as follows:
Political
- The need for re-election
- EMU membership
-
Increasing globalisation6, consumerism and competition
- Sustainability, in particular the need to cut greenhouse gas emissions
- The implementation of the transport policy (with investment in light rail as well as roads)
- Review of UK labour laws
- Increasing EU legislation (e.g. on parental leave)
- The need to cultivate small businesses (SMEs) to generate flexibility and competitiveness.
Economic
- Increasing tendency towards sustained growth rather than cycles of boom and bust
- The globalisation of the economy, raising the importance of performance of USA, Japan and the tiger economies
- Impact of oil price rises
- Labour rates in the UK compared to the Far East
- Pound vs. Euro
- Change of the UK economy from manufacturing to service economy.
Social-Cultural
- Population changes – the rise of the ‘grey pound’ (one third of the population will be over 50 by 2001)
- Population distribution (large tendency for population in SE to increase)
- Social responsibility – the public are increasingly having a say in political issues ranging from sustainability (e.g. Brent Spa) to GM crops.
Technological
- Growth of the internet, creating possibilities for business to business (B2B) and business to consumer (B2C)
- Growth of communications technology, making 24/7 working a reality
- Increasing developments in material
- New fuel cell technologies for cars
- Recycling
These factors need to be assessed for threat, and turned into opportunities for the UK car industry. This can only be done, however, by assessing the current strengths and weaknesses of the UK.
Strengths/weaknesses of the UK
On the face of it, the UK economy at present would seem to be in a position of strength. The UK is currently in its 9th successive year of growth, the economy is predicted to grow by 3% in 2004 and inflation should remain subdued due to the structural upsurge of competition in British markets.
Despite continued concern on oil prices– there is no sign of the Government’s 2.5% inflation target being exceeded (still at 2%). OPEC’s7 assurances that they will alter production to produce stable oil prices is one cause, but the increasing competition in British markets also means that manufacturers are absorbing any rise in raw materials costs themselves.
At present, the UK’s economic success has largely been due to a sensible fiscal policy and tight monetary framework. Its demand management skills have been very successful and are the envy of many of the UK’s competitors. The perils of being a leader are, however, that others can catch up. In the future, the emphasis will be less on the demand and more on the supply side of the economy – the very area where the UK is weak.
The UK clearly can attain world-class productivity in the car industry – it has the most productive and efficient plant in Europe at Nissan, Sunderland, whilst Peugeot successfully exported two thirds of production in May despite the strong pound. The key to success in the car industry is good productivity and a strong brand/models. The UK must improve productivity if it is to remain competitive in the future. Job losses are occurring everywhere in the supply chain in the face of a continuously strong pound vs. the Euro.
CONCLUSION
This report has presented an analysis of the current situation in the EU car industry.
Its main argument was that the excess capacity crisis that we are facing requires
new instruments and strategies in order to safeguard employment and keep the
UK car industry competitive.
The report suggested such an alternative industrial model that consists of two
elements: a search for a labour-intensive competitive model, which, by relying on
flexible workers' skills instead of expensive capital equipment, is more
cost competitive, and a European-level industrial policy to re-tool older plants. Such a model, which in essence builds on labour union demands for more and better work, allows us to avoid an employment crisis in the future, even in an age of structural excess capacity.
The car industry on a global scale is overshadowing what is happening in the UK. The fact that Britain as a whole has not committed to joining the Euro is a major reason why big car manufacturers have not opened any production plants. There are other reasons aswell like in Eastern Europe labour is cheaper and workers work longer hours and a lot harder. This is due to their being less Trade Union interference.
They all expect their industry to develop the way the car industry
has. In an increasingly globalised marketplace, maturing industries will become
steadily more concentrated. Only a small number of big companies will survive.
The evolution of the world car industry has followed a complex pattern,
although one that is common to many other products. The hundreds, perhaps
thousands, of small car manufacturers at the beginning of the 20th century
mostly went out of business or were absorbed into larger companies. They simply
were not good enough to compete with the few companies that managed to master
the technology and understand the market.
As markets evolve, differentiation becomes steadily more important. Globalisation allows small producers that develop competitive advantages to deploy them on a world scale. Success in the motor industry comes not from size and scale but from developing competitive advantages in operations and marketing these advantages internationally.
REFERENCES
-
- IMVP-MIT Report – International Motor Vehicle Program https://hpds1.mit.edu/handle/1721.1/751
2 – Decentralised - The dispersion or distribution of functions and powers; specifically : the delegation of power from a central authority to regional and local industries.
3 - Ad hoc – A query written to return records on the spur of the moment, without careful planning, often just once for a single use. An example would be a query to return the number of rows existing in a table, to confirm that a data import worked correctly
4 - Manufacturer Share of world car market
General Motors 22.8%
Ford 16.8%
Volkswagen 9.4%
Toyota 9.2%
Nissan/Renault 8.7%
DaimlerChrysler 8.3%
- - Block Exemption - The system that permits carmakers to restrict sales to exclusive dealer networks, thus enabling them to keep prices high
6 - Globalisation – The widening, spreading and deepening of world-wide interconnectedness in all aspects of contemporary social life from the cultural to the criminal, financial to spiritual.
- OPEC – The Oil and Petrol European Commission
8 - (EWCs) - European Works Councils.
BIBLIOGRAPHY
Trade Journals and Electronic Journals
The World Trade Journal – 2000
- All of the Union Responses can be found in (Eller-Braatz and Klebe 1998) The Car Industry Union Report (1998)
-
Nexus-Lexus (accessed via )
-
Mintel (accessed via )
5- Analyse Auto Journal 1997
6- Wirtschaftswoche, 19 June 1997
Web-sites
Books
1 – Worthington I, and Britton C. The Business Environment. (2000 3rd edition) Prentice Hall. Ch 1, 2, 3, 9, 10, 13
2- Dickens, P. Global Shift: Transforming the World Economy (1998) London
Ch 3, 4, 5, 8, 9 Class Mark DIC313
3- Heil, S. Encyclopedia of Global Industries.(1998) Detroit, Gale Research Ch 7, 8 Class Mark 313.2HEI
Articles
1 - Financial Times - March 27, 2003, Thursday London Edition, JOHN KAY
2 - Morning Star January 09, 2003, London Edition, TOM GILL
- AAP Information Services Pty Ltd, AAP News, June 27, 2002
4 - The Observer, November 2, 1997, ANTONY BARNETT
5 - Financial Times (London) June 29, 1995, Thursday HAIG SIMONIAN
- - Financial Times (London) March 6, 2002, Wednesday London Edition,
LOUISE KEHOE
