car industry

3.2 – DISTRIBUTORS.

• The recent Competition Commission of 2002 has affected the European car dealership network hugely. In an attempt to promote competition and to offer better deals to European consumers the regulation separates new car sales, repair and parts supply, and dealers and repairers are given more autonomy.
• For new cars, the manufacturer can choose an exclusive system (where the dealer is given an exclusive territory), in which the dealer can actively sell to independent resellers within their exclusive territory and may also, if approached, sell to final consumers or resellers based outside their territory. Or the manufacturer can opt for a selective system (where they may sell actively to consumers in any location and in any EU country, but not to independent resellers.). All but one manufacturer (Suzuki) have chosen the latter.
• The evaluation report of the previous regulations stated that is was the vehicle manufacturers combined control over dealer selection and the allocation of exclusive sales territories of dealers as the main reason for substantial lack of intra-brand competition.

• The new system has encouraged vehicle manufacturers to rationalise their distribution networks. A 12% reduction in franchised dealer numbers was seen in 2002 . Low margins on sales, and ever-present cost competition, have meant dealers need to increase the number of sales per site; hence, a cut in numbers follows.

• The New Block Exemption (NBE) itself will also lead to reductions in the number of franchises through consolidation. It allows dealers to sell franchises within the network and, after 2005, dealers can open additional sites, both without the need for the manufacturer’s agreement. This growth will lead to an increase in distributor bargaining power. This is very significant as, in most of the EU average dealerships are small single franchise businesses, which are now vulnerable. The exception is the UK where multi-outlet dealerships are common.

• The NBE also separates the contracts which vehicle manufacturers sign for new car sales, repair and parts supply. Sales and service can therefore be separated. Most franchises will retain both businesses, but only with the vehicle manufacturers’ support in making technical information and training available .

• Authorised dealers currently account for over 40% of all repairs, and 80% are undertaken in cars that are less than four years old. The OEM supply most of the spares used, of which about 20% of them are produced themselves and the remainders are bought in and sold on from suppliers. The NBE has stopped manufacturers doing this, enabling repairers to buy parts directly from an authorised parts producer, which is in many cases the same supplier of the original part in the first place.

3.3 - CUSTOMERS.

• Consumer demand is the most significant variable that can vary in absolute or comparative terms. The total number of new car sales will be dependent on the growth and employment levels in European economies as it is income elastic. Forecasts suggest that demand within Europe is likely to be fairly flat in coming years. Figure 1 shows the variation of production levels, and forecasts to 2007. The graph shows that production will hover around 15.5 million.

• A differential of the European consumer is their preferences for sports, racing and luxury vehicles. Europe has remained the world leader in motor sports, with technological developments that are filtering through to the mass market. Combined with the consumer demand for novelty, the process has led to Europe’s technological lead in several areas .

• There has also been high consumer demand recently for niche vehicles, such as small ‘people carriers’ or sports cars built on vehicle platforms in high volume production; areas which the EU-based divisions of Ford and General Motors, have  expertise.

• The European market also shows an increasing trend towards luxury vehicles, which has benefited producers of premium cars such as BMW, at the expense of volume producers of medium range models.

• The long-term trend in car sales, is driven by customer preferences, infrastructure, demographic development and wealth – and the individual manufacturers have to remember this.

3.4- COMPETITORS

• The European market has both competitors from within their Euro Zone (EU-15) in terms of sector, segment and national competition, and from abroad – especially from the US and Japan.

• The industry has been radically transformed in recent years through consolidation and restructuring. These changes accelerated in the 1990s, with the opening to international competition of new and increasingly important markets such as Eastern Europe, China and Russia. Large manufacturers looked for scope in other markets, which has resulted in an ever decreasing number of independent manufacturers in the market .

Figure 2:

Despite the decline in the number of car manufacturers, competition in all the markets has increased, as the larger companies are now present in them through mergers and acquisitions (M&A). These actions grant instant access to particular regions and niche markets

• With 209 million passenger cars in use in 2002 the European Union (EU-25) is by far the largest single market for cars in the world. It accounts for roughly 38 % of all cars on major international markets, followed by the US and Japan .

4.0- SITUATION REVIEW OF THE EUROPEAN CAR MANUFACTURING INDUSTRY.

Market positions:

• Within the European market, France and Germany are the dominant players in production. Germany is the world’s third largest producer after the US and Japan, producing over five million vehicles a year, and homes multinational companies such as DaimlerChrysler, BMW, Volkswagen and Bosch. The German industry alone employs about 825,000 people.
• The fourth largest global producer is France, where the industry employs about 7% of the workforce, manufacturing around three million vehicles a year.
• The native UK automotive industry declined in the 1970s and 1980s, mainly as the result of foreign investment by companies such as Nissan, BMW, General Motors and Toyota, and most recently the demise of the British Rover brand has landed yet another blow to the UK manufacturing industry.
• Automotive manufacture now accounts for about 5% of GDP and nearly 12% of UK exports.

Figure 2: Ranking of top 20 Car manufacturers (2002).

• The EU-15 market is dominated by European brands. Between 1998 and 2002, only minor shifts took place in the market shares of different brands. German and French brands hold by far the largest shares, and were even able to expand their market presence, while Italian and UK market shares declined. Japanese brands are the largest external players on the European markets. American manufacturers serve the market through their European divisions and brands (e.g. Opel), so while traditional American brands might be absent from the European markets, the US manufacturers are not.

Investment and export/import levels:

• Due to the increased levels of consolidation and outsourcing responsibilities of the value added to the suppliers, the result has been that more R&D has (34%-38%), and will continue to increase and shift to them .

- In Germany alone, the share of the vehicle manufacturer in total automotive value added declined from 18 % in 1995 to 12.8 % in 2001. Similar declines were registered for the UK, Italy, Spain and France apart from in Sweden whose vehicle manufacturers’ share in the total value added increased.

• The industry is a valuable provider to the economy, contributing €33.515 million with exports of €67.406 million and imports at €33.890 million to the trade balance in 2003 .

Car prices: Car prices at the end of 2004 had increased by 0.5% in the EU since end 2003 (+0.9% in the Euro zone). Headline inflation amounted to 2.4% over the same period both in EU-12 and EU-25 .

• Price differences, based on Nov 2004 figures, are smaller than those recorded in May 2004, with the average standard deviation of prices between the EU-25 markets falling from 6.9% to 6.4 %. New Member States account for two thirds of this convergence, while dispersion remains low at the Euro-zone level (4.4%).

• However there are some substantial price differentials for particular models, which can be found in a recent EU head office report (March 2005). Out of 1909 prices quoted in the report, 598 are more than 20% the cheapest market in the EU. The widest price difference is for the Opel Astra, which costs almost 50% more in Germany than in Denmark. This represents a potential saving of €3700.
• Germany and Austria, are the more expensive markets in the EU .  In Germany, 38 models out of 91 in the report are sold to consumers at the highest prices in the Euro Zone. Greece and Finland are cheapest markets. Outside the Euro zone, Estonia has replaced Poland as the cheapest market in the EU with prices 2.5% below Greece.

4.1- COMPARISON TO US & JAPANESE MARKETS.

• The special features of the European automotive industry such as, their consumer preferences, organisation of the supply chain and the work culture, have all been influenced by the European policy framework. This industry by progress has grown into a global market, from which the remaining two main automotive producing areas have had influence and have been influenced.

• The trend for outsourcing value in large modules or systems has gone further in Europe than in either Japan or the US.  Although American-owned suppliers have been keen to offer and benefit from the supply of modules and systems, many European suppliers have gained a technological lead as a result of the trend. European vehicle manufacturers have also out-sourced high value design and engineering functions. This has led to the development of an industry segment providing design and engineering services whose firms have the capacity to produce small volume niche vehicles that are popular in Europe such as the firm Mayflower (UK).

• In the European car market, consumer demand and the regulatory system have created a major segment for diesel-powered cars that is not reflected elsewhere. As can be seen in Table 1, there is no equivalent demand in Japan or the US. At the same time, there is little demand in Europe for light passenger trucks, as in the US, or for mini-cars as in Japan.

Table 1: Market Share of car and engine types (2002)

*The EFTA countries are Iceland, Liechtenstein, Norway and Switzerland.

Source: Jürgens, 2002,

• Another important difference is the lower number of cars per household compared with the US. In the US this figure is around 2.5 whereas it is less than 2 in Europe . Although European road conditions and the availability of public transport make comparisons difficult, there may be scope for expansion of the European market in times of economic buoyancy and high consumer confidence.
• The European market is often seen as a single automotive space even though it is not entirely homogeneous. Different growth rates are possible in different Member States depending on localised issues and policy effects. Such differences are likely to increase in the light of the recent EU enlargement in May 2004.

• However, the share of vehicle manufacturers in the total value added of the American automobile industry still lies around 55 %, way above that in Europe. Japanese vehicle manufacturers account for 15.4 percent of the value added in the automotive sector in Japan, which is more than in most producing EU countries . The Japanese modular changes to production has taken place ‘in-house’ as Toyota and Honda see a strategic advantage in having total control over the value chain, which avoids handing over responsibility to the suppliers.  

5.0 – DRIVERS OF CHANGE.

• The automotive industry needs to recognise that some of the drivers of change, such as demand and the general economic situation, can vary. Others, such as consolidation or the increasing strictures of environmental legislation, are constant trends. The only variable is the pace at which they proceed.

• Demand - Any dramatic expansion is likely to be outside Europe, either in the new developing markets or in North America. The rate at which new markets might develop is also an issue as considerable commitments have been made in China, India and South America and if these fail to pay off, companies’ profitability will suffer. Second, consumer tastes can change and lead to growth in different market segments. The European interest in diesel power, ‘people carriers’ and technological novelty has been discussed above.

• Economy and Capacity - The issue of over-capacity in world and European automotive production has been the subject of much discussion. An excess of capacity arises when demand fails to meet expectations or where the market develops less quickly than forecast. Such circumstances cause obvious problems for the car producers with significant knock-on effects on the supply base. The excess capacity in Europe has been estimated at 30% . Also, entering new markets inevitably means investment in additional capacity to serve these markets, which only exacerbates the issue. However, the issue of over-capacity is complex and varied; dependent upon place, time, and organisation.

• Environmental issues - Transport is a major user of energy and contributes considerably to carbon dioxide (CO2) emissions. The EU adoption of the Kyoto agreement, calling for a significant reduction in greenhouse gases, is a major driver towards cutting emissions. The EU and individual Member States, in co-operation with manufacturers, have pursued a policy of emission reduction for many years .

6.0- THE MACRO-ENVIRONMENT.

        6.1- SWOT Analysis.

This section provides a summary of strengths (S), weaknesses (W), opportunities (O) and threats (T) within the European automotive industry by comparing the industry’s resources and capabilities to the competitive environment in which it operates. In essence the European automotive industry has defended its position in the international market effectively, both in terms of exports and international sales and shows potential for future growth in emerging markets and in the field of innovation; yet there are always challenges.

 

6.2- PESTLE Analysis.

P (Political) – Jürgens (2002) observes that the European policy framework, although it is aiming towards internationalisation and liberalising the market, has a number of features not found elsewhere:

• The EU Working Time Directive ,
• Provisions for European Works Councils
• The notion of the concept of ‘rewarding’ and ‘quality’ work
• The EC Whole Vehicle Type-Approval (WVTA)

These have all led to a move away from repetitive production line operations and emphasised the need for high level skills and relationships built on trust.

•    On 17th July 2002 the European Commission released a reform of the competition rules for the motor vehicle sector of 2000, which was implemented on 1 October 2002. It was designed to increase competition and bring tangible benefits to European consumers for both vehicle sales and servicing, and encouraging greater use of new distribution techniques, such as Internet sales. Its main aims were to:

• Encourage more competition between dealers            

• Allow cross-border purchases of new vehicles easier within the Single Market.

• And create greater price competition.

The benefits to the European consumer is that they now have access to a more diverse market, with car price comparison and dealership services data, so that they can make an informed and a potentially cheaper decision without having to sacrifice quality.

• The NBE is much stricter than the old block exemption when it comes to ensuring effective competition, yet it is also more flexible in offering a broad range of possibilities:  

- Dealers may now choose whether they want to offer repairs themselves, or sub-contract them to another authorised member of the manufacturer's network. The NBE will also ban manufacturers from restricting repairers from gaining quality spare parts elsewhere, which will give consumers a choice as to which spare parts are used to repair their vehicle.

E (Economic) – Over the past five years, there has been a slowdown in economic output across the EU, and, while the forecasts were positive, a modest growth of 2.0%-2.3% was estimated for 2004. Weak growth has led to reduced consumer and business confidence. Industrial production has decreased, including the production of durable consumer goods. This was partly due to poor labour market conditions, with EU unemployment rising during 2002 . Economic indicators are weak in some major EU economies such as Germany, France, Italy and Spain. Only the United Kingdom (UK) has managed to resist these trends.

If downward trends continue, demand will fall and will result in over-capacity, which will lead to a reduction in shift patterns and lay-offs, though not necessarily plant closures.

S (Social) – Vehicles have become much more reliable, which means service intervals are further apart and fewer components need to be replaced. Demand from European customers is more sophisticated and informed, with importance being given to status vehicles (which has given the premium market its success). These trends have lead to development of more innovative vehicles, which meet these unique consumer tastes.

Relative car ownership in Europe also varies widely, indicating the relative importance of cars for citizens of different countries . On average, 4/10 EU inhabitants own a car, which is in line with Japan and the US. Luxembourg posts the highest, and Slovenia posts the lowest values here among the Member States.

T (Technological) – Rapid changes in technology are forecast for the auto industry over the next 10 years. To provide comfort and safety, while still being friendly to the environment, these new vehicles use the latest developments of many different technologies. Further developments are expected in the areas of brake assistance, adaptive speed control and global navigation and satellite tracking systems. Other global innovative issues such as technology/fuel solutions that ensure a long-term supply at acceptable costs need to be considered. These include reducing driving weight through material changes (aluminium, magnesium plastics and composites). Changes in the use of materials will recycle, make modes of assembly cheaper, and make occupant and pedestrian safety reinforced. Europe leads in new vehicle technology/communications, but Japan and the US lead in electronics and software.

L (Legal) – European legislation is a major driver of the industry. The new block exemption regulation (NBE) governing how vehicle manufacturers distribute their products in Europe took effect on 1 October 2003. The direct effect it has had on the dealership network has already been discussed (3.2). In most Member States – the automotive laws are identical and compulsory.

E (Environmental) – The automotive industry has recognised the significance of environmental concerns, and of demands for safer vehicles and has already taken action to contribute to long-term resolutions.

• The EU emissions standards are mandatory in all EU Member States . The standards covers acceptable emission levels of CO2, N2O, and hydrocarbon particulates for both diesel and petrol engines, and also addresses the introduction of low sulphur fuels, which will be requisite by this year (2005).

• Recycling is also addressed by law through the End-of-Life Vehicle Directive (ELVD).  All Member States must encourage recycling, re-use and recovery of ELVs and their components, and they must withdraw the use of certain hazardous substances by 2007.

7.0- CONCLUSIONS AND RECOMMENDATIONS.

• The EU enlargement will continue to provide automotive firms with new opportunities to profit from low labour costs  through restructuring and relocating. This will help the EU-15 automotive industry to stay competitive , although jobs prospects are less promising than in the past .
• Higher labour costs and their impact on price competitiveness are a threat, especially in light of global over-capacity .
• Capacity utilisation rates are still high in the EU , however, new capacity from emerging markets will inevitably fuel price competition, especially in the mass market segments of the automotive industry.
• Success in the future is not guaranteed, and because Japanese manufacturers are investing a lot into automotive innovations and US producers are taking advantage of their internationalisation strategies, the future will be threatening.

‘When everyone is projecting gains in a market that is expected to be flat or worse, someone must lose’

•  There are major technological challenges ahead, most prominently the development of new technology/ fuel combinations, including fuel cells. Competition and innovation will continue to be central determinants of the viability and strength of Europe’s automobile industry. The fate of the industry will primarily depend on the excellence and expertise of the individual companies.

• Public Policy will have to conscientiously act an enabler and facilitator by setting framework conditions that are beneficial to growth and innovation.

• Demands to make vehicles safer and more environment-friendly will continue. These demands will drive research and innovation; it is crucial to identify and implement innovative technical solutions that will become global, thus giving the European industry a lead advantage

• Tax policies, such as rebates acted as incentives for consumers to buy advanced technologies in the past, and could be used again in the future. Such tax policies should also be used to further align the Member States’ vehicle tax systems also, so as to allow the full benefits from operating within a single market true.

• Regulations have to anticipate technology trends and take into account that EU producers, in order to exploit economies of scale and scope, must be allowed to sell similar products in Europe and on the world market.

• If barriers to free trade are removed, the EU motor industry’s competitiveness in international markets can be utilised and strengthened.

• In major emerging markets such as China, foreign investment would certainly foster the competitiveness of the automotive industry. However there is still room for more flexible labour markets, and for improvement in the road infrastructure.
• Road transport is the back-bone of the European transportation system, and without an effective infrastructure, European automotive demand will fail. Future transport needs, fuelled by new logistics, more intense division of labour and new characteristics of products, will require flexible modes of transport – this is more true than ever now with the EU enlargement.

BIBLIOGRAPHY:

Books:

• David Jobber (2004), ‘Principles and Practice of Marketing’, 4th Edition, McGraw Hill Education, Maidenhead, Berks.

Student essential textbook used for general marketing theory, especially the theories of organisational segmentation of markets.

• M. Rza Vaghefi, Steven K. Paulson & William H. Tomlinson (1991), ‘International Business Theory and Practice’, Taylor & Francis Ltd., London.

This book gave me a comprehensive insight into the entry and exit barriers of the European automotive industry in past decades.

• Malcolm McDonald & Ian Dunbar (1995), ‘Market Segmentation’, MacMillan Press Ltd, Basingstoke, Hampshire.

This book explained that in the event of demand/supply equilibrium, the only way a competitor can avoid the worst effects of the situation is by being either (1) the lowest cost supplier, or (2) a product differentiator so as to command a higher price.

• Peter Wells & Michael Rawlinson (1994), ‘The New European Automobile Industry’, MacMillan Press Ltd, Basingstoke, Hampshire.

This book gave insight into past predictions of the present day, and offered information concerning the historical influences and investments of the US and Japanese markets.

Reports:

• Key Indicators on the Competitiveness of the EU’s Automotive Industry – Brussels, 13 January 2005.
• The European Automotive Industry: Competitiveness, Challenges and Future Strategies – 2004.
• Trends and Drivers of Change in the European Automotive Industry: Four Scenarios – European Foundation for the Improvement of Working Conditions 2004.
• Trends and drivers of change in the European automotive industry: Mapping report - European Foundation for the Improvement of Working Conditions 2004.

Internet:

• Automotive News Europe, 3/7/2005, Vol. 10 Issue 5,
  Rhys, Garel, "The Motor Industry in an Enlarged EU" The World Economy, Vol. 27, No. 6, pp. 877-900, June 2004 

• http://www.lmu.ac.uk/lis/imgtserv/topics/supply.htm

• The Motor Industry in 2001: The Current State of Play –  
• Differences in European Car Prices narrow – Tuesday 8 March, 2005 – www.detnews.com/2005/autoinsider/ 

GLOSSARY.

 An Original Equipment Manufacturer (OEM) is a company that manufactures and/or assembles the final product. In other words, while a car made under a brand name by a given company may contain various components, such as tires, brakes or entertainment features which are manufactured by different suppliers, the firm

responsible for the final assembly/manufacturing is the OEM;

 Tier 1 supplier: A component manufacturer delivering directly to final vehicle assemblers. Tier 1 suppliers work hand-in-hand with auto-mobile manufacturers to design, manufacture and deliver complex automobile systems and modules, such as significant interior, exterior or drive train units. Tier 1 suppliers in turn purchase from tier 2 and tier 3 suppliers;

 Tier 2 supplier: These companies produce value-adding parts in the minor sub-assembly phase. Tier 2 suppliers buy from tier 3 and deliver to tier 1;

 Tier 3 supplier: A supplier of engineered materials and special services, such as rolls of sheet steel, bars and heat and surface treatments. Tier 3 suppliers rank below tier 2 and tier 1 suppliers in terms of the complexity of the products that they provide.

TOP 10: Global Vehicle Producers:

1. General Motors                              6. PSA/Peugeot-Citroen SA

2. Ford Motor Co.                              7. Hyundia Motor Co.

3. Toyota Motor Co.                          8. Honda Motor Co.  

4. Volkswagen AG                            9. Nissan Motor Co.    

5. DaimlerChrysler AG                     10. Renault SA

PPP – (Purchasing Power Parity) Rates calculated by the OECD, which converts currency into US$ for the purposes of clearer analysis.

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RESEARCH PORTFOLIO.

(1)

* Figures for 1995 and 2000 are actual, remainder are forecasts

** North American Free Trade Agreement

Source: Autopolis 

(2)

(3)

(4)

European Vehicle Production Since 1997 by Country 
Passenger Vehicles 

Source: OICA.net  

(5)

Table 3: Vehicle sales by region*

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