The global automotive industry's second century of business.

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Executive Summary

The global automotive industry is entering its second century of business; the landscape of the trade has drastically changed. Successful companies will survive by being innovative in the way they design, develop, and deliver their products and services to the end user. It is up to the management of the firm to develop innovation, and provide strategies in order to reach its customers. In order to understand the opportunities and challenges that an individual company’s management may face, this analysis will first examine current trends of the industry, common business strategies, sources of competitive advantage, and other trends significant to competitors in the sector, in this case Volkswagen and BMW. Often, a company’s survival is dependent on the creation of a competitive advantage, which is designed and implemented by management. Creative ideas and technological innovations are essential from any automobile player challenging for the status of innovation and technology leader. The global automobile industry has become very saturated.  With industry overcapacity, many automobile manufacturers will either merge with other automobile companies, become acquired, or go out of business. In the face of these threats and industry trends, Volkswagen has decided to re- organize its brands and restructure its management. The company’s seven brands will be divided into two groups: a sporty grouping and a traditional or conservative grouping. The main reason for this restructuring has been brand erosion due to the similar technology used in the different brands, and a falling share price. Despite the problems at Volkswagen, they still command one of the most impressive customer bases in the automotive industry and will continue to remain at the forefront of the industry. The management of BMW on the other hand has chosen to focus on a pure premium strategy. The company has tried in the past to appeal to the masses with the purchase of Rover, but ultimately failed to achieve synergies with the mass and premium brands and sold the division a few years later. BMW continues to have a firm commitment as a global player, and with new attempts to differentiate their product line they should be able to reach many more potential customers, thus earning a new competitive advantage.

Introduction

As the automotive industry enters its second century of business, the landscape of the trade has drastically changed. Yet, the industries’ fundamental goals remain the same. Automobile companies still strive to minimize costs by pursuing economies of scale, with long term goals of maximizing efficiency while maintaining their product quality. Successful companies will survive by being innovative in the way they design, develop, and deliver their products and services to the end user. It is up to the management of the firm to develop innovation, and provide strategies in order to reach its customers.  In order to understand the opportunities and challenges that an individual company’s management may face, this analysis will first examine current trends of the industry, common business strategies, sources of competitive advantage, and other trends significant to individual competitors. This paper will then provide an analysis of two competitors, Volkswagen and BMW.  

Current Industry Trends

Mergers, acquisitions, and integrations have transformed the landscape of the global automobile industry. Examples include:

  • The merger of Chrysler and Daimler-Benz
  • Volkswagen acquiring Bentley and Lamborghini.
  • Toyota’s growing control over Daihatsu.
  • Ford acquiring Volvo’s car business.
  • BMW acquiring Rolls Royce

The 1998 PricewaterhouseCoopers Global Automotive Deal Survey cites overcapacity, the pressure to increase economic profit, and the drive by Vehicle Manufactures to respond to the power shift towards consumers as all contributing to the rapid structural change in the industry. The report says that 6 to 8 global manufacturers might control the industry in the near future as small manufacturers continue to be acquired. This consolidation is the most noticeable trend in the automotive industry.

There is also a trend towards the integration of suppliers in product development systems, and the outsourcing of modular assembly to suppliers located near the vehicle manufacturers assembly operations. These changes have produced large decreases in unit cost for the global industry.

One problem burdening the industry is the excess capacity that many companies face. Worldwide excess capacity is estimated at 20 million vehicles, or 45% of current capacity. This inefficiency has cost the automobile industry billions of dollars and will continue to burden the sector over the coming years.

Another negative trend in the global automotive market is declining sales in the European sector. After years of positive growth, the European Automotive Industry is now experiencing a phase of stagnation. It is still unclear how Europe’s integration will affect this trend. . This lethargic growth has created increased competition among European Automakers. It is now more important than ever for carmakers to innovate, in order to increase quality and/or reduce cost. In addition, it has increased the need to reach out to foreign markets particularly the United States. However, for Volkswagen and BMW, exports to the United States already account for such a large part of their business they have not been as severely affected by the downturn as many of their European counterparts.

 

Industry Strategies

Economies of scale strategies are widely used in the highly competitive automobile industry. Recall, Profit = Revenues - Costs. Therefore, these strategies reduce costs to increase their company’s profit. The three primary cost reduction strategies are

  • Globalization – to gain incremental volume leveraging “know-how” from other parts of the world
  • Consolidation – to decrease the cost base supporting relatively stable volume, usually attained through the elimination of duplication in assets, such as the number of production facilities and suppliers. Note: In the second automotive century it is believed that this strategy will dominate.
  • Platform deproliferation – to provide a broad end product range across a smaller number of basic design structures, thereby leveraging development and other costs for a greater volume opportunity.  

Although these strategies are implemented in hope of lowered cost it is incorrect to assume that all automobile manufactures are competing solely on a low cost strategy. The analysis of Volkswagen and BMW shows that the majority of their automobiles do not compete on low cost, rather their focus is on product differentiation and focus strategies.

Competitive Advantage

Often, a company’s survival is dependent on their creation of a competitive advantage. There are many sources of competitive advantages in the automobile industry. One such advantage is the relationship between the automobile company and the end customer. The automotive business differs from other industries in that there is a continued relationship between the buyer and the seller. Often, service conducted after the initial purchase is the deciding factor for future repurchase with the same vehicle manufacturer. BMW has increased its sales and reputation through award winning service and customer relations.

Low cost and product differentiation is also a source of competitive advantage used in the global automotive industry. For example, Ford Motor Company produces the Focus that competes on low price. Therefore, Ford must find the most efficient, cost-effective way of producing this automobile while still providing value to their customers. Ford’s ability to mix these factors is the key to holding a competitive advantage on competitors. Ford also produces Jaguar automobiles that compete on prestige and unsurpassed quality. To create a competitive advantage Ford must be able to differentiate their product from other high-end producers. These competitive battles based on cost and on differentiation are commonplace in the automobile industry. As discussed earlier, Volkswagen and BMW compete on product differentiation rather than on low cost. However, this does not mean they can produce inefficiently and without regard to cost. They still compete on price by offering similar car models as Porsche, Jaguar, and other luxury producers. For this reason, they must still be price competitive with their competitors.

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Globalization

The 1998 PricewaterhouseCoopers Global Automotive Deal Survey states that “Nearly 70 percent of anticipated growth in light vehicle output between 1999 and 2006 is expected to come from outside of North America and Western Europe. The trend towards Globalization has changed the landscape of the global business environment. Automobile companies cannot ignore emerging markets, such as Russia and China. These new markets provide large, untapped customer bases allowing producers to gain further economies of scale. On the other hand, globalization will mean new entrants to compete with in their current markets. The trend of globalization has created greater ...

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