Essay: Automotive Industry

The automotive industry is made up of companies and organizations involved in the design, development, manufacturing, marketing, and selling of passenger cars. Major companies include Fiat, Ford, GM, Honda, Toyota, and Volkswagen. It is one of the world’s most important economic sectors generating annual revenue of more than $2 trillion (Firstresearch.com, 2015).
The auto manufacturing industry is considered to be highly capital and labor intensive. The major costs for producing and selling automobiles include:
‘ Labor .
‘ Materials- steel, aluminum, dashboards, seats, tires, etc. are purchased from suppliers.
‘ Advertising – Each year automakers spend billions on print and broadcast advertising; furthermore, they spent large amounts of money on market research to anticipate consumer trends and preferences (Investopedia, 2004).
During the 20th century we saw the dominance of US car manufacturers, with the highly competitive manufacturers based in Detroit, Michigan. The theory of Comparative Advantage could be used to explain this dominance, in that because America had a population of just under 250 million in the 1990, American companies had access to cheap labor and as resources such as wood and iron ore for example, which arguable allowed them to produce cars at a lower marginal cost than other countries. The State of Detroit definitely had such an advantage. Palmer, (2015) argues that Detroit became so dominant firstly because innovators like Henry Ford, whodeveloped the mass production techniques that made the machine affordable and Ransom Olds lived in Michigan. Secondly, automotive executives in early-20th-century Detroit behaved a lot like Silicon Valley executives today: They regularly switched companies and launched spinoffs and startups. This culture of cross-pollination spread innovative manufacturing and design ideas among the Detroit manufacturers. Distant competitors couldn’t keep up with Motown’s research and development operations and eventually failed or sold themselves to Detroit. Thirdly, Detroit and its surroundings had a lot to offer the embryonic auto industry around the turn of the 20th century. Iron ore was available from the Mesabi Range in Minnesota, and there was ample timber in Michigan itself. (Early car frames were made of wood.) Rail and water routes made it easy to ship cars to Chicago and New York. Detroit already hosted heavy industry like machine shops and stove works. However, many countries in Europe as well as many states in America such as Toledo, Cleveland, Milwaukee, and Buffalo could have made similar claims, yet none of them became Motown or rise in dominance like the US. Detroit’s and the US eventual dominance probably had more to do with a couple of historical accidents and that, the US’s comparative advantage in manufacturing cars was not a gift of nature but something that is mainly man-made (The Huffington Post, 2015). The United States has seen then been overtaken as the largest automobile producer by Japan in the 1980s, and subsequently by China in 2008. Leading countries for car manufacturing now include Brazil, China, Germany, Japan, South Korea, and the US.
Competitive Landscape
The market structure of the global auto industry can most appropriately be classified as an oligopoly with only a few firms controlling a high percentage of total sales. It has been argued that it has been so since the inception of the industry but that the extent of competition faced by firms in this industry has changed over time (Hashmi, AR, Van Biesebroeck, J 2007). There were also significant consolidations over the last few decades and many global giants found it beneficial to merge with some of their former rivals. For example mergers between Daimler-Benz and Chrysler in and between Hyundai and Kia, the association between Renault and Nissan and the takeover of Mazda, Jaguar and Volvo by Ford are some of the most significant examples of this consolidation. (Hashmi, AR, Van Biesebroeck, J 2007). Rivalry among the competitors is very strong is this industry, with all vying for the crown of the world’s largest automaker. The major competitors are so closely balanced that it increases the rivalry for example in 2014, Toyota sold 10.23 million vehicles worldwide, Volkswagen sold 10.14 million units and General Motors, 9.92 million (Ramsey, 2015). In order to gain market share in the automobile must gain market share by taking it from their competitors. One of the other reasons there is such high rivalry is that there is a lack of differentiation opportunities. Firms under oligopoly are interdependent so that they find themselves copying the design of their rivals. When all is considered the structure of a car, an SUV for example, produced by Ford and General Motors are the same.
Barriers to entry
As stated Hashmi, AR, Van Biesebroeck, J (2007) the threat of new entrants is very low in the automobile industry. The industry is very mature and it has successfully reached economies of scale. In order to compete in this industry a manufacture must be able to achieve economies of scale. Another barrier to entry the high amount of capital needed to manufacture the automobiles and invest in the research and development necessary in this highly innovative industry. Finally, access to distribution channels can be another barrier as a company must find a dealership to sell their automobiles or have their own dealership.
Ford
Ford Motor Company was founded in 1903 by automotive and industrial pioneer Henry Ford in Dearborn, Michigan. Being first to implement a moving assembly line for automotive manufacturing, Ford was able to more efficiently mass produce their products than their competitors. In 1908 the Model T was introduced and went on to sell over 15 million vehicles, firmly establishing Ford as the major player in the early automotive industry with 50% market share by the 1920s. The Ford Motor Company product portfolio includes cars, trucks, and SUVs from the following brands: Ford, Lincoln, Mercury, Mazda, Aston-Martin, Jaguar, Volvo, and Land Rover. In addition to its core automotive business, Ford has a finance division, a parts and service division, and they also currently own Hertz Corporation, the largest car rental business in the world. (Bradley D, et al 2005)
Ford began to struggle: difficulties arose from poor model development ((NPR.org, 2006- mentions the costly safety recall of over 13 million defective Firestone tires used on numerous Ford and Mercury trucks and tires), excess capacity and a failure to recognize the emergence of new market segments in addition to an inability to control costs. (Bradley D, et al 2005)
Ford Motors India
Motive
In the early 1990s, the Indian market became increasingly open due to reforms implemented by the government, evolving from a quasi-socialist economy into a more market-based economy (Trade.gov, 2015). De-licensing and de-regulation of the auto-industry reduced the barriers to entry considerably. As a result, the period post 1995 witnessed a large number of global automakers making an entry into the Indian automotive market. (Tejas.iimb.ac.in, 2015) Economic growth rates increased as policies were liberalized resulting in rising disposable incomes of Indians, especially the middle class. This led to the rise in demand for four wheelers, in a market earlier dominated by scooters or other two wheelers. (Tejas.iimb.ac.in, 2015)
In 1995, India’s population was at just under a 1 billion (Data.worldbank.org, 2015).Figures from Econstats.com, (2015) going back to 2002 showed passenger cars per 1000 in India stood stand at only 7 in 2002 and 8 in 2003, compared with 446 in the United Kingdom (2002), and 467 in the United States 2003). We can therefore say that less than 1% of the population would have owned a car in 1995. India therefore represented an untapped market with an upcoming middle class with disposable income to spend.
In 1995, Ford Motors established a 50:50 joint venture company with Mahindra & Mahindra (M&M) to assemble and distribute the Ford Escort, the company’s first model to be showcased in India. The company was renamed Ford India in 1999, following a change in equity holding, with Ford buying out a majority stake. Ford India is a part of Ford Motor Company’s regional operating unit, Ford Asia Pacific (FAP). Ford India set up its 250 acre manufacturing plant near Chennai with an investment of over US$ 354 million. The joint venture was intended to diversify Ford’s car portfolio to the passenger car segment by creating Ford Escort and Ford Fiesta (Rediff, 2015).
Ford executives in 1996 stated that Ford wants to learn the ropes of a market that is expected to grow to at least 800,000 units annually within 10 years. That ‘the whole intent with Escort is it gets us to the marketplace and allows us to physically operate in the market,’ and that ‘the whole thing is a learning curve.’ (Rediff, 2015). Ford intention was to use the joint venture to facilitate the transfer of knowledge from the domestic Indian car producers to themselves. To use this experience to study the Indian market, their customers from an insider’s perspective, and make connections with local suppliers with the hopes that this would lead to a knowledgeable and expanding automotive consumer base in India (Thefreelibrary.com, 2015).Later that participation was watered down to 16%, and in 2005, all remaining shares were sold to Ford
Mode of Entry
As the Indian government liberalized its economic policies, economic growth surged and the foundation was laid for India becoming one of the fastest growing economies of the world.
Exhibit 1: Mode of Entry of Auto majors between 1995 and 2000
*Error.. Ford joint venture created in 1995.
Ford India Private Limited began production in 1926, but was shut down in 1954 as the company was in loss. Ford re-entered the market in October 1995 (Business.mapsofindia.com, 2015). As Ford was one of the first foreign companies to enter the Indian automotive market they had a First-Mover advantage. By being the first to enter a market, the business gains an advantage over its actual and potential rivals. First, the lack of competition helps it to gain market share much more easily because the lack of competition means that they are not competition with any firm for the same customers. Second, when competition does arrive the first-mover will have advantages, such as familiar products, brand loyalty, the best retail outlets, and up-and-running distribution systems. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively (Pearsoned.co.uk, 2015). With this advantage, first-movers can be rewarded with huge profit margins and a monopoly-like status. Not all first-movers are rewarded however because if the first-mover does not capitalize on its advantage, it can give new entrants the opportunity to enter the market, learn and improve from their mistakes to compete more effectively and efficiently than the first-movers; such firms have “second-mover advantage (Referenceforbusiness.com, 2015).
All but one of major global auto majors chose to enter the Indian market chose to enter via Joint Venture or Technical Collaboration with local players. Companies can choose to enter into a joint venture because they want to explore international trade without taking on the full responsibilities of cross-border business transactions. International investors entering into a joint venture minimize the risk that comes with an outright acquisition of a business, if due diligence is performed on the foreign country and the partner limits the risks involved in such a business transaction. JVs aid companies to form strategic alliances, which allow them to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. International joint ventures are viewed as a practical vehicle for knowledge exchange, international corporates learn about customer preferences, behaviors, best distribution list from the local firm and the local firms gain technology transfer which can contribute to the performance improvement of local companies (Wikipedia, 2015). Whilst the benefits listed above are true for JV, they are not always guaranteed. The potential for conflicts and disputes is one of the biggest disadvantages present in a joint venture. Partners may disagree on how to manage the company’s business affairs. There may be disagreements regarding the direction or future of the business, as well as disputes regarding how to capitalize the business (Small Business – Chron.com, 2015). Although the joint venture with Mahindra & Mahindra did not last long but parties were able to benefit. Ford developed a foothold in the region and the Indian auto company through the partnership learnt the best global practices in manufacturing, which it later used in developing its most successful product, the Scorpio (Rediff, 2015).
A study of the ‘Resource cum Institutional Framework’ quoted by Tejas.iimb.ac.in, (2015) suggests that when companies are deciding between the three modes of entry:
(1) Acquisition
(2) Joint Ventures
(3) Greenfield,
They must consider the Institutional frameworks of the country. It summarizes that in a country with a strong institutional framework, where the local markets for acquiring necessary resources are efficient, it is prudent for foreign entrants to establish a Greenfield operation, subject to the condition that the nature of resources required by the global players is of a tangible nature. If the resources required are intangible (such as brand recognition or a learning curve) it may be difficult to procure the requisite resources from the local markets. As a result, the foreign entrant may prefer an acquisition entry strategy over a Greenfield one.
Now where the country receiving the Foreign Direct Investment (FDI) suffers from weak institutional framework resulting in inefficient markets for acquisition of resources, the foreign entrant will prefer to choose between an acquisition mode of entry and a JV. Further, the local firms would have better access to these local markets and hence, the requisite resources. Efficient financial markets and mature corporate governance practices play a significant role in the success of an acquisition mode of entry. In the absence of these, an acquisition strategy may be prohibitively costly to the acquirer. For instance, in the absence of mature financial markets, resources of the acquired entity may be incorrectly over-valued. Further, post-acquisition integration typically poses a significant challenge. In such cases, a JV is a more attractive option. Foreign entrants can gain access of local resources held by local firms via JVs. It has been argued that during the 1990’s India institutional framework was weak. The financial markets were inefficient and under-developed. Conducting business was contingent more on relationships rather than on contracts. The local markets for acquiring resources such as a reliable supplier network or a widespread distribution network were inefficient; there was scarcity of such resources given the immature stage of the automobile industry in India with a few incumbent players. Also although the Indian Government set out several structural adjustment programs post the government still had interests of the domestic automobile industry at heart4. In such circumstances, obtaining approval for a wholly owned subsidiary would have been a challenge. Thus, the institutional framework in the country during still called for sustained interaction with the government over regulatory issues. It served well for global automakers to be in collaboration with a domestic partner to be perceived in favorable light by the government. The Auto Policy of 2002 abolished most clauses in the previous Auto Policy, easing regulations and allowing 100% FDI via the automatic route, which prompted several global automakers to either increase their stakes to near 100% in their JVs or exit the JVs all together. Not surprisingly, the major global auto majors entering the Indian market post 2000 chose to enter via Greenfield mode.
Based on the reasoning above, we can see that the best mode of entry for Ford India was the JV approach which they rightfully choose. It is therefore surprising that up to date Ford only has 3% of the Indian Automobile Industry.
Production Strategy
Ford started its journey into India with the Mahindra-Ford joint venture which produced the Escort out of M&M Nasik plant. After meeting initial success, sales of the Escort was finally replaced by the Ikon in 1999. The Ikon marked a new beginning for Ford in India. As it was the first model by the multinational to be developed specifically for India. The Ikon underwent cosmetic upgrades and price cuts to keep demand high. However, fresher competition and a reputation for high-maintenance saw sales gradually decline. After the arrival of the modern and highly-capable Fiesta, another made for- India car, with state-of-the-art engines, the Ikon has been marginalized. Though the Ikon and Fiesta have been the mainstays of Ford’s production in India, the company has had limited success with other models (Slideshare.net, 2014).
It has been argued that the reason why the world’s fifth largest automobile manufacturer has been a fringe player in the ever-growing Indian automobile Market is because it was happy with a token presence till late 2008. Alan Mulally, who at the time was the President and Chief Executive Officer of the Ford Motor Company, stated that ‘earlier, Ford wasn’t focused on India (Headquarters:, 2013). This lack of focus caused Ford India to follow an inadequate product strategy where only a few vehicles were made with Indian’s poor road conditions in mind. Ford fell into the trap of bringing in products from their existing range and then realized that they would have to have products specifically for India with different pricing points. This can be done through localization and development of products only for the Indian market. India’s poor infrastructure and overcrowded cities spur drivers to choose compact cars — which currently account for 70% of car sales there — but Ford instead spent years focusing on larger sedans and SUVs. Also, when Ford launched the Escort, it did so to a growing market, where sales were concentrated in the under-$7,000 range. However, it priced the subcompact against the Daewoo Cielo and the Opel Astra, two other new entries in India, so in the range of $12,500 to $17,400. Those prices put the vehicles in India’s near-luxury to luxury segment. While acknowledging the price-sensitivity of the Indian market, Ford stressed that the Escort is a marketing and manufacturing groundbreaker, not a volume entry (Automotive News, 1996). Ford had priced itself so that only the upper middle class and the rich urban population could afford its offerings and the Indian customer was very reluctant to upgrade his or her car resulting in no repurchase. This luxury car segment of only constituted 25-30% of the total Indian car market segment (Slideshare.net, 2014).
India was largely treated India as an export hub and were happy with the cost arbitrage which they were getting from it. In spite of a first mover advantage they simply neglected the Market. But now with the slowdown in western Market Ford could simply not afford to neglect India. (MBA Skool-Study.Learn.Share., 2015).
Ford’s business strategy was diversification with different operations for different markets with different standards and specifications, for example one Ford model called explorer was different for USA and Europe market. (UKEssays, 2015). As mentioned above, because of a lack of focus on the India market they failed to implement this strategy correctly in India. The success of such strategy however depends on the research and innovation, and therein lies the problem if not managed properly.
Heavy costs can be associated with this strategy, in terms of high parts cost, separate R&D for different markets and models, inefficient production cycle and no knowledge sharing among strategic business units resulting in silos instead of synergies. Ford found out that the strategy increased their cost and eat into their profits (UKEssays, 2015).
As a result of the failings of their current strategy Ford launched their globalization 2000 plan. They shut down their some of the plants and came to the strategy of standardization. This strategy help them reduce cost in terms of R&D, as Research and Development was done at one place and on one product and applied everywhere so that they were able to share knowledge and made their production more profitable and cost efficient by adopting each other’s best practices. (UKEssays, 2015)
China
With China’s entry into the World Trade Organization in December 2001, meaning lower tariffs on imported cars, Ford saw that this was the perfect time to enter the market aggressively as their other competitors mainly GM had done many years ago. In 1997, Ford lost out to GM in the bidding to form a joint venture with Shanghai-based SAIC Motor Corp. It was another four years before the Chinese government allowed Ford to establish its own partnership, called Ford Changan Ford Automobile Ltd in April 200. This 50-50 joint venture between Ford Motor Company and Chang’an Automobile Group. Operations began in 2003, with 20,000 Ford Fiestas produced in that year. It has been argued that the joint ventures’ first vehicle failed to attract the Chinese customers as they were craving larger sedans instead of the smaller Fiesta car (Reuters, 2015).
Mazda acquired a 15% stake in Changan Ford from Ford on April 4, 2006, with the company being renamed Changan Ford Mazda Automobile Co., Ltd. Due to having lost a great deal of time entering the market in China, the company invested $5 billion in the country. This will increase Ford’s annual manufacturing capacity in China of 450,000 cars, in what has become the world’s largest market, with annual sales of 18 million vehicles to 1.2 million vehicles annually by 2015 (Solutions, 2015).
Ford’s late start in the Chinese market has given it another liability: most of its operations are far from the coast in western China, making it much harder to export cars someday if the Chinese market cannot absorb them. In 2012, Ford had an annual manufacturing capacity in China of 450,000 cars, in what has become the world’s largest market, with annual sales of 18 million vehicles. But by 2015, it plans to have an annual capacity of 1.2 million cars (BRADSHER, 2012).Ford Motor since its entry has doubled its market share to 4.5 percent in 2014 by introducing new models and expanding output.
Conclusion
Future consideration- The Current Landscape: Signs of Change
Lang, Collie and Zhai, (2015) highlighted in their article the fact that emerging markets are now the growth engine of the car industry. The proportion of light vehicles been produced in emerging countries has increase from 37% of global production in 2008 to almost 50 percent in 2013. China alone had an annual output of 21 million units. Although we have witnessed this global shift in production location, the ten largest MNC suppliers have an average of $29 billion in annual revenues, which is almost six times the average annual revenue level of the top ten EMPs.
Nonetheless, the shift of car manufacturing to emerging markets enabled these EMPs to achieve growth that averaged 21 percent annually from 2008 through 2014; the MNCs grew at a much slower pace during that period. The intensifying competition between rising emerging-market players (EMPs) and established multinationals corporation (MNCs) must be and remain at the top of the agenda for all MNCs. Challengers not only are radically disrupting a wide range of industries but also are increasingly becoming global leaders themselves. For example India’s domestic companies such as Tata and Mahindra & Mahindra own considerable market shares.
This trend from the perspective of MNC puts many component segments under threat. Although EMP’s still find it hard to compete with MNC’s on critical core components such as engines, transmissions, and car electronics, they have made strides and are now challenging and in some cases surpassing MNC’s in segments such as interiors, passenger restraints, wheels and tires, fuel systems, and body glass. One example is China’s Fuyao Group, a company although unknown to many has now become one of the world’s leading manufacturers of automotive safety glass, producing windshields for both local Chinese clients and Western and Japanese multinationals.