The impact of the global downturn on the car manufacturing industry


Term Paper (Advanced seminar), 2010

35 Pages, Grade: Sehr gut


Excerpt

Table of contents

I. Market Review
1. The Financial Crisis and its Impact on the Car Manufacturing Industry
2. Regional Different Implications on Car Manufactures in 2009
a. EU27
b. North America
c. Asia

II. Changes in the Car Manufacturing Industry
1. Market Globalisation Drivers
2. Competitive Globalisation Drivers
3. Government Globalization Drivers
4. Cost Globalization Drivers
5. Résumé
6. Strategic Implications

III. Daimler AG and the Characteristics of the German Car Manufacturing Market
1. Daimler AG, a German Car Manufacturer
2. Situation of Daimler’s Domestic Market Germany
a. Competitive Advantage of the Domestic Market
b. Rivalry and Competitive Situation in the German Market
c. Major Customer Trends
3. Effects of the Recession on Daimler AG’s Competitiveness
a. Resources and Capabilities
b. SWOT Analysis and Evaluation of Daimler AG’s Competitive Situation

IV. Reactions and Strategic directions at Daimler AG
1. Reactions on the Crisis by Daimler AG
2. Recommendations
V. References
1. Graphics
2. Literature

I. Market Review

1. The Financial Crisis and its Impact on the Car Manufacturing Industry

As many other industries the car manufacturing industry has been hardly hit in the most countries by the international financial crisis and subsequent economic slowdown. Several reasons of the credit crunch have also been the trigger for turbulences in the car industry, especially in Europe and the United States of America. Years of cheap and extensive opportunities to finance new cars (low interest rates and negligent credit approvals) have decoupled the economic growth from the car sales and have lead to extensive excess in demand (Alixpartners, 2009). European and American car manufacturers thus have not executed the necessary reduction in production capacity taking into account utilization rates of under 85% (Figure 1).

Figure 1: EU Light Vehicle Assembly (PwC Europe Q4, 2009)

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Figure 2: Car registration and GDP growth in EU (ACEA industry report, 2009)

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Figure 2 shows, that in 2006 the GDP (Gross domestic product) in Europe already had decreased (red line), while the number of new car registrations still was growing (blue line). But with the emerging credit crunch the credit approvals became more tightened, combined with overall negative expectations (e.g. unemployment) and high oil prices, the consumer climate and as result the new car registrations (as indicator for sales) decreased dramatically in Europe (Business Monitor a), 2010) and other regions as the following table shows.

Table 1: Car Sales in certain countries (own creation based on VDA a), 2009)

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As a result of the decreased demand in 2008 and 2009 the utilization rates (Figure 1) decreased heavily which went along with higher unit cost. Additionally, due to the slow reaction and subsequent overproduction the surplus on the car market resulted in extended discounts and decreases in second-hand car prices and thus necessary re-evaluations of the returning leasing cars, which again caused substantial financial losses for the car makers and dealers (Business Monitor a), 2009). But as Table 1 shows, not every country’s car market was hidden the same way, which is deeper examined in the next chapter (as the entire work, reduced to the “passenger car” sector).

2. Regional Different Implications on Car Manufactures in 2009

In 2007, NAFTA, EU27 and the four big Asian manufacturing countries (Japan, China, South Korea and India) were responsible for 82.1% of the world passenger car production why the further focus will be on these regions (Figure 3).

Figure 3: World Passenger Car Production (ACEA industry report 2009)

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a. EU27

The EU27 was faced with a heavy decline in one of the most important industry sectors employing 12.1 million people which are 6% of EU employed population (ACEA industry report 2009). Not surprisingly the governments of several countries placed supporting stimulus programs often as scrappage bonuses. As result, the EU sales in Q3 2009 increased by 7.6%, but for the price of expected turbulences in 2010, when the effect of the brought forward invests will arise (PWC Global Q4, 2009). Experts doubt, that the prices deducted by discounts and scrappage bonuses will rise again in next future and expect additional reductions in production capacity and the future growing markets outside the EU27 (Zeit Online, 2009). Even the suppliers has been hit which is evidenced by a study of the consulting firm “Struktur Management” (Dudenhöffer, 2009) in which banks evaluate 23% of the German suppliers as highly risked for becoming insolvent and 44% as infected but with chance for rescue, mainly caused by overproduction.

b. North America

When the credit crunch hits the American car industry in 2008, the industry had already been in heavy turbulences. The Big Three (GM, Ford, Chrysler) struggled with low utilization rates and excess capacity (Figure 4). Further they missed to react early on trends towards fuel efficient cars, caused by the high oil prices, why sales decreased even if some foreign manufactures benefits (Msnbc, 2008).

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Figure 4: North America Light Vehicle Outlook (PWC Automotive Review, 2009)

In the following the same spiral started, of discounts, tightened credit approvals (previously home equity loans had been used for cars) and decreased sales (NY Times a), 2008). Not even bail-out plans by the US Government could prevent Chrysler and GM from bankruptcy using the Chapter 11 procedure (see us courts, 2010) allowing Fiat to entry at Chrysler and GM to cut down and restructure its business (NY Times b), 2008). The US government also introduced a scrappage bonus known under “Cash for Clunkers”, to support fuel efficient cars and the scrappage of old inefficient cars (CARS, 2010), even if it should be obvious that American manufactures won’t benefit as e.g. Asian who already offered fuel efficient cars (only two of ten bought cars are from US manufactures) (DOT, 2009).

c. Asia

The situation in Asia seems to be almost unaffected from the current recession.

Table 2: Personal vehicle sales in Asien Countries (J.D. Power, 2009)

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Even if Japan had in 2008 and 2009 a slight decline, the other markets had strong increases in 2009 (Table 2). Looking further at the utilisation rate of their production capacities of approximately 90% (Figure 5) it is obvious that the industry in these regions is in good shape, benefiting from their growing economies and stimulus packages as e.g. India’s duty cuts (PWC Asia, 2009).

Figure 5: Asia-Pacific Light Vehicle Production (PWC Asia, 2009)

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With a strong economic growth (e.g. India 7.1%, China 9.0% in 2008 (The World Bank, 2010) and subsequent demand for cars, the positive situation should be sustainable as well for domestic manufactures like Tata Motors (Pasricha, 2010) as for foreign competitors serve e.g. the growing middle class in India (PWC Asia, 2009).

II. Changes in the Car Manufacturing Industry

To examine implications on a global level the inherent complexity due to regional differences must be considered. A helpful tool is the “drivers of globalisation” framework by George Yip (Yip, 1992). Originally formulated to provide a tool to give insights of the globalization potential of certain industries by showing the relevant drivers (Johnson et al., 2008), it can also be used for the present purpose to identify the effects of changes to those drivers and to deduce possible requirements for adjustments in firm’s strategies (Yip a), 2000). Here the focus will be on the implications resulting from the more affected European and American markets, but because of their high impact on future strategies, supplemented by major impacts of Asian markets. Further, sticking to the purpose of this work, there will be a focus on those effects resulting from the current recession; even if major other impacts will be considered.

1. Market Globalisation Drivers

Even if not surely relatable, the crisis and subsequent reduced customer spending ability might be causal for the increasing demand for smaller and more affordable cars at least in Europe and the decreased demand on executive level (Figure 6).

Figure 6: Trends in new car sales (Mintel a), 2009)

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Even if this aligns European customers, other features relevant for the purchase decision are still different depending on the country, e.g. comfort in French 1st compared to Spain 5th priority (Figure 7).

Figure 7: New car purchase factors (Mintel a), 2009)

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What might align all customers in future, at least in Europe and USA, is the feature of fuel efficiency supported by the stimulus programs offering financial support for cars keeping defined limits in fuel consumption (e.g. 8 gallons per mile or less in USA (CARS, 2010)). This enables more international transferable marketing activities, promoting fuel efficiency, starting in Europe and United States and possibly influencing customer behaviour also in other regions (Kornblum, 2008). The financial crisis might have formed a groundwork to downsizing in size as well as in terms of fuel consumption, even if there is a growing market for luxury cars in Asia especially China as well (Business Monitor b) 2010). Another aligning aspect at least in western countries is the aging society and therewith demands for appropriate operational concepts and supportive features.

However, it is to state that customer demand is still different, especially when considering the growing Asian markets where price is still the most important criteria for purchase (Mayer et al., 2007) and global products would not satisfy the special needs per region.

2. Competitive Globalisation Drivers

In times of declines in market demand, competitors force a global competition to gain as much as possible market share to increase the sale of products produced over demand due to fix capacities (like in the car manufacturing). In opposite of growing markets, the only opportunity to gain market share is to reduce the share of competitors which increases the global competition as a driver towards globalisation and the creation of global strategies (Evans et al., 2003). By this reason a further globalized competition can be expected as a result of the current recession.

3. Government Globalization Drivers

Negative effects on the ability to globalize are the country specific subsidies linked with governmental efforts to save local jobs. Especially latter might increase the barriers for foreign manufactures in terms of selling-opportunities and competitive situation in those countries (protectionism) (van Wyk, 2010) if not considered as local producer (Sanger, 2008). Especially China increasingly strengthens its policies e.g. in terms of co-operations (Han, 2010). Further, governments try to prevent manufactures from cutting-down or displace capacities (by severely criticise those firms in public) (Bryant, 2009) which hinders a free flow of resources to use them most efficient.

On the other hand, the national debts in several countries increased among others due to subsidies and lower tax receipts (Figure 6) (strong increase in 2009 expected), why further tax approaches must be expected especially in terms of facilitating low emission products and therefore increasing demand for fuel efficient cars.

Figure 8: Government debt (Eurostat a), 2009)

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4. Cost Globalization Drivers

Faced with rapid changes in technology and appropriate developing cost (e.g. hybrid) and simultaneous demand for low-priced cars (especially in increasingly important Asian markets (Soellner et al., 2007)) car manufactures are aligned in efforts to reduce cost. Therefore manufactures try to realize economies of scale and scope by creating alliances (e.g. Fiat and Chrysler), which is supported by weak competitors cheap to acquire during a crisis, or by increasing the pressure on their suppliers. As result, the pressure to cut cost increases at supplier side as well and therewith also supplier’s focus on globalization to reach growth (Roland Berger, 2009). But car manufactures have to consider, that the consolidation expected and already ongoing at the supplier side (4.500 auto suppliers globally in 2008 compared to 30.000 ten years previously (Thomson et al., 2009)), might cause bigger and more powerful suppliers or future competitors by horizontal or vertical integration (Govindan et al., 2000) e.g. Autoliv, a steering wheel supplier, vertically integrating armature manufacturing, molding and leather wrapping (Datamonitor, 2010), which increases the necessity for global strategies.

Another effect is the loss in value of U.S. Dollar caused by the financial crunch, making it necessary to consider production facilities in U.S. markets to avoid cost disadvantages through exchange losses (e.g. Daimler’s shift of C-Class production capacities from Sindelfingen to Tuscaloosa (Wirtschaftswoche, 2009)).

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Excerpt out of 35 pages

Details

Title
The impact of the global downturn on the car manufacturing industry
College
The University of Surrey  (School of Management)
Grade
Sehr gut
Author
Year
2010
Pages
35
Catalog Number
V179415
ISBN (eBook)
9783656017714
ISBN (Book)
9783656017899
File size
4980 KB
Language
English
Notes
Tags
downturn, automobil, car manufacturing industry, porter, strategic management, strategie, yip, daimler, smart, diamond, five forces, fünf kräfte, wettbewerbskräfte
Quote paper
Nils Peters (Author), 2010, The impact of the global downturn on the car manufacturing industry, Munich, GRIN Verlag, https://www.grin.com/document/179415

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