Excerpt
CONTENT
About the author
1 Abstract & Conclusion
2 Industry examination and evaluation
2.1 The global downturn - summary of the important events
2.2 Impact onto the automotive industry - PESTEL Analysis
2.3 Reaction of the automotive industry - Porter’s five forces
3 Company examination and evaluation
3.1 BMW AG - company profile and current performance - SWOT Analysis
3.2 Impact of the global downturn onto the company
3.2.1 Value chain analysis
3.2.2 Impact on resources, strategic capabilities and competitiveness
4 Recommendation
4.1 Perspective and recommendations for the automotive industry
4.2 Evaluation of strategic directions and recommendations for BMW
4.2.1 Portfolio screen - McKinsey Matrix
4.2.2 Product and market growth strategy - Ansoff’s Product-Market Growth Matrix
REFERENCES
Keywords:
industry examination, global downturn, automotive industry, PESTEL, analysis, value chain analysis, resources, strategic capabilities, competitiveness, strategic directions, portfolio screen, McKinsey matrix, growth strategy, Ansoff’s Product-Market Growth Matrix, BMW, strategic management, global context, impact of the downturn, Real estate crisis, Financial crisis, green technology, SWOT Analysis,
About the author
Markus B. Baum, MBA
Markus Baum is Group Finance Director at a management consulting firm with focus on
business strategy, supply chain management (SCM), manufacturing & logistics, sourcing & purchasing, marketing & sales, financial management and information technology (IT- strategy). The company has subsidiaries in Germany, Switzerland, Belgian, France, United Kingdom and Russia.
He is responsible for the management and control of the financial shared service center (FSSC) which includes accounting, controlling, reporting, taxation, treasury and ERP; development and execution of financial strategies, management and further development of financial and corporate processes, workflows, controls, standards, policies, governance and compliance; financial analysis and board decision support (business partnering) , financial planning and budgeting, internal and external audits, project management, corporate law and contract management, investor relationship.
Markus Baum has a unique background of combined senior experience in financial excellence, strategy, process excellence, accounting, controlling and cash flow management. He previously worked as an Accounting and Controlling Manager (consulting firm), Finance Analyst (global brand leader) and Consultant (tax, accounting, audit).
Markus Baum earned a MBA with distinction from the University of Surrey (UK), is an international certified accountant, has and graduation in accounting & controlling and an apprenticeship as tax adviser assistant. Markus Baum is a member of the International Controlling Association.
1 Abstract & Conclusion
The current recession, arising from a real estate crisis in the US and followed by a global financial crisis, has affected industries differently around the world. The automotive industry decreased by 15% globally in production of cars and light commercial vehicles (VDA, 2009) as result of the downturn. Lot of companies were supported by the government directly or indirectly. Obsolete structure of the industry and high overcapacity are the main problems. The assessment in this paper examines and evaluates the global impact of the downturn on the automotive industry and how the industries have reacted.
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Figure 1.1: total economic environment - world economic growth (GDP), December 2009 (IWF, 2010)
BMW, one of the ten largest car manufacturers worldwide, operates experienced a 10.4% loss in sales in relating to the previous year as result of the recession and decrease in demand in the automotive industry. The reaction to it was for example less investment in to R&D and redundancies. Almost all resources, capabilities and competitiveness of BMW were concerned. The extent to which the downturn affected those will be examined and evaluated in the second part of this paper.
The most important future trends in the automotive industry will be “green technology” and “changing in customers demand”. Capacity optimization will be important to win the competition. BMW is recommended to penetrate the market with its successful products and to invest in R&D to follow and setting industry trends. The third part of this paper provides perspectives and recommendation for the industry and provides strategy recommendations for BMW.
2 Industry examination and evaluation
2.1 The global downturn - summary of the important events
Real estate crisis: The global downturn has its roots in 2006, when the downturn of the US real estate market began. Increasing cash loss on mortgage loans led to sales by court order and a high price pressure on the real estate market.
Financial crisis: January to August 2007, the real estate crisis developed into financial crisis as US real estate price went into decline and the first real estate financer applied for insolvency. Rating agencies downgraded real estate securities as real values didn’t covered the value of the securities. Institutes that had high volumes of real estate securities in their portfolio couldn’t fund themselves on the short term money market as usual because the market consisted of asset-backed securities and the market didn’t believe in the recoverability of these assets. Thereby such institutes fell into liquidity problems. The institutes were forced to depreciate the securities in 2008. Following on this action some of these institutes collapsed. Some companies were rescued by other institute (i.e. Bear Stearns) and some had to apply for insolvency (i.e. Lehman Brothers). Nearly all investment institutes were at risk for insolvency.
Global downturn: The financial crisis developed into a global downturn. The refunding cost of the banks was raised thereby complicating companies’ refinancing. Average household consumption decreased and developed into a slack period for consumption.
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Figure 2.1: Development of global downturn 2006 - 2010
2.2 Impact onto the automotive industry - PESTEL Analysis
The global downturn has had a significant impact on the automotive industry. The slack period for consumption (see Chapter 2.1) led to a fall in demand for cars and placed the automotive industry in a difficult position. To fully evaluate the impact, it is critical to understand all the factors that influence the industry. The following evaluation is based on the PESTEL method, which scans the macro environment factors political, economic, social, technological, ecological and legal. The evaluation is limited to factors that are specifically important for the automotive industry in relation to the impact of the global downturn. The direct impact is described after each factor.
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Figure 2.2: external environment - PESTEL analysis (adopted from: Ireland et al., 2009)
POLITICAL: The automotive industry is influenced by several political aspects.
Environmental protection is one current main topic of concern to all important global governments. From this derives the government’s demand that the automotive industry invest in developing low energy consuming cars. The car should use regenerative energy and should be manufactured in an environmentally-friendly way (clean manufacturing). Another political topic especially important within the context of the global downturn is unemployment protection. Politicians try to protect civil income and otherwise stress public finances through transfer payments and less tax income.
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Figure 2.3: Selected vehicle scrapping schemes implemented in the EU (adopted from: ACEA, 2009)
- Governments usually act contra-cyclical in time of downturn. To support industry, they bolstered the economy with expansive monetary policies and large stimulus packages and thereby work against the downturn (OECD, 2009b).
- Unique to the automotive industry stimulus measurements were car scrapping programmes introduced by most governments. The programmes incentive for the wrecking of high polluting cars supported sales in the automotive industry while also fitting exactly to their environment protection strategy (ACEA, 2010). Job protection and the accompanying issues were supported by most global governments through the introduction of subsidized working programmes (e.g. short time work) (OECD, 2009b).
ECONOMIC: The automotive industry has a large impact on most countries’ economies as the industry directly (own) and indirectly (suppliers) employs a large amount of people and consumes a large volume of raw materials (OECD, 2009a). Refunding and financing in the industry usually happens through bank institute networks. Through its global business, the industry works with different currencies and thereby is subjected to currency risks. BRIC- markets (Brazil, Russia, India, China) are the future market for the automotive industry because the demand of cars will increase by 30% until 2030 in these countries (Deloitte, 2009).
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Figure 2.4: BRIC Automotive Markets 2007-2014 (BCG, 2010)
Direct impact of global downturn:
- The global sales market in 2009 has decreased by 15% compared with 2009 as a reaction to the worldwide decrease in demand in conjunction with the global downturn (VDA, 2009). This caused overcapacity and therefore a production and purchasing decline in the industry. To adjust the cost structure plants have been closed.
- The imperative refunding was complicated due to the actions of the baks (see Chapter 2.1.) and led to liquidity problems in the industry. Many companies became insolvent due to financial problems, the inability to invest or to finance debts.
- Global exchange rates were subject to substantial fluctuations and resulted in currency losses and a negative impact on financing performance.
- Even demand in the BRIC-markets stagnated, resulting in the investments made in these countries failing to return a profit (KMPG, 2009).
SOCIAL: The ageing population in industrialized countries and growing population in less developed countries will have different requirements with regard to price, comfort, technology and support (OECD, 2009a, Wengel et al., 2003) in the future. According to UN studies, 84% of the population of the more developed countries and 56% of the less developed countries will live in urban areas and mega cities by 2030 (United Nations, 2000).
Direct impact of global downturn:
- The consumers were affected by the future uncertainty meaning that buying behaviour was affected negatively by the downturn.
Consumer behaviour shifted from expensive to cheaper products or to simply rescheduling new acquisitions for a later date. (Capgemini, 2009)
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Figure 2.5: Change in vehicle buying criteria 2008 - 2020 (Rishi et al., 2008)
TECHNICAL: The automotive industry is highly automated resulting in a highly efficient and effective process. The consumer market demands rapid innovation and short product lifecycles (e.g. green technologies, safety and security, comfort and flexibility, information and entertainment) (Schlie and Yip, 2009).
Direct impact of global downturn:
- The automotive industry compensated for sales losses and responded to less available free working capital with reduced research and development expenses and the prioritisation of investment projects.
- Single company research programmes were reduced and more joint ventures for such activities were formed. Developments were concentrated on current available technologies and improvements relating to efficiency and optimisation.
(OECD, 2009a; OECD 2009b)
ECOLOGICAL: Especially in industrialised countries, developing sense of social responsibility has developed as a result of the need to protect the environment. Governments developed policies to reduce greenhouse gas emission (CO2), for example committing themselves within the 2005 Kyoto protocol to reducing their emissions from 2008 to 2012 by at least 5% in relation to the levels in 1990 (Morris and Therivel, 2009).
Direct impact of global downturn:
- The global downturn caused people to think about other priorities. Developing new social responsibility increased demand for small and “green” cars, whose sales volume rose in comparison to larger and traditional cars.
- The automotive industry needed to develop clean technology to get and hold government incentives and tax reliefs as the governments supported these changing consumer behaviours. (VDA, 2009; Morris and Therivel, 2009)
LEGAL: The legal framework of the industry involves employment laws (e.g. antidiscrimination, short-term work, minimum wages etc.), production laws (e.g. security, environment protection, recycling) and other general and financial laws (e.g. tax).
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