American Automotive Industry and Porter's Research Paper

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2.4 Effects of Environment:

Concerns related to carbon emission were heightened in mid-2000s and in 2007 Al-Gore in his book 'An inconvenient Truth' condemned the big three saying "They keep trying to sell large, inefficient gas-guzzlers even though fewer and fewer people are buying them." In comparison to other developed countries in Europe and Asia, American standard for distance covered in one U.S. gallon was only 25 mpg (miles per gallon). We see a sharp contrast here as Japan has a standard of 45 miles per U.S. gallon followed by 35 miles per U.S. gallon in China and 47 miles per U.S. gallon in European Union. Having least concerns for environment when the state of California raised its standards the big three went to courts. An amount of USD 25 billion was provided to the big three in October 2008 to upgrade themselves and produce vehicles with a standard of at least 35 miles per U.S. gallon.

In order to be respected as a good corporate citizen with a priority on lessening carbon emissions, these companies started their research and development efforts and emphasized on introducing fuel efficient (hybrid and electronic) cars to the market. This initiative was welcomed by both environment enthusiasts and general public; although it should be noted here that majority of the vehicles produced by all the players in this industry are still oil based.

3) Industry Structure:

Considering the period 2008 -- 2009 only Ford has a positive differential with a tiny of 0.6%; (White paper, Grant Thornton, p.4, 2009) while GM and Chrysler have both lost market share to other competitors; losing their chunk of market share to manufacturers from Asian continent. The industry structure of 2008 -- 2009 is given in Figure 5 in Appendix a.

4) Future Outlook as of 2012:

As American auto industry is going through drastic changes, therefore as per forecasting performed by CSM worldwide (White paper, Grant thornton, p.6, 2009), the local manufacturers are anticipated to reduce combined congregation capacity in North America by more than 11.5 million units, to 7.5 million units. Capacity of other auto manufacturers will increase by 20% showing an increase of 1.5 million. Volkswagen will increase their capacity by 100% reaching 1 million units approx. same will be done by BMW. Whereas combined capacity of Toyota, Hyundai, Nissan and Honda will nearly reach 1.3 million units. The American automotive industry can only reclaim its former pride by adopting the same market strategy and offer fuel efficient / environment friendly vehicles to buyers that are affordable and durable. The emphasis on muscle (powerful engines) is a failed strategy and can only be offered to niche demography in these hard economic times. There is a great possibility that established brands can save the American industry if the inevitable change is adopted by the "big three." Current state of American industry can be analyzed by the words of John Humphrey, senior vice president and general manager for J.D. Power and Associates' Global Automotive Division."

"While we are still early in the recovery we are somewhat optimistic about both the future rate of growth as well as the overall health of the industry," (Prial, Fox Business, February 03, 2012)

American Auto Industry as Porter's Model:

As mentioned in Samuelson's Managerial Economics; Michael Porter identified five forces that drive an industry. These forces are: (1) degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5) supplier power. Analyzing the dynamics of automotive industry in U.S. using this frame will help us understand its dynamics.

1) Degree of Rivalry

Globally, the American automotive industry has already left its mark but strong competitors such as Toyota and Honda cannot be ignored. There are a variety of players mostly belonging to Asia and Europe, trying to capture the market share and are to a great extent successful in nearly wiping out American automotive brands from their own regions and especially third world countries.

In the American local market, rivalry is intense between American manufacturers and foreigners and total market share of the big three American manufacturers (GM, Ford and Chrysler) accumulates up to 55.5% in 2009 suffering an accumulated loss of 3.1% (White Paper, Grant Thornton, p.4, 2009 ).

What's lost has been gained by overseas manufacturers with Hyundai gaining a 2.0% share in 2009 (White Paper, Grant Thornton, p.4, 2009).

2) Threat of Substitutes

Automotive industry itself doesn't face a fierce threat of substitutes. Where there are other modes of transportation available, majority of consumers prefer an option offering convenience, utility and independence. However different patterns of behavior can be observed dependent on difference of rural and urban culture in America. However, one must not ignore that American consumer has been observed to have a desire of owning a personal vehicle which makes this market quite fertile.

It would not be unrealistic to predict that the American manufactures can lose further market share to their competitors but a complete wipe out is not realistic as the niche of an American Car would always have a prestige for an American citizen.

3) Barriers to Entry

One must not ignore the significant barriers which can be faced by new entrants in American market. For a new player, even a startup fixed cost high-priced. Furthermore the specialization of industry makes the chances of failure quite inevitable.

However, it is comparatively easy for established players such as GM, Ford, Chrysler and Honda to venture into new markets and explore them. But having in hand local knowledge gives the upcoming domestic companies an edge over other established brands who are still struggling hard on American ground.

4) Buyer and Supplier Power

As far as the relationship between automotive industry and its suppliers goes; the power tilt is towards the automotive industry (buyer). The automotive industry is easily in a commanding position and is able to enforce their own set of terms on their suppliers.

Automotive industry (buyer) is in a power situation due to following reasons;

(1) Since the American automotive industry is dominated by four large companies; major share of supplies and shipment value goes to them.

(2) Automotive parts (e.g., oil / air filters, bumpers, mufflers and belts, etc.) can only be used in vehicles hence the element of supplier preference is left to a minimum.

(3) as a result of hard economic time, acquisition of supplier companies by these large automotive companies can and will occur, as seen in summer 2005 when Ford purchased struggling parts maker Visteon. A possibility of in-sourcing the supply function completely by the automotive manufacturer themselves is also not a distinct possibility.

b) Analysis of American Manufacturers:

1) Daimler Chrysler

DaimlerChrysler (DCX) was a result of a merger between Benz and Chrysler Corporation

in 1998 and is the fourth largest vehicle producer in the world in terms of units sold behind GM, Ford, and Toyota. Chrysler has been substantially successful in U.S. As it has been offering broad range of product addressing different sects of consumers. Due to its substantial size and prestigious history, Chrysler enjoys dominance over new comers. However, like every other enterprise, Chrysler is governed by its consumers, therefore during a recent hit of recession where millions of American consumers suffered; Chrysler equally felt the burn and filed for bankruptcy.

However, improving situation of American market has also resulted in increased demand of Chrysler products and has made its future more promising, comparatively.

2) General Motors

Born in 1908, General motors' was once the highest producer and highest seller of U.S. market. However, this huge empire has failed in combating the ever increasing competition in U.S. As well as global market. Till 2005, GM had shown highest sales but later on it couldn't address the issues of low costs, changing consumer behavior, highly volatile fuel prices and strong rivalry. In fact U.S. federal government had to save this organization by owning it up to 61% (retrieved from Plunkett Research, 2012, para.1), after recession.

After the decline of sales in late-2000s, GM has been doing well in reaching out global markets and capturing a significant market share in China, Canada, Middle East and some regions in South America. In 2010, GM was the second on the list of number of units produced globally. Its brand Chevrolet has attracted the masses and has done very well in Asian Continent and third world countries. With future in sight GM has invested huge amounts in its research and development wing manufacturing environment friendly vehicles (Hybrid and all electric vehicles).

With a mere 19.7% (see Appendix a figure 5) home ground market share, an ambition of recapturing the automotive market is obvious.

3) Ford

Incorporated in 1903, Ford is the second largest vehicle producer in America and fifth largest globally. Initiated by Henry Ford and having survived the great depression, Ford had to rely on heavy borrowing to continue its operations during the economic downturn having being declined a financial assistance from congressional legislation. Like other key players…[continue]

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