Social, political and economic factors impacting the automotive industry

Automotive Industry

Assessing the Social, Political and Economic Factors

Impacting the Auto Industry

auto industry today is going through a disruptive, turbulent transition away from build-to-inventory manufacturing practices to more demand-driven and build-to-order manufacturing and selling strategies. This transition is being driven by economic factors including consumers not replacing their autos as much as in the past, and being much more focused on the environmental impact and carbon footprint of their cars. The political factors of dependence on foreign oil which is seen by many as a threat to national security and the high dependence the U.S. has on many nations they don't have diplomatic ties with including Venezuela are all combining to change the structure of this industry (Gaylord, 2010). These broader, more global trends are having a direct impact on how manufacturers globally are competing today as well. The most significantly impacted area of their operations are their supply chains as noted by Dr. Bilek (2010) in his studies of supply chain performance in the auto industry. Time-to-market and the ability to move from concept to prototype and on to product launch are compressed, with knowledge transfer and supplier coordination more critical than ever. The need for better management of the knowledge transfer process within the supplier base of manufacturers has never been greater, as is the need for more efficient tacit knowledge transfer between suppliers and manufacturers as was found by Dyer and Nobeoka in their studies of the Toyota Production System (2000). All of these trends are making the auto industry go through a very disruptive time in 2010.

Auto Industry Trend Analysis

The most important trends affecting the auto industry in rank order of importance are presented in this section of the report. They are organized into the areas of economic, social and political trends, with a discussion of how each is affecting the industry. Opportunity and threat analysis follows in the next section of this report. Starting with the economic trends, consumer sentiment and confidence in the economy is the most dominant. As a result of the continued recession and perceptually low consumer confidence over the last two years of the downturn, many consumers are delaying purchasing a new car, often opting to fix their older, often paid-for ones . While auto manufacturers diligently work to attract new customers through aggressive price discounting and extensive branding campaigns both on -- and offline, new sales continued to be below pre-recession levels (Herrmann, Henneberg, Landwehr, 2010). A second critical economic factor is the cost of steel and the stabilization of the supplier base, which had been quickly consolidating due to slower sales of new cars. A third economic factor is increasing the speed and time-to-market of new car designs. The industry had been lulled into updating models on a 36 to 72-month cycle, which led to consumers who wanted sportier designs migrating to Audi, BMW, Mercedes and other brands with industry-leading designs. Today there is much greater focus on creating highly customized, build-to-order cars, which is the strategy BMW, Ford, Lexus and other auto manufacturers are increasingly relying on to gain new sales (Bilek, 2010). This is in turn forcing a much greater level of supply chain synchronization throughout the industry, making tacit knowledge transfer critically important to the success of product lines (Dyer, Hatch, 2004). Studies of the Toyota Production System (TPS) and its practices of knowledge sharing have become best practices in enabling tacit knowledge sharing throughout organizations. With the growth of social networks, tacit knowledge sharing through supply chains has become even more pervasive, a point made by Bernoff and Li in their studies of social networking (2008).

The social factors trends affecting the auto industry include a much greater concern over carbon emissions and the environmental impacts of gas-burning engines, much greater concern and interest in how the auto company is managing its Corporate Social Responsibility (CSR) initiatives including transparency over its supply chains (Oh, Rhee, 2010). Within the industry there is more focus on how to increase the speed of product development and ensure more effective product introductions using open innovation including more efficient green or eco-friendly cars. The influence of social networks on open innovation, including the collaborative platforms used for new product development that borrow concepts from Facebook, are increasingly commonplace (Bernoff, Li, 2008).

The political factors include the dependence on foreign oil that cars represent in the minds of many consumers, including the very volatile issue of gasoline prices. These political factors have as their catalyst the lack of consumer confidence many have in their governments to effectively turn economies around. While the political climate is not nearly as turbulent and disruptive as the auto industry, the fact remains that this industry that thrives on disposable income and the availability of easy credit, both of which are constrained by current economic conditions.

Recommendations

The auto industry needs to re-think its role in consumers' lives and redesign its entire value chain accordingly. The focus on smaller, more easily custom-configured cars through the build-to-order process needs to become a priority as is the need to invent entirely new engines and technologies to minimize environmental impact of their operation. Cars are very much of a status symbol; it is the second largest purchase many people make with the exception of their homes. The focus on making the car more of a statement of environmental awareness is already happening, as many celebrities only drive the popular hybrid models, with the Toyota Prius being their favorite.

The marketing of cars will go through a massive shift over the next five as consumer behavior and purchasing patterns continue to solidify. No longer will cars be sold based on the technical merits alone or just their aesthetics; cars will be increasingly sold for the environmental contribution they make will giving customers the chance to make a statement of what their values are. If the auto industry can redesign itself and in so doing architect its direction on these factors, it will continue to grow. The need for massive change to the value chain, from supplier enablement and knowledge sharing to the customization process and selling all are changing at a very rapid pace today and will into the future.