U.S. Automotive Industry Chosen Industry: Automotive Industry

¶ … U.S. Automotive Industry

Chosen industry:

automotive industry is the focus of this analysis. More emphasizes are made on the large -- scale automobile manufacturers. This is because of the inherently interesting industry as a result it being competitive and projected to go through a major restructuring due to globalization in the near days to come. The issue of decreasing oil reserves is the other reason that is going to trigger this restructuring. This analysis is carried out by a team of experts who have had extensive experience in the industry and have the right qualifications for the industry.

Analysis Methodology:

An historical overview of the U.S. automotive industry forms the introductory part of the report. Using the Porter's % forces model as the analysis framework, industry's structural characteristics is made carried out providing the current state of the U.S. automotive industry. An analysis of some of the leading companies is then carried out to compare their varied sizes. General Motors, Toyota and Ford are chosen for this analysis due to their current positions as leaders in the industry.

Nissan, Volkswagen, Honda and DaimlerChrysler were not chosen despite being international companies which have been in automotive industry for several years. This is because most of these companies are not U.S. based. They are however viewed as new in the industry and have shown potential growth in the future.

These companies were analyzed according to their financial situation, market position and their management strategy. Very specific and useful statistics like the revenues, return on sales, market value added, debt rating, net expenses, number of business models used, brans used and debt ratio are included in the analysis. For insightful conclusions would be arrived at through this examination which involves both the examination of some of the companies which are major players and the industry as a whole.

Major Findings and Conclusions:

In conclusion, the attributes all the successful companies are identified and described. These would include but not limited to the cost structures that are well- planned, production efficiency, bran management that is distributed and well respected, manageable size and the company's attention to underserved market. The specific company's analysis was then carried out and involved focusing on the company's trends in the U.S. automotive industry while focusing on the whole industry in areas of distributed competition in the new markets, conglomeration in the mature markets and international expansion. Increased operational efficiency, environmental regulation, energy constraints were also included in the analysis. These trends would help in predicting the direction in which the industry was headed in and how to meet the ever growing challenges.

A recommendation would then be made for the future success of the each all the analyzed companies. The DaimlerChrysler according to this analysis is seen to be holding up the best while the general outlook of the four well- established American companies is not great. General Motors, Ford and Toyota have their markets positions down unlike most of the Asian companies like the Nissan, Honda and Hyundai which have good future prospects in the international market having taken up most of the substantive market share both locally in their parent countries and in the international market like the U.S. Some companies like the Shanghai Automotive Industrial Company have however found it difficult to penetrate the U.S. market despite having been successful on the local market and continue to sell well domestically. This is because of the stiff competition from most of the large and well-established companies operating in the U.S.

1. Industry Overview

1.1. History

There are several factors that have influenced the evolution in the automotive industry in the U.S. And worldwide. Some of these factors include vehicle components, manufacturing practices, market changes, fuels, societal infrastructure and the ever changing business structures. History dictates that in the early 1600, the first car was invented and was propelled something else other the humans or animals. These were sail-mounted carriages and formed the basis of the first vehicle. The discovery of an engine has however been viewed by most historians has the genesis of the development of automotive industry and its subsequent discovery of energy carrying mediums and new fuels like gasoline and gas. The establishment of automotive firms in the U.S. came as result of development of the first vehicles. This took place in the late 17 century.

Other technologies were developed in the early 1900s that sped up the development of U.S. automotive industry. They included the invention of the steering wheel and accelerator that is mounted on the floor. During this period the American society was undergoing infrastructural changes that would enable the proliferation of automobiles. Car sales with time payments were instituted, service stations were opened and driver's licenses were issued. Some of the famous vehicle models in the U.S. such as the Ford's Model T. were developed during this period. All the car designs by this time had taken "motorage" appearance unlike the initial carriage look by 1906.

The development of new societal infrastructure and new technologies continued in the 1900s.This coupled with new business strategies and manufacturing practices revolutionized the U.S. automotive industry in the U.S. The installation of traffic lights and road signs further changed the way the U.S. automotive industry was viewed in the U.S. The launching of the famous Henry Ford's assembly line in 1913 lead to a new turn of events that resulted in mass production of vehicles. This lead to the achievement of economies of scale as it also involved the use of interchangeable and parts that was standard. Mergers and acquisitions of other companies started to be evident during this period. A case in point the acquisition of Chevrolet by GM. The automaker also expanded to other markets like Canada e.g., GM of Canada.

Through the 1920's new manufacturing practices, merging of companies and development of new infrastructure continued. Some of the mergers included Ford and Lincoln, Chrysler and Dodge and Benz and Daimler. Roads continued to be built in the U.S. As the enactment of Kahn-Wadsworth Bill that facilitated alongside the support of the Bureau of Public Roads. There was also better establishment of methods of mass production in manufacturing. This resulted in better and more efficient and satisfactory cars to the public. There was however varied production strategies employed by different companies. GM for example provided a variety of products in the market helping the company to increase its market share to about 20% while that of Ford which focused on one product reduced in its market share by up to 24%.

As it continued to the 1930's new brands were developed which include the Lincoln Continental, Volkswagen and Ford Mercury which gained high demand and preference from the public differentiating both the American market and other international markets like the European market. The U.S. market for instance preferred powerful and luxurious cars. The European market on the other hand preferred the low-priced and smaller cars. There was however continued competitive advantage by GM over Ford making it to gain as Ford lost in their market.

Military vehicles were 'however manufactured by these automotive companies during the World War II (WWII), this was during the 1940's and had to change the way civilian vehicles were manufactured. This paved way for the coming up of the several companies especially from some Asian-pacific and European countries. These included companies like Toyota from Japan. Most of the first models were however similar to those of the pre-war designs. This is because it was time consuming and expensive hence was hard to establish the manufacturing plants.

Technological innovations continued into the 1950s and 1960s the development of fiberglass and higher compression ration fuels, allowed the manufacturers to focus on customers' specifications which included the look, feel and comfort of the vehicle. This was mostly motivated by the need to have a more environmentally safe vehicle with the front seat beats and speed limits becoming the benchmarks alongside other features like the ventilation and heating equipment.

The 1970s were marked by stricter environmental regulations and the oil embargo of the early 70s, which led to the development of low emission vehicle technologies, such as catalytic converters, and a 55-mph nationwide speed limit in the U.S. Foreign cars like the Japanese Honda Civic started appearing in the U.S. market. The Civic was marketed as a fuel efficient and low-emissions vehicle, which given the recent high oil prices and strict environmental regulations made it well-received. Despite the entrance of new competitors into the U.S. market, U.S. automakers underestimated the threat of foreign automakers to their market shares.

In the 1980s, the U.S. automotive industry began losing market share to the higher quality, affordable, and fuel efficient cars from Japanese automakers. In response to this market share loss, U.S. automakers began focusing on improving quality by adopting different Japanese manufacturing management philosophies, such as JIT. Although their adoption of JIT and other philosophies helped improve the quality of U.S. vehicles, it did not fully bridge the gap between the quality of U.S. And Japanese cars. This gap remained because U.S. automakers tried applying JIT techniques without a full understanding of the whole Japanese manufacturing system, while Japanese automakers had decades to develop, refine and master their JIT approach.

Another significant paradigm of the 1980s was the global nature of vehicle manufacturing. Automakers started assembling vehicles around the world. This trend was accelerated in the 1990s with the construction of overseas facilities and mergers between multinational automakers. This global expansion gave automakers a greater capacity to infiltrate new markets quickly and at lower costs. The increased product offerings in many markets led to consumers having a greater variety of vehicles from which to choose. To this new vehicle buffet was coupled the explosion of the internet, which made vehicle-related information readily accessible to consumers. Internet-informed and empowered consumers now wanted a vehicle that was "personalizable," inexpensive, reliable, and quickly obtainable. Consumers desired vehicles that were less harmful to the environment, which led to the introduction of hybrid vehicles by Japanese automakers in the late 1990s.

1980s was characterized by the global nature that most of the manufacturing

The trends in the recent past have with customers being more sophisticated and saturated market has led into identification of more specialized and new markets in the already oversaturated market and having diverse customer bases both locally in the U.S. And infiltrating all the emerging markets like the Latin America, Southern Asia and Africa. This has widely prompted the creation of and establishment of facilities overseas with global alliances being part of the wider strategy to enter the global markets and forming foreign commercial partnerships with these promising markets.

1.2. Porter's Five Forces Analysis

Michael Porter identified five forces that influence an industry. These forces are: (1) degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5) supplier power. For more on this framework proposed by Porter, please see Appendix C. Like other industries operating under free market, capitalistic systems, viewing the U.S. automotive industry through the lens of Porter's Five Forces can be helpful in understanding the forces at play.

Degree of Rivalry

Despite the high concentration ratios seen in the U.S. market (see Appendix D), which typically signify that a lesser degree of competition is seen in the industry, rivalry in the U.S. And the global automotive industry is intense. Clearly, the concentration ratios do not tell the whole story. The automotive industry in the U.S. is no longer the playground of the Big 3 (GM, Ford, and Daimler Chrysler); global companies compete in the U.S. market, while U.S. companies have globalized themselves. In the 1980s, the Japanese car makers Honda and Toyota entered a fairly disciplined U.S. market and have been very focused in growing their shares of the market. The great diversity of rivals in terms of cultures and associated philosophies has intensified rivalry in the industry. Market growth is slow in the established markets of the U.S. And Western Europe, and companies must fight fiercely to eke out gains or prevent losses in market share. However, growth is potentially huge in the rapidly industrializing nations of China and India; in these booming markets, companies could take advantage of the opportunities to reap handsome rewards. The degree of rivalry in the U.S. automotive industry is further heightened by high fixed costs associated with manufacturing cars and trucks and the low switching costs for consumers when buying different makes and models.

Threat of Substitutes

The threat of substitutes to the U.S. automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence, and value afforded by automobiles. The switching costs associated with using a different mode of transportation, such as train, may be high in terms of personal time (i.e., independence), convenience, and utility (e.g., luggage capacity), but not necessarily monetarily (e.g., round trip train fare on MARTA would most likely be less expensive than the cost of fuel consumed on a similar round trip, daily parking, car insurance, and maintenance). The exception to this statement occurs in the global urban areas with high population densities. In these areas, the substitutes available (e.g., walking, mass transit, bicycles, etc.) can be less costly than automobiles and thus alternative modes of transportation are often preferred.

Also, there are inherent underlying social and cultural attitudes that keep people from owning automobiles in some parts of the world. Many nations are not as spread out or as mobile as the U.S.; they are constrained either by geography, race, class, or religion and the need for personal transportation is not as great, yet. The American dream of "a car [or two] in every garage" is not what the rest of the world currently wants or needs. However, the marketing arms of the global automotive manufacturers are certainly working very hard to change this paradigm, and with unprecedented production volumes worldwide, all signs indicate that they are succeeding. Most with the ability and means to own a vehicle, who live in a society with the necessary infrastructure (e.g., roads and fueling stations), will do so.

Barriers to Entry

The barriers to enter the U.S. automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily retooled.

Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies. In fact, the barriers to entry for new (or different) markets may be quite low; in the 1980s, U.S. companies practically invited Japanese makers into the U.S. By failing to offer quality vehicles in the lower price markets. All of the large automotive companies have globalized and entered foreign markets with varying degrees of success.

In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist. However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold.

Buyer and Supplier Power

In the relationship between the U.S. automotive industry and its suppliers, the power axis is substantially tipped in the industry's favor. The U.S. automotive industry is comprised of powerful buyers who are generally able to dictate their terms to their suppliers. There are specific characteristics that make members of the U.S. automotive industry powerful buyers: (1) there is not a grand proliferation of companies manufacturing automotives, and the four largest automotive companies in the U.S. have roughly 90% of the value of shipments and value added in the U.S. (see Appendix D); (2) automotive parts (e.g., oil filters, mufflers, belts, etc.) are standardized commodities and these parts are only used on automobiles; and (3) backward integration can and does occur, as seen in summer 2011 when Ford purchased struggling parts maker Visteon.

In the relationship between the U.S. automotive industry and its ultimate consumers, purchasers of finished vehicles, the power axis is tipped in the consumers' favor. Consumers wield the greatest power in this relationship due to the fairly standardized nature of the automotive commodity (a vehicle) and the low switching costs associated with selecting from among competing brands. However, the U.S. automotive industry remains marginally powerful due to the large customer to producer ratio. The U.S. automotive industry is a dynamic place. With the forces above at play, and with history as a guide, it is safe to say that the U.S. automotive industry will continue to change, evolve, and adapt.

2. Analysis

In this part we examine ten major companies in the U.S. automotive industry to collect a better understanding of the U.S. automotive industry's changes and dynamics on a basis of company-by-company. For insight into the comparative revenues and net incomes for 2010 for every of the company analyzed an analysis was done. Additional financial information for every company may also be found in Appendix B.

2.1. DaimlerChrysler

DaimlerChrysler (DCX) was established in 1998 in a merger of two oldest and most prestigious manufacturers in the U.S. automotive industry: the Chrysler Corporation and Daimler-Benz AG. This so-called "merger of equals" was the end of a long complicated family record that in some sense follows the history of the automobile itself. Due to this prestigious history and record, DaimlerChrysler enjoys a strong character and reputation on both sides of the Atlantic.

Currently, Daimler Chrysler employs a total of 384,723 workers in 17 countries in various parts of the world. The company's products are sold in over 200 countries. It is the fourth largest vehicle producer all over the world in terms of units sold behind GM, Toyota and Ford. In 2010, the company sold 4,000,700 passenger vehicles and 712,200 commercial vehicles. It is structured into three main automotive groups namely the Mercedes Car Group, Commercial Vehicles Division and the Chrysler Group. These groups are parents to a total of 12 diverse brands, including Mercedes-Benz, Jeep, Dodge, Chrysler, the luxury car Maybach and the compact environmentally friendly smart car. Generally, DaimlerChrysler produces approximately 126 vehicle models.

Daimler Chrysler has been a little bit successful in the United States where the Chrysler Group has in the near past been the strongest of Detroit's Big 3. In fact, in the third-quarter of 2011, Chrysler was the only Big 3 Company to earn a profit ($379 million for the quarter). This achievement came in spite of a 21% drop in third-quarter income by DaimlerChrysler worldwide as a result of the increasing taxes. Nevertheless, during this same period, DaimlerChrysler increased generating profit by 38%. Analysts have related this odd result to rising demand for Chrysler and Mercedes products and outputs. This improved demand is evidenced in the U.S. market in which the Chrysler Group produces four of the 20 top selling passenger vehicle models which include Dodge Ram, the Jeep Grand Cherokee, the Dodge Caravan and the Jeep Liberty. Due to this improved third-quarter performance, Chrysler's share in the U.S. market has risen to 13.3%. extra broadly, the popularity of DaimlerChrysler models can be realized in the steady improvement in revenue over the past three years (see Figure 5 in Appendix A). Since 2008 to 2010, revenue has risen by 22.6% from $157 billion to $192 billion. Since demand for DaimlerChrysler products has remained comparatively stable in the face of rising oil prices, their future looks relatively improved. Growth in demand for passenger vehicles is expected to further fall in North America, Japan as well as Western Europe,. Therefore, DaimlerChrysler's future is dependent upon successful marketing in upcoming markets across the globe.

2.2. Ford

Ford Motor Company (F) was established in 1903 by industrial and automotive pioneer Henry Ford in Dearborn, Michigan.

Ford was able to more efficiently mass produce their products than their competitors since it was the first to implement a moving assembly line for automotive manufacturing. In 1908 the Model

T was introduced and moved on to sell over 15 million vehicles. This model firmly established Ford as the major actor in the early U.S. automotive industry with 50% market share by the 1920s. Ford Motor Company went public in 1956 and from then it has grown to be a considerable presence in the global automotive market.

The Company product portfolio includes cars, trucks, as well as SUVs from brands which include Ford, Mazda, Mercury, Jaguar, Volvo, Aston-Martin and Land Rover and Lincoln. In addition to its core automotive dealing, Ford has a finance division, a parts and service division, and they also currently own Hertz Corporation. This corporation is the largest car rental business worldwide. Relative to other substantial automotive manufacturers in 2009, Ford was the second domestically and globally in terms of number of vehicles sold. The leading company was GM.

The outlook of Ford Company is challenging. During the 3rd quarter of 2011, it posted a pre-tax profit loss of over $1.3 billion in their automotive operations. $1.1 billion loss was experienced in North America. The current losses for the year 2011 are due to various reasons: (1) rising costs of commodities, such as energy and steel, have increased manufacturing costs considerably; (2) ongoing and increasing health care costs, mainly 'legacy' remuneration and benefits paid to retirees and their families; (3) bailing out main parts supplier Visteon from bankruptcy; and (4) vehicle sales lagging by 81,000 units compared to similar point in 2010, in spite of exceptional "Employee Pricing" sales offered during summer 2011. Sales are especially lagging in the profitable truck and SUV markets where demand is declining due to rising cost of gasoline. This loss is disappointing given the positive record seen in net income for the past two years. The negative net income witnessed in 2008 was as a result of the costly security recall of defective Firestone tires used on various Ford and Mercury trucks as well as SUVs.

The company's poor performance in 2011 and dark outlook were reflected in the decline of their credit ratings by both Standard & Poor and Moody's to "debris" status in late spring 2011 - from BBB- to BB+ and Baa3 to Ba1, respectively. The unpredictability of Ford's stock, in terms of its Beta rating, is in the neighborhood of 1.6 which shows that investing in their stock has fairly high threat. In the face of poor performance and negative trends, crucial steps must be taken in the near future to make sure the long-term viability of Ford Motor Company.

Essentials of company-wide restructuring have been announced and implementation begun. Part of the improvement involves reducing personnel, mostly from white-collar positions. In more long-term reorganization the company requirements to shed over-capacity in manufacturing. Shedding over-capacity involves closing down and consolidating manufacturing facilities. The closures are prevented by agreements made with the United Auto Workers (UAW) through 2007. A major element in Ford's achievement is its relationship with the UAW and capacity to get concessions from the union. Concessions over costs of healthcare, which cost upwards of $2,000 per new vehicle sold, and plant consolidations are required for Ford to be leaner, more efficient, and more cost-effective in its business.

In addition to organizational reformation being crucial to the future success of Ford, the company realizes the need to restore their market share, particularly in the U.S. domestic market. They have begun attempts to do this with the introduction of many new vehicles to freshen and strengthen their product line. The company has announced plans to raise its hybrid vehicle production tenfold to 250,000 per year by 2010. This could be viewed as an effort to place itself as the domestic leader in the fast growing hybrid market in the U.S. If the managerial reformation comes off well and new product offerings are a hit with consumers Ford stands a good opportunity to see another 100 years as an industry leader.

2.3. General Motors

After its organization in 1908, General Motors (GM) went on to acquire seven companies by the end of 1909. Currently, the company's brand names include many of the beginning acquisitions including Buick,, Chevrolet, Oldsmobile, Cadillac, Pontiac and GMC as well as newer creations and acquisitions including Holden, Hummer, Opel, Saturn, Saab and Vauxhall. The company is the largest automobile manufacturer in the world, selling almost nine million cars in 2010, which equated to a 14.5% global market share.

At the end of 2010, GM reduced its projected earnings for 2011 by over 50% from previous projections, which reflects its low expectations for the company in the near future. Investors have also lost faith in the future of GM; the current stock price is selling at a fraction of the book value. GM's debt has been steadily downgraded and stood at BBB- as of the end of 2010 according to Standard & Poor's ratings.

According to their Letter to Stockholders, GM's main problems consist of "global overcapacity & #8230; falling prices & #8230; rapidly rising healthcare costs & #8230; unstable fuel prices & #8230;and increasing competition." The impacts of these troubles can be seen quantitatively through the ratios provided in Table 1 of Appendix A. GM's debt ratio illustrates that their overall debt nearly equals their assets; their current ratio shows that they have more liabilities than assets in the upcoming year; and the return on sales and equity are very low in comparison to industry standards. Each of the five ratios places GM among the worst three out of the ten sampled companies. While these ratios in no way provide a complete measure of a company, they do illustrate that GM is currently struggling to keep up with its competitors.

The company's main challenge is their failure to remain cost-competitive in the global market. To address this, GM has reworked deals with both American and European Union's which will reduce its cost of labor. In order to increase revenues, GM is focusing on improving market share in growing countries such as China and India. They are also offering more hybrids to increase their fuel efficient offerings, which is a fast growing market in America and has been one of the main ways that foreign manufacturers have increased their market share in GM's primary markets.

It will take some time for GM to become profitable again. In the first three quarters of 2011, GM has seen losses continue to grow well past $1 Billion and their credit rating has been reduced to junk status. However, the company still has the largest market share all over the world and the capability to become victorious again. If General Motors can reign in increasing costs and offer cost-competitive products, the automobile giant will be in position to once again assert its domination of the market.

Financial Ratios Section

Our competitors' financial ratios from three areas were compared. Ratios in liquidity, debt management, asset management, and profitability were compared. The data for the years 1999 through 2009 was obtained from research insight. While data for the year 2010 is available from various sources, it was not used in comparison because the methods of computation would have been various as well, thus rendering the comparison meaningless.

The first area of comparison is liquidity. Historical data for Ford and GM was not available as well as two years of data for Daimler Chrysler. DCX had the highest current ratios and managed to raise them by over thirty percent over 5 years. Likewise DCX also improved their quick ratios to lead the comparison group, but not by a decisive margin. Toyota had the highest cash to current liabilities and with all 3 companies with marginal change in this area, TM decreased by almost twenty percent. And lastly DCX led net working capital to total assets, doubling this ratio over 5 years. Generally DCX had the most liquidity of the three firms that were compared in this area, and for the most part their ratios changed in a scale larger than the group (caveat n=3).

The next area of comparison is asset management. All companies had data for asset management ratios, so the whole group can be compared in this area. Ford strongly led the group in days to sell inventory in the high teens. After the closest rival TM, other competitors had numbers around the forties. Poor GM had increased its days to sell inventory by nearly eighty percent over five years to seventy one days while Honda had the only development decreasing by nearly ten percent. Honda led fixed asset turnover, while Toyota was most improved. DCX made negative progress in this area. None of the companies manage an improvement in total asset turnover with GM doing the worst overall and in change, while HMC kept their turnover higher than competitors. So while Ford had the lowest days to sell inventory, HMC pulled better turnovers to be the winning asset manager.

The third area is debt management. General Motors and Ford lead total debt to total assets by a wide margin. They also lead long-term debt to total capital decisively by a wide margin. Toyota and Honda had interest coverage, while the big three had interest coverage between one and a half, the two Japanese companies had almost doubled their already high interest coverage to 56 for Honda and 43 for Toyota. So GM and Ford use much more debt. This could be good or bad. They assume more business risk, while the Japanese companies could in theory take more debt to exploit opportunities.

The last and arguable most significant area of comparison is profitability. Data was unfinished for price to book comparisons, so those will not be used. Toyota holds a whopping fourteen percent, while the big three barely have any margin. The two Japanese companies also have very strong return on assets compared to domestics. Amazingly General Motors has double the ROE of Toyota or Honda, with the others in the middle, with all facing declines since 1999. Return on investment has slid for all except General Motors, who nearly doubles the Japanese returns. Price to earnings run around 15 with the exception of General Motors at 10 and Toyota at 17, this is the markets reward to Toyota for producing an advanced product, and penalty for General Motors for turning out undistinguished products.

Although efforts were taken to keep these numbers accurate and meaningful, it should be understood that there are numerous factors working against this effort. The two Japanese companies function in a different business environment and face diverse regulations than the domestic firms. Also the effects of Daimler's merger/takeover of Chrysler should have affected numbers in ways that would make data not as suitable for contrast. With companies on three continents doing business in dozens of countries, currency translation also becomes an issue. The five companies have different business models and search out different parts of the market (even though they compete in areas). They have diverse regulations to face and various accesses to capital. These differences are reflected in the difference in the ratios, as much as management effectiveness is shown.

Labor Costs

Labor is one of the greatest expenses that are associated with the automotive industry. Research show that on average most automotive firms spend 45% of their total revenue on the costs of labor. The table below shows that on average each employee earns approximately $15 per hour. There has been however a continued effort after the financial crisis by most companies to reduce their overall costs of labor with the motivation of increasing their profit margins.

Occupations

Employment

Mean hourly wage ($)

Total

138,978,340

Transportation and vehicles sold

68

5.3

8,967,430

7.1

14.88

The above table indicates that close to 29% of the automotive industry labor force work mainly in the ground operations of the manufacturing process. The other operations include the vehicle assembly process which also forms a significant part of the workforce. The management and the sales executives form a very small position of labor. After the financial crisis of 2008, most automotive companies entered into negotiations with labor unions in an attempt to cut labor costs. Being members of the union, more than 40% of the workforces have had their wages driven up in the past decades. This was with the aid of the union.

This has driven most companies to bankruptcy. The government however hopes to reduce cases of bankruptcy by working with the union to cut wage rates in the industry.

2011 National -- Occupational Employment and Wage Estimates

Automotive industry

Employment Estimates

Percent of industry (%)

Mean annual income ($)

Industry total

1,890,340

45,359

Management occupations

28,890

3.78

52,290

Business and financial operations Occupations

39,060

2.78

52,280

Customer care and service occupations

145,874

15.76

47,939

Customer attendants

117,640

19.78

47,900

Office and administrative support occupations

278,648

26.78

39,756

Maintenance and repair occupations

97,785

8.98

47,129

Mechanics and service technicians

67,878

5.78

47,280

Mechanical engineers

79,789

6.89

109,380

Drivers and delivery services

179,290

18.98

38,028

Laborers

167,567

16.67

27,780

The automotive industry salary and wage jobs are projected to increase by 25% between 2011 -- 2015. The entire labor market is however expected to increase by only 15% during the same period. The industry's growth is attributed to the increase in population, business activities and disposable income among the households. Industry analysts agree that income trends and demographics have led to these positive trends.

One Capital Cost Issue and Risk management oversight structure

In the risk mitigating process, there is need for an oversight structure that spells out clearly the guidelines and procedures to be followed in the effective functioning of the structure. Some of the mitigating plans that need to be implemented.

For these mitigating actions and plans to be fully and exhaustively implemented, there are recommended organizational structures that have been deemed to effectively monitor and give good mitigating actions in risk management. These specific recommended structures among many other things make sure that there is continuous improvement of organizations capabilities to manage its priority risks and allocation of resources to the risk management process. With the establishment of other organizational models that have additional techniques that are aimed at improving the process of risk management through provision of additional approaches with better benefits.

With all these considerations considered, it found out that the complexity of the enterprises risk management and its size is expanded.

A priority order for every risk identified should include the list below which is in itself not limited to:

The preventive actions that help minimize the likelihood of risk occurring

The contingent actions that are meant to reduce the impacts of the risks in the event that the risks occur.

A resource, time and date must be identified for every risk action that has been identified. The resources used for undertaking the resource must also be sufficient and the time allocation and date should also be appropriate. The table below shows an example of how these resources and time is allocated.

For very risk identified, the above table must be completed with those risks that have higher priority risks being assigned more actions than those risks that have less priority since they are less risky to the continuation of the projection. The actions that are assigned to the higher priority risks must also be comprehensive as much as possible.

The priority of each risk must be identified and its likelihood must also be established. Its impacts on the project must also be evaluated for those risks that eventuate. The priority score is then calculated as shown in the table below once the scores on the likelihood and impact are identified and quantified.

Building Capabilities

Once the foundations and objectives of the organization have been established and all the risk management infrastructure elements have been achieved, its advancement on the process of expanding its priority risk is then put into considerations. This possible through having the following three steps serving as the critical aspects of risk management expansion in its capabilities

Assessment and development of responses is the first that is considered. When this made sure that it's in place, factors like risk management process, planning a process of responding to priority risks and risk policy development among other key things. The second is designing and implementation of all the risk management capabilities that have been set to be achieved. This include making sure that all the competencies, reports, processes, methodologies and other technologies that ought to set up in order to respond to the risks accordingly. The third step is making sure that there is a continuous improvement of the capabilities. What matter in any risk management process just like it is done any other disciplines?

Is Bigger Better?

The issue of firm size and whether or not if affects the profitability of the firm has widely been debated with various analysts in the industry sharing varied views. The industry for instance has been categorized into three major categories depending on their total revenue per year, the nature of or the vehicles they manufacture and scope of their coverage. How wide are its distribution and manufacturing branches? The table below illustrates how the various categories vary.

International (major) manufacturer

National manufacturer

Regional manufacturer

Revenue

$1 billion

$100 million-$1billion

Types of vehicles

All types

Specialized

specialized

Coverage

International market

National market

Regional market

In the automotive industry, the larger the company the higher the profits. This is because there is a direct correlation between the size of the company and the profit margins that the company is making. This is due to the factor of economies of scale whereby large firm then to produce at a lower cost while they produce in bulk while those small firms produce less but costly. The large firm will therefore always operate on the low-cost strategy hence continue to make profits.

A case in point is the GM which is one of the leading automotive companies that has managed to utilize its wide network and the law of economies of scale to manufacture many vehicles and be able to massive profits while minimizing its cost of production. Other companies on the other hand like the Daimler Chrysler which is relatively small compared to other companies has always made losses due to its small production capacity hence the diseconomies of scale.

Ford being one of the other largest automotive companies in the U.S. has maintained a good profitability records just like its competitor, GM. The company just like the GM focuses on maintaining a low-approach to carrying out its business by producing on large scale due to its wide network of production plant. Both companies crosstrain their employees as part of their wider low-cost strategy to minimize the cost of doing business. Small companies on the other have not always enjoyed successful financial prowess like their larger counter part due to their reduced production which result in reduced revenue hence low profits. It is imperative to say that big is better.

Summary

3. Conclusions

Conclusions about U.S. automotive industry are in most cases as a result of studying an individual company in the same field. Visions and strategies have been known to be shared by many successful companies. Some trends have been universal in the industry and have been key to revolution of the industry and some of them areas discussed below.

3.1. Attributes of Successful Companies

Well respected brands and products, focused strategy, attention to underserved markets, distributed management of brands, manageable sizes well-planned structures and production efficiency are some of the factors that have been universal in the most successful companies in the automobile sector. We are going to look into these factors in depth learn how they have influenced the industry

To begin with we are looking to distributed management brands which have been a major factor in shaping the industry. This has largely influenced the way the corporations in the industry have had to market their products. In the mature markets most of the companies under central managements have consolidated forces to build more powerful effect in the market. The best example for this is Stuttgart-based Daimler Chrysler management marketing Dodge products in the U.S. are much better than the Chrysler Group-based Detroit would have been able to do. The brand and the customers are better understood by the local management

Production efficiency is a factor which is key to shaping the automobile

Industry.IN the case of Toyota which is known to be among the most successful automobile manufactures, this factor has played a major role. Toyota has been known to use innovative strategies to like Total Quality Management (TQM) view of design and production and JIT paradigm to enable keep a competitive edge in the market. They have also embraced use of technology thus bringing the production cost and increasing on efficiency.

A study shows that in U.S. automotive industry some if the industry's most productive companies in revenue are the same companies that are least profitable (refer to Figures 3 and 4 in Appendix A). Absence of well-planned cost structures can be said to have influenced the trend in the industry. The high production costs can be traced back to lack of efficient distribution and production practices but on the other side the increased cost of health care has had a role to play in draining the Big 3.Companies that do not have strong labor unions benefit by having lower labor coast and flexible cost structures in general.

Manageable size is a factor though not considered a threat of today's automobile industry. In 2010 Ford motors and GM both established and big auto companies in terms of vehicle production manufactured (8 million units and 15 million units, respectively), but in terms of production cost they two run lowest with both recording under 2%.Inertia and poor management is to blame in this case. It has been much easier to adopt changes in the relatively new and flexible companies as comp aired to already established and atrophied bureaucracy.

Attention to underserved markets has been recorded to have helped smaller producers in the industry wedge their way into the larger markets share by after identifying them. A good example is Honda not being able to compete in the luxury sedans on the category with Mercedes' brand named prestige. Honda is also not able to compete in the pickup category with Ford or GM due to the royalty of the customers. However after studying and analyzing the market, Honda for cussed on producing inexpensive and reliable sedans. Niche markets exploitation examples have been best demonstrated by Toyota and Honda. The two companies have established a position in the Big 3 by being among the first to produce hybrid automobiles. DaimlerChrysler's Smart Car and Toyota's Scion line customizable cars appear to be indicative of the emerging markets.