U.S. automobile industry.

EXECUTIVE SUMMARY

Car is great invention of human development. After more than two centuries of development and innovation, automotive products remain irreplaceable in the transportation. Automobile industry is always one of the most important industries of each country and the world in general. The U.S. automobile industry was born in the beginning of 19th century, contributes a huge amount in GDP of American as well as one of the domination industries in American particularly and globe generally.

This project provides an overall and comprehensive view about the U.S. automobile industry. Through application of appropriate strategic analysis tools, this topic focus on analyze four following parts:

Firstly, the overall current macro-environment of this industry is provided, especially the key forces driving change in the U.S. automobile industry.

Secondly, using the Michael Porter model to analyze the competitive environment or also called task or industry environment, the strengths and extent of competitive forces, which affect the attractiveness of the U.S. automobile industry.

Next, map of the key strategic group in the U.S. automobile industry and analysis of the competitors in a main strategic group.

Finally, based on the analysis of both environments, this report offers comments of the key opportunities and threats facing by the firm in the U.S. automobile industry and its attractiveness of the present incumbents and potential new entrants.

I. INTRODUCTION

The United States, with its total current resident is about 308 million, is the third most populous country in the world. It is the second largest country in Western Hemisphere, and the third or fourth largest in the world by total area. With an estimated 2008 gross domestic product (GDP) of US $14.4 trillion (a quarter of nominal global GDP and a fifth of global GDP at purchasing power parity), the U.S. economy continuingly occupies the most important position in global economy.

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Based on these advantages, the U.S. automobile market is one of the third largest markets, after China and Japan, both of manufacturing and consumption. The U.S. automobile industry has long historic development from the early decades of the 19th. There were over 1800 automobile manufacturers in the United States in the past. Although very few can survive and only a few new ones were started after that period, they are on the top automakers of the world. Moreover, it attracts most of the biggest foreign automakers to locate factories and invest, such as Toyota, Honda, BMW, Mitsubishi, etc.

Recently, the automobile industry dramatically down caused the shortage resource and the current economic crisis. The U.S. automobile cannot avoid this trend. However, the general industry and Big Three U.S. automakers – General Motors, Chrysler, and Ford – recover gradually whereby the timely auto industry bailout and restructuring of the President Barack Obama’s government.

II. THE CURRENT MACRO-ENVIRONMENT OF THE AUTOMOBILE INDUSTRY

There are many external forces that can affect an industry’s performance and hence to know well about the environment is the best way for improving the strength as well as reducing the weaknesses of companies in the field. This analysis of Socio-cultural, Technological, Economic, Ecological, Political and legal forces that affect the automobile manufacturing industry will be presented as follows.

1. Socio-cultural forces

It cannot be deny that in today’s society, people are judged on the type of cars they drive. Anyone who drives a nice and expensive vehicle is thought to be wealthy and success. People will find them-selves more valuable and feel better when they drive a nice and new car and therefore, car manufacturers target their markets by these thoughts. For example, with Mercedes-Benz, the producer launched three types of cars, which represent the brand’s value: luxury, safety, innovation. They are A-Class, F400-Carving and C-Class which being able to appeal the significant diversity of Mercedes-Benz in conquering the customers.

Another thought provoking issue of the socio cultural is the environmental concerns for the need of fuel-efficient vehicles. Many environmentalists are worried about the impact that the gas cars have on the environment. The lower amount of gas emission emits into the air, the better the environment becomes. Therefore this problem also is taken into consideration by specialists of automobile companies.

2. Technological forces

The U.S. is the world’s largest producer and consumer of motor vehicles with production of 16 million units every year. To increase its scale, the U.S automotive industry continues to experience technological change by investing on research and develop projects every year. These plan aim at finding out clean and renewable energy resources so that car can be used in the most efficient way. In addition to this, improving the quality of engine, making new more functions, changing technical innovation and styles for cars are also the objects that car-manufacturers want to bring to customers.

Getting success as today, automobile industry should consider Internet as an important and useful instrument that make the business easier and more convenient. Thanks to its functions, the business of automobile industry becomes more efficiency and lower cost by e-booking, payment, connecting suppliers and customers online. For example, Ford, GM, and Daimler Chrysler created a global online exchange for suppliers and the original equipment manufacturers.

3. Economic forces

In the past, the automobile manufacturing industry is regarded as one of the largest and vital industries within the U.S due to its great contributing to this economy in employment and productivity. Reports indicate that motor vehicle production represents over 5 % of the U.S. private sector GDP.

However, because of the global crisis and the increase in oil price, 2008 and 2009 are the most difficult periods for automobile companies all over the world. In US, the number of cars sold is significantly reduced to be lower than 30% in 2008 and predicted 50% in 2009, making many automobile companies got into trouble, especially big ones like General Motors, Ford and Chrysler. 19.4 billion aid from the U.S. government with 9.5 billion from Canada government can not help General Motors avoid from breaking in 1/6/2009. The car consumption of Ford Corporation also decreased significantly, they had to close four plants in the U.S. and thousands of workers to leave work until now.

The head of corporate manufacturing automotive components Continental (Germany) Karl-Thomas Neumann is predicted, the crisis in the automobile industry could take up to the next 5 years. This means that over 50 million people live based on the automobile industry will have to face unemployment in this period.

4. Ecological forces

After the crisis, major technology trends that automobile production corporations want to aim at are comfortable, friendly environment with consumption of fuel savings cars. In present, Hybrid vehicles with fuel economy of fuel consumption at 35 km per liter gasoline are taken into consideration and eventually moving to the car model that does not use fuel as crude oil is development direction of the automobile industry in the near future.

Besides, Pollution Prevention Project will be carried out regularly with the hope of finding innovative ways to keep our environment healthier and cleaner.

5. Political and legal forces

Since the 1960’s, the U.S. government has issued regulations that affect the production and consumption of cars in this country. Accordingly, almost all of the provisions are about environmental related problems and the safety of the drivers as well as passengers. The first National Traffic and Motor Vehicle Safety Act that forced manufacturers to improve the safety for the passengers, the driver visibility, and the braking of the car were approved in 1966.

After that, there was also growing concern for the environment, many Acts were introduced in order to set standards for automobile pollution and decrease in automobile emission such as The Vehicle Air Pollution and Control Act, Clean Air Act. Then, after the oil crisis in the 1970’s, The Energy Policy and Conservation Act stated that all automobiles must meet a certain mileage per gallon to ensure that the amount of energy could be saved as much as possible.

III. THE COMPETITIVE ENVIRONMENT

In today’s fierce competitive environment, the firms need to achieve competitive advantages for competing, existing and growing. Accordingly, the firms must recognize the environment that powerfully influences the firms. In American automobile industry, the automobile manufacturers have realized the environment’s influence to automotive industry. At the same time, they must look at the main sources of competitive forces and how high or low competitive force is. As stated by Wheelen and Hunger (2008, p. 83) about the six sources of competition in Porter’s Five Forces model. This framework is used to identify the opportunities and threats for entering in to a particular industry. It is featured as follow:

Rivalry amongst

existing

firms in the industry

The American automobile industry includes three major manufacturers, General Motors, Fords, and Daimler Chrysler. On the other hand, it has also two Japanese biggest competitors, Honda and Toyota.

Now we will discuss about how strong each competitive force is and which they affect on the attractiveness of the American automotive industry.

1. The threat of new entrants-Barriers to entry

New entrants can threaten the market share of existing competitors. One reason new entrants pose such a threat is that they bring additional production capacity, reducing the attractiveness. (Hitt, Ireland and Hoskinsson, 2008). The threat of new entrants is low in the American automobile industry because of some main reasons. First, the American automobile industry now is mature and it has attained economies of scale. Although Honda and Toyota have invested heavily in America to produce cars, now the crisis in the auto industry and the slow sluggish state of the global economy lead to small demand; therefore, new entrants are not interested to enter this sector.

Besides, this heavy industry requires a significant amount of capital for producing automobiles as well as research and development new designs. It also demands modern technologies, management and marketing skills. Besides, establishing the intermediaries for distributing the products is not the simply problem in America. The firms must look for the dealership to sell their automobiles. These entry barriers are substantial that make it difficult for new automakers. Accordingly, it is not easy for any new entrants to enter the American automobile industry.

2. Bargaining power of suppliers

According to Hill and Jones (2008), the bargaining power of suppliers is the suppliers’ ability to raise input prices or the costs of the industry by providing poor quality inputs or poor services. In the automobile industry, the bargaining power of suppliers is low. The auto manufactures need several components from suppliers. Moreover, there are many suppliers in this sector. We can see that suppliers in the U.S automobile industry have little power. Therefore, the auto manufacturers have many options for bargaining prices and deliveries. If suppliers do not meet some main qualifications such as quality and delivery, the auto manufacturers can switch to other suppliers. Besides, the automakers can have many opportunities to force down input price as well as demand higher quality inputs.

3. Bargaining power of buyers

Wheelen and Hunger (2008) mentioned that buyers could have an effect on an industry through their ability to force down price, bargain for high quality or more services. Thus, powerful buyers should be viewed as a threat of the industry. The bargaining power of the buyers in the American automobile industry is high. Nowadays, customers easily get information and have many options in choosing brands and models of cars between auto suppliers. Some of qualifications that they based on in choosing cars are quality, price, appearance, efficient, and so on. Because of the variety of lifestyle, customers purchase the cars in different ways.

Besides, the switching costs are low in automobile industry. As a result, the buyers can play off the supplying company against each other to force down price. What’s more, a buyer has the potential to integrate backward by producing the product itself as a bargaining tool. Ford and General Motor have used the threat of manufacturing a component themselves instead of buying it from suppliers.

4. The threat of substitute products

Hitt, Ireland and Hoskinsson (2008) pointed out that substitute products are goods or services from outside a given industry that perform similar or the same functions as a products that the industry produce. The threat of substitute products in U.S automobile industry is medium. Although people can travel by several public transportation means such as subways, trains, buses, the need of automobiles is inevitable in today’s modern life. Traveling by automobiles bring conveniences and dependences for people whenever and wherever they want to go. Moreover, in using subways, trains, buses, the switching costs are high in considering of time, money and convenience. The cost of fuel consumption, the maintenance costs, the annual insurance fee, and so on in using automobiles may be higher than traveling by public transportation means.

Thus, we can see that the threat of substitute products is depend on personal preference and it can be seen mild in automobile industry.

5. Rivalry among existing firms in the industry

Rivalry refers to the competitive struggle between companies in an industry to gain market share from each other (Hill and Jones, 2008). Rivalry among competitors is extremely intense in the American automobile industry. There are few competitors in this sector and they are roughly equal in size. We can consider that American automobile industry is a consolidated industry because a small number of large automobile companies dominate this industry. They are General Motors, Fords, and Daimler Chrysler. In today’s economic recession with slow market growth, each auto company watches each other carefully and fights to take market share from each other. They compete with each other by offering long-term warranties to customers.

Besides, the rivalry among existing firms is high in this industry because of not much differentiation opportunities. General Motors, Fords, and Daimler Chrysler produce automobiles and sport utility vehicles. They evaluate about the price, quality, product design, and after-sales services and support of each other in competing to gain market share.

Overall, the competition between American automakers can strengthen the attractiveness of automobile market as well as improve the product quality and after-sales services in automobile industry.

6. Relative power of other stakeholders

The US government has low power over the automobile industry. General Motors, Fords have plants outside the United States, where U.S laws are not applicable. Forces driven by market demand are the only forces that significantly affect profit potential of auto industry. Accordingly, the relative power of other stakeholders’ ability to affect profit potential is low.

After analyzing the Porter’s Five Forces model in the American automobile industry, we can see that the threat of new entrants is low through high entry barriers. The rivalry among existing firms is extremely intense because of few automakers in this sector. The overall impact from buyer’s bargaining power to the industry’s attractiveness is high because customers have many options. Suppliers have limited bargaining power in this industry. The threat of substitute products is moderate and the relative power of other stakeholders’ is low.

IV. MAPPING OF THE KEY STRATEGIC GROUPS AND ANALYSIS OF THE COMPETITORS

According to Anthony Henry (2007) and Gregory, Lumpkin & Marilyn (2002), the purpose of strategic group mapping is help organization identify their directly competitors, recognize mobility barriers, indicate the direction in which their strategies are moving to determine industry competition and analyze trends in the general and competitive environment.

Automotive industry is one of the most complicated industries in which the giant corporations own many brands and focus on many different market sectors. The price of the product in the automotive industry is not only depended the cost but also related to the brand image of the firm. Those are the reason why this report chose the brand image and product ranger as the two variances for the two dimensions.

Base on two dimensions as mentioned above, five strategic groups are formed. These groups are mainly formed base on the difference of brand image. However, the criterion of product ranger is very useful when mentioning about the luxury and extreme luxury group.

The first group includes firms that have the brand image as low class / low price (Hyundai, Kia, Tata…). However, this group is the second highest wide range of product cluster. All most of those firms are defender. The short-term strategy of the companies mostly is cost orientation. The strategy of these organizations is try to clear the image of the low class, low quality brand and endeavor to enter to the second group which is middle class brands. The way that Hyundai try to do is build a new image of a quality brand when they offer an extensive warranty (7 years, 100,000 miles) (Gregory at all, 2002)

The second group is the most powerful cluster. They have the most wide range of product which cover all most of segment of the automotive market – exclude S-segment (Appendix I car classification). Majority of them are analyzers type. Toyota is a typical example. They have a wide range of current traditional engine product, which can give it a stable fundamental for them to innovate in the other sector. On the other sector, Toyota innovate the new generation hybrid engine (Toyota Prius), which is the solution in the world of traditional energy shortage nowadays. In the future, as the competitors in the same strategic group, Honda and Ford are going to introduce the new generation hybrid cars to compete with Toyota.

To reach to the higher class of customers, these firms that stick with the image of middle class car try not to introduce a new high-class line but create a new higher-class brand or purchase an existence higher-class brand. With this purpose, Toyota creates Lexus, Nissan owns Infiniti, Volkswagen has Audi, Bentley and Bugatty etc.

The third group is the high-class cluster. The price is higher than the middle-class mainly because the brand image and the performance of engine. In this group, the ranger of product is narrower than the middle class group because of the focus on the higher income group. To reach the higher class of customer, those firms also implicate the same strategy with the second group, which create new brands or purchase new ones. For example, BMW owns Rolls Royce.

The fourth and fifth group is the luxury and extremely luxury car. Those two groups differ between each other not only on the price but also on the target customer although they are seemed in the same position when we mention in the ranger of product.

The fourth group mainly focuses on the sport car, which has the high speed and hi-end technology. The target customers are young successful businessperson and celebrities. On the other section, the target customers of fifth group are people have the high state in the society, successful executives and of very rich. Because of the difference in the target customer and brand history image, the barrier of motivation is very high between those two groups.

The group that this report focus on is the middle class which is the most profitable and innovative group in the automotive industry

FORD

Henry Ford in June 16, 1903 founded Ford Motors Company, which would go on to become one of the most profitable and largest companies in the world. As known one of the largest family-controlled companies, Ford family has been continuous controlling this company for over 100 years. The company locates the head-quarter in Dearborn, Michigan, United States. Ford is currently the fourth-largest automaker in the world and the third in US based on number of vehicle sold annually which records 1,602,011 in the U.S. market and 5,407,000 in the global market. In 2008, Ford employed about 213,000 employees at around 90 plants and facilities worldwide.

STRENGTHS

WEAKNESSES

Well-known brand and history

Product diversification

Offering hybrid and environmental friendly cars

Good marketing plan: Bold Moves

Sponsoring and financing for big event.

Product has a good review: quality, reliability, moderate price.

Firestone tire recalls.

CEO Jacques Nasser and Chairman Bill Ford Jr. cannot get along.

Their overseas allocation and outsourcing creates fewer jobs in America.

Their products are getting lower quality due to use cheap ways to make them.

HONDA

Soichiro Honda found the Honda Technical Research Institute in Hamamatsu in October 1946, to develop and produce small 2-cycle motorbike engines. Two years later, Honda Motor Company, Ltd. was born, and in 1959, Honda opened its first storefront in Los Angeles with six industrious employees. Today, Honda employs nearly 27,000 people in all 50 states.

STRENGTHS

WEAKNESSES

Good brand in producing high quality products from cars to motorcycles to lawn mowers.

One of the largest manufacturers of motorcycles in the world

Awards for initial quality and customer satisfaction

Pioneer in engineering low emissions internal combustion and hybrid technology.

Higher price for non-luxury vehicles.

Non-attractive in truck product.

High technology cost cause over-price for consumer.

MITSUBISHI MOTOR

Basically, Mitsubishi Motors is one member of Mitsubishi group was found on April 22, 1970, and was based on the successful introduction of the first Galant. Until now, MMC has 33,202 employees and 12,761 non-consolidated employees, as of March 2008. The Mitsubishi brand was introduced to the American market for the first time in 1971. Until now, they employ about 18,500 employees across United States. Nearly two-thirds of the Mitsubishi vehicles are sold in the U.S; particularly this number is 58,963 in the end of 2008.

STRENGTHS

WEAKNESSES

4th largest automaker in Japan

Restructuring & Recovery plan.

Strong brand awareness.

Member of Mitsubishi Group.

Poor model awareness.

Loss of R&D engineers.

Weak & uncertain leadership.

Eclipse brand strongly associated with Female buyers.

History of product recalls

TOYOTA

Toyota Motors Corporation was established on 28 August 1937 as independent company, headquarter is being located in Toyota city, Japan. The founder of Toyota was Kiichiro Toyoda. Nowadays, Toyota is basing 26 factories to produce vehicles, and marketing & distribution in more than 170 countries in the world. In 2008, Toyota passed General Motors to become the No1 automaker in USA and the world’s largest automaker in global sales for the first time in history.

STRENGTHS

WEAKNESSES

Well-trained employees.

Strong leadership.

Global organization, with a strong international position in 170 countries worldwide.

High financial strength.

Strong brand image based on quality, environmental friendly (greener), customized range.

The largest automaker.

Well culture-friendly, family… – encourages employees.

Product diversification, developing the hybrid- motor product ranges.

Japanese car manufacturer – seen as a foreign importer.

Quality issues due to rge-scale re-call made in 2005.

Most products targeted to the US and Japan only – shifting attention to the Chinese market.

VOLKSWAGEN

Founded by Ferdinand Porsche on May 28, 1937 as “Grsellschaft zur Vorbereitung des Deutschen Volkswagens mbH” and renamed as “Volkswagenwerk GmbH” in 1938, from a small car company, nowadays Volkswagen becomes the largest automobile maker in the world by vehicle production (Autocar, 2009)

STRENGTHS

WEAKNESSES

Aggressive and talent leadership

High financial strength.

The largest automaker.

High reputation German quality engine

Cost-control with the purchasing list

Non-stop requirement for the new project

Special production testing process (manager attend the test drives)

Lower position than Toyota and Honda in the market share

Bad public image because of GM sue

Not good relationship with their investors

V. THE COMMENTATION

VI. CONCLUSION

Automobile industry is one of the most important industries contributed the U.S. worldwide dominated position. However, this industry now is facing the worst crisis of the car industry in the past decades. The most urgent task is recovering this crisis. Moreover, finding out the new developed trend is the main strategic for whole the industry.