STRATEGIC MANAGEMENT IN AUTOMOTIVE INDUSTRY

By: Y.Vikramaditya Reddy Roll No: 50

Industry Background:

Indian Automotive Industry: India is manufacturing over 11 million vehicles and exporting about 1.5 million every year ever year. It is the world's second largest

manufacturer of motorcycles, with annual sales exceeding 8.5 million in 2009. India's passenger car and commercial vehicle manufacturing industry is

the seventh largest in the world, with an annual production of more than 2.6 million units in 2009.In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea and Thailand. Size of Indian automobile industry is $90 billion.

As of 2009, India is home to 40 million passenger vehicles and more than 1.5 million cars were sold in India in 2009 (an increase of 26%), making the country the second fastest growing automobile market in the world. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads. Production Statistics: Year 2009 2008 2007 2006 2005 Car Production 2,166,238 1,846,051 1,713,479 1,473,000 1,264,000 % Change 17.34 7.74 16.33 16.53 7.27 Commercial Vehicles 466,456 486,277 540,250 546,808 362, 755 % Change -4.08 -9.99 -1.20 50.74 9.00

Exports:

India's automobile exports reached S4.5 billion in 2009. India's automobile exports are expected to cross $12 billion by 2014. In 2008, Hyundai Motors alone exported 240,000 cars made in India. Nissan Motors plans to export 250,000 vehicles manufactured in its India plant by 2011. In September 2009, Ford Motors announced its plans to setup a plant in India with an annual capacity of 250,000 cars for US$500 million. The cars will be manufactured both for the Indian market and for export. The company said that the plant was a part of its plan to make India the hub for its global production business. Fiat Motors also announced that it would source more than US$1 billion worth auto components from India.

Global Scenario: Worldwide Production:

In 2007, worldwide production reached a peak of 73.3 million new motor vehicles. In 2009, production dropped 13.5 percent to 61 million. Sales in the U.S. dropped 21.2 percent to 10.4 million units, sales in the European Union (supported by scrapping incentives in many markets) dropped 1.3 percent to 14.1 million units. China became the world's largest motor-vehicle market, by both sales and production. Sales in China rose 45 percent in 2009 to 13.6 million units.

Sales Trends:

About 250 million vehicles are in use in the United States. Around the world, there were about 806 million cars and light trucks on the road in

2007, consuming over 260 billion gallons of gasoline and diesel fuel yearly. The Detroit branch of Boston Consulting Group predicts that, by 2014,

one-third of world demand will be in the four BRIC markets (Brazil, Russia, India and China). Other potentially powerful automotive markets are Iran and Indonesia.

Year 2000 2001 2002 2003 2004

Production 58,374,162 56,304,925 58,994,318 60,663,225 64,496,220

2005 2006 2007 2008 2009

66,482,439 69,222,975 73,266,061 70,520,493 60,986,985

-1

Block Diagram of Auto Industry:

Electronics, electricals, plastic, vinyl, Auto ancillary/auto component industrytransmission, casting, forging etc steel, copper, lead GovernmentTaxes (12%, 14%) Petroleum Industry

Loan / Insurance

Car
Accessories

Pre owned cars

Service centers/ repair centers Power (electricity) Rentals/ Taxis Rubber- tyres Part/Component Replacement

Competitive Structure: Major automobile (car) manufacturing companies in India: 1. BMW India 2. Fiat India 3. Ford India 4. General Motors India - Chevrolet 5. Honda Siel 6. Hyundai Motor India 7. Mahindra Renault 8. Maruti Suzuki 9. Mercedes-Benz India 10. Mitsubishi Motors 11. Nissan Motor India 12. Toyota Kirloskar 13. Volkswagen India 14. Audi India 15. koda Auto India 16. Tata Motors

Industry analysis with Porters five competitive forces model:

A competitive strategy should base on the understanding of industry structures and the way they change. Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter, professor of Harvard Business School. He has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. 1.1 Bargaining power of suppliers To be able to focus more on car-related services and to cope with the huge costs associated with an ever growing number of new modules and systems, automobile manufacturers are becoming less involved in manufacturing and assembly,passing the responsibility of developing, manufacturing, and assembling important sections of the car on to their suppliers. As a result of fierce competition, automakers are now planning operations on a global scale , with models being launched at the same time in different locations with similar standard. So they expect the suppliers to be present in the new regions where they are located, often near their plants. There is a clear strategic goal of OEM (original equipment manufacturer namely the industry brand name) toward working with a smaller number of large suppliers. That requires obviously a strong cooperation and intensive communication between the parties. The growing importance of suppliers in the automotive industry is affecting their structure. Traditionally, the industry supply chain was organized in tiers. OEMs would design and assemble the car. First tiers would manufacture and supply components directly to the automaker (e.g., the fuel pump). Second tiers would produce some of the simpler individual parts that would be included in a component manufactured by a first tier (e.g., the housing of the fuel pump), and third and fourth tiers would mostly supply raw materials.

1.2 Bargaining power of customers Generally we can say that the automobile end-customers have no bargaining power as in most of the cases they are individuals who purchase the cars directly from the automobile manufacturers through their franchised distribution system. Only the biggest leasing companies or car-rental enterprises can probably gain discount. Despite that the car manufacturers have to be attentive to the customers as todays automotive consumers are increas ingly well-informed and have an unprecedented level of choice in the marketplace. Customer loyalty is no longer a given and in these times automotive companies have to work harder than ever to earn and retain it. To respond to high customer expectations, companies have to deliver m ore effective, efficient, and profitable marketing, sales, and customer service. The question of price sensitivity willing to buy new cars, they prefer used vehicles. The biggest manufacturers have already reacted on the changes. For instance BMW and Mercedes-Benz are buying back the pre-owned cars which are off-lease. The new performance aims to reduce the number of off-lease cars going to auction and keep residuals up. Every car manufacturer tries to encourage for purchasing through different tools. But most of them sold cars over the real purchasing power. People could buy automobiles on zero deposit loan and instalments could be extended to120-150 months.

1.3 Threat of new entrants It is extremely difficult to enter such a concentrated and expensive market like the car industry. There are more barriers requiring huge investments that make the market nearly unreachable. First of all brand image is a key factor in the industry, inasmuch as the name sells the car. Most of the current existing manufacturers have a history of minimum 50 years. The first Mercedes model was produced in 1900 by Daimler-Motoren-Gesellschaft (later the company merged with its main rival Benz). Car designers work hard to consistently create refreshing designs that are new -some of them retain the classic elements-, luxurious and stylish that consumers expect. To build and maintain recognized image it is crucial to invest a mint of money in research and development Besides the technical and design improvement they have to put a stress on up-to-date issues such as resource and energy conversation, environmental preservation and enhancement of comfort and safety. The foundation of production facilities is also very cost and time- intensive. Although in the present crisis it can occur that some big automotive manufacturers will go bankrupt, and the remaining players can use this opportunity to acquire the vacant factories. Another problematic issue of new entrance is the configuration of retail distribution network. All major car manufacturers have built up their own franchised retail distribution channel. It same to be the most effective way of selling cars as franchisees get all the needed information about the products, they offer parts, service and warranty repairs, so customers trust them. It would be very difficult for a new entrant to recruit franchisees, as who wants to sell a no-name car? Substantiating the above arguments we can outline that the Korean brand Daewoo founded in 1967 was one of the newest brands, but could not survive the cutthroat competition. It was dismantled by the Korean government in 1999. The Indian Tata Motors entered the passenger vehicle market in 1998 and could fight its way up through aggressive acquisitions of foreign brands, but it still did not penetrate effectively the most important markets like Europe or the US. 1.4 Threat of substitute products As possible substitute products of automobiles we could mention the public transport vehicles like trains, busses, airplanes. But they have big disadvantages compared to a car, namely that they do not provide door-to-door transport and have fixed routes and timetables. The motorbike and bicycle are also not relevant substitutes, as they do not insure the comfort of a car. The rise in oil prices plays a major role in the automotive industry. Oil provides 97 percent of the transportation fuels and it is used also in tire production. But despite several oil price jumps in the past 100 years the demand for passenger car have been sharply increased This is partly due to the significant improvement in mileage of cars and on the other hand people are used to the mobility offered by automobiles, and they will not give it up because of some percent increase in oil price. 1.5 Rivalry among compet ing firms in the industry Rivalry indicates both the number of players and the level of competition among firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers have tried to avoid price-based competition, but more recently the competition has intensified rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales. Automotive manufacturing is one of the most global industries in the world. But there is this interesting fact that the 50 biggest automotive companies in 2005 headquartered in 8 countries, and the biggest ones were from 3 countries: USA, Germany and Japan. This phenomenon supports the diamond theory of Porter that Defines national competitive advantage. It points to the need for companies and governments to encourage and support subordinate industries to enhance global competitiveness. In 2007, a total of 71.9 million new automobiles were sold worldwide: 22.9 million in Europe, 21.4 million in Asia-Pacific, 19.4 million in USA and Canada, 4.4 million in Latin-America, 2.4 million in the Middle East and 1.4 million in Africa. The markets in North America and Japan were stagnant, while those in South America and Asia grew strongly. Of the major markets, Russia, Brazil, India and China saw the most rapid growth. After all the industry had the potential to build far more cars already that times. Industry overcapacity has cut profits, driven consolidation and increased the tension between automakers and suppliers.The car producers are also forced upon diversification in terms of variety of cars. It is not enough to concentrate on one type of cars. They have to show off a wide range of models including vans, mini- vans, SUVs, wagons, smart cars and so on. In conclusion we can say that the automobile industry is a very complex market with fixed players who fight a red battle for survival. 1.6 The sixth force Porters framework has been challenged by other academics and strategists and they extended Porters five forces model with a sixth force, which is termed as the relative power of other stakeholders ,which can refer to a number of other groups or entities, depending on the factor which has the greatest influence including: Complementary products The government The public Shareholders Employees

Strategies that can make a car manufacturer win:

Probably all OEM has its own answer for this question, but essentially these have to focus on the same issues. On the basis of the industry analysis , trend analysis, the outlined consolidation process and value chain analysis in the previous chapters I will give my own answer to this question. I defined three behaviours that have to be characteristic of a successful independent global carmaker . These are the following: 5.1 Focus on the future In the past growth period the main priority area for investment was the enhancement of production capacity. All automobile manufacturers were striving for economy of scale that refers to the efficiency gained in the production or distribution process through increased siz e of the operating unit. It was the critical success factor of the past few years, and this generated an overcapacity that resulted in price war. Now the first priority to escape from the present critical situation is to secure profits and cash flow, and this requires an optimization of the swollen systems . Car manufacturer have to review their production, sales, development and back-office sections, and downsize them. They have to consider what can they manufacture inhouse and what special proces ses should be outsourced. At the same time, it is important to secure flexibility for the future growth opportunity. The Profit Pools method of Orit Gadiesh and James L. Gilbert can be used to help managers in understanding the profit structure of their business. They describe a framework for analyzing how profits are distributed among the activities that form an industry's value chain. Profit pool can be defined as any point along the value chain. In the car industry this can be car manufacturers, new car dealers, used car dealers, insurance, leasing, financing, repair, etc. Mapping a profit pool involves four steps: defining the boundaries of the pool, estimating the pool's overall size, estimating the size of each value-chain activity in the pool, and checking the calculations. It will help managers to see the various forces that are determining the distribution of profit, they will get a view on the 5.2 Effective customization

underlying structure of the industry, and it will help them to focus on profit, rather than on revenue growth. And by identifying the profit pools in the industry they can find which activities are generating disproportionately large or small shares of profits. For example, new car dealers have consistently posted the lowest margins (below 5%) whereas leasing has proved to be the deepest pool with margin over 20%. And this shows that for carmakers it is worth to put more stress on financial transactions. Although nearly all OEMs are in red currently, but the investments toward future growth are really required . Whether or not they can survive depends on how carefully they can build a scenario for the future and, based on that, how effectively they can invest in the priority areas. If only a limited effect is possible from individual companies, a governmental aid for strategic investment might be necessary. In the current transition it seems to be essential to invest in technological development that can ensure the future. As the world is moving into the trend of electric cars, it makes sense to invest in rechargeable battery technologies that offer a wide range of application, and could be the core of the next motorized society. (Eiji Kawahara, 2009) 5.2 Effective customization Long gone is the homogeneous market that Henry Ford conquered with his mass production of one model of car. Consumer diversity is increasing rapidly and firms have to differentiate their products relative to competitors. And this is where market segmentation comes in. A true market segment meets all of the following criteria: it is distinct from other segments ( ), it is heterogen homogeneous within the segment; it is stable over time; it is and measurableidentifiable; it can be reached by a market intervention (accessable responds similarly to market incentives ( actionable ); it is large ); it enough to be profitable . There are numerous ways in which the automobile industry can be segmented, but it is usual to divide it into some distinct product groups according to a combination of size and price . For instance on the European market for passenger cars we can identify nine segments. 46

: 3 Table Classification of passenger cars in Europe Segment Consumer/Product characteristics Targeting example Compact, short journeys Renault Twingo, Smart 1. Mini Small size, small shopping Ford Fiesta, Suzuki Swift 2. Small 3. Lower-medium Lower income, shopping Toyota Corolla, Opel Astra 4. Upper-medium Medium income, some luxury BMW 3-Series, Mercedes C-Class 5. Executive Business consumers, comfort Mercedes E-Class, Audi A6 6. Luxury Space, high comfort, luxury Audi A8, BMW 7-Series 7. Sports High comfort, attention seekers Porsche 911, Vauxhall Tigra 8. 4x4s (Four-wheel drive) Performance, space, adventure Land Rover, Ford Escape 9. MPV (Multi- purpose vehicles) Medium income, comfort, large shopping VW Touran, Fiat Idea

After the market has been separated into its segments, the marketer will select a . segment or series of segments and target it/them In case of car industry it is preferable to sell more but limited number of product lines in many countries as if one of its product lines falls out of fashion or one country has an economic slowdown, the company will, most likely, be able to continue trading. Furthermore it can be more efficient to ship a range of products to any given location than to ship a single model. However developing many k ind of products is costly and insufficient after a certain number of models. Companies such as Mercedes and BMW have had historically a very little interest in the segment small and lower medium cars . But these segments dominate the European market with 30 percent market share each, so they cant ignore them any more. They had to plan and introduce lower-class models too in order to gain a bigger market share . On the other hand car manufacturers have to pay a deep attention to the different customer segments and their specific requirements. They m ust carefully position 47

their vehicles and ruling out the possibility of cannibalisation by giving up the unnecessary brands. 5.3 Ability and willingness to cooperation There is a strong expectation towards the carmakers to provide fuel-efficient cars with much lower CO2 emission in a short time. Internationally, the most prominent early step in the direction of a low-carbon economy was the signing of the Kyoto Protocol, under which most industrialized countries committed to reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 over the period of 2008-2012. Global warming requires a worldwide collaboration . In this project all carmakers have to concentrate forces to bring the solutions. In addition the car manufacturing process got to that degree of complexity where it is inevitable the cooperation between competitors. The past isolation and lack of standardization resulted in the situation where neither OEMs nor part suppliers or dealers could maintain their profitability. Both vertical and horizontal integration process within the automobile industry is goingget to its maximum level soon. Every major car manufacturer designs its to own engines and drive-trains, assembles the parts, manages a network of dealers and has its own finance companies. But this level of vertical integration is not sustainable on long distance, as it kills research and absorbs the profit. The most common forms of horizontal integration are mergers and acquisitions, but there were several joint ventures also in the past decades, though they us ually did not last longed. Now the car makers have to focus on how to maintain these large systems. They have to open doors to their competitors and cooperate with them. Entering into a strategic relationship with another firm for the purpose to improve capabilities is not uncommon within the automotive sector. But the concept of strategic alliances has become extremely pervasive in the 1980s. General 7 Strategic alliance refers to the cooperation of two or more independent partners in certain predefined 7 areas while, as a rule, they still compete in other areas. Duration and scope of the cooperation depend on the formulation of the agreement between the alliance partners.

objective of alliance is the competitive advantage for all parties involved. Specific objectives can be the easier, faster and more cost-efficient ac cess to new markets, the cost reduction through economies of scale, the access to know-how in a timesaving way, reduction of risks and strengthening of competitiveness through focusing on core competencies. According to Fujimoto and Takeishi there are eight types of alliances within the automotive industry: equity investment, joint venture, provision of production technology, supply of complemented car, supply of components, join R&D, join manufacturing and joint marketing. The capability of managing international alliances will be in the future one of the most important strategic success factors. But I have to stress that it requires healthy fir ms and is not a solution for ailing companies. The further precondition for success is the selection of right partner who is equal and culturally compatible. Furthermore the cooperation partners have to define clear and realistic initial expectations. And a crucial operative challenge is the harmoniz ing of interfaces between the partners. This form of collabor ation is much more flexible than mergers and acquisitions. It involves considerably less capital input and integration problems. However, coordination problems can arise. But this can be perceived as the first step of the learning process between the parties.

THREATS:
Increasing price of fuel: Petrol price has been deregulated Infrastructure:

Inadequate and poor quality of road surface leads to increased Vehicle Operation Costs and also increased pollution. It has been estimated that improvements in roads will result in savings of about 15% of Vehicle Operation Costs. Emission norms:

BS IV is prevalent in 13 cities & BS III is prevalent in the country. The cost to manufacture BS IV compliant engines will result in price increase of commercial vehicles upto Rs 60,000 Pre-owned vehicles: Shriram Transport Finance Corporation accounts for 25% of the pre-owned commercial vehicle financing which has disbursed 3.5 lakh loans in last fiscal. Increase in royalty: The royalty for using global partners technology has been increased from 3.5% to 5% of total revenue. Eg. Mruti-suzuki. Excise duty:

The increase in the excise duty to 10% in the Union Budget did make an immediate impact on the automobile sector in India. Major

automobile-makers including Maruti Suzuki, Tata Motors, Honda, General Motors and Hyundai have announced plans to raise the prices of their vehicles by up to Rs 41,000. Union Finance minister Pranab Mukherjee has raised the Central excise duty by 2% to 10%, partially rolling back the cut made previously. Increase in prices of raw material: Due to inflation, prices of iron ore, one of the main raw materials has risen. The automakers in India on an average imports 75% of high-grade automotive steel for outer panels of cars and other vehicles. An import duty of 5% puts pricing pressure on the companies The price of HR (Hot Rolled) Coil, which is the main input for many of these products, is now close to Rs 45,500 a tonne, a third increase since January this year. Steel Authority of India Ltd (SAIL) and Essar Steel have increased prices by Rs 2,000-2,500 a tonne and this has had a direct impact on the country's largest car-maker, Maruti. The company is implementing a price hike between Rs 1,000 and Rs 10,000 across its models. The A-star and Ritz will now cost Rs 1,000 more, while the Estilo will become costlier by Rs 2,500, the Omni by Rs 3,000, the Swift by Rs 3,750, the DZire by Rs 7,000 and the SX4 by Rs 9,000, said the company, attributing its revision to increasing input costs

Source: 1. http://elib.kkf.hu/edip/D_14581.pdf 2. http://www.pim.com.pk/faq.htm 3. http://www.slideshare.net/nayanscud/final-strat-print 4. http://dspace.iimk.ac.in/bitstream/2259/488/1/299-303+.pdf