Environmental Issues in the Car Industry
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What are the environmental issues facing the future of the European car industry?
This paper looks at the issues facing the European car industry with regard to environmental issues. This is done by looking at past and present published material that revolves around the subject matter under specified themes. Theoretical perspectives within the European business environment such as pestle, models of market structure, profit maximisation, sources of finance, market segmentation, branding strategy, European business and its effects on the environment are all explained in relation to their relevance of environmental issues. These theoretical themes are used because they all act as a catalyst to the subject matter of the problems caused by cars which are not fuel efficient or less pollutant within Europe.
In addition, a recently published paper on the directive for labelling on cars with regard to CO2 emissions, awareness of consumers, and fuel efficiency types in the European Union is used as empirical evidence to support ones findings as there was a shortage of time to carry out one. Finally a critical review of matches and miss-matches is used to compare and contrast similarities between the theoretical perspectives identified to prove the latter mentioned and the empirical evidence gathered for this paper, so as to forge a way forward for the European Car Industry.
Chapter 1: A Brief History of The Car Industry
The European Car Industry is one that has come of age. From its early beginnings over 100 years ago, it is beginning to show signs of struggling in today’s modern society. This has come about due to the new challenges that the industry is facing in the new millennium. Issues such as air pollution, congestion, traffic jams etc., are all factors that have made the car industry rethink its goals, objectives, its marketing, and the consequences that are not foreseen. As a whole the car industry makes nearly 60 million cars and trucks every year, and employs millions of people around the world. Average profit margins have declined from 20 present or more in its hey days of the1920’s to around 10 present in the 1960’s and less than 5 present in this present day, infect some volume car makers such as Fiat, Ford, and Vauxhall, have actually been losing money.
It can be stated that over century ago the car industry feasibly invented modern industrial capitalism. In the Economist (2004) the car started life in Germany and early development of the industry began in France (hence the word automobile, a French word) in the 1900’s, but it was in America that the car industry came of age with the Henry Ford T-Model of mass production which started in Chicago round about the same period(1900’s).
In the 1920’s Alfred Sloan’s ideas of running General Motors provided the model for the great corporations that grew up to dominate the second half of the 20th century. General Motors soon swept past Ford as Alfred Sloan revolutionized the young car industry, and Ford never regained the dominance it enjoyed in its infancy days of mass production. The car industry can be said to be ahead of its time in many respects. For example, in ‘planned obsolescence, which is the frequent changes in design and style that tempted customers to switch to a newer model every year or so. In the 1970’s when the oil price quadrupled, the industry found itself under attack from environmentalists outraged by its products gas consuming and exhuming nature, (air pollution, etc.).
It was also the first industry to come under government scrutiny, from safety concerns to environmental issues to antitrust worries in the days when General Motors had 60 present of its domestic market and could shut out competitors with a few well-chosen price cuts. However, when small economical and reliable Japanese Cars started to eat into Detroit’s market share, the American government imposed restraints on those imports. Soon afterwards, theca industry in Europe came under the same similar pressures and followed suit.
Due to the sporadic recognition and existence as a pillar of industrial capitalism, the car industry also found itself at the mercy of trade unions in the 1920’s and 1930’s. Its workers increasingly pushed for trade unionisation in which a times the car factories in the Detroit area, the British Midlands, in Frankfurt, Germany, and the huge plants around Paris were the main battleground of the Class war. Although today trade union membership is still as high as ever, the power they wielded in the 1920’s to 1970’s has diminished immensely. Today, the motor car is the epitome of mass production, mass marketing and mass consumption, with some of the strongest brands in the world.
For most households in rich countries, it is the second-biggest purchase after a house or flat, which makes the industry a pillar of modern industrial capitalism as earlier mentioned. Few other consumer goods industries depend so heavily on second hand market for their products. Now, understanding how the European Car Industry operates and the many pressures that it faces is essential to an understanding of the predicament the UK car buyers currently faces. Around 70 present of new cars sold in the UK are imported, with the great majority of these imports coming from the rest of Europe. The UK market is intrinsically tied into the pattern of car making and distribution across Europe.
Thus the behaviour of the UK motor industry towards both its retailing and service partners and towards consumers is part of the wider behaviour of the European Car Industry. The industry can be said to be mature one. In virtually every country of North West Europe, the density of car ownership has almost reached its practical maximum. There are some opportunities for growth left in Southern and Central Europe, but they will be largely used up in the next few years.
Following on, the consequences of mass production, and a slow introduction of cars that run on synthetic or alternative fuels has led to a rapid increase in environmental pollution, CO2 emissions, traffic jams, congestion, and human related diseases such as lung cancer, all of which are serious environmental issues, which the European Car Industry have found itself slow to adapt, change, amend and implement to the betterment of the wider society. This has led to directives and committees from the European Union to be setup to tackle the issued mentioned above and the latter.
With this in mind a review of existing material that has been published in the press and journals will now be critically analysed.
Chapter 2: Existing Literature Reviewed
The need to galvanise and understand the unforeseen circumstances of mass car production and environmental issues in the European Union has been stressed by researchers for more than three decades. According to the Europa (2005), the EU is the largest automotive production region (34%) in the world and the industry comprises 7.5% of the manufacturing sector in the union. Direct employment by the automotive industry stands at about two million employees, while the total employment effect (direct and indirect) is estimated to be about ten million. It also adds that since the year 2001, the motor vehicle production has decreased in the European Union, from 17.2 million units in 2001 to 16.9 million units in 2002. The decline continued into2003, with 70,000 motor vehicles less being produced, compared to2002.
This decline is due to the worsening of the macro-economic situation where consumer demand has been decreasing. Lagunas (2005)correlates with this by stating that motor vehicles have become the prime means of personal and commercial mobility in today’s world. Growing prosperity has led to a spectacular rise in car use, phenomenon being repeated in the new member states which joined the Union in 2004. In China and other booming countries with looser anti-pollution rules than the EU, trends show major increases in private transportation.
This success has generated serious concerns about the environmental effects of vehicle use, in particular traffic congestion, air pollution, traffic-related diseases, and noise. In addition Lagunas (2005) states that these concerns have led the EU to formulate the objective of decoupling economic growth from transport growth. The EU has come up with legislation and initiatives to drive the change towards cleaner cars while promoting sustainable transport modes and model shift. It goes on to state that the interest in cleaner, less polluting vehicles and fuel has grown rapidly in recent years.
Emissions from petrol and diesel engines have been significantly reduced in the last decade, driven mainly by European legislation and will continue to be reduced. In elaboration Lagunas(2005) states that in the EU, almost 40 present of the transport sector’s CO2 emissions are produced by the use of private cars in cities, CO2 emissions are damaging the environment and contributing to climate change; both petrol and diesel engines have their good and bedsides as regards emissions; engines working with diesel fuel emit lessCO2 than the ones working with petrol; on the other hand diesel engines are releasing more cancer causing particles in the air.
Air pollution caused by car emissions has health impacts; problems include aggravation of respiratory and cardio-vascular diseases, asthma, and decreased lung functions. Gartner (2005) also argues that the effectiveness of the directive made by the EU relating to the availability of consumer information on fuel economy and CO2 emissions has been successful and gained momentum in some European countries but not all. Reasons being consumers lack awareness of fuel economy and environmental impacts of fuels as well as available information tools, in which one of the possibly ways to tackle this as stated by Gartner(2005) was to increase consumers awareness by standard equipment of new cars with fuel consumption indicators or cruise control.
In addition Gartner (2005) argues that fuel economy and environmental impact are in general no major factor in vehicle purchase decisions and fuel consumption is mostly only important because of the cost, but not to environmental issues. ACNielsen (2005) agrees with this by saying when it comes to what influences consumer’s choice of car brand, manufacturers of luxury vehicles may be surprised to learn that image and prestige do not appear to be a top priority, in which engine size and environmentally friendly cars are regarded as the least important features to the Europeans when it comes to buying a car. Interest; however is growing slowing with a greater awareness of climate change and CO2 emission issues. Gartner (2005) also states that general awareness of label, poster/display and guide on CO2 emissions and fuel efficiency on cars is quite small and most of the information tools are not regarded as very informative or effective, although it can be said that this varies from one EU country to another.
For example, in Austria, the label is regarded as the most informative and efficient element, compared to teak where the label was not assessed as effective in detail. In an article by the BBC (2002) it was argued that there are five major groups of car manufacturers in the world, they are General Motors, Ford, DaimlerChrysler Benz, Toyota, and Volkswagen. Of these only Toyota relies on one global brand name. All the others have a web of subsidiaries spanning the world. We must understand that the real reason why the car manufacturing firms are in business is to make money and maintain their prestige as a world class car manufacturer.
To do this means they (car manufacturers) will have to constantly roll-out new models, with better gadgets, with performance and style. That is why, as Madsen (2002) argues, Volkswagen launched its luxury car, ‘the Phaeton’ to compete against the Audi, Bentley, Bugatti, and Lamborghini brands. This initiative was and is deemed as a risky push by the Group. However, the Chairman of the group Rd. Bernd Pischetsrieder argues that success would not be measured by sales volumes that the key was to enhance the Volkswagen brand. It was also argued by critics from within and outside the firm that the launch of the Phaeton, delayed the launch of the Audi, which is a car from within the group.
However, he was quick to mute the negative by stating that possibly, the dealers learn to be a bit quicker and not to find the competitor in-house but out-house, and this will help the business; adding it is the engineers and marketers of the Audi brand that have the serious challenge of making sure that the brand does well. With this type of attitude within car firms it shows that environmental issues are the least likely concern within the European Car Industry. In the UK, white paper by DETR (2002) stated that many towns and cities suffer from traffic jams and polluted streets and as a result, are less attractive places in which to live and do business. Reducing the negative impacts of traffic on the quality of people’s lives is a key element of improving the urban environment, as set out in the government’s recent urban white paper. Adding that emissions of air pollutants arising from road traffic are set to decline over the period to 2010 as a result of improvements in vehicle technology and fuel quality, but are forecast to begin rising again beyond 2010 due to increased traffic growth. Indirectly, an increase in car sales that are not fuel efficient means more air pollution, increased traffic jams, and lung cancer. However, in Europe the car market has become largely a market for replacement vehicles within a largely static market rather than one driven by a growing buyer base, Consumer association (2000).
In addition, the market is crowded with over 40 marques and 250 models on offer and major product innovation is rare and rapidly imitated. Notwithstanding, product branding activity is intense and advertising spends are large and directed at creating a sense of differentiation. In another article by the BBC (2002) it was argued that in the UK, car prices were still too high and one of the major reasons for this was the ‘block exemption’, which allows network of national or regional dealers selected by car manufacturers, to flourish. However, this (block exempt) has now been abolished byte European parliament. In another article by the BBC (2002), it was argued that the number of car manufacturing companies had shut down due to the fall in export demand owing to the euros weakness against the pound; this is in relation to the fact that 70% of cars driven on Roads are European Imports. In the Economist (2004), it was argued that out of the world’s top 17 car companies, only half were earning more than the cost of their capital.
The value creators in Europe were Porsche, the Mercedes bit of DaimlerChrysler, BMW, and Peugeot. In Asia, Toyota, Nissan, Honda, Hyundai, and Kia made the cut. But America’s big three GM, Ford, and Chrysler, were all in the value destruction group, along with Renault, Fiat, Mazda, Mitsubishi, and. In the same article GM’s boss argues that the Japanese government is providing indirect aid to the country’s car companies by holding down the yen, thereby lowering their costs of producing export models and parts for the American assembly plants and also in Europe. American and European manufacturers maintain that the Japanese do this solely to boost their exports; but it can be stated that the real reason for the Japanese government of implementing such a policy may have been to head off deflation and revive the domestic Japanese economy.
In another article by Europa (2005) Verheugen, the vice-president of the European Commission responsible for Enterprise and Industry argues that a legal framework will need to be created via CARS 21 High level group, in which the overall objective is to make recommendations for the short, medium and long-term public policy and regulatory framework for the car industry that enhances its global competitiveness as well as employment, while sustaining further progress in safety and environmental performance at a price affordable to the customer. Corby (2005) also argues that the environmental performance of cars has been improved dramatically over the past decade.
New cars have become more fuel efficient and they emit less toxic emissions than cars in the 1970’s, adding that environmental innovation is essential for the sustainability and competitiveness of the European car industry. The previous mentioned shows that great changes are being made in the European Car Industry with regard to environmental issues. In a press release by the Auto Industry (2003), it was argued that new car average CO2 emissions fell to 174.2 g/CO2per km in 2002, 8.2 present down on the 1997 baseline and 1.9 present below the 2001 average. The rise of the superman in the UK over recent years has helped to lower average CO2 emissions through the wider appeal of smaller cars. In the same article, it was stated that Diesel fuelled cars have been a significant influence on the reduction in average CO2 emissions. Diesel models took a record 23.5 present share of the UK market in 2002, with demand up 38 present.
In another published article by Lagunas (2005), it was suggested that the average new car in the EU – 15 was releasing almost 12% less CO2 in 2003 than it did in 1995, however pressure was growing, especially from Berlin, to push automakers to make further cuts. In the same article, the German Advisory Council on the Environment (SRU), a government body, blamed the European commission for allowing car makers to exceed limit values for particulate matter (pm) and CO2.
It criticizes the industry’s voluntary target to reduce emissions to 120 g/km by 2012 as being too modest, saying a target of 100g/km is achievable by that date. It therefore, proposes an ‘innovation forcing strategy’ to push carmakers embarking on the global competitive race for improved environmental performance of vehicles. Balzac (1998) adds to the furore that because the Yen is one of the leading international currencies, solving the problem (devaluation of Yen) requires international answers.
In the same article, as the Car industry is considered one of the key industries in Japan and Europe, a devaluation of the Yen directly affects the European Car Industry. As mentioned in the latter sections a devaluation of the Yen enables Japanese car manufacturers to sell their cars at much lower affordable prices to potential customers in Europe, and North America, in which the European Car Industry would suffer the most due to a high value of the currencies within the European Union member states.
With all this in mind, the remainder of this paper proceeds as follows:
Chapter 3: Theoretical Perspectives on the European Business Environment and Marketing
Chapter 4: Empirical Evidence.
Chapter 5: Critical analysis of Theoretical perspectives and empirical evidence
Chapter 6: Summary and Conclusion.
Chapter 3: Theoretical Perspectives On The European Business Environment and Marketing
In order to have a clear understanding of the concept of the business environment within Europe and the marketing of the car industry, we will first need to identify the meaning of the terminologies. European business is a generic term which describes Avery wide variety of agricultural, industrial and service activities undertaken by a large number of different organisations across the continent of Europe. Examples of European business might include: Privatised telecommunications companies such as Deutsche Telekom; a French recording company based in a converted barn in Normandy, France; a farm in Eastern England, highly mechanised and engaged in agribusiness; a transnational organisation such as the German car producer Volkswagen, with factories in Germany (VW and Audi), Spain (Seat), the Czech Republic (Skoda) and the UK (Bentley) etc. European business may be run by one person or it may be a small private company.
Alternatively it may be a large organisation employing thousands of people, with assets worth hundreds of millions of euros and based in many different European countries. The European business environment refers to the conditions within which European businesses operate. Typically it involves a number of different interacting forces which shape the environment, and thus how a business formulates its long-term strategy, its tactics and its daily operations within this environment. These factors may include political, economic, social, cultural, religious and linguistic forces.
Now, marketing is the social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others Kilter et al. (2005). For example, important terms such as needs, wants, and demands; products and services; value, satisfaction and quality; exchange, transactions and relationship; and markets are all core marketing concepts which are linked, with each concept building on the one before it. Each part of the marketing definition defines what marketing is and how it is practised.
With this in mind we can now move on to discuss about the theoretical concepts used in the understanding of the business environment and marketing of the European car industry.
There are several important conceptual frameworks that are used for understanding the environmental impacts of the European car industry.
The ones used in this paper are:
• Models of Market Structure
• Profit Maximisation
• Sources of Finance
• Market segmentation
• Branding strategy
• The European Business and the environment
This means, Political factors influencing a business environment; Economic factors; Sociological influences; Technological influences; Legal factors; and Environmental/ethical issues. This framework issued to analyse the European business environment.
The political beliefs of governments and the policies they implement to pursue them have a major impact on the European business environment. This is both in their own right and also through other policies, such as economic ones; hence the re-emergence of political economy in recent years. Additionally, other political philosophies may also have an impact on EU society and hence on the business environment. In the extreme case the economic policies pursued by the former Soviet bloc, with its emphasis on central planning, clearly had massive impact on the ownership, organisational structure, operations and lack of profitability of government-owned European businesses operating in this area. Similarly, the UK Thatcher governments of the1980s created a business environment of entrepreneurship which was largely shaped by the political beliefs of Margaret Thatcher and her close advisors, which subsequently influenced other countries in Europe
The economic policies pursued by EU governments clearly have significant influence on the environment within which European businesses operate. Since the signing of the Treaty of Maastricht was completed in 1993 EU currency (SEC), formerly called the European currency unit (ecru) but now known as the euro, as part of the moves to Economic and Monetary Union (EMU). The commitment by EU governments to meet the Maastricht convergence criteria, as a precondition for acceptance to the first wave of membership of the single European currency, has obliged them to demonstrate fiscal restraint to meet the criteria relating to budget deficit (not to exceed 3 present of the country’s gross domestic product or GDP) and national debt (not to exceed 60 present of GDP).
The purpose of the convergence criteria, as their name suggest, is to converge potential members’ economies to broadly similar levels in terms of the rate of inflation, the level of long-run interest rates, and the stability of their exchange rates and, as noted, government debt. In addition the ability of countries to converge to a common position in their business cycles, in practice to converge their business cycles with that of Germany’s as the leading Economy. In practice the problems of non-convergence were demonstrated in the early 1990s when Germany raised its interest rates to counter inflationary pressures. These had resulted from borrowing to fund major expenditure in Eastern Germany to redevelop the infrastructure and productive capacity after the collapse of the communist regime of the former East Germany.
This is examined in three broad areas: culture, language and religion.
Culture: The fact that the British have a totally private sense of distance. This is most visibly seen in the shared pretence that Britain is a lonely island in the middle of an empty green sea. Culture has been described as ‘the way we do things round here’. In this sense it may be viewed as the inherent values, attitudes, social conventions and mores of a nation. In most cases these are transmitted from one generation to another, usually through the family. Increasingly, however, culture is modified by education, the media and peer influences as the pace of change accelerates in modern society. Cultural differences contribute to the diversity of the people who live in Europe and hence are an enriching experience.
Cultural differences can also create barriers, however, which in turn have significant implications for European Businesses since, if they are to succeed another than their domestic market, these differences must be taken into account. Examples of cultural differences are: the business organisation, in Germany businesses are rigid in their approach and expect everything to be done through proper bureaucratic channels with full technical detail provided.
In contrast, British firms involved in collaborative ventures, or who have opened subsidiary companies in Germany, are more casual and relaxed enabling them to be more flexible when sudden response is needed to market change. This difference in operational philosophy can cause problems. Class is also a major factor in determining social attitudes in the business environment, particularly in the UK but also in other parts of Europe.
In contrast, in less class-divisive societies such as Denmark, Sweden, and Norway attitudes may be quite different, people such as senior managers secretaries are regarded as important people in the organisation, whereas in the previously mentioned countries this would not be so tithe same extent. Business attitudes to delivery dates are also important.
European businesses operating in Germany soon find that when they promise a delivery date for a new product consumers expect it in the shops on that day, not several weeks later Firms who slack on this simple rule find themselves bombarded with telephone calls-mails, and letters. In contrast, in Spain and Greece attitudes are much more causal in this respect; the personal appearance and behaviour, the French place much emphasis on establishing personal contact in business dealings and expect the people they deal with to have style.
The Spanish believe in the importance of being smartly but conservatively dressed and demonstrating worldly knowledge, for example of good cuisine and wine; these are important issues when dining out, attending trade delegation receptions and so on, where business contacts are made. Scandinavians in contrast are much more casual in their dress; Cultural training programmes, these differences have implications for the training policies adopted by companies; some European businesses are now adopting recruitment policies where new employees are expected not only to have fluency in more than one language, but also to demonstrate some cross-cultural knowledge.
Language: In the EU there are currently 13 EU official languages and another 35 territorial minority languages, which include Basque, Breton, Catalan, Cornish, Frisian, Galician, Letzeburgesh, Irish Gaelic, Occitan, Slovene, and Welsh. Language above all else defines group of people as distinct from all others in Europe, since it also implies culture, inherited knowledge and beliefs and terms of reference and thought specific to that group alone. In that sense there is therefore an overlap with the above. Different languages and dialects as a whole all create market differences.
Religion: In the traditional Catholic countries of Europe, particularly Eire, Italy, Poland and Spain, the impact of formal organised religion on society and hence business is very important. Past controls on the sale of contraceptives in Eire are one such example. In Poland the Catholic Church has a vital role to play in the political scene with all parties having a commitment to Christian values in their policies. As a whole, businesses in Europe must bearing that increasingly the EU is becoming a society of many faiths. Certainly the large number of Jews resident in Europe has always been obvious. Now however many Muslims have entered EU countries and their religious and moral susceptibilities must also be heeded as much as another religion.
Clearly technology has had a major impact on the European business environment, particularly information technology. The impact of its use will be so pervasive as to be hard to imagine life without it. This ranges from autopilots on aeroplanes to computer-controlled traffic management systems in our cities; from computer-controlled robots on factory assembly lines to screen trading in stock and foreign exchange markets; from the growth of consumer purchases via the internet to the use of e-mail rather than conventional letters or faxes.
In this sense Bill Gates of Microsoft has argued that the internet will in effect act as a market-maker, bringing together buyers and sellers with minimum friction, and not just for goods and services but also in the Labour market. In 1994 the EU setup a first policy framework for the EU information society. These proposed initiatives to regulate the information society: it sought to bring together all those involved in creating networks, applying information technology and establishing the basic services; and it sought to raise public awareness about information technology. Most of these have now been implemented or are in the process of being implemented. This has had significant implications for European businesses by shaping the environment within which they operate.
Inevitably legal systems can differ significantly from European country to country both in terms of their content and how they are interpreted. At the one extreme in Russia, transformation has required work, in the 1990s, to develop a legal system to come to terms with the concepts of private property (particularly ownership of land) and the legal existence of private and public limited companies with the ability to hire and dismiss labour, enter into contracts, buy, own and sell assets and so forth. At the other extreme, in the EU, Union legislation applies to all member countries and is establishing elements of a common legal framework for all, even though individual countries still, of course, have their own laws. This is based on key treaties, such as, the Treaty of Rom 1957, the Single European Act1987, the Maastricht Treaty 1993, and so forth.
All these treaties will directly affect European Businesses. The main influences of country’s legal system on a business are through their impact on the business’s marketing mix and the laws affecting competition. For the most legal systems are based on civil law that is detailed rules and regulations which are strictly interpreted. In the UK, in contrast, the legal system is based on common law which is determined by past precedent and is more flexible in its interpretation. In terms of marketing a product EU countries tend to be more regulated because the latter only now experiencing western marketing methods. In essence, the implications of this are that different EU countries operate legal systems with different philosophical foundations and, hence, since legal systems are nationally based, the same issue may be treated indifferent ways in different states. However, current EU legislation provides an overarching framework which seeks to ensure some consistency in areas such as competition policy, environmental issues and so forth.
3.1.6 Environmental and ethical issues
In terms of environmental issues the impact of global warming is already having an effect on the operations of European businesses, partly in response to consumer pressures and partly because of the actions of the U. For example the community’s Fifth Action Programme, intended to provide guidelines for member states, argued that environmental costs be included in the prices of goods and services; the so called green levy, to reflect the principle of the polluter pays. However, the Commission insists that these should not be used as an unofficial tariff barrier against the products of other countries in the single market. In terms of ethical issues this is not yet a major item on the EU agenda, with other areas taking precedence.
3.2 Models of Market Structure
The Economist View: They view monopolists as the sole supplier of an industry’s output, producing goods and services for which no substitute is available. In this extreme case a monopoly is said to have a concentration ratio of 100. It being the only organisation supplying the market. Those monopolies that enjoy massive economies of scale are called natural monopolies; in this case, there is only room for one firm producing at minimum efficient scale, for example, example, water, gas and electricity suppliers. The market power of these organisations is controlled by regulatory authorities. Monopolies can arise because of barriers to entry that prevents competition. These barriers maybe due to actions taken by incumbents or innocent barriers.
De Beers very strong position in the supply of diamonds relies on its central selling organisation controlling 80percent of world trade in rough diamonds. Monopolists because of their protected position need to be overly concerned by the threat of new organisations entering the industry in the short or medium term. It is also possible for monopolists to make abnormal profits in the long run, unlike in a competitive industry where profits are eroded by new organisations entering the market. Indeed companies which hold monopoly positions, and are able to maintain large profits, are not uncommon. The utilities, privatised in the United Kingdom during the1980s and 1990s, on the whole enjoy monopoly positions in their home market.
The View of the Authorities: This is the view from the competition authorities. In the UK an organisation is said to be a scale monopoly if it has over 25 present of the relevant regional or national market. If two or more organisations are involved by agreement or conduct that prevents restricts or distorts competition then the monopoly is said tube complex. In 1995 Sega had a 38 present share of the UK combined video games console and games software market and is, by this definition, a monopoly.
Problems associated with monopoly: Lac of competition in the market may mean that there is a danger that a monopolist can take action that may adversely affect the consumer. Results include:
• Restriction of output, as the monopolist can create a shortage, depriving consumers while increasing profits;
• Price fixing, as the monopolist can restrict supply to those who can afford to pay higher prices;
• Regulation of terms of supply, as the monopolist can impose harsh terms on consumers;
• Removal of consumer choice, for example, the situation for consumers buying cars in the former communist states of Eastern Europe was dire.
Control of monopoly power: The imposition of strict controls provides a challenge to the monopolist’s position and its ability to make profits. Control of monopoly can take a number of forms. In an effort to limit the dangers of monopoly power many monopolies is not only the province of national government but is increasingly coming under a higher tier of control, that of the European Union. The main regulating body in the UK was until recently the Monopolies and Mergers Commission (MMC). The MMC had to determine whether the referred monopoly or proposed merger operated against the public interest and recommend action to ensure the maintenance of competition.
The MMC was replaced by the Competition Commission under the Competition Act 1998. In the UK the privatisations of the 1980s and 1990s also spawned the growth of regulatory bodies such as OFTEL, OFGAS, and OFFER, to provide framework to control those newly privatised monopolies. This has been done to protect consumers against the abuse of dominant market power bay monopolist, and to promote competition across all sectors in the economy. Regulation of monopolies can also have a detrimental effect. BT is restricted by government legislation from entering the market forcible television.
The rapidly changing technology and the ability of other domestic and foreign competitors to enter the market maybe to the long-term disadvantage of BT. As Joseph Schumpeter (1883 – 1950) puts it a monopoly will eventually be circumvented by technology and innovation and that barriers to entry are not a serious problem to competitive market in the long run. The position of BT, for example, has substantially altered from its position as a monopoly provider of telecommunications in the UK prior to privatisation in August 1984.
This is defined as a market in which a small number of producers compete with each other. In some cases two organisations dominate, for example in the detergent market where Procter and Gamble and Unleveraged dominant, or in the UK mobile phone market where Vodafone andCellnet hold sway. This form of oligopoly is known as duopoly. Because of the small number of competitors each organisation has to consider how its actions will affect the decision of its competitors. Organisations are interdependent, which means that action by one organisation will solicit a response from its competitor(s). This is particularly important in regard to pricing decisions.
It is likely that any change in price will be copied by competitors, with the effect of reducing profits for all organisations. Freedom of manoeuvre for an organisation is very restricted, not because of fear of entry into the market, but because of this interdependence of organisations within the market. The consequence of this is relative price stability in the market, with competition based on quality, branding, advertising, and service. Economists usually distinguish further between those oligopolies that sell homogeneous products, for example oil companies, and those producing differentiated products.
In reality alloligopolists try to differentiate their products, either in substance or by marketing, advertising and image creation. In 1996 Gallaher and Imperial, the two leading manufacturers, each held around 38 present of the United Kingdom market and marketed eight of the ten most popular brands Mintel (1997), leaving very little room for new entrants. The sort of concentration ration in this sort of market is typically high, with each organisation holding a substantial share of the market.
In addition (See Appendices) the top five car manufacturers in the United Kingdom retain a substantially larger market share than their smaller niche rivals. It is in the interest of firms to erect barriers to entry to make it difficult for new organisations to enter the market. Barriers can be created in many ways. In some markets it may be possible for organisations to enter and exit at no cost, increasing the effect of competition greatly. One way organisations can manufacture barriers to entry is by entering into agreements, known as collusion.
Organisations in an oligopolistic market may have much to gain from some form of collaboration or collusion. This can be implicit or explicit.
Explicit collusion: Under this form of collusion, usually referred to as a cartel, prices are fixed and output or sales are allocated teach member of the cartel. The cartel is able to act as a monopolist. Allocation decisions are made in relation to the sales each organisation has had historically.
Implicit collusion: In the case of implicit collusion a price leader may materialise within an industry and other organisations tacitly follow. Alternatively, agreements may have some form of official sanction. Because agreements are often tacit rather than explicit it is difficult to find evidence of such arrangement. The European Commission may be forced to take action to stop this kind of price fixing. An example of this is prevalent within the European car industry.
The breakdown of collusion: A major problem associated with collusion is the temptation for organisations to cheat and so ignore any agreement. By doing so it is possible for the organisation or country, in the short-run, to increase profits at the expense of other parties to the agreement. As a result it may be difficult to sustain any agreement for a prolonged period, particularly if there are a large number of organisations. The Japanese construction cartel seems to have collapsed because of increasing competition in the market. The demise of OPEC was due largely to cartel members selling too much oil, that is, above their quota level. The break-up of the cartel contributed to the increased tension between Iraq and Iran which culminated in war and later in Iraq’s invasion of Kuwait.
3.3 Profit Maximisation
So far the assumption has been made that businesses seek to maximise profits. Infect a wide range of different theories exist as to the motives of operating a business. These can be considered under number of different headings:
3.3.1 Sales revenue maximisation
In 1959 the economist William J. Baume (1982) developed a model which identified sales revenue maximisation rather than profit maximisation as an explanation of a firm’s behaviour. His argument was that manager’s success was judged on the level of their firm’s sales; this in turn directly affected their salaries, bonuses, and on-monetary rewards, for example, car, size of office, and so on. Soling as the firm can achieve sufficient profits to keep shareholders happy, its managers will spend more on advertising to boost sales than if the business’s main objective was profit maximisation. In other words the managers are profit satisfiers.
3.3.2 Growth maximisation
Maximising growth may be another motive either by increasing existing market share or diversifying into new markets, either geographical or in terms of product, or by mergers or takeovers.
3.3.3 Profit maximisation
As a working hypothesis, however, the assumption will be that private-sector organisations (that is, not owned by the national or regional government of the state where the business is resident) do seek to maximise profits. It should be noted at this point that business’s undistributed profits are a major source of finance for its capital expenditure.
3.4 Sources of Finance
Funds may be provided either through internal or external sources. Internal funds are accumulated by undistributed profits, that is retained by the company rather than distributed to shareholders, and are a major source for investment expenditure. Obviously, the amount retained varies depending on success of the business during the previous year. In the recession of the early 1990s, for example, retained profits fell as businesses sought to cover costs, reduce debt and pay dividends to shareholders; by the mid-1990s, as the business cycle entered its upswing, they recovered.
External sources of finance are those where the business obtains funds from elsewhere, including European capital markets. The main types of finance are: short term, which includes bank borrowing, trade credit, and factoring; medium-term, which consists of bank loans, leasing, hire purchase, using the European capital markets, and venture capital; and long-term, which deals with mortgages, debentures, Eurobonds, preference shares, and equity. All of these are important to understanding how the European Car Industry finances itself to stay afloat and how various consumers finance their own purchases for cars and the environment.
3.5 Market Segmentation
This is when a market is divided into distinct groups of buyers with different needs, characteristics or behaviour, who might require separate products or marketing mixes.
Markets consist of buyers, and buyers differ in one or more ways. They may differ in their wants, resources, locations, buying attitudes and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently with products and services that match their unique needs. There are four levels of market segmentation; they are mass marketing, segmenting markets, niche marketing, and micromarketing.
3.5.1 Mass Marketing
Companies have not always practised target marketing. Infect, foremost of the 20th century, major consumer-products companies held fast to mass marketing, mass producing, mass distributing and mass promoting about the same product in about the same way to all consumers. The traditional argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can translate into either lower prices or higher margins.
3.5.2 Segmenting Markets
A company that practises segmenting marketing recognises that buyers differ in their need, perceptions and buying behaviours. The company tries to isolate broad segments that make up a market and adapts its offers to match more closely the needs of one or more segments. It offers several benefits over mass marketing. The company can market more efficiently, targeting its products or services, channels and communications programmes towards only consumers that it can serve best.
3.5.3 Niche Marketing
Market segments are normally large identifiable groups within market, for example, luxury car buyers, performance car buyers, utility car buyers and economy car buyers. Niche marketing focuses on subgroups within these segments. A niche is a more narrowly defined group, usually identified by dividing a segment into sub segments or by defining a group with a distinctive set of traits who may seek special combination of benefits. For example, property developers have recognised a niche within the grey market. Whereas segments are fairly large and normally attract several competitors, niches are smaller and normally attract only one or a few competitors. Niche marketers have to understand their niches needs so well that their customers willingly pay a price premium.
Segment and niche marketers tailor their offers and marketing programmes to meet the needs of various market segments. At the same time, however, they do not customise their offers to each individual customer. Thus segment marketing and niche marketing fall between the extremes of mass marketing and micromarketing. Micromarketing is the practice of tailoring products and marketing programmes to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing.
Local marketing: this involves tailoring brands and promotions tithe needs and wants of local customer groups, cities, neighbourhoods and even specific stores. Local marketing has its drawbacks. It can drive up manufacturing and marketing costs by reducing economies of scale. It can also create logistical problems as companies try to meet the varied requirements of different regional and local markets.
Individual marketing: In the extreme, micromarketing becomes individual marketing, by tailoring products and marketing programmes tithe needs and preferences of individual customers. Individual marketing has also been labelled ‘markets-of-one marketing’, customised marketing and one-to-one marketing. New technologies are permitting many larger companies to return to customised marketing. This has enabled mass customisation, which is the ability tom prepare on a mass basis individually designed products and communications to meet each customer’s requirements.
3.6 BRANDING STRATEGY
A brand is a name, term, sign, symbol, design or a combination of these, that identifies the maker or seller of the product or service. Consumers view a brand as an important part of a product, and branding can add value to a product. A brand can provide a guarantee of reliability and quality. For example, a book buyer might not entrust her credit card details with an unknown online bookstore, but would have little hesitation doing so when buying from Amazon.com as experience had taught the individual to trust the Amazon brand. Branding has become so strong that today hardly anything goes unbranded.
3.6.1 Brand Equity
Now brands can be viewed as the major enduring asset of a company, outlasting the company’s specific products and facilities. Additionally, they represent consumers’ perceptions and feelings about products and its performance, everything that the product or service means to consumers. As one branding expert suggests, ultimately, brands reside in the minds of consumers. Thus the real value of strong brand is its power to capture consumer preference and loyalty. A powerful brand can be said to be one with high brand equity.
This is the positive differential effect that knowing the brand name has on customer response to the product or service. Brands have higher brand equity to the extent that they have higher brand loyalty, name awareness, perceived quality, strong brand associations and other assets such as patents, trademarks and channel relationship. A good measure of brand equity is the extent to which customers are willing to pay more for the brand. In general marketers need to manage their brands carefully to preserve brand equity. In order to maintain or improve brand awareness, perceived brand quality and usefulness, and positive brand association’s overtime, they need to work with research and development to provide a constant flow of improved and innovative products to satisfy customers’ changing needs.
3.7 The European Business and The Environment
The Impact of environmental problems
European businesses and their purpose in supplying goods and/or services have already been examined, as have new production and management processes which emphasise cost-reduction through placing quality at centre-stage. However, production also generates outputs other than goods, which might be described as beds; these include pollution and waste and are either side-effects or a direct consequence of production. They impose external costs on society in terms of their effects and in terms of the need to redress these, but are not reflected in a business’s accounts nor, except partially with petrol, in the price paid by the consumer in the marketplace.
Now, estimates of the effect on the German economy of environmental damage in the early 1990s totalled approximately DM200 billion, or between 6 – 10 present of GDP Hopfenbeck (1993). The harmful effects of economic growth are manifested in the following ways:
This is clearly evidenced by the growth of respiratory illnesses such as asthma, and the number of cities which have air quality poorer than EU and World Health Organisation limits, often by significant amounts. The major contributor to this, and hence to the harming of the ozone layer, is transport and specifically automobiles although other sources such as power stations and aeroplanes also contribute. This has implications in terms of hospital costs, lost working days and the increasing incidence of cancer.
3.7.2 Damage to the ozone layer
Although environmental scientists are at present reluctant to state categorically that sustained global warming is occurring, probable evidence of its existence has been well-documented in recent years. Emissions of pollutants such as carbon dioxide, nitrous dioxide, sulphur dioxide and CFC s (chlorofluorocarbons) are harming the ozone layer which shields the planet from the sun’s harmful ultraviolet rays. This is currently demonstrated by the increasing incidence of skin cancer with its attendant hospital costs both in the EU and elsewhere.
3.7.3 Climatic change
Global warming which contributes to climatic change will cause the polar ice caps to melt, a process which already has started to occur. This has implications for EU coastal regions at sea level requiring major expenditure on sea defence systems in the short to medium term. This has been proved by the recent Tsunami, a huge wave, that hit southeast Asia, with the loss of about 500,000 lives, a tourist destination by western standards. In the long term the risk is that area may have to be abandoned if sea levels rise very high.
In extreme case, if both ice caps were fully to melt estimates suggest that sea level would rise50 metres (160 feet). The increasing risk of unstable weather storms, such as hurricanes or rivers flooding, will impose costs on households and businesses both in terms of clearing up and repairing the damage and through rising insurance premiums, assuming insurance companies will still take this business.
3.7.4 Waste generation and disposal
The EU is a major generator of waste, both household and industrial. This ranges from waste products to non-biodegradable packaging, scarp to domestic refuse. In the past this has been disposed of by the use of landfill sites, incineration, sewage treatment, or at worst discharge untreated into the North and Irish seas. Not only has this led to sea unfit to bathe in, but also to the death of marine life including fish, one of the EU’s major food sources.
The most important aspect of all this is that pollution and waste from present production and consumption is passed on to future generations through polluted seas and air, a thinner ozone layer and depleted resources.
Chapter 4: Empirical Evidence
In a report by Gartner (2005) on the effectiveness of the directive by the European Union on a study relating to the availability of consumer information on fuel economy and CO2 emissions in respect of the marketing of new passenger cars, a comprehensive and through empirical evidence was gathered with regard to consumer purchases of cars within the EU, the sort of criteria consumers use as a guide to purchasing a car, and its effects on the environment. The following are the empirical results gathered. Look in appendix for a sample of the questionnaire used.
In total of 7,515 people joined the members survey carried out by Gartner (2005). After deleting the meaningless answers as well as answers which were sent twice or more often 7, 168 answers remain for evaluation. The number of participants per country is shown on the table below.
Number of Participants
The Netherlands 1,641
United Kingdom 83
The table above represents the number of participants in the research carried out.
The findings of the survey suggest that the environmental friendliness of a car does not rank among the major factors in vehicle purchase decisions of purchasers of a new car. Firstly priority factors were directed particularly to car reliability and safety standard. But also vehicle type (e.g. notch back, SUV, convertible),vehicle price, running cost and comfort are important criteria for the selection of a new passenger car. Environmental friendliness is ranked in general in the middle or at the end.
The fuel consumption is the most important factor in terms of ‘environmental friendliness’ of a passenger car. Low CO2 emissions are less important. This shows that most consumers are not aware of the correlation of fuel consumption and CO2 emissions of passenger cars and their environmental impact. Alternative fuels (e.g. CNG, hybrid) have no great importance generally.
As to running cost of passenger car, the fuel cost is the most important factor. This confirms the findings of the report that fuel consumption is mostly only important for economic reasons, but not because of environmental issues.
When purchasing a new passenger car, consumers consult driver’s information sources, e.g. dealerships, sales brochures, and car magazines.
The member’s survey also confirms the increasing importance of the internet as a source of information, especially the websites of the car manufacturers. An interesting finding was that TV automobile programmes are of less importance and promotion/advertising is even insignificant for the consumers.
The survey also confirmed that general awareness of the energy efficiency labelling directive as well as its provisions is quite small(except in the Netherlands).
It was stated as interesting to the contrary result for the noted question ‘Do you pay attention to CO2 emissions and fuel consumption data in promotion materials for a car model’. While in 7 countries more than half of the participants indicated to pay attention to CO2emissions and fuel consumption data, in the Netherlands only 34%agree. Here, the label and poster seem to be more relevant.
In the Netherlands, more than half of the participants got the information from the dealers. The other information sources are quite irrelevant here. Within the other 6 countries the results vary widely, besides the dealers, automobile clubs and consumer protection organisations, automobile magazines as well as the internet were the most important sources of information, and often consumers noticed the provisions by themselves. Newspaper advertisements, radio/TV as well as family/friends were in general quite irrelevant as information source.
The findings of the survey also confirms that the tendency can be identified in all countries that the information tools are regarded as comprehensible and extensively as informative, but with less effect on car purchase decisions. The label is mostly regarded as the most effective information tool, closely followed by the guide. The posters generally regarded as less effective.
A direct comparison of CO2 emissions or fuel consumption of passenger cars is important for most consumers. But the member’s survey shows that the interest in choosing a passenger car of another vehicle category, with less CO2 emissions and lower fuel consumption (e.g. miniinstead of small family car) is relatively small, about 25%. Only in Italy 45% of the participants would be willing to choose a more fuel-efficient car of vehicle category. In the Netherlands and Sweden, willingness is less than 20%.
The majority of the participants prefer a comparison of cars of ascertain group. Only in the United Kingdom, the comparison of all cars wins by a close vote. As a basis for a relative comparison the vehicle category (e.g. minis, family cars) is the preferred criterion, followed by vehicle type (e.g. hatch back, SUV, convertible) and engine power. Vehicle weight and vehicle floor space, used for example in Switzerland, the Netherlands or Spain as comparison criteria, are unimportant for the participants of the survey and rank general at the end, far behind the vehicle size which ranks fourth.
Chapter 5: Critical Analysis of Theoretical Perspectives and Empirical Evidence
An analysis is made as to whether there is consistency from the published material so far gathered and the empirical evidence presented.
The PESTLE can be said to correlate with the empirical evidence of governments, politically; economically; socially; technologically; environmentally; and legally, trying to cut CO2 emissions under the various concepts mentioned. This is highlighted by the EU,implementing policy shifts on the Car manufacturers such as the elimination of the ‘block exempt’, and the issuance of the directive on the labelling of CO2 emissions on cars. Also, economic policies do influence the environment and business people within the European Car Industry.
This is rectified empirically by the fact that fuel consumption is mostly only important for economic reasons and not environmental issues. The models of market structure shows that the European Car Industry can be categorized as an oligopoly where a few firms dominate the market, although there is no stated agenda, as to their market dominance from an empirical perspective it is worthwhile to note this, so as to have a better understanding of the European Car Industry. The real reason why a majority of Car firms are in businesses to make a profit.
This point is worth noting because it will prove expensive for the European Car Industry to sporadically configure its car makes into environmentally fuel efficient cars, without substantial investment going into research, in which a majority of car firms are already running at a loss. Hence, reluctance by the European Car Industry to adhere to the latter mentioned.
A majority of the Car firms have huge bank loans, and venture capitalist for them to keep the business going. Thereby, they have to keep the business going, where their benefactors must be kept happy, i.e. Banks, in which environmentally fuel efficient cars is the least of their problems. Empirically this is not covered, however, consumers are likely(particularly in the UK) to purchase a car on hire-purchase, whereminis and family cars are the most preferred. Market segmentation plays a crucial part in the European Car Industry.
This is where empirically, minis and family cars are preferred as opposed to SUV’s,hatchbacks, and convertibles; in correlation to the empirical evidence showing that interest in choosing a passenger car of another vehicle category, with less CO2 emissions and lower fuel consumption is relatively small. The theoretical perspective of Brand strategy is another crucial element, where empirically vehicle type was identified as an important criterion for the selection of a new passenger car. The environment (CO2 emissions) was empirically signified by consumers to be at the middle or least of their priorities when buying a car. This correlates with the theoretical idea of the business environment in Europe, where there is a need to cut CO2 emissions.
Chapter 6: Summary and Conclusion
This paper has looked at past and present published material on environmental issues facing the European Car Industry. We have also looked at theoretical perspectives on the European business environment and marketing under specific themes, such as, pestle, models of market structure, profit maximisation, sources of finance, market segmentation, branding strategy, and the European business and environment. The above mentioned have been looked at carefully to illustrate their relevance to the research carried out in this paper. A recently published report as to the directive of C02 emissions and labelling on cars by the European commission was used as empirical evidence.
Finally, an analysis of both the theoretical perspectives mentioned and the empirical analysis gathered were critically analysed to identify any matches or mismatches between the latter mentioned.
It will be worthwhile to conclude that the main issue on CO2 emissions with regard to the environmental issues facing the European car
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