The motor industry

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INTRODUCTION

The 2004 enlargement of the European Union (EU) has had significant impact on the automotive sector; the enlargement has presented huge economic effects, especially the motor industry which is often endorsed as the engine room of Europe, generating around €378 billion in form of taxes from vehicles (Ghosn 2009). The EU motor industry is one of the largest industries in the EU and it continues to thrive in delivering economic benefits to the EU economy by providing social mobility to millions in the EU region. Due to constant technological advancement in the auto sector, the motor industry has become more competitive and innovative which has consequently lead to increased employment opportunities in terms of the activities in the industry and related industries ranging from Manufacturing, research and development, Procurement, logistics, sales, marketing, insurance and after sales service. The industry support over 2 million European jobs and 10 million additional jobs in associated industries, vehicle exports are valued at over €70 billion annually, and lastly the industry spends over €20 billion in Research and development every year making it a major contributor to economic prosperity (Ghosn 2009).

This essay presents the impact of the EU enlargement on the motor industry, an industry analysis of the motor industry in an enlarged EU, the benefits and the backdrops of the EU enlargement to the motor industries in Western and Eastern Europe, development strategies employed by manufacturers after the 2004 enlargement, lastly conclusions

IMPACT OF THE EU ENLARGEMENT ON THE MOTOR INDUSTRY

Prior to the EU enlargement in 2004, the EU had 15 member states, on the 1st of May 2004 10 countries from Eastern and Central Europe joined the European union (Czech republic, Estonia, Lithuania, Hungary, Cyprus, Malta, Latvia, Poland, Slovenia, and Slovakia) making it 25 member states until 1st of January 2007 when Bulgaria and Romania became members (Keereman 2009). The integration of these European states was the largest ever enlargement of the EU and has created enormous benefits for the EU and its citizens. The impacts of the EU enlargement on the motor industry are highlighted below:

In economic terms, the enlargement of the EU has made it a stronger international force in world market in terms of embracing the benefits and tackling the challenges of globalisation, the enlarged EU is more influential when addressing global issues such as climate change or international financial crises, in order to tackle the issue of climate change in the motor industry, the European parliament and council in December 2008 approved environmental legislation enforcing all passenger car manufacturer to reduce tailpipe CO2 to an average of 130 g/km by 2012 for 65% of newly registered cars, increasing to 100% by 2015) through technology measures (Ghosn 2009). This however demands adequate infrastructure for alternative fuels and congestion reduction measures which will bring enormous benefits to the economy (Ghosn 2009).

The enlarged EU has unleashed further growth opportunities by deepening economic integration and creating economic policies to enable a stable and competitive economic environment impelled by increase in human capital investment and infrastructure, the enlarged EU account for more than 30% of world's GDP and more than 17% of world trade excluding intra EU trade making it the largest economic area in the world (Keereman 2009). Transport and environmental policies that concerns vehicle emission, noise pollution, energy use, and recycling will impact on the industry's R&D costs in terms of developing innovative materials used in manufacturing vehicles, the cost of capital needed for investment and competition in the user industries. However the emergence of better flexibility over the internet and the single currency has contribute immensely to promoting competition and eliminating price discrimination across borders (Garel 2004).

Manufacturers and citizens in the enlarged EU have reaped huge benefits, new member states have witnessed falling unemployment, rapid productivity growth and gain access to capital at reduced interest rates, while the old member states have witnessed large labour migration which has helped eased the availability of labour in these countries, the motor industry have exploited the benefits of cheap labour, access to credit in the accession countries, several manufacturers have moved their production plant to the Eastern and central part of Europe for example Peugeot, Kia, Toyota, and Hyundai have built new plants in central Europe (Mackintosh 2006).

However, the tight control of incentives given to industrial operations by the EU, has slowed down the rate of investment in the accession countries in that only money regional aid is forthcoming, for example in Czech republic the incentive given to Toyota was a 10-year tax holiday and cash incentives measured at about $840 million but with severe restriction placed on investment incentives like tax breaks how the auto sector in the accession countries develop still remains a question to be addressed (Garel 2004).

EU Car manufactures like Volkswagen, Fiat, Audi, BMW, and Mercedes Benz have strengthened their global competitiveness with the enlargement of the EU, new markets for the exports of cars and new investment opportunities have been created which has helped increase efficiency. For example Skoda of Czech republic was acquired by Volkswagen and transformed from an inefficient producer to one of Volkswagen's profitable brand making 500,000 cars annually (Hutton 2006).

INDUSTRY ANALYSIS OF THE MOTOR INDUSTRY IN AN ENLARGED EU

Motor industry in European Union using Porters five forces framework

The threat of new entrants: the motor industry is characterized by huge entry barriers in form of capital requirement, economies of scale, absolute cost advantage, access to distribution channel.

The capital requirement needed to start up in this industry as a new manufacturer is very high; this ranges from cost of building manufacturing plants, cost of R&D, cost of production etc, this makes it difficult for new entrant to penetrate the industry, however, established manufacturers from other regions like Kia, Hyundai from Asia would easily penetrate the industry because they have large amount of capital needed to start production and easy access to credit, but the threat of new entrant is still relatively low because few very large firms possess the capital needed to continue production (Jurgens 2004).

The economy of scale is another threat to new entrants. This prevents most entrepreneurs from getting into the business of manufacturing cars. The reason is because the large scale manufacturing is what differentiates the automobile industry from other industry. It is only companies with large capital that can survive in this industry thus results to few but very large firms (David and Matt 2007).

Another entry barrier to this industry is the absolute cost advantage of existing recognized firms in this industry. Due to their experience curve, larger firms enjoy the precedence of sourcing for low cost auto parts which has contributed to the reduction of cost hence increasing their competitiveness.

Threat of substitutes-the threat to substitutes is relatively low in this industry because we have small number of auto firms in the world market. In addition, the cost to change from one automobile company to another is high, particularly considering the middle class customers, not given the cheap prices of cars. The automobile companies have the opportunity to develop other brand of cars at a high cost because the threat of substitute in the automobile industry is still very low (Patrick and Jacques 2008).

Bargaining power of buyers: The bargaining powers of buyers in this industry is also low, because of the size and concentration of the few large firms, also factors affecting the production of cars are highly dependent on external forces which the producers have no control over. For example oil prices, availability of steel, glass production to mention a few. High switching cost makes it difficult for buyers to have a strong negotiating position (David and Matt 2007).

Bargaining power of suppliers: the suppliers of auto part components are few for example the iron ore industry is concentrated in the hand of three main producers, the gives the supplier higher bargaining power over the buyers, also because the manufacturers depend largely on the this components to manufacture vehicles or the components supplied are highly differentiated the suppliers will have a higher bargaining power over its buyers (David 2003).

Competitive Rivalry: the intensity of rivalry amongst firms in the EU motor industry is relatively high; this is because of the following factors:

Increase in global competition: significant potential for growth in the EU automotive industry has been driven by the needs of emergent economies like Russia, China, India, and Brazil, which has encouraged the entrance of new manufacturers into the industry thereby intensifying competition in both matured European markets and emerging markets (Roth 2005).

Competitor balance: competitors in the industry are relatively equal in size, this creates intense competition amongst the firms as one firm attempts to gain dominance over the other. For example: BMW and Mercedes Benz.

Low differentiation: Cars are poorly differentiated, which makes it easy for customers to switch between manufacturers. For example: Citroën C1 and Peugeot 107 (Roth 2005).

Investment and building up capacities in low cost countries and emerging markets, saturated markets and over capacity also intensifies competition in this industry. The price, durability, performance and quality of different manufacturers play a key role in deciding what type of vehicle to purchase (Roth 2005).

DEVELOPMENT STRATEGIES EMPLOYED IN THE MOTOR INDUSTRY FOLLOWING THE ENLARGEMENT OF THE EU

The Ansoff strategy framework will be employed in analyzing the development strategies used in the industry.

Market penetration strategy tends to increase market share for present products in present markets through increased marketing efforts (David 2003). This is a very common strategy used in the motor industry; most manufacturers spend huge amounts on promotional campaigns so as to increase their market share. Some of the promotions are sponsoring of the F1 by Honda, Chrysler and Renault.

Market development strategy involves introducing present products into new geographical segments. For example the EU enlargement has created new opportunities for automotive manufacturers to exploit growth potential in those new market segments. Most manufacturers have moved production plants to different parts of central and Eastern Europe in a bid to exploit market opportunities in those area for example countries like Volkswagen and Audi in Slovakia, Daimler is also considering plans to start manufacturing Mercedes Benz in Poland, also Fiat and GM has manufacturing plant in Poland and Toyota and Volkswagen in Czech republic (Marsh 2006).

Product development strategy involves manufacturing new product or modifying existing product and selling to existing customers (David 2003). Success of this strategy lies on constant innovation; product development strategy is critical success factor in this industry because it is characterized by rapid technological developments. For example most manufacturers develop new models for each of their brand every year.

Diversification strategy entails marketing new products in new geographical segments. Diversification is of two types, related or unrelated (David 2003). This is also a common strategy in the motor industry; new cars are produced in a particular region and exported to other geographical region. For example Volkswagen started production of the touareg in Slovakia and exports to other parts of Europe (Hutton 2006).

MEANS FOR ACHIEVING THE ABOVE STRATEGIES

Joint venture is a strategy that occurs when two or more firms form a separate organisation and share equity ownership in the new firm. This is a strategy commonly used in the motor industry in order to enter new geographical markets for example Toyota and PSA Peugeot Citroán jointly developed 1.0-liter car to be priced at less than 8,000 Euros (Mclaugin and Andrew 2008).

Mergers and Acquisition: a merger occurs when two large firms unite to form one enterprise. An acquisition occurs when larger firm purchases or acquire a smaller firm. These strategies are the most commonly used strategies to exploit new markets, new technology and access to capital. Several mergers and acquisitions have taken place in the past few years in the motor industry such as Chrysler Daimler-Benz; GM acquisition of Saab; Ford's acquisition of Daewoo, Suzuki and Volvo's passenger car division; BMW's take over and then sale of Rover; and Volkswagen's acquisition of Bentley, Lamborghini, SEAT and Skoda, Tata's acquisition of Jaguar and land rover (Jurgens 2004).

REFERENCES

  • David, F. (ed.) (2003) Strategic Management: Concepts and Cases. Ninth edn. New Jersey: Pearson Education
  • David, H. and Matt, G. (2007) 'Automotive Industry Strategic Analysis.'
  • Garel, D. (2004) 'The Motor Industry in an Enlarged Eu.' Blackwell Ltd
  • Ghosn, C. (2009) 'European Automobile Industry Report.' ACEA
  • Hutton, R. (2006) 'Eastern Europe: The New Detroit.' Sunday Times
  • Jurgens, U. (2004) 'Trends and Drivers of Change in the European Automotive Industry: Mapping Report.'
  • Keereman, F. (2009) 'Five Years of an Enlarged Eu: Economic Achievements and Challenges.' European Commission
  • Mackintosh, J. (2006) 'All Roads in Europe Are Pointing East for Carmakers ' Financial Times
  • Marsh, P. (2006) 'Fears for Uk Car Plants as Factories Shift East.' Guardian
  • McLaugin, M. and Andrew, M. (2008) 'Modern Global Automobile Industry: European Automotive Market.' [online]
  • Patrick, L. and Jacques, J. (2008) 'Comprehensive Analysis of the Evolution of the European Automotive Industry.'
  • Roth, S. (2005) 'Future of the European Automotive Industry.' EMF

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