A Comparison Between Volvo And Proton Economics Essay

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The automotive industry is one of the four largest exporters. It gives significant contribution to national production and development, employment and level of technology. The global automobile industry has seen significant consolidation over the last few decades. More than 85% of all vehicles were produced by the 13 largest firms, which are active in all major regions of the world.

The recent development is not distinctive to the automotive industry. It may superficially seem less globalized than many other industry sectors. Because of differences in customer priorities, dictated in part by considerations such as the price of fuel, vehicles differ radically from market to market. Nevertheless, in terms of industry ownership, and including parts suppliers, some companies have been global for a long time, while mid-size and strictly regional companies have increasingly been acquired by larger competitors

Many of the industry giants have found it beneficial to join hands with some of their former rivals. On the one hand, this consolidation is the result of increased competition, which has made it harder for smaller firms to survive on their own. On the other hand, consolidation intensifies competition as the emerging groups are highly research intensive. The industry is concentrated worldwide, making it highly likely that the main firms will take actions of competitors into account when deciding on their own innovative activities.

There have been dramatic improvements in the development cycle of automotive industry since early 90s. In the past, auto companies tried to design a single car for the multiple markets around the world. These efforts almost always failed due the generic nature of the resulting designs. By trying to design and build a single vehicle for multiple markets, automakers failed to capture buyers in any of them. Today, the concept of a vehicle platform is somewhat more complex, incorporating a variety of systems shared between vehicles but with styling that disguises the origin.

The automotive industry is undergoing unprecedented change. The off-shoring of manufacturing and increased global competition has squeezed auto companies. The growing environmental movement and volatility of global oil supplies are increasing the pressure on automakers to innovate around alternative energy resources such as hydrogen and bio-fuels.

There are some trends that can be observed from the automotive industry:

The focus on energy prices is impacting consumer purchasing decisions for automobiles. Energy efficiency is a key leverage point over comfort and size.

Environmentally conscious consumers will likely be attracted to new technologies being developed.

Consumers are increasingly sophisticated and educated; a majority of consumers conduct online research before making a decision on purchases.

The growing competition between international and domestic car manufacturers has placed cost pressures on producers. They have turned to quality and productivity measures with the assistance of computer design, production, and testing.

SWEDENGross Domestic Product - GDP

480,021 millions of US dollars (2009)

Real GDP growth

2001

2002

2003

2004

2005

2006

2007

2008

1.1%

2.4%

1.9%

4.1%

3.3%

4.2%

2.6%

-0.2%

2009: -4.8% 2010: 1.2% (forecast)

Gross domestic expenditure on R&D (% of GDP)

3.82% (2006)

Inflation

3.3% (2008) 2.2% (2009)

Unemployment rate

6.2% (2008) 8.5% (2009 ) 8.2% (2010 forecast)

Total exports

US$185.1 billion f.o.b. (2008 estimate)

Export commodities

machinery 35%, motor vehicles, paper products, pulp and wood, iron and steel products, chemicals

Total imports

US$166.6 billion f.o.b. (2008 estimate)

Import commodities

machinery, petroleum and petroleum products, chemicals, motor vehicles, iron and steel; foodstuffs, clothing

Exports - major partners

Germany 10.4%, Norway 9.4%, US 7.6%, Denmark 7.4%, UK 7.1%, Finland 6.4%, Netherlands 5.1%, France 5%, Belgium 4.6% (2007)

Imports - major partners

Germany 18.4%, Denmark 9.2%, Norway 8.3%, UK 6.8%, Finland 6.1%, Netherlands 5.8%, France 5%, China 4.3%, Belgium 4.1% (2007)

FDI inflows

2007

2008

US$22.070 million

US$43.655 million

FDI outflows

2007

2008

US$37.797 million(2009)

US$37.351 million(2009)

Global competitiveness ranking

(ranking by country on a basis of 133, the first is the best)

4 (2009/2010)

Economic freedom index

70.5 (2009)

(100=totally free 0=totally repressed )

MALAYSIA

Gross Domestic Product - GDP

194,927 millions of US dollars (2009)

Real GDP growth

2001

2002

2003

2004

2005

2006

2007

2008

0.5%

5.4%

5.8%

6.8%

5.3%

5.8%

6.2%

4.6%

2009: -3.6% (estimate)    

2010: 2.5% (forecast)

Gross domestic expenditure on R&D (% of GDP)

0.60% (2004)

Inflation

5.4% (2008)

Unemployment rate

3.7% (2008 estimate)

-

-

Total exports

US$195.7 billion f.o.b. (2008 estimate)

Export commodities

electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, chemicals

Total imports

US$156.2 billion f.o.b. (2008 estimate)

Import commodities

electronics, machinery, petroleum products, plastics, vehicles, iron and steel products, chemicals

FDI inflows

2007

2008

US$8.401 million

US$8.053 million

FDI outflows

2007

2008

US$11.087 million(2009)

US$14.059 million(2009)

Economic freedom index

64.6 (2009)

The GDP of Sweden is significantly higher compared to Malaysia although the real GDP growth of Malaysia is slightly higher than Sweden. In terms of research and development expenditure represented in percentage of GDP, Malaysia's R&D is negligible compared to Sweden. The inflation rate is higher in Sweden and the country also has higher unemployment rate.

In terms of export, Sweden exports less in USD than Malaysia and Imports more than Malaysia. Both countries are net exporter with different types of import and export commodities.

Foreign direct investment in Sweden is much higher than Malaysia and the inflow amount of FDI doubled from 2008 to 2009 while the amount of FDI inflow in Malaysia decreased from 2008 to 2009. Sweden also invests overseas more than Malaysia. The amount of FDI outflows from Sweden is almost three times higher compared to Malaysia.

In terms of global competitiveness, Sweden is one of the top 5 in the world that ranks at 4 while Malaysia is 20 levels behind ranking at 24. In terms of economic freedom, Malaysia is considered more repressive than Sweden as Sweden has around 7 points higher than Malaysia that stands at 64.6 point out of 100. (Sweden 70.5)

PEST ANALYSIS OF AUTOMOTIVE INDUSTRY

POLITICAL

There are many regulations that are relevant for the automobile industry. Laws and government regulations have affected this industry since the 1960s. Almost all of the regulations come from consumers increasing concerns for the environment and the concern for safer automobiles. One of them is regarding worldwide pollution. The laws on exhaust fumes get tightened around the world to diminish the emission of carbon dioxide because of the increasing pollution. The legislative situation includes a lot of treaties and regulations by which manufacturers have to abide. Documents like the Kyoto protocol have worldwide impacts, e.g. on new engine-developments

ECONOMIC

The automobile industry has a huge impact on every country's economy. According to various studies, this industry is the major user of computer chips, textiles, aluminum, copper, steel, iron, lead, plastics, vinyl, and rubber. The study also showed that for every autoworker there are seven other jobs created in other industries. These industries include anything from the aluminums to lead to vinyl.

SOCIAL

The world's automotive industry affects the society as a whole. It employs millions of people directly, tens of millions indirectly. Its products have transformed society, bringing undreamed-of levels of mobility, changing the ways people live and work. The social value of the additional mobility that this industry brings involves the value of the people being able to commute over longer distances easily, among many others. The automotive industry has the role to play in helping develop the mobility of such countries and it can be achieved at an acceptable social cost of the country is prepared to learn the necessary lessons from those who have traveled this route before it, and to make the necessary investments.

TECHNOLOGY

Ecological Taxation System enhances the gasoline prices which forces the consumers' demand for renewable energy sources. High investments need to be made in Research and Development in order to discover an effective and sensible technology. The Hybrid Technology is likely to be the futures' solution to the problem and the first company that makes the technology applicable earns the profits of innovation.

PORTER'S FIVE FORCES ANALYSIS FOR AUTOMOTIVE INDUSTRY

THREAT OF NEW ENTRY

The existence of new firms in an industry may force prices down and put strain on profits. There are, however, barriers to entry that tend to protect established automotive firms. The production of automobiles to require major economies of scale which is a a significant barrier to entry. The new competitor would have to attain considerable market share to reach minimum efficient scale, and if it does not, it may be at a large cost disadvantage. While the evidence suggests that economies of scale in the auto industry are important, there are also signal that large size may not be as important as commonly assumed. Nevertheless, entry would represent a large capital investment to any new firm and the body of research still indicates that economies of scale represent a substantial barrier to entry. As a result, entry is currently a weak threat to profitability.

BARGAINING POWER OF BUYER

Buyer power refers to the ability of customers to negotiate prices that extract profit from the seller. Consumers have some influence over price within a given dealership, they can easily, and with little cost, switch to other auto dealers. But customers have little power over manufacturers. Furthermore, customers now have access to market information (prices and costs) from the Internet that enhances their negotiating power. But when there are many customers in the industry, each representing a small proportion of total sales, they will have little bargaining power with manufacturers and therefore pose a weak threat to industry profit.

BARGAINING POWER OF SUPPLIER

Auto manufacturers require inputs like labor, raw materials and services. The cost of these inputs

can have a significant effect on profitability. Whether the strength of suppliers is weak, moderate

or strong depends on how much bargaining power they can exercise. The auto manufacturers have large supplier networks that appear to exert little bargaining power. Nevertheless, the United Auto Workers (UAW), the only supplier of labor, has historically apply a great deal of force over the benefits and wages provided. Because of this historical dominance by the UAW and the uncertain results of their current negotiations with the big three, the supplier power has a strong as a strong threat to profits.

DEGREE OF RIVALRY

With the rise of foreign competitors like Toyota, Honda and Nissan in the 1970's and 80's, rivalry in the auto industry has become much more concentrated. Companies compete in terms of price and non price aspects. The price competition grinds down profits by drawing down price-cost margins while non-price competition like new car rebates and interest free loans drives up fixed cost and marginal cost). The other reason there is such high rivalry is that there is a lack of opportunities for differentiation. All the companies make quite similar cars, trucks or SUVs. The competitors are being compared to one another constantly. The indications of rivalry mentioned above showed that degree of rivalry in automobile industry is high.

THREAT OF SUBSTITUTES

Although new cars generally are slightly price elastic, suggesting few real substitutes (e.g., bus and rapid transit), the demand for a particular model is highly sensitive to price because of the availability of close substitutes for a given model. A change in the price of a complementary product (e.g., gasoline, batteries, and tires) could have a significant impact on the demand for automobiles. The rising price of gas, an important complementary product in automotive industry, is likely to affect some firms more than others depending upon the vehicle composition. Current rise in fuel prices are likely to have a greater impact on the big three (GM, Ford Motor and Daimler-Chrysler) whose most product models are energy consuming pick-up trucks and sports utility vehicles. Overall, substitutes and complements in auto industry is weak to moderate.

AUTOMOTIVE INDUSTRY

Demand and Supply

Precise data regarding demand and supply of auto in Sweden and Malaysia is unobtainable. Therefore, this paper takes demand and supply as an overview. The Asian countries, mainly by Japan, China and India, registered a 9% increase in production over last year, constituting 35.9% of the global production. In Malaysia, domestic demand for automobiles has increased dramatically. Malaysia has reached one of the highest penetration rates of cars per capita in the world.

Market share and Competition

The European automotive market is the world's biggest. Western Europe, including the new EU Member States, has a 30% share in global car production. In Malaysia, the market is dominated by local carmakers such as Perodua and Proton while the remaining market share is acquired by international auto brands. The market was oligopolistic in nature.

Market Structure

The major players in Sweden are Scania, in the truck and bus market, and Volvo and Saab in the passenger car market. In Malaysia, auto market is dominated by Malaysia's national cars, Proton and Perodua which in 1998 accounted for 90 percent of the vehicles sold annually. Some 25 other manufacturers compete for the remaining 10 percent.

Industry Policy

There is no specific information available regarding auto industry policy in Sweden so this paper takes EU policy as an example. In Europe, CARS 21 (Competitive Automotive Regulatory System for the 21st century) process, which was launched in 2005, is a policy that aims to make recommendations for the short-, medium-, and long-term public policy and regulatory framework of the European automotive industry. This framework enhances global competitiveness and employment, while sustaining further progress in safety and environmental performance at a price affordable to the consumer. In terms of policy, Malaysia has National Car Policy whereby the Malaysian government heavily influences the activities of the domestic automotive manufacturers/assemblers. Malaysia has developed the automotive sector to help reduce the effects of volatile changes in rubber and palm oil prices on its economy, avoid having a huge trade deficit, and as a platform for economic development. Malaysia believes that a strong motor industry brings employment, technology and prestige.

In terms of technology policy, automotive industry around the world has emphasized on environmental issues. Measures have been taken by many major manufacturers to stress their research and development and technological advancement on 'green technology' which means the trends in automotive industries around the world nowadays is not only focused on cutting edge and safety technology but also how to produce vehicles that are environmentally friendly.

Taxation Policy

In EU, the VAT rules applies when a vehicle is acquired in one EU Member State and is intended to be registered and used in another Member State which means If you buy a new car, you must pay VAT in the country of destination, i.e. the country where the car is to be registered. The amount of VAT will depend on the registered country. While in Malaysia, tax for foreign car (imported cars) is significantly higher than local cars. In 2004, Malaysia simultaneously raises taxes on cars and parts sold in Malaysia to range of 40% to 250% from a range of 30 to 100%. The move angered foreign car manufacturers and the protectionism remains strong.

VOLVO AND PROTON

Proton Stock Performance

Last close on Mar 04 2010, PROTON Holdings Bhd (PROTON:KLS) closed at 4.08, 11.30% below its 52-week high of 4.60, set on September 23, 2009. PROTON Holdings Bhd (PROTON:KLS) underperformed the KLSE Composite index. Overall the relative performance against the index has been mixed.

Volvo Stock Performance

As of last trade Volvo AB (VOLV B:STO) traded at 64.30, 11.98% below its 52-week high of 73.05, set on November 17, 2009. Volvo AB (VOLV B:STO) outperformed the OMX Stockholm 30 index.

Financial Performance

Ratio

Proton

Volvo

Asset Turnover

1.01

0.6197

Receivables Turnover

8.92

3.02

Inventory Turnover

-

4.01

Return on Average Assets

-1.46%

2.67%

Return on Investment

-1.93%

4.76%

Gross Margin

10.08%

14.74%

Quick Ratio

1.31

0.8876

Revenue Growth

0.391%

0.6809%

http://markets.ft.com

In terms of management efficiency, proton is better than Volvo since it has higher turnover ratio which means proton in effectively managing is asset and its receivables compared to Volvo. The return shows that proton has negative figure which indicates it doesn't generate return out if assets and investment utilization while Volvo generates better return out of its assets and investment. Volvo has higher gross margin than proton, it can be that Volvo has higher revenue or lower cost of goods sold compared to Proton. In terms of liquidity, Proton is considered as more liquid than Volvo since it has better liquidity ratio. Volvo's revenue grows higher than Proton's.

SWOT ANALYSIS OF VOLVO

STRENGTH

Volvo, being a subsidiary of Ford, achieves synergy from its parent company through technological innovations and development. Volvo has strong interest in research and development activities which make the company reputable for its advanced technology like preventive safety system, intelligent driver information system, protective safety system and post crash safety system. In the domestic market, Volvo has a strong presence. Evidence suggest that Volvo's sales volume increase 2.4% annually.

WEAKNESS

28% of Volvo sales volume is derived from United States customers. However, there is lack of manufacturing facilities in the US. This situation force Volvo to produce its cars in Sweden which results in customers in United States have to pay higher price.

OPPORTUNITY

Growing economy of China drives up the demand for premium cars. Volvo captures 2.3 % of China's premium car market and the company's sales volume increased 83.4%. To capture growth potential opportunity in the developing market of Asia, Volvo plan to set up joint venture production in China in the near future. Volvo also plans to double its dealership base to strengthen the company's sales network.

THREAT

Premium car manufacturers like Audi, Mercedes Benz and BMW are expanding their products offerings. Competitive pressure in European and world market is expected to be more vicious during the coming period. Japanese car manufacturers are also expanding their reach into European and global market, posing threat to the existing companies. Moreover, the relaxation of import restrictions and duty reductions are expected to increase the competition from Japanese car manufacturers in Asia Pacific region. Other threat that is relevant to Volvo is fluctuation in foreign exchange and changes. Volvo cars are manufactured in Europe and exported to United States making the company sensitive to movement in foreign exchange. The increasing commodity price that is used as raw material like steel also imposes potential threat to Volvo.

SWOT ANALYSIS OF PROTON

STRENGTH

Proton adopt a three-pronged thrust namely development of market-driven products, focus on high growth regional markets and a production strategy that achieves economies of scale. Proton has also made commendable progress to bring about other operational improvements. The focus on cost management resulted in cost savings for new models, which were then passed on to the customers through competitive pricing. Proton as a local product of Malaysia, enjoy the benefit of cheaper product price compared to its international competitor. This is due to no tax imposed on local cars compared to imported cars that have exorbitant tax duty.

WEAKNESS

There are some quality issues in proton that resulted in negatively affected brand image. These quality issues also affect the ability of Proton to enter export markets. The declining national industry in 2006 followed by proton losing its market leadership for the first time resulted in funds shrinkage and it has effect on the ability of Proton to introduce new models.

OPPORTUNITY

There are several overseas expansion opportunities for Proton in the coming future. As an example, Gen 2 and Savvy are already marketed in Egypt and South Africa. It shows that there's a market that the company can penetrate. Egypt doesn't only provide a large market but could also act as a base for neighboring countries like Saudi Arabia and Sudan. Proton also plans to sell 30,000 units in China by end-2008. The models will be sold under the Europestar brand by distributor Youngman Automobile Group. Proton has also appointed a Thai distributor. Phranakorn Auto Sales will initially sell Proton models in 20 dealerships, with the network due to double within four years.

THREAT

Malaysia's trade dispute with Thailand over non-trade barriers in the automotive industry could hamper the export projects of major carmakers. Burgeoning capacity levels of around 700,000 units could result in a supply surplus. The competition between Proton and Perodua can also be a massive threat for the company. Proton and Perodua has been at each other's heels since December 2006 when Perodua outsold Proton in monthly sales by 99 cars. Perodua's lead was short lived when Proton outsold Perodua the following month by 550 cars. In February, Perodua outsold Proton again, beating Proton monthly sales figures by 763 units. This time however, the Malaysian Automotive Association reports that Perodua's monthly sales have topped Proton by a massive 4,284 units, making it achieved market share of 44% (13,574 units) as opposed to proton's 30.35% is 9,290 units. Losing market share to its competitor is a threat that should be concerned by Proton.

OVERALL CONCLUSION

The Proton does not carry much brand equity. Many view Proton as a maker of cars that lack of thrill but are relatively cheap compared with other global car makers. .

The company needs more attractive models like the Persona, which has helped in stimulating sales, and would have to maintain its recent improvements in quality as that would have a strong bearing on its acceptance level.Proton's Campro engine, which is the bread and butter of its product line, is hardly advanced compared to today's technology. Proton also lacks an engine or platform to expand into the SUV and MPV markets, or the 2.0-litre and above segments. Proton may need to collaborate with a foreign partner like BMW and PSA Peugeot-Citroen are working together to develop new engines and technologies.

In the future, many of the green engine technologies that are emerging as a result of rising fuel prices and global warming would dictate the direction of automotive development, and these are beyond Proton's capabilities.

On its own, Proton has limited funds for research and development. And the bulk of its exports are mostly confined to less mature markets, including China and some Gulf Cooperation Council. A tie-up with a strong foreign brand will enable Proton to penetrate more sharp markets. Volvo, on the other hand, has successfully linked both be a responsible parent and add excitement to life to the Volvo brand through combining a high performance engine, suitable racing, with a family car, blurring the age-old distinction between a family car and a sports car. By successfully linking these goals along with the safety so long associated with the brand. Volvo has defined the brand as delivering value that none other can. Brand-goal links such as these built through strategy and learned by consumers prove themselves to be unique.

Overall, the industry has intense competition. Thus, the auto makers should have more concern in doing business and be well prepared in every part to compete with the competitors most effectively. Auto makers have to understand the factors affecting customers' loyalty. They should know the customers would most likely buy which type of automobile.

Many new improvements in the automotive industry are forcing companies to reorganize the conceptions of their brands. The new developments have created a need for vital action in brand management. The auto makers should provide the good driving system and long durability car for the customers and consider the design of a car as the most important factors. And they should also focus on customers' satisfaction in terms of repair and maintenance cost, safety and rapidity of repair and maintenance service.

Car makers should also focus on what the local consumers think about the local products.

Car makers should develop products that are more reliable and better than competing products in terms of quality and value since consumers are emphasizing heavily in quality of product.

Car makers should also construct product from consumers' preferences. Consumer's preferences are vary across consumers. Some consumer evaluate brand on the basis of their underlying attributes. And to gain market share, it is necessary for auto makers to capture what consumers need.

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