The European Car industry has been continuously evolving from its early years. The world economic recession leading up to World War II led to strengthening of the uneven automobile manufacturing market, while in the postwar period, improved economic growth, marketing, and an expanding road structures increased sales for auto manufacturers in many developed countries. Design, service, and speed became trademarks of the thriving car producers, as evidenced by the every growing range of car models and the increasing popularity of Formula 1 racing all over Europe.
In today’s modern society the car industry is beginning to show signs of struggle due to the challenges that the industry faces in the new era. Issues such as congestion, rising oil prices, traffic jams and air pollution are some of the reasons that have forced the car makers to rethink its marketing, its goals, its objectives, and all the other unforeseen consequences. In total car makers produce almost 60 million vehicles every year, and provide employment to millions and millions of people all over the world. Average profits have been on a decrease from 20% or more in its first days of the 1920’s to nearly 10% in the 1960’s and way less than 5% in this present day. In fact some volume car makers such as Fiat, GM, and Ford all have actually been losing money.
EUROPEAN AUTOMOTIVE INDUSTRY
The European industry is the world’s largest car manufacturing region and the world’s largest market. In addition to that the industry is considered a leader in the worldwide market, with incorporated operations consisting of design, research, development, production and sales (BERA 2004). The market is made up of a concentrated and refined universal network, which includes different joint-ventures, special productions, many cooperatives, and assembly sites. European car manufacturers have a combined productivity that exceeds that of the United States and Japan; but no one single European manufacturer produces more than its Japanese or United States competitor (BERA 2004).
There are more than 20 vehicle producers in Europe, with the largest carmakers producing numerous brands, such as VW, GM, Fiat, DaimlerChrysler, and Peugeot Citroen (McLaughlin, Maloney 1999, p. 193). There are also independent carmakers, such as Porsche, BMW and Baritone (McLaughlin, Maloney 1999, p. 193). The vehicle production of the European automotive industry has shown a great increase over the last 10 years.
According to recent studies the largest car manufacturing country in Europe is Germany which is estimated at 30% of regions total production, followed by France at 19%, than Spain at 17% and UK at 10% (BERA 2004).
Similar to the other markets in the global car industry trade, European industry has undergone an important restructuring, consolidation and reorganization, which comprises of mergers, such as Chrysler and Daimler-Benz, General Motor’s acquisition of Saab, BMW’s hostile take over and then sale of Rover, Jaguar and Volvo’s passenger car division are now all under Ford, Volkswagen’s acquisition of Lamborghini, Bentley, SEAT and Skoda (McLaughlin, Maloney 1999, p. 193). Presently there are many other supply arrangements and co-production efforts amongst the European carmakers and other manufacturers all over the globe.
Trends and issues in Europe: Increasing challenges
Sustainable development for European Car industry requires sufficient and capable, economically feasible, socially adequate and environmentally sound transport systems (UNDESA 2010, p.1). Urban population is growing rapidly, in particular in the developing countries such as Turkey, Poland, Croatia and Ukraine.
By 2050, two-thirds of people will live in mega-cities and other urban areas. Cities in developing countries urgently need better and affordable public urban transport systems (UNDESA 2010, p.2). With increasing income and prosperity many city dwellers aspire to own their own motor vehicles. Rapidly growing use of private motor vehicles and of freight transport, limited space and inadequate infrastructure result in urban traffic congestion, lost time, wasted resources, polluted air and negative health impacts through emissions of sulfur oxide, nitrogen oxide, volatile organic compounds and particulates, including black carbon (UNDESA 2010, p.2).
Motorized transport depends almost entirely on oil products for its energy needs.
Many developing countries are energy importers. Inefficient use of motor fuel in congested urban transport imposes unnecessary costs on countries, which can contribute to foreign trade imbalances and hamper economic development (UNDESA 2010, p.2).
At present, the transport sector is responsible for almost a quarter of greenhouse gas emission from fossil fuel sources worldwide. It is the fastest growing sector with respect to green house gas emissions, yet is has received so far little attention from international climate initiatives and support programmes.
For increasing resource productivity in transport, both for passenger and freight transport, a comprehensive approach is required that seeks (UNDESA 2010, p.2):
to avoid or reduce transport demand, where possible,
to encourage a shift towards less polluting and more efficient transport modes, and
to improve and deploy clean transport technologies.
EXISTING LITERATURE REVIEWED
The automobile sector, is very important in the European economy, but is currently facing a number of problems. The lack of funding creates difficulties for the consumer to finance the purchase of a new car. European markets are also in overcapacity, and the evolution towards an aging and a ‘no car’ society is predictable on the structural long-term (EJCIC 2009, p.4).
To address these issues European Union has adopted a number of policies as well. To finance the sector in the short-term, to elaborate short-term schemes to favour demand, to restructure the sector on the long term, also to finance R&D and clean cars, and finally to improve traffic flow and promote efficient use of transportation (EJCIC 2009, p.4).
The car industry is one of the main manufacturing sectors in the Europe and remains important in terms of production, wealth and jobs: it produces 15 to 18 million cars a year, about 1/3 of the world production, and employs directly and indirectly 12 million people (EJCIC 2009, p.4). Many suppliers depend on the automobile industry (steel, aluminum, plastic, glass, textile industries, etc.) and its investments in R&D benefit also to other sectors (EJCIC 2009, p.4).
Once a symbol of social and industrial development, the automotive industry is now facing a multitude of severe challenges: fight against climate change, oil price volatility and the financial and economic crisis that has caused a significant decline in demand and, therefore, jobs (EJCIC 2009, p.11). Automotive industry is considered as a vital sector for growth and competitiveness in the EU, and it figures prominently on the political agendas of the European Commission (EJCIC 2009, p.11).
THEORETICAL PERSPECTIVES OF THE INTERNATIONAL BUSINESS ENVIRONMENT AND MARKETING
The business environment of the firm or an industry consists of all the external influences that affect its function, decision making and its performance. When given the measureless number and range of external influences, how can companies expect to analyze, let alone monitor, environmental situation? This organizing of information can be done by using some form of system or framework. Environmental influences can be classified by PEST analysis into political, economic, social, and technological factors (Grant 2005, p.68). Also environmental influences can be sorted by the micro-environment or task environment that can be distinguished from the wider influences that form the macro-environment (Grant 2005, p.68).
Although systematized and constant scanning of the entire range of external influences is always desirable by most companies in the industry, such extensive environmental analysis is expensive, because it creates an excess of information (Grant 2005, p.68).
The condition for efficient environmental analysis is to differentiate the vital information from the information that is less important. To do this, we must look at primary principles of most companies (Grant 2005, p.68). In order for the firm to make profit it must first create value for its customers. That’s why; it must understand its consumers. Second, in creating value, the firm must acquire goods and services from suppliers. That’s why; the firm must have a good understanding of its suppliers with whom they should form good business relationships. Third, the capability to generate income from value creating activity entirely depends on the intensity of rivalry amongst firms that compete for the same value creating opportunities. That’s why, the firm must be aware of competition.
Hence, the core of the industry’s business environment is formed by the relationships that the firms in the industry have with three sets of players: customers, suppliers, and competitors (Grant 2005, p.68). These make up the industry environment.
At the same time one cannot say that macro-level factors are unimportant to environmental analysis. Macro-level factors consist of general changes in demographic structure, economic or social and political trends (Grant 2005, p.68). These factors are also critical determinants of the threats and opportunities companies in the industry will face in the near future. The main concern is how these more general environmental factors affect the firm’s industry environment.
Strategically speaking the threat of global warming, for most industries, will not be an important issue, at least not for next few hundred years (Grant 2005, p.68). However for European car industry, the implications of global warming are a vital issue because of restrictions on burning fossil fuel and rising taxes on oil. To analyze the strategic implications of global warming, the automobile manufacturers need to trace its implications for the industry environment (Grant 2005, p.69):
What will be the impact on demand, will consumers favor more fuel-efficient cars or will there be a shift from gasoline-powered to electrically powered vehicles?
Will there be substitution of public transportation for private transportation?
Will there be new entry by manufacturers of electric vehicles into the car industry?
Will the heavy R&D costs associated with adapting cars to the new environmental challenge cause the industry to consolidate?
A technique that’s used to identify, assess and evaluate external factors affecting the performance of firm in the industry is known as PEST analysis (Gregory 2004 p.49). PEST analysis is done to help an organisation gain knowledge and understanding of the broader business environment and may be carried out as part of a continuous process of environmental scanning (Campbell, Stonehouse & Houston 2002, p.118). PEST analysis may be used to evaluate firm’s expansion into a new market or to evaluate the feasibility of a new product or service (Campbell, Stonehouse & Houston 2002, p.118).
There are a large number of factors that may be included into PEST analysis, few of which are outlined below.
Political and legal factors play a critical role on the development of any industry. Political and legal factors shape the rules of rivalry, supply chain requirements and operational costs (Jones 2010).
International instability has led to an increase of oil prices that has created a sturdy trend towards smaller engines, hybrid engines as well as lighter diesel engines (Jones 2010). Present high level of oil prices has damaged the sales of larger engine-sized cars that are more then two litres in capacity, most of which are luxury and premium vehicles. There are also various quality controls and operation requirements for safety standards and emission levels that have a negative impact on the costs of production which in turn reduce the operating profit margin of companies (Jones 2010). A new legislation for car parking has been implemented in various European countries due to the threat of high congestion with the extreme traffic load of road networks.
The foreign ownership regulations also form a part of political and legal factors. Currently the UK, France and Spain are considered as one of the most FDI welcoming countries in Europe. Automotive industry is being deregulated, which means that foreign car makers have a flexibility of choosing between various entries into the market and expansion modes in doing business with European companies (Jones 2010). The political relations between countries of operations imply certain benefits in a form of reduced tariff and non-tariff barriers, for example India and Japan work together with the UK within the regime of favorability (Jones 2010).
The country’s present and future demand situation is one of the most important determinants of location, because demand influences operations margin, the pricing strategy of the product, potential growth of the market, and the potential of return on investment (Jones 2010).
Since early 2000s the target market size in Europe has experienced steady growth by size and value. There has been growth in size as every day current car parking capacity is being increased. The steady increase of average price level of parking contributed to the growth of market value (Jones 2010).
European market is viewed as extremely mature. The present maturity has led to the overcapacity issue and an evident drop in sales of particular car segments.
In general due to the maturity issue the market is experiencing negative growth. Even so, there is still an enormous significant growth potential for the sales of certain car segments due to the impact of technological factor as well as socio-cultural factors (Jones 2010).
The strong growth of GDP, personal disposable income and consumer expenditures reveal the soaring level of consumer confidence. But when looking at the purchase of new cars, consumer confidence has fallen a lot. Nowadays consumers in Europe have been very unwilling to take out new debt and instead been choosing to service their existing debt. Also there has been a decline in the levels of mortgage equity withdrawal, which indicates that European consumers do not seek other funds to buy pricey items like cars (Jones 2010).
The current strong position of Euro against other currencies has created many benefits for manufacturers’ consumers operating in Euro zone such as certainty of operations and reduced currency fluctuation risk.
When highlighting the outlook of the automaker’s industry, it is evident that one of the key concerns with establishing and maintaining the competitive advantage is the cost factor, to be more specific, it is the ability of the firm to manage its direct and indirect costs (Jones 2010). Furthermore, when a decision has to be made with regard to the location of operations and the establishments of factories, industry specialists say that the key determinant here is labour-specific costs. A major emphasis is being put on the labour-specific cost saving (Jones 2010).
According to the survey, more than 85% of industry specialists agreed that not only in Europe but all over the world, in the next coming five years there will be a very big increase in labour specific costs, such as legal services, cost of pensions and medical benefits for the employees (Jones 2010).
According to predictions as the target market for car makers, the attractiveness of Europe will stay high (Jones 2010). The reason why European region will remain attractive for car makers is the potential increase of its market size and value, due to the expansion of the European Union and their strong currency. There are however suggestions that the share of markets in Europe will drop, because of the present maturity of the market, excessive competition and the demand trend.
Whenever social factors are discussed the key factor that always comes to mind is a demographic factor, because it involves the lifestyle, the trend and the spending power of the consumer. The type of risk aversive behavior and value per customer all fall under a demographic factor (Jones 2010). The use of particular type of products and its projections can be determined by looking at the status of demographic trends. For example, the sales of family cars have been damaged by the current European demographics. The changes of routines, lifestyles and habits have a direct impact on the consumer spending. For instance, there has been a recent increase in preferences for secondhand car ownership instead of brand new vehicles. Additionally, the impact of trend factors such as fashion ability and luxury preferences can be so strong that it can remove and neglect the negative effects of oil prices and maturity of the market in some car segments (Jones 2010). That’s why, despite the predictions, luxury cars and many SUVs can experience strong growth, while the sales in other car segments experience dramatic fall.
New transactional capabilities are now open with the current development of Internet. Continuous development and growth of technological solutions, particularly in the area of digital technologies and communication create fresh operating opportunities such as innovative marketing mix channels, latest market research tools along with new purchase environment known as e-commerce (Jones 2010). To counter the problem of overcapacity, a number of leading car distributors make use of e-commerce.
There e-exchange channels linking supply chain agents have undergone major improvements and have become the source of strategic advantage since it creates the aptitude of better value chain quality control and faster market response (Jones 2010).
Porter’s Five Forces of Competition Framework
When it comes down to it, there are many tools that can determine the level of profitability and the amount of competition in an industry. A helpful, commonly used framework for analyzing and categorizing these factors is the one developed by Michael Porter of Harvard Business School (Grant 2005, p.73). Porter’s Five Forces of Competition framework analyzes the profitability and the fertility of an industry, as indicated by its rate of return on capital relative to its cost of capital, as determined by five forces of competition (Grant 2005, p.73). These five sources of competitive pressure fall under either horizontal or vertical competition. Three sources make up horizontal competition namely: competition from new entrants, competition from substitute products or services, and competition from established rivals. And two sources make up vertical competition namely: the bargaining power of buyers and the bargaining power of suppliers (Grant 2005, p.73)
Competition from Established Rivals
The European automotive market is highly collective. The main rivalry involves Ford, General Motors, Volkswagen, Renault, Peugeot, BMW, Citroen, Honda and Toyota. There is a threat of intense price wars and a strong requirement for product differentiation because of this presence of powerful competitors with established brands (Jones 2010). This competitive pressure leads to an increase in promotional costs; and overcapacity introduces a significant price pressure. The current market conditions are so intense, that some manufacturers had no choice but to close certain plants to slash the costs and stay alive on the market.
There are three major competitive strategies that firms use to survive; the first one is to serve and satisfy the needs of emerging market segments, new product development strategy, and lastly the supply chain improvement strategy (Jones 2010). Any opportunity that might arise requires an immediate operational responsiveness as there always is little space till market opportunity is leveraged by competitors.
Bargaining Power of Buyers
Because of the increasing overcapacity issue and high intensity of competition on the worldwide scale, European buyers experience very strong bargaining power (Jones 2010). It is said that buyers have a high level of bargain seeking behavior.
Competition from Substitutes
Apart from straight competitors such as public transport, cars compete with other forms of transport: air, sea, and rail. The ever-increasing importance of door to door transportation as well as environmental concerns has decreased the present threat of other forms of transport as substitutes. The main source of substitute threat comes from the sales of used cars. The steady accumulation of secondhand cars is one of the major reasons for the dramatic fall of the sales of new cars (Jones 2010).
Bargaining Power of Suppliers
Although carmakers have formed large entities it did not make a noteworthy shift of bargaining power in relations between original equipment manufacturers and the suppliers. The consolidation in the original equipment manufacturers sector has generated the equivalent consolidation between different groups of suppliers (Jones 2010). In the light of the overcapacity issue, demand chain partners and especially large car dealers do experience large bargaining power.
Competition from entrants
There is a high level of entry barriers when an industry is extremely consolidated and there is a well-developed value-added chain, R&D and marketing capability. All of these minimize the threat of new entrants. However, due to global nature of the automotive industry the idea of new entrant is not that straightforward, since existing companies may enter new geographical markets. For example there is a huge potential for Chinese manufacturers to flood European markets in case safety measures and protectionist laws are not introduced by European countries (Jones 2010).
Attractiveness of the industry for Foreign Direct Investments
The value of Foreign Direct Investments (FDI) per annum or per capita is one of the most common indices used to compare the attractiveness of countries (Maksymiuk 2006, p.4). The attractiveness of any country for FDI consists of many factors (which are valid also for sectors): low transaction costs, low risks for investment, a developed capital market, assured property rights, high expenditure in research and development, a highly developed infrastructure, a liberal economy, a lack of barriers for the entrance or exit from the market, a high quality of institutions supporting entrepreneurship and innovations, low taxes for employees, highly qualified specialists, a big domestic market, positive perspectives for the development of the country and political and social stability (Maksymiuk 2006, p.4). The attractiveness of the automotive industry can be increased by additional factors: the number of automotive suppliers qualified by quality management systems, the close proximity of car manufacturers, and the access to raw materials, a good climate guaranteed by government, operational clusters and co-operation between the industry and universities as well as R&D institutions and consulting companies (Maksymiuk 2006, p.4).
Information technologies are essential in all phases of development of the product, through manufacturing, logistics, purchasing and up to sales and after-sale services (Maksymiuk 2006, p.18). IT reduces the period of implementation of solutions and the costs of implementation. It supports the transfer of data around the world and makes it easier for transnational corporations to develop their products in a country that offers the most favorable conditions for FDI. IT is also one of the first tools which helps during mergers and acquisitions.
The automotive industry could face some issues in the future. There could be a fall in the popularity of cars because of increases in car prices, increases in maintenance costs, and the appearance of substitutes for the car (Maksymiuk 2006, p.19).
Another threat for the automotive industry could be triggered by an increase in transaction costs. It would be rather difficult to find such a situation in all automotive regions in the world, however decline in one of the regions (e.g. nationalization or a change of law against FDI in a big country) would bring higher losses and an extension of profits from investments in the longer term Many companies could be stopped because of a lack of components. Europe (especially the countries that have recently joined the European Union), with its strengths and opportunities reduces the risk of losses and is an attractive place for future investors (Maksymiuk 2006, p.19).
SUMMARY AND CONCLUSION
Out of all the main manufacturing car industries in the world (Japan and US), the European is the largest and the most competitive. European automotive industry is a complex one and at the same time very diverse. It is basically dominated by German manufacturers. Although there has been a rise in sales and manufacturing from France, Spain and UK, German car makers still dominate the market. The market is also further divided by manufacturers that produce mass volumes of cars, than the manufacturers that focus on specializations and finally those that target niche markets and only cater to those specific customers. I say that the car industry is a complex one, because the state of industry affects many markets that are related to it, such as car parts, accessories, fuels and many more. Another reason why the industry is complex is that there are changing regulations of the car production, such as issues of global warming, safety and reliability. Also, companies must continuously consider political, environmental and technological concerns in order to succeed.
However despite the complexity of the environment of the automotive industry, European car industry has many favorable business and environmental factors such as the future growth potential within Europe, also there is an economic stability, positive growth of certain car market segments and finally there’s relatively medium entry barriers which makes it an excellent place for FDI investors.
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