Ford and the World Automobile Industry

Topics: Automotive industry, Renault, Tata Motors Pages: 5 (1507 words) Published: October 16, 2008
1.Changes in the structure of the auto industry

The 1965-1972 automobile industry was a low competitive environment, and as a consequence was a profitable industry. Indeed, during this period:

Industry rivalry was rather low:
The automotive market was fragmented into separate national markets and the primary concern of manufacturers was their domestic sales. As a consequence only a few competitor were disputing each market. The supply was meeting the demand in a correct manner: the production could provide the number of vehicles bought each year, without a major over-capacity. As a consequence, fixed costs were “under control”; no manufacturer was trying to gain market share in order to spread fixed costs over sales volume. Car models were much more differentiated that during the 2000’s. Several technologies were used in the various models available. As a consequence, models were considered as more unique by customer, hence a weaker tendency to switch between manufacturers. Suppliers power was almost inexistent, as manufacturer were much “vertical integrated”, to reduce costs and increase flexibility.  Oil price was not a concern, with barrel under $15 during the whole period (expressed in 2006 US $). With no environmental concern, the substitution threat was very low. Low competition in national market and high capital costs were mainly responsible for the low threat of new entrant in each local market. Moreover markets were far from being global, notably due to the transportation problems, which were on the verge to be solved : becoming global would have required at that time to completely reinvent the production process, as shipping components would have been excessively complex.

Between 1972 and the beginning of the 2000’s, the world automobile market has faced a major upheaval, which primarily is due to one major phenomenon: “globalization”. The GATT and other international agreement have provided a framework for global trades, including the automobile industry. Moreover the slow growth rates of the industry provided incentives for manufacturer to look for new markets. This resulted in a major shift in the industry structure:

The competition intensified during the period,
The introduction of completely new manufacturers of market that used to be stable: the new production, management and transportation methods gave a boost to the competition atmosphere. Excess capacities were added during the 80’s and 90’s, when Japanese companies tried to enter foreign markets (and most notably the US), resulting in high fixed costs that had to be covered. This high fixed costs problem was reinforced by the rising new models development costs. Car model standardization induces less differentiation, hence an easier customer switch between manufacturers. Moreover the fact markets have globally the same structure among different countries (luxury car/SUV/salient/low-cost cars) make it easy to compete around the world. Consumers have been requiring more “esthetic” personalization, requiring more flexibility in the manufacturing technology. That has reduced the benefits of economies of scale. New entrants have appeared and are still threatening to enter. Despite the major capital requirements to enter the automobile industry, several new competitors have emerged on each market segment during the last 40 years. On the one hand, developing countries have created national manufacturers, often protected by their own legislation before deciding to go global. On the other hand, existing multinational do have the cash required to enter new segment market, as the SUV example shows. The suppliers bargaining power has had a tendency to rise, and more and more manufactured decided to outsource the component manufacturing. This is reinforced by the fact that several component supplies have become as big as automotive manufacturers. Buyers have never been so well informed about models, performance,...
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