Introduction Of Automobile Industry Management Essay
There is a long history of automobile production in Australia. The first car was produced in 1897, and by the 1930 there were more than 10 firms assembling cars and components. From the beginning, foreign companies established in Australia and played an important role in the development of the industry. Companies included the Ford Motor Company, General Motors (Holden), International Harvester, Chrysler, Nissan, Toyota, Mitsubishi, Volkswagen and Leyland Motors. As a response to increasing competition in the 1960s, Australian Governments introduced a range of measures to protect Australian producers. By the 1980s, however, it became apparent that Australian automotive manufacturers and component makers were unable to compete with imports, even with the assistance of protectionist policies. Thus, protectionism could not assure the long-term survival of the industry.
Automobile industry is a symbol of technical marvel by human kind. Being one of the fastest growing sectors in the world its dynamic growth phases are explained by nature of competition, product life cycle and consumer demand. Today, the global automobile industry is concerned with consumer demands for styling, safety, and comfort; and with labor relations and manufacturing efficiency. The industry is at the crossroads with global mergers and relocation of production centers to emerging developing economies.
Due to its deep forward and backward linkages with several key segments of the economy, the automobile industry is having a strong multiplier effect on the growth of a country and hence is capable of being the driver of economic growth. It plays a major catalytic role in developing transport sector in one hand and help industrial sector on the other to grow faster and thereby generate a significant employment opportunities. Also as many countries are opening the land border for trade and developing international road links, the contribution of automobile sector in increasing exports and imports will be significantly high.
Structure, function and business activity in automobile industry
Today, the large car manufacturers has a production facility in the different markets and from each platform a car is produced for that market as well as for exports to other markets. Big players in automobile industry do not have just one big factory which exports its products to all other countries. In addition, the products are not identical in each different market. It may have the same technical platform, but the design and the options and features differ between countries. They are different because the demands of customers differ between countries. For example, in South America, incomes are lower than in Western Europe and customers need more affordable cars. In the USA the customers want more space in the car, and that’s an important factor for a car to be successful there. On the contrary, small cars are quite popular in India. It is not possible to be in the high volume market and to send the same cars to every market all over the world. So car makers are researching what their customers want and changing the car for each market otherwise they will loose customers. More and more CKD (completely knocked down) cars are being produced for some countries in smaller volumes. That is
often the case if there are barriers to exporting cars to particular countries, and they are
only being sold in smaller volumes. With larger markets, where sales of particular models are high, companies really need their own plant which has its own suppliers of parts. Due to sharp competition and changing customer demand, product development
process advances have been more significant than changes in product architecture. Product cycles continue to grow shorter as more companies adopt the simultaneous
engineering approach pioneered by Japanese automakersÃ¢â‚¬Â¡. At the same time, advances in Computer-Aided Design (CAD) and Computer-Aided Engineering (CAE) tools are being used to replace physical prototypes and testing processes. Now, major players (in post M&A situation) take greater responsibility for product design and allow production base to get shifted to advantageous location for low cost. However, still due to lack of standardization, number of tiers at the supply chain is not reduced. Moreover, when design is replicated with modification for physical product development, several
domestic issues need to be taken into consideration. These are mainly legal liability, and regulatory procedures. Furthermore, there is a technological move towards modules, i.e. self-contained functional units with standardized interfaces that can serve as building blocks for a variety of different products. Modularization is expected to reshape the entire supply chain in automobile industry as component designs will gradually get shifted to supplier companies. This is expected to reduce cost significantly and increase efficiency. However, IMVP (International Motor Vehicle Programme at MIT) found that cost saving is still elusive. The absence of a clear cost advantage for modules, combined with the inherent technical difficulties of changing the highly integral product architecture of an automobile, has reduced the probability of successful modularization. Nevertheless, a number of factors could still accelerate the move towards modularity, including automaker efforts to shift investment risk to suppliers, the increasing use of information technology within vehicles, and the possibility that consumers will show a strong interest in built-to-order vehicles..
Automobile companies have adopted a strategy of global perspective in their operation. Growth of transplants in 1990s led to a presence of all competitors in virtually every corner of the globe. By focusing on common platforms and interchangeable modules, companies are able to make faster and lower cost deployment of new solutions across the whole product range, while tailoring vehicles to a multitude of tastes and preferences of consumers in the world. Moreover, they can assure enough differentiation between products to cope with proliferation while maintaining scale efficiency and a proper management of brand equity (Lung et al. 1999).
The supply chain of auto industry has completely changed over the years. Major
OEM (original equipment manufacturer) players world-wide are increasingly focusing on
basic design and assembly operations as well as servicing the after-sales market and prefer to deal with a smaller number of large suppliers. Consequently, the supply chain is morphing into sub-system integrators, component makers, and commodity players. The segregation is increasingly defined by ‘risk sharing’ which was earlier defined by only ‘cost pressure’. Tier 1 suppliers (concentrating on system supply, module assembly and sub supplier management) are taking increasing risk from major players shifting the cost pressure to Tier 2 supplier who concentrate only on production of sub components.
In general, suppliers can be divided into few groups such as Systems Integrator (capable of designing and integrating components, subassemblies), Global Standardized-Systems Manufacturer (specialist in design, development and manufacturing of complex systems), Component Specialist (produces specific component or subsystem for a given car or platform) and Raw Material Supplier. Many companies (such as Volkswagen and Renault) feel that a mono-supplier strategy (such as in Ford) is not good but having limited number of large suppliers are of a better strategy. Ford pushes the supplier to own the tools, a strategy of pushing the risk associated with volume fluctuations onto the supplier rather than Ford.
On the contrary, Volkswagen and Renault, are satisfied with 2 suppliers in each region with an additional one having less responsibility but ready replace any of the existing supplier. Globally, these companies want their suppliers to invest near their plants or transfer their knowledge to local players. Companies bring the quality standards and price reduction condition while developing the contract with the suppliers. In general, contract length and overall value are related to price reduction targets that the supplier is able to commit to. For some of the assemblers, suppliers can also propose alternative designs that have the same economy results. The experience shows that magnitude of reduction per year varies from 2 to 8 percent due to achieving economies of scale. The competitive pressure in the industry is increasingly bringing the cost reduction targets as a major management decision of assemblers. Nowadays, major companies target cost reduction along with the design and models over a period of time. For example, German companies are targeting price reduction of 13% for the next generation model. Ford and Renault targets price reduction of 5-8% per annum and the figure is 13% for Toyota over 3 years (Veloso & Kumar 2002).
The changes in the automobile companies’ strategy have led to considerable restructuring in the components industry. In the 1990s, mergers and acquisitions created global mega-suppliers who became responsible for designing systems for vehicles. Mega suppliers also in turn reorganized the rest of the value chain, managing the second-tier suppliers and developing supply systems in many different locations. The components industry is now increasingly concentrated in companies that can design and provide systems and sub-assemblies across different markets. Several supplier companies were created by assemblers. In fact, in-house component manufacturing division were given separate identities and encouraged to compete with other companies. Suppliers also became a common feature in 1990s. Lucas and Varity merged in 1996, T&N was taken over by Allied Signal; Bertrand Faure was acquired by ECIA. New global companies were created through the fusion of smaller manufacturers.
Pricing of automobiles is a complex issue as it is dependent on fixed cost, economies of scale, technology and other aspects. Competition and consumer demand also play important role in this. Currently, most of the automobiles companies consider price reduction as major strategic move for survival. For price reduction, companies need to take series of decisions at every stage of production and selling; starting from managing factors of production and supply chain to negotiation with dealers. Price is one of the factors that influences sales variability of products and services significantly. Companies require appropriate policies to be played intelligently for managing the series of decisions. Interestingly, reducing prices does not always generate profits. It should be in combination of other decisions regarding maintaining quality and marketing of the product. One undesired consequences of considering price reduction as the main means of obtaining customers, is attracting disloyal customers, who are attracted by the offer but do not see any other value in the company. Their life-cycle in the end is short, and they receive a much greater return from the company than the company can even make up the cost for obtaining them.
The dynamics of international trade in automobile sector attracted attention of economists and policy makers to formulate trade strategy. International trade of automobiles has been influenced both by liberalization as well as protectionism. In the
1970s and 1980s, the U.S. auto industry faced its first major challenge from foreign competition as Japanese automakers aggressively entered the American market.
The decline of automobile sector in USA and rising Japanese imports led to protectionism in USA through imposition of quota. This led to voluntary export restraints (VER) from Japan anticipating further restriction. Japan continued with VER even after the relaxation of quantitative restrictions by the USA government in 1985. In the post oil crisis period, Japanese fuel efficient cars were high in demand in USA ( Finan, & Rappoport (1982). Also, reluctance of the Big Three in the USA to produce smaller cars led to increase in import demand from Japan. Apart from this, the annual import limit had the perverse effect of encouraging Japanese car companies to change the product mix of vehicles they shipped to the USA, sending more upscale models, where the profits were greatest, and fewer smaller, cheaper cars. In the early 1980s estimates say that the quota was transferring US$5 billion a year in additional profits to Japanese automakers, who could This was due to constrained small car production capacity by the US players in short run. sell their quota-limited cars at a premiumÃ¢â‚¬Â Ã¢â‚¬Â . Japanese car majors Toyota, Nissan, Honda, etc jumped the quota barrier and invested in USA for the domestic market also. The protectionism in automobile market is also prevalent in Korea Rep. Korean automobile companies developed the sector through protection and currently companies like Hyundai are heavily into export business. Similarly, Indian trade policy ensures high barrier in importing vehicles to provide protection to domestic players who have started exporting recently.
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