The Global Automobile Industry in 2009

AACSB Case Report

The Global Automobile Industry in 2009

Introduction

The Global Automobile Industry in 2009 was facing unparalleled economic challenges. Porters Five Forces Model helps show strategically the competitive intensity and profitability in the global auto industry. I found that the most interesting thing about this case to be how American and foreign competitors have strategically functioned throughout their competitive history.

Risk of Entry by Potential Competitors

The force is weak due to high entry barriers that the industry currently has. The Global Automobile Industry is a consolidated industry that is composed of a select few American and foreign automakers. The consolidation causes these companies to have superior advantages such as establishing absolute cost advantages over potential entries. For example, Toyota's introduction of lean production methods such as the just-in-time (JIT) production system has allowed Toyota and other imitators in the industry to significantly lower its costs. This industry is continuously looking hard at ways to take cost out of their system by new innovations of developing and manufacturing automobiles. For example, the industries companies are "trying to do this by using a common platform and parts in a wider range in cars." (The Global Automobile Industry in 2009)

Another barrier to entry is government regulation. During the credit crisis of 2008, many car companies received aid and loans from pressured local governments that were attempting to protect jobs. This allowed for inefficient car companies to remain in business and according to the case "discriminate against efficient producers that didn't receive similar subsidies." (The Global Automobile Industry in 2009) Finally, the industry demand for automobiles has been in a decline over the past decade, which results in few competitors attempting to enter in such a high cost industry. Therefore this force works towards increasing the profitability within the industry.

Rivalry Among Established Companies

The force is strong due to current cost conditions, industry demand and high exit barriers within the automobile industry. The cost of the auto industry has a high fixed cost that is dependent on spreading its cost over high sales volume. For example, "historically it costs as much as $1 billion dollars to develop a new car model and prepare a factory for production." (The Global Automobile Industry in 2009)This makes for intensive rivalry when trying to recoup expenditures. In addition, the industry demand in total global sales has been declining. The high fixed cost mixed with sharp sales decline has forced established companies to cut their prices and/or increase promotion spending in an attempt to cover break-even cost. For instance, "during 2008-2009 there was excess production of 40%." (The Global Automobile Industry in 2009). This resulted in significant price competition that included zero rate financing, cash back on purchases, and large reduction in prices. Finally, there are high exit barriers in the automotive industry. The cost for investing in capital improvements is not cheap. For example, "Ford has spent $7.5-$8 billion dollars annually on its factories." Not including the cost of pensions, which place a heavily financial burden to companies. Therefore, the intensive rivalry amongst global car manufactures has threatened industry profits.

The Bargaining Power of Buyers

The force is strong because of auto manufactures being large in size and few in number versus their suppliers being numerous and small in scale. Large car manufactures also force suppliers against each other to drive down prices. Additionally,