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EUROPEAN AUTOMOTIVE INDUSTRY.
Term Paper ID:26260
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Examines cost structure, impact of European Union, global competition, labor issues, productivity, role of govts., innovations, mergers.... More...
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Paper Abstract:
Examines cost structure, impact of European Union, global competition, labor issues, productivity, role of govts., innovations, mergers.
Paper Introduction:
Introduction
The 1998 merger between Germany's Daimler-Benz and America's Chrysler Corporation brought into sharp focus the increased globalization of the automobile industry. For most of the twentieth century, Europe's automobile industry was highly regionalized, with some companies having "captive" markets through protectionist barriers imposed by governments. By the end of the century, however, the trend was toward open markets, both in Europe and abroad, and the European automobile manufacturers found that they had to modify their strategies to survive amidst the changing cost structure. This research examines the cost structure in the European automotive industry, the effects that the single European Union are likely to have on the industry's cost structure, and the opportunities and threats presented by the industry'
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"The Car in Front is Still Japanese." The European, 28 August 1997, 36.Carter, Matthew. The European automobile industry is likely to seeincreased consolidation in the next several years, characterized byalliances among European manufacturers as well as across regional borders(such as the Daimler-Chrysler merger), and the result is likely to beincreased competition among global giants. Volkswagen is well-positioned to endure such changes in theenvironment since it has four brands in the market (Volkswagen, Audi, Skodaand SEAT), and since it uses the same technology across its productplatform. Daimler-Benz, for example, agreed to produce the Swatchcar in a joint venture with key suppliers. In 1997, for example, theNissan factory at Sunderland was the most productive of any European carplant; the General Motors factory at Eisenach was the second mostproductive, and Toyota's plant at Burnaston in the UK came in third.[6] The improvements in productivity which have been made at Europeanplants are not necessarily all positive so far as European manufacturersare concerned. The European Union has also been able to implement voluntaryagreements regarding carbon dioxide emissions among the three majorEuropean automotive manufacturing countries (Germany, France and Italy).These agreements are designed to reduce fuel consumption by 25 percent by2 5. ----------------------- [1]"Coups and Coupes," The Economist, 3 October 1998, 75. "Driven to a Deal." Forbes, 22 February 1999, 18A.Cameron, Doug. Until these purchase taxes are removed, theEU will not truly have a single market with equal access for allmanufacturers. Sales began to slow in mid-1998, and saleswere not expected to increase more than four percent for the year as awhole over 1997.[2] Analysts recognized that while sales were increasing,they were doing so at a decreasing level. Ford workers in Germany areinitially hired on a six-month contract which then may be extended to 12 or18 months. This research examines the cost structure in the Europeanautomotive industry, the effects that the single European Union are likelyto have on the industry's cost structure, and the opportunities and threatspresented by the industry's cost structure. InItaly, the government removed financial incentives for individuals topurchase new cars; this caused a decline in demand for all cars, includingFiat, in that country.[9] Italy was not the only country which offered subsidies to promote carsales. Representatives from French manufacturers Renault and Peugeot lobbiedthe French government to subsidize retirement for older automotive workers,but were unsuccessful in their efforts.[1 ] During the downturn that many European car manufacturers saw in themid-199 s, companies began to close factories in nations where they werenot based, thus shifting their costs to local regions. [6]Doug Cameron, "The Car in Front is Still Japanese," The European,28 August 1998, 36. As a result, Ford has seen a 25 percent improvement in themanufacturing of the Focus over the Escorts which were previouslymanufactured at this facility.[8] Fiat suffered particular setbacks during 1998 when the collapse of theBrazilian economy (where Fiat has a large market) and a depressed Italianmarket meant that the company's automobile division barely broke even. These taxes have thenet effect of increasing the price of automobiles in some countries anddampening demand as a result. [3]Matthew Carter, "Car Firms Put the Brakes On," The European, 23November 1998, 18. It is expected that by 2 1,sales will have fallen ten percent from their 1998 levels.[3] In this highly competitive environment, companies must improve theiroperating margins by reducing costs, and some companies have foundinnovative ways to accomplish this. [4]Ibid. This trend, and theflexibility for workers and managers that it offers, is setting the tonefor additional changes within the industry. This providesgreater flexibility in the market, but also results in mixed salesperformance since older models may be outsold by the competition. Conclusion Once protected by regional trade barriers and government action,European car makers must now compete not only against Japanese and Americanmanufacturers, but against other European car makers pursuing a pan-European strategy. [7]Carter, 18. [5]Ibid. Korean cars, forexample, are imported to various nations within Europe, but European carsare nearly nonexistent in Korea. "Europe's Industry Chief: We Need a Common Voice." Automotive News, 15 September 1997, 2 H-21H."Fiat May Follow in Volvo's Footsteps." Business Week, 15 February 1999, 26."Global Motors." Time, 8 February 1999, 45."Going, Going, Gone." Industry Week, 1 September 1997, 68."Renissant?" The Economist, 2 March 1999, 65. Productivity at European car factories is up, butdemand is slowing, and it is unclear whether smaller manufacturers willsurvive in markets where government subsidies have disappeared along withtrade barriers. [13]Stephane Farhi and Diane Kurylko, "Europe's Industry Chief: WeNeed a Common Voice," Automotive News, 15 September 1997, 2 H. [22]"Fiat May Follow in Volvo's Footsteps," Business Week, 15 February1999, 26. Even thethreat of a plant closure can bring about incentives from the hostgovernment which results in a more favorable cost structure.[11] Daimler-Benz and Volkswagen have been successful at introducing newtypes of cars and new approaches to business during the 199 s well beyondthe competition. At the Ford Focus plant in Saarlouis, Germany, outsidesuppliers have facilities within the "industrial park" where they producecomponents which are assembled in their entirety into the automobile. "Car Firms Put the Brakes on." The European, 23 November 1998, 18."Coups and Coupes." The Economist, 3 October 1998, 75."Europe's Great Car War." The Economist, 8 March 1997, 69-7 .Farhi, Stephane and Diane Kurylko. Introduction The 1998 merger between Germany's Daimler-Benz and America's ChryslerCorporation brought into sharp focus the increased globalization of theautomobile industry. Afterthe European Union became fact in 1992, the industry began to consolidateand the European manufacturers faced competition not only from traditionalrivals based in Japan and the United States, but also from other Europeanmanufacturers. [17]"Europe's Great Car War," 69. Mercedes products were recognized for their reliability andquality, but not for their innovation. Prior to the formation of the EuropeanUnion, individual nations (or manufacturers) would have to lobby for accessto such markets and would have only their small home market with which tobargain. It is rumored that Renault andNissan might forge a strategic alliance, although this is generally seen asa marriage of two weak partners.[2 ] DaimlerChrysler, which was formed in1998 by the merger of Germany's and America's large manufacturers, hadconsidered acquiring Nissan, but has apparently decided against the deal.Ford agreed to acquire Volvo's automotive group in early 1999, andannounced plans to keep the current Volvo product line intact, but tointroduce new models with appeal to the American consumer.[21] There wasalso speculation that Fiat was actively seeking a buyer for its cardivision.[22] Such consolidations are likely to continue as manufacturers try toposition themselves to take advantage of the single European Union.Smaller car manufacturers will not enjoy the same cost savings as theirlarger counterparts, and the incentive to benefit from the single market,as well as increased competition from increasingly global competitors, willhelp bring about fewer competitors and larger companies in Europe. [2 ]"Renissant," The Economist, 2 March 1999, 65. For most of the twentieth century, Europe'sautomobile industry was highly regionalized, with some companies having"captive" markets through protectionist barriers imposed by governments.By the end of the century, however, the trend was toward open markets, bothin Europe and abroad, and the European automobile manufacturers found thatthey had to modify their strategies to survive amidst the changing coststructure. BMW, for its part, implemented flexible schedulingas early as 199 at its Regensburg plant. Thusdashboards, engines, wiring harnesses and body subassemblies are all sentto the Focus factor on conveyor belts and "just-in-time" to be incorporatedinto the Focus. [21]Katherine Bruce, "Driven to a Deal," Forbes, 22 February 1999,18A. With the formation of a single trading bloc, the bargaining powerof the EU and its member nations increases substantially.[15] Even with the formation of the EU, however, there remain someimpediments to free trade within the European car market, which keep costshigh for those companies marketing in various countries. The mergers and acquisitions which have taken place in the199 s are likely to continue, and some traditional European manufacturesare likely to disappear altogether by 2 2.[18] Volvo has been acquired byFord, Volkswagen owns Audi and Rolls-Royce, and America's General Motorsowns Opel, Vauxhall, 5 percent of Saab, and has manufacturing partnershipswith Suzuki, Isuzu and Toyota.[19] Speculation about the next round of mergers and acquisitions isrunning high at the end of the 199 s. [11]Ibid., 69. Automotive plants continue to operate at well below theircapacity due to sagging demand, and it is the productivity gains which havebeen responsible, in part, for the need to implement more flexible workstructures at plants. During 1996, the French government offered up to 7, francs toanyone trading in an older car for a new model. When the decadeopened, the traditional Mercedes was a solidly built sedan with a highprice point. [9]"Coups and Coupes," 75. Thus Renault closeda Belgian factory (which meant a loss of 3,1 jobs) in 1997, the same yearthat Ford closed a British factory (with 13 jobs), also in 1997. Influential Environmental Factors on the Cost Structure Europe endured a recession in the late 199 s which affected luxurycars more than small cars, but which had a widespread effect on theindustry as a whole and which helped to contribute to the overcapacity ofthe industry. [16]Farhi and Kurylko, 21H. [1 ]"Europe's Great Car War," The Economist, 8 March 1997, 7 . [14]Ibid. "Car Industry Stuck in the Slow Lane." The European, 8 August 1996, 19.Bruce, Katherine. This prevents laying off workers during downturns,and increases the options available to the company as demand changes,providing greater flexibility to the company's cost structure.[5] Most European manufacturers have imitated the successful manufacturingtechniques of the Japanese, but Japanese manufacturers remain among themost productive of European manufacturers. [8]Ibid. This applies to the automobileindustry, as well. TheRenault closure was particularly worrisome to the Belgians since, percapita, Belgium is the largest producer of cars in the world, although thefive largest factories belong to foreign (non-Belgium) companies. During periods of uncertainty, consumersput off making significant buying decisions, particularly for purchasessuch as automobiles.[14] The European Union also makes it easier for industry activists to seekremedy from trading partners for equal access to markets. [18]"Going, Going, Gone," Industry Week, 1 September 1997, 68. [19]"Global Motors," Time, 8 February 1999, 45. When the EU began discussion of a common currencyin the mid-199 s, and when the euro became fact in the beginning of 1999,consumers again held off on major purchases to see how the currency wasreceived throughout the world. The company managed to preserve itshard-won reputation for quality, and Mercedes sedans continue to be favoredby embassy staffs and German taxis, but Mercedes now also markets the CLKcoupe, the SLK roadster and the M-class four-by-four (built in the UnitedStates, where costs are somewhat higher, but popular among Europeanconsumers, as well).[4] Germany has the shortest working hours of any major industrial nationin the world combined with the highest wages. At 2.6 meters long, the Swatchcar is much smaller than other European cars, and its success is far fromassured. Background and Trends European auto manufacturers have focused on introducing many newmodels in order to attract customers, but such innovation increasesresearch and development costs, and makes it difficult for companies torecover their investment. Nonetheless, other manufacturers, including Ford and Peugeot,have developed similar vehicles based on the Swatch concept.[12] The Influence of the European Union on the Cost Structure For many years, Europe was a highly fragmented automobile market withseparate markets for separate nations. Ingeneral however, maintaining older product mixes lowers the cost structurefor companies since they invest less in research and development on aregular basis. In some cases, nationalmanufacturers dominated the market in their respective countries. At that facility, workerstypically average four nine-hour workdays each week, but may be required towork Saturdays at no extra pay. Just as the EU has greater lobbying power with regard to foreignmarkets, it also has considerable power with regard to its own industries.Automotive manufacturers are reluctant to forego access to a singleEuropean market (as opposed to the fragmented markets which used to exist)and are so more willing to work with regulators in order to meet emissionand fuel consumption standards.[16] The single market created by the European Union has brought with itother difficulties, such as increased marketing costs. Prices declined, rather than increased, as a result.[13] During the years immediately following the formation of the EU, demandin Europe wavered as consumers determined what the effect of the EU wouldbe on their own lives. Over the course of the decade,Mercedes set about to reinvent itself. [15]Ibid. That subsidy was ended inthe end of 1996, and sales, which had been boosted by the subsidy, felloff. This reduces its research and development costs and helps dilutedownturns in the environment.[7] Increasingly, European manufacturers in many different types ofindustries are learning from their Japanese counterparts about the benefitsof just-in-time manufacturing techniques. Mercedes-Benz has, in particular,changed its product image during the course of the 199 s. [12]David Brierley and Nicholas Moss, "Car Industry Stuck in the SlowLane," The European, 8 August 1996, 19. BibliographyBrierley, David and Nicholas Moss. This gives the company greater flexibility in terms of meetingdemand for its products. The mid- to late 199 s were characterized by overcapacity in theEuropean automobile industry despite some increases in sales growth.During the first half of 1998, sales were up more than seven percent thanin the same period of 1997. Now that they are competing throughoutEurope, marketing costs have increased significantly, to the point thatthey are more than double the costs of marketing in the United States.Discounts are responsible for some of these costs, as are additionalpromotional efforts which have a more direct effect on sales.[17] With the formation of the European Union, those manufacturers whichenjoy significant economies of scale are those which are likely to see themost benefit. At the 1998 Paris Motor Show, more than 4 newmodels were introduced to the car-buying public.[1] Some companies, suchas Ford, continue to offer a mixture of old and new models. Workers do not receive overtime pay, butdo receive overtime credits which can be used for holiday or whenproduction slows down. There arepurchase taxes on new automobiles in some countries (Denmark and Greece,for example), but not in others (France and Germany). When manufacturerswere assured of protected markets in their home countries, they were ableto keep their marketing costs down. [2]Ibid.
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