automotive

Note: Sample Data 2006

Changing customer preference

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As the competition in the automotive industry intensifies on a daily basis, major players now face a struggle to retain their margins. A shift in customer preferences has led to large-scale overhauls for car-design. For instance, entry-level compact vehicles, priced at around USD10,000 for much of the 1990s, began to lose sales volumes after 2000 due to the popular conception that these cars tended to have drab styling, substandard quality and poor handling.

Consumer taste shifted from traditional small sedans to other body styles, such as hatchbacks and sport wagons, forcing companies to rethink their strategies. In 2003, Toyota released two hatchbacks (the xA and xB) under the banner of its subsidiary, Scion. The styling of both cars made them far more attractive to consumers than most other hatchbacks on the market, prompting Honda, Nissan and General Motors to produce their own improved budget cars.

Customer preferences with regards to automotive products are changing at a faster pace than ever before, demanding constant innovations from the major players. Under these circumstances, product development has taken prime importance, and models have to be renewed regularly. The rise in operational and R&D costs owing to increased product ranges has put extra pressure on auto companies. Common platforms for new models will help reduce manufacturing and other operational costs, with the ideal platform being one that is flexible enough to incorporate future design changes.

Customer preferences with regards to automotive products are changing at a faster pace than ever before, demanding constant innovations from the major players. In the largest auto market of the world, China, consumers are increasingly seeking more innovative design for their first cars. Under these circumstances, product development has taken prime importance, and models have to be renewed regularly. The rise in operational and R&D costs owing to increased product ranges has put extra pressure on auto companies. Common platforms for new models will help reduce manufacturing and other operational costs, with the ideal platform being one that is flexible enough to incorporate future design changes.


Changing industry dynamics

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The last few years have witnessed the emergence of Japanese auto companies as a major global force and the conspicuous fall of the US giants. Operational efficiency, product differentiation and customer satisfaction were key factors in the success of Japanese automakers. Localization also played an important role in capturing market share. All of these factors show the changing dynamics of the global automotive industry. For instance, the number of Japanese owned automobile plants in the US grew from 11 in 1993 to 25 in 2005, and is expected to grow to 28 by the end 2006. In 2004, Japanese automakers produced nearly 3.2 million vehicles in the US, more than a five-fold increase over the 617,000 cars and trucks built in 1986. Similarly, as of July 2005 they employed 359,905 people at their 7,066 US dealerships, a significant increase over the 281,000 employees at 6,400 dealerships in 1993. The importance of localization has been highlighted by advertisements from Japanese automakers that played on the popular slogan ‘be American buy American’. Localization was equally important to American automakers tapping non-American auto markets as well.

The answers to the questions like "What major factors will determine automotive industry’s growth in the near future? How will the big three – GM, Ford and Chryler – handle the Japanese auto invasion? What is the importance of emerging markets such as China and India?" will determine the automotive industry’s success over the coming years.

Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. are the three largest Japanese automakers with a global presence. The last few years have witnessed the emergence of Japanese auto companies as a major global force and the conspicuous fall of the US giants. Japanese car companies like Toyota and Honda have pioneered the auto industry’s first truly global manufacturing system. They implemented an idea, wherein a car’s design and production was fine-tuned in one place, in order to produce ‘world cars’, which can be sold in any part of the world. Toyota created a one-of-a-kind system that enabled it to manage auto production levels between Japan and the US. 

In a situation, wherein fewer cars needed to be built, concepts like ‘line balancing,’ ‘leveling’ of production and ‘continuous flow’ were applied, which enabled the companies to derive maximum efficiency from assembly lines. Instead of sharply reducing production and idling/laying off workers, Japanese run plants gradually reduced production. Moreover, the just-in-time production process calls for lower inventories of parts from outside suppliers, which also enables suppliers to adjust their production schedules. 

In July 2008, for the first time the total sales on a monthly basis by eight Japanese automakers in the US, exceeded the sales of the American Big Three (GM, Ford and Chrysler) and Japanese automakers had a market share of 43% in US, whereas the Big Three accounted for 42.7% market share. In early 2009, Toyota overtook GM to become the largest automaker in the world, while Honda and Nissan were in the top 10. Toyota was also the biggest beneficiary in the US-government sponsored ‘Cash for Clunkers’ program. While Toyota gained 19.4% of the clunkers market share, Honda gained 13% and Nissan gained 9%. 

Critical success factors

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Given the highly competitive landscape of the industry, operational efficiency is key for all auto companies. Efficient operation translates into competitive advantage in the market, as can be seen from the Japanese auto giant, Toyota. Toyota, with its strong operational efficiency and implementation of the Six Sigma approach, has been able to dramatically bring down its operational costs, providing the necessary margin to compete with companies such as GM and Ford. For decades, Toyota has set benchmark standards for human resource management, supplier networks and distribution systems, and its highly efficient ‘just-in-time’ inventory system has been appreciated and emulated by other automakers for some time due to its simplicity and effectiveness. Toyota’s success shows the importance of operational efficiency, and showcases the corporation’s

ability to be flexible and responsive to customer demand. The American Big Three have all performed major benchmarking studies, and have implemented their own forms of the Toyota Production System with varying degrees of success. General Motors went as far as establishing a joint venture with Toyota in 1984 called New United Motor Manufacturing, Inc. (NUMMI), which, despite plans for the venture to become a separate entity, has now become an informal collaborative business.

It is clear that in order to achieve growth, auto companies must realign themselves to attain operational efficiency. Operations need to be flexible and responsive to customer demand. The scope and importance of operational efficiency has further improved following the implementation of information systems within manufacturing processes.

Resource sharing among automakers is another solution that can be implemented if two companies agree to collaborate. Many companies have already begun sharing advanced technology, with GM and Toyota recently agreeing to extend their advanced technology collaboration to 2008. Both companies also have agreements with ExxonMobil to speed the development of a clean hydrocarbon fuel for fuel cell vehicles. Nissan and Renault have been working collaboratively on various projects since 1999. These collaborations will help companies tap niche markets and develop newer product lines and products more cost effectively. Automotive companies will attain both short term and long term gains if they succeed in collaborating in this way.

The global recession enabled auto companies to implement several restructuring initiatives that streamlined their operations, making them leaner and more productive. It also provided them with an opportunity to close down unproductive plants and layoff excess staff – a measure that was previously opposed by auto and labor unions.  

Most auto companies have no qualms in shifting their production overseas, in order to cut down production costs. All the key automakers have assembly plants in the main emerging markets and are building up their offshore production capabilities. Almost 60% of the worldwide production of motor vehicles happens in a country, other than the one in which the vehicle is sold. 

Emerging markets

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The automotive market is a mature market, but the success of auto companies depends largely on the strategies they adopt within emerging markets. Localization and flexibility are key components for gaining market share.

Auto companies are faced with the challenge of manufacturing products for emerging markets that differ significantly from those produced for the US and European markets. As the prospective customers in emerging markets are often first-time buyers, entry level cars are expected to be the most popular segment. However, creating brand new entry level models within a sufficiently low price range is a hard task. In addition, the buyers are on the lookout for high-quality, stylish, well designed and affordable automotive products.

Volkswagen, which had been the top foreign brand in China for the last twenty years, was superseded by GM in 2004. GM’s success in China is attributed to its ability to adapt and localize its automobile products, such as the Wuling Sunshine minivan. Aggressive auto financing schemes, already fuelling sales, will also be a determining factor in attracting new customers and further boosting sales. In India, according to industry estimates, 80% of the one million cars sold in 2004 were financed by bank loans.

Over the years, there has been a steady contraction in the auto markets of the US, Japan and Western Europe. In 2009, the regions accounted for 47% of global automotive production and are expected to account for 56% by 2016. Other countries with strong growth prospects are Mexico, Thailand, Indonesia and South Africa. Localization and flexibility are key components for gaining market share.

In addition, auto companies have to devise strategies to overcome the various barriers put up by the governments of the emerging auto markets to protect their indigenous auto industry. The barriers include various forms of support to the local auto companies, putting restrictions on the ownership structures of auto companies to limit foreign investment and levying heavy custom duties. The auto companies also have to compete against local automakers, who would have better understanding of customer preferences and would have built up trust over several years. 

The biggest players in emerging nations are GM, Volkswagen, Toyota, Honda, Chevrolet, Ford and Hyundai. GM’s success in China is attributed to its ability to adapt and localize its automobile products. Aggressive auto financing schemes, already fuelling sales, will also be a determining factor in attracting new customers and further boosting sales. The companies also need to spend a lot on marketing, expanding dealer and service networks and creating a supply chain. Between 2011 and 2015, Ford intends to spend USD 2.4 billion in Brazil. 

Key challenges

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As competition grows, launching new models at short intervals is of vital importance, but poses some large challenges for automakers. The integration of all segments of the manufacturing process, and coordination between design team, production line, suppliers and distributors are paramount to successful product launches. Once again, the Toyota Corporation’s production system proved an invaluable tool for the company, with the Just-In-Time ethos not only put into use in terms of manufacturing, but also in product development, supplier relations and distribution, allowing the company to develop new vehicles at a much quicker rate than many competitors.

Improved supplier-manufacturer relationships is another aspect that may well define the success of the automotive industry. Developing a supplier strategy for improving relations with suppliers will help auto companies to ensure goal compatibility and adopt better product improvement parameters. Toyota is an exemplar of effective supply chain management. It has built close and enduring relationship with suppliers, continuously helping suppliers to achieve economies of scale.

In order to meet environmental norms and customer expectations, it has become a necessity to incorporate the latest technological features in new automotive products. The real challenge comes in developing a car or vehicle that meets safety and environmental standards whilst maintaining excellent performance. Fuel efficiency is also very important, particularly in light of continuously rising fuel prices.

The time lag between design and rollout of vehicles has gone down considerably from 18-24 months in the 1980s, to 12 months in 2010. This has been mostly achieved thorough better re-use of components between models and improved design processes. However, the rising competition and spurt of new technologies, means that automakers need to be quicker, in order to maintain their market position.  

The global financial crisis has negatively impacted the automakers, with most of them struggling to maintain their market shares, profitability and capitalization. Car companies are finding it hard to cope with an auto environment in which consumers’ demand to pay the least amount possible, for more and more facilities. Most of the auto companies are looking for collaborations in the supply chain and in their R&D efforts.

Technological Advancements

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Some of the key models in this segment are the Toyota Prius and the Honda Civic hybrid. Today, almost all major auto companies have hybrid models in their product range. The crossover segment is also witnessing stupendous growth, especially in the US market.

Telematics systems are another key segment changing the face of automotive products. During 2001 and 2005, global sales of Telematic enabled vehicles increased from 4.5m to 21.7m in 2005, up 21.7%. This segment is expected to grow 57% between 2005 and 2007. Advanced features such as Global Positioning System (GPS) are now seen in middle segment cars as well as high end vehicles. Hydrogen fuel cell technology is another area of great interest, and is possibly the main solution for the hunt for a sustainable alternative fuel. Technological innovations bring about product differentiation and enable companies to stand above the competition.

Most of the automakers are taking a cautious but positive approach towards the development of new technologies. This caution is required in order to minimize infrastructure-related risks and maximize return from previous investments made to optimize combustion engines. 

By 2020, battery-powered vehicles, namely, plug-in full-electric and plug-in hybrid electric vehicles are expected to account for 5-8% of all vehicles sold, utilizing several types of propulsion technologies. By 2030, battery-powered vehicles are expected to account for 15-20% of all vehicle sales. The major technological developments for EVs are a rise in the energy density for various chemical compositions in EV batteries; new powertrain designs with higher reliability; latest software control models (e.g., for energy, battery and temperature management); and more standardization efforts, such as the SAE J1772 initiative for standardizing EV charging plugs. 

Automakers also offer a variety of safety systems, intelligent cruise control systems, blind-spot monitoring, lane departure warning systems, ‘vehicle-to-vehicle’ communications (which provide warning to a driver that cars ahead are applying their brakes) and parking assistance systems. 


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