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The Automotive Industry: The Case of General Motors

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Introduction

The automotive industry consists of numerous companies that design, produce, sell and market motor vehicles. This sector is one of the largest revenue generators across the globe, with total revenues of approximately $4 trillion. The main products from this industry include passenger vehicles, light trucks (which include vans, SUVs, and pickups), and commercial vehicles. Over the years, Chinese, Korean, American, Indian and German companies among other have increased their vehicle production to satisfy the demands of a growing market.

One of these companies is General Motors (GM), which was established in 1908 and is now ranked amongst the top vehicle manufacturers, designers, and sellers across the globe. GM is currently ranked amongst the top revenue generators in the U.S. It has 173,000 employees and in 2018, it generated revenues of $147.049 billion and a net income of $8.014 billion. The company manufactures its products in 37 countries, with brands such as the Cadillac, Buick, Chevrolet, and GMC. GM also manufactures hybrid electric vehicles, extended-range electric vehicles, flexible-fuel vehicles, and hydrotec military vehicles. This large product offering has enabled GM to become a globally renowned manufacturer and seller of vehicles and thus secure its position in the automotive market.

The automotive industry

Companies in this industry manufacture, design, and sell their vehicle products globally. However, the automotive industry does not include organizations such as gas stations and vehicle repair shops, which are responsible for vehicle maintenance. The industry was established in the 1860, with the U.S. leading in production. The demand for vehicles has increased since 1929 when there were approximately 32,028,500 vehicles globally, most of which were produced in the U.S., but by 2010 the number had reached 1 billion vehicles. The U.S. led other countries in production for many decades but over time, countries such as China and Japan have overtaken the U.S. and sold more vehicle units than before. In addition, there are many more models of vehicles in the U.S. than in previous decades.

Most individuals in developed economies use vehicles as their main transport mode and thus the demand for vehicles has been high. However, a McKinsey & Company (2013) report found that profits and sales from vehicles will increase by 50%, and there would be increasing demand for vehicles from the BRIC markets (Brazil, Russia, India, and China). Conversely, the industry has slackened in developing nations, and this trend might continue into the foreseeable future. It is therefore important for organizations in the industry to realize that challenges based on changing consumer trends, diverging markets, digital demands, cost pressure due to platform sharing, and regulatory pressures will significantly influence the industry.

The main vehicle manufacturers in the industry based on production are Toyota, Volkswagen Group, Hyundai, GM, Ford, Nissan, and Honda. Many manufacturers in the automotive industry usually form partnerships in order to enhance their economies of scale, increase brand recognition, and increase profits and revenues. For instance, Daimler AG has a stake in Mitsubishi Fuso Truck as well as in the Renault-Nissan Alliance, while GM has a stake in SAIC Group and in GM Korea. This has ensured that the industry produces vehicles that are diverse and unique, satisfying the varied demands of the consumers.

Sensitivity of the Automotive Industry to the U.S. Business Cycle

Even though the automotive industry contributes significantly to the GDP growth rate in the U.S. business cycle due to its connections to other parts of the economy, it represents a very small fraction of the total GDP (OECD, 2009). The business cycle and this industry work in unison, but the impact of the cycle is larger in the auto industry. Therefore, the industry is more volatile compared to other manufacturing industries in general because it heavily relies on the business cycle. As such, the automotive industry has been significantly affected by recessions that have reduced consumer spending power. However, a positive change in market conditions should also improve car sales.

During the financial crisis of 2008 to 2010, many American, European and Asian vehicle manufacturers were affected. In addition, the increased price of fuel due to the 2003-2008 energy crisis, poor housing market, and strict credit conditions further weakened the industry (Das, 2008). As a result, the sale of SUVs and pickup trucks reduced in American companies such as GM, Ford and Chrysler (The Big Three) because of their vehicles’ high fuel consumption as consumers switched to using hybrid and other fuel-conserving vehicles. This resulted in a reduction in sales and by 2008, the credit crunch worsened the industry’s ability to obtain affordable raw materials. Automotive manufacturers therefore implemented creative marketing strategies in order to retain old customers and obtain new ones during the trough period of the business cycle. The Big Three and other manufacturers gave significant discounts on their products but this did not increase sales. In particular, The Big Three were faulted for selling expensive vehicles at a time when fuel prices were a challenge, and this forced consumers to switch to affordable and smaller vehicles from Europe and Japan.

As a result, the U.S. government stepped in to rescue the automotive industry at a cost of $80.7 billion between 2008 and 2014 (Amadeo, 2019). This helped GM and Ford to stay in business and to prevent job loss for their workers. The industry felt that their losses were caused by external business factors that they could not control. This demonstrates that when the business markets suffer, companies in the automotive industry also suffer. During the recession, car sales declined in the U.S. and this impacted on both international and domestic manufacturers. However, GM filed for bankruptcy in June 2009 but soon emerged from this bankruptcy the following month.

It is evident that the economy and U.S. business cycle largely affects the industry. A reduction in consumer credit during the recession resulted in reduced vehicle sales as the average consumer with limited credit was unable to obtain a loan to purchase a vehicle.

By 2012, the sales of vehicles in North America was 17 million units, an increase from previous years. This is due to the fact that at this point, the effects of the economic recession were mitigated, so consumers had better spending power. In addition, instabilities in America’s job market and in consumers’ finances discouraged consumers with a working car to purchase another one at this time and this affected production for most manufacturers.

As such, vehicle sales are cyclical because they rise and fall over time. The economic recession was very severe until American vehicle sales went below the replacement rate of 15 million, but this figure improved to 17 million by 2015. However, there are now concerns that vehicle sales worldwide have once again reached their peak and might drop in coming years. The economy is solid at the moment but analysts in the industry are worried because vehicles are expensive, and the industry employs a large number of people (Business Insider, 2019). As such, the above factors are now considered to be a recessionary indicator that the industry can follow to determine its place in the business cycle.

Companies in the industry went bankrupt and faced challenges during the recession, but routine downturns do not significantly impact on the industry. The idea that vehicle sales are now at a peak and can only fall is gaining ground, as analysts posit that car-sharing and alternative transport have reduced the need for individuals to own cars. This means that even during a positive economy, consumers are still shifting to alternative modes of transport, and this will affect the industry. However, the U.S. credit cycle is countercyclical and this enables vehicle manufacturers to make profits globally even when there is a recession in the U.S.

Currently, the American automotive industry accounts for 28% of total GDP, which is equal to $518.1 billion. Vehicle manufacture in the U.S. is ranked second across the globe, due to its annual production of approximately 11.19 million units (Investopedia, 2019). The market therefore rises and falls based on expansions and declines in the American business cycle. This means that the industry and its consumers do well when the economy is growing and reaching its peak and vice versa. Mainly this is due to the fact that similar to all discretionary habits, organizations and consumers spend more when they have a surplus and vice versa.

Automotive Industry Structure and Performance

Threat of New Entrants

This threat is very limited because the industry is very capital-intensive and thus has significant entry and exit barriers. Manufacturers invest significant resources in financial, human and infrastructure resources in the industry, and the legal and compliance costs for the industry are prohibitive. Therefore, new companies find it difficult to enter the industry and to build customer trust and loyalty the same way that Mercedes and GM enjoy brand loyalty.

Threat of Substitutes

This threat is moderate for GM because customers can switch to GM’s competitors or use alternative forms of transport. Various manufacturers sell luxury and stylish vehicles, but the threat of substitutes is mitigated here because GM is a well-known brand and customers trust the company’s products. As such, even though companies in the industry pose a threat to each other, their different product offerings enable them to attain and maintain loyal customers. Customers will therefore look for manufacturers that sell less costly, fuel-efficient, or durable products. However, substitute companies attempt to obtain customers who are sensitive to vehicle prices.

Threat of Rivalry

There is strong competition between companies in the industry because they offer a wide range of products based on application of technology, pricing strategies, design and style, and on brand image. All the companies have significant investments in innovation, Research and Development, as well as on brand and sales marketing. The competition means that the companies are highly aggressive as they seek competitive advantage and a larger market share. The industry is mainly oligopolistic because there are approximately 10 manufacturers who control 70% of the market. The rivalry is very strong between the top five manufacturers but it could increase due to globalization that forces companies to enter new developed and developing markets.

GM functions in an oligopoly market structure, with very few manufacturers using a similar structure. As a result, customers easily substitute one product for another, but their purchases are limited to the few companies in the oligopoly. However, any action taken by GM (for instance launch of a new product or a price reduction) usually provokes a reaction from the other firms. This keeps the competition intense between the firms, who must predict how their rivals will respond. According to the Nash Equilibrium, one player’s strategy is usually the most effective response to other’s strategies. For instance, GM and Ford gave rebates on popular SUVs. This resulted in discount wars with each company having a unilateral incentive to discount, but ultimately, neither achieved a pricing advantage.

Bargaining Power of Customers

This is a significant threat because customers can switch to other companies that sell cheaper products. The customers nowadays are price-sensitive and are able to seek information before they make a purchase, so they can easily select the best vehicle option (Menon, 2017). However, vehicle manufacturers usually offer customer services as well as discounts to individuals and corporations, and this ensures customer loyalty.

GM has been involved in antitrust suits over the years as the federal government campaigns to ensure customer safety. For instance, the Federal Trade Commission (2016) found GM culpable of deceptive advertising and ordered the company to recall its Certified Pre-Owned vehicles due to safety issues. This gives the customers power and ensures that any products purchased are durable and safe for long-term use. In addition, such enforcements empower customers to make better purchasing decisions. In United States v. General Motors Corp (1966), GM and three associations of Chevrolet dealers were found culpable of colluding to restrain trade and eliminate a class of competitors, thus demonstrating a monopolistic market strategy.

Bargaining Power of Suppliers

This threat is low because manufacturers can select raw materials from a wide range of suppliers in the market who ultimately sell their materials at affordable prices. In addition, some companies manufacture their own components, thus reducing the need for a supplier. Therefore, manufacturers are able to insist on concessions from suppliers because they have numerous options.

Business Strategy of GM

GM is still the largest automaker in the U.S., with 17% of the industry’s total sales. However in terms of the global market, GM is not part of the leaders but it holds 9.5% of the market share because this is a highly competitive and diversified market. As the emerging markets continue to develop, GM has the opportunity to establish a presence in these markets and thus increase its market share in the local and global markets.

GM’s business strategy is based on innovation, safety and quality, delivering value, making a positive difference, and customer loyalty. These factors aim to promote sustainability at GM and ensure customer satisfaction through offerings based on renewable technologies, innovation, and efficiency metrics. The company uses a generic strategy that allows it to gain competitive advantage in the dynamic industry. GM uses its economies of scale as a strength, and it also uses intensive growth strategies. Its cost leadership strategy means that GM is able to sell its products at lower prices than its competitors such as Mercedes and this satisfies the majority of consumers’ needs and leads to competitive advantage.

The company further uses product differentiation by manufacturing energy-efficient vehicles to suit changing consumer needs and the demand for fuel-saving vehicles. This means that GM must ensure that its brand image remains positive and that it offers user-friendly and innovative features in its products. In addition, the company has a market penetration strategy that ensures GM has a large number of dealerships across the globe that enables ease of customer access to its products. GM also uses vehicle financing and leasing as part of its business model in order to increase revenues and profits through the General Motors Financial Company.

Conclusion

GM therefore needs to ensure that its business and marketing strategies enable it to grow its market share and to retain competitive advantage. A careful evaluation of its internal and external environment should serve as factors for exploiting opportunities and mitigating threats in the automotive industry. This is because the industry is expected to keep growing but also evolve as trends in the market also change with time.

References

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