Auto Industry AnalysisGroup #2

February 24, 2009

Jacob WesternHeather McMahon

Ryan WhiteBrittany Thomason

Scott DeVoreCory GregoryMitchell Stack

The Automotive IndustryForced to change its business characteristics:

Closing of factoriesLaying off workersShrinking product line and modelsCreative marketing techniques

Automotive Industry is HUGEGM, Ford, and Chrysler contribute to more

than 7 million American jobsForeign auto manufacturers contribute to

more than 1.8 million American jobs

If the Big 3 Collapse3 million jobs would instantly be lostDecline of $151 billion in personal income the

first year$398 billion the second year

$156 billion lost in tax and revenue for the government over three years

American Automotive Industry: EmployeesHeavily unionized

United Auto Workers (UAW)Canadian Auto Workers (CAW)

This leads toHigher labor costsHeavy fringe benefits and health care

American Automotive Industry: EmployeesSome Facts:

UAW workers receive $10-$20 more to do than competitors

Wages + Benefits = ~$73 per hour for unskilled labor Foreign Wages + Benefits = ~$48

Foreign Automotive Industry: EmployeesSuccessful in keeping out unions from their

plants, both in America and abroadHas given them strong advantage over Big 3

Example: Toyota is able to make cars that require less moneyCheaper to make and more money can be

spent on other business aspects

Foreign Automotive Industry: EmployeesTransplants = foreign manufacturers

making/assembling cars in AmericaTransplants are relatively new in America

compared to the 100 year old American automotive industry

Honda and Toyota have younger workforce, so pension and healthcare costs are significantly lower

American Automotive Industry: Fuel PricesAmerican car makers focused on producing

SUVs1) easy and cheap to build2) Americans paid the high price without

thought of gas pricesHALF of the Big 3’s profits came from the sell

of SUVs and trucks

American Automotive Industry: Fuel PricesOil Crisis of the early 21st Century

Americans stopped purchasing large vehiclesAmerican sales plummeted

Sudden decrease in sales + strong foreign competition = huge surpluses of back stock

This causedSteep incentivesProduction cutsProduction shiftsCompletely new business strategy

Foreign Automotive Industry:Fuel PricesForeign companies have traditionally focused

on smaller, more economical vehiclesHas given companies such as Toyota and

Honda huge advantage in small car market over American manufacturers

Americans turned to more efficient cars that were in great abundance in foreign car dealerships

Automotive Industry at a GlanceAutomotive industry in North America has

suffered greatly during the past few yearsYet production is still strong

71.9 million vehicles were sold worldwideIncrease of 5.7% over 2006

Industry in South America and Asia is strong

Foreign Automotive Industry:Fuel PricesThis competitive advantage has allowed

foreign car manufactures to avoid the possibility of bankruptcy

HOWEVERToyota, for the first time in 70 years, has had

a net profit LOSS due to the decreasing world marketBut is still safe from the threat of bankruptcy

Identify/Assess driving forces for change

ChangesAutomobiles have been designed, developed,

manufactured, and marketed since the late 1800’s. 

Over the decades, engineers have embarked upon the task of looking for ways to improve and renovate an age-old industry.

Henry FordBorn July 30, 1863 in Dearborn Michigan.Incorporated Ford Motor Co. in 1903.Introduced the Model T in 1908; sold for $950.Ford’s Model T evolved from being a luxury item

for the well-to-do to essential transportation for the average man. As more middle-class Americans began owning cars, urbanization patterns changed. The United States saw the growth of suburbia, the creation of a national highway system, and a population excited by the possibility of going anywhere anytime.

Ford’s Assembly LineMass scale

Able to produce a chassis every 92 minutes

Able to manufacture a Model T every 24 seconds

Safety GlassCoated on both sides by a liquid plastic and

invented by: Edouard Benedictus. Accident: inadvertently knocked a glass flask

to the floor and it held together.Recently held a solution of cellulose nitrate, a

liquid plastic.Automakers were reluctant to use the

expensive “safety glass”WW1 – gas masks

Car safetyThe prevalent attitude was that the driving

safety was largely in the hands of the driver, not the manufacturer. Initially, car makers engineered cars with the idea of only preventing an accident, not minimizing injury if an accident occurred.

Rising concern of safety1920 – 1st 3-light traffic light system 1930 – Automobile Safety League of America1934 – GM conducts crash tests1944 – Volvo safety cage1960s - USDOT

Firestone / Ford Explorer scandal1990s - 6.5 million tires recalled because of

high speed blowouts150 deaths and 1,100 accidents linked to the

tiresWho’s at fault? Firestone or Ford26 psi or 30?

Ford Pinto Scandal1970sFord rushed the car to market when it had

fuel tank ruptures in 37 of 40 crash tests. In that incident “Ford knew of its problems, but decided that it would be more cost effective to allow deaths than to make it safer. (They could have fixed the problem at just $10 per car.)”

OnStarProvides subscription-based communications,

in-vehicle security, turn-by-turn navigation, and remote diagnostics systems throughout the United States and Canada.

Only available on GM models currentlyLocked outStolen

Gas & Greenhouse gassesRising cost of gas and effects of greenhouse

gasses on the atmosphere Purchase more fuel efficient carsObama’s plan

1 million plug0in hybrid cars by 2015All White House fleet plug-in hybrid w/in 1 yearAll Government fleets plug-in hybrid by 2012

EVALUATE COMPETITIVE FORCES

Porters Five Forces

Threats to EntryBarriers of Entry - Factors that limit new

companies entering a market.- Substantial Barrier due to cost- Current companies relying on strategic partnerships or mergers to help enter new markets

Threats to EntryHyundai – Korean Automaker

New Luxury car called GenesisGenesis is promised to deliver features equal to a $60,000 vehicle at a price of around $30,000.

Threats to EntryTesla Motors

- Electric powered sports car- Range – 221 miles - 0-60 mph less than 4 sec.- Base price roughly $110,000- Raised 187 million and has delivers 147 cars

Power of SuppliersLarge amount of suppliers Many suppliers rely on one or two major

manufactures buying the bulk of their parts.

Switching suppliers can lead to devastating effects to that supply firm. Resulting in suppliers being extremely susceptible to automakers requirements and demands. This leaves suppliers with little bargaining power.

Power of BuyersCurrently consumers have better buying

power which is reflected buy auto dealers providing large incentives to buy.

Hyundai has chosen not to create a new luxury brand like Toyota (Lexus) and Honda (Acura) but instead to badge its premier luxury vehicle (Genesis) as a Hyundai. Time will only tell how U.S. buyers react.

Threats of SubstitutesThe threat of substitutes to the automotive

industry is fairly mild.There are numerous other forms of

transportation available to the public, but none offer the independence, convenience and the value provided by automobiles.

Cultural Threats

Competitive RivalryThe automotive industry in the U.S. is no longer a

playground for the Big 3 (GM, Ford, and Daimler Chrysler); global companies compete in the U.S. market, while U.S. companies have globalized themselves.

In the 1980’s Honda and Toyota entered a fairly disciplined U.S. market and were very focused in growing their share in the market.

The degree of rivalry in the automotive industry is further heightened by high fixed costs associated with manufacturing cars and trucks and the low switching costs for consumers when buying different makes and models.

Competitive PositionsCompetitive Position is the relative level of

dominance (or lack thereof) a firm has in the market as compared to its competitors.

Must Analyze: Market Share Competitive Advantage Porter’s 5 Forces of Competitive Position

Competitive Positions Continued…Market Share: shows how a company is

doing as compared to its competitors who are experiencing the same opportunities or challenges at the same time.

Market Share

Competitive Positions Continued…•The Big Three have dropped from 70% to 57% in

2006•Currently it has dropped to 43%

Market Share

Competitive Positions Continued…Big Three now share less than 50%

Market Share

Competitive Positions Continued…Losses in Market Share =

Operate Below Capacity Production Cuts Plant Closures Layoffs

Employment Losses creates aWEAK competitive position!

Competitive Advantage

Competitive Positions Continued…

Competitive Advantage: is position a firm occupies against its competitors.

According to Michael Porter there is 2…. Cost Advantage (Low Cost) Differentiation Advantage (Unique & Appealing)

Competitive Advantage: Cost

Competitive Positions Continued…The Big 3 is lacking on the Health Care

Advantage…

“Universal free health care is the secret competitive weapon of the Japanese, Canadian and European auto industries. ” - Bruce Dixon, manager of BlackAgentReport.com

Competitive Advantage: Cost

Competitive Positions Continued…Big 3 Pensions Paid > Pensions paid in the

Foreign Industry.

Competitive Advantage: Cost

Competitive Positions Continued…

The US can’t compete on this level!

The Foreign market is investing in Innovation instead of Health Care & Pensions!

Competitive Advantage: Cost

Competitive Positions Continued…

Each car produced by the Big Three firms costs $2000 more in wages and benefits to produce than it does its foreign competitors. - Mitt Romney, NY Times

These extra costs must be reduced in order for the US to compete!

This lack in resources once again leads to a WEAK Competitive Position for the Big 3!

Competitive Advantage: Differentiation

Competitive Positions Continued…The Big Three spends over $21 Billion each

year on: Technological Innovation New Products Training Education

…to build safer, cleaner, and higher-quality vehicles with state of the art technology!

But its not enough to keep up with the foreign Industry!

Competitive Advantage: Differentiation

Competitive Positions Continued…Toyota was the first firm to come out with a hybrid

in the US…. The Toyota PriusThe Big 3 were still producing gas guzzling SUV’sToyota had the competitive advantage = BEST

competitive position!!

Competitive Position Conclusion…The Foreign Auto Industry is quickly taking

the lead in market share and cost & differentiation competitive advantages.

This leaves the US Big 3 in a very weak competitive position!

Start of a TrendToyota Prius

Honda Insight

Gas saving SUVsMSRP $75,000

Tahoe MSRP $55,000

Plug in HybridThe Chevy Volt. Can it save GM?

Electric CarsZap MakesSmall Cars andTrucks

Electric Cars Cont.GEM

We don’t seethis becomingthe main Str.eam

Hydrogen CarThe FCX Clarity has a range of 280 miles,

and refueling is simple.

Leasing started in Southern California

They have the most refueling stations in the US.

FCX

Refueling From HomeThe Home Energy StationHonda has operated an experimental Home

Energy Station in Torrance, California, since 2003. The Home Energy Station, which generates hydrogen from natural gas, is designed to provide heat and electricity for the home through fuel cell cogeneration and to supply fuel for a hydrogen-powered fuel cell vehicle.

Who Will Make What MovesToyota – Prius and more Hybrid Models

Honda – FCX and Home Energy Station

GM – Plug in Hybrids and Hydrogen

Chrysler – Plug in Hybrids

Ford - Hybrids

Key Success Points- Global AlliancesA global alliance is when a company makes

an agreement with suppliers and manufacturers around the world

This is helpful because it can allow for cheaper manufacturing or keep a company in business in a foreign marketEx: GM in compact European Cars

Environmental Factors Political- companies must pay attention to

every new piece of legislation that the government makes so they can find new ways for innovationEX: Vehicle Air Pollution and Control Act

Environmental Factors Cont.Global- cooperation between competitors is

very important when it comes to the auto industry.

Need to keep friends close but enemies closer

Alliance of Automotive ManufacturersSeveral car companies joined together to work

on pubic policy matters.U.S. manufacturers at a disadvantage

Hedgehog ConceptAutomotive companies employ the Hedgehog

Concept to keep from getting stuck in a rut. Japanese manufacturers are better at doing

this than U.S. manufacturersToyota Ex: New innovations on truck line

In the automotive industry being able to see through the complexity of competition, price wars, and struggling markets and discern any underlying patterns will ultimately lead to a crucial success factor.Hyundai Ex:

Blue OceansOne of the biggest success factors in the auto

industry is finding the next big market before the competition.Toyota HybridsGM Hydrogen Fuel Cell Concept

By not getting bogged down within boundaries of the market, and always looking for the next big thing will help secure long term success

ReputationReputation is a very powerful force in the

automotive industry.The Big Three have relied on reputation for

the last decade to get them through the recessionEx: Ford Motor Company and the Explorer

problem

Attractiveness of the Auto Industry

Baby Boomer Generation

Numerous retirements

Pension plans to be paid out

Tremendous amount of health care benefits

Big Three’s consumer confidenceDifficulties in their internal environments

Such as their management of reputation resources

This news has diminished the Big Three’s consumer confidence.

Obstacle at hand for the Big 3Costs of production seems almost impossible

to control

If the Big Three do not efficiently use the government loans

Unionized structureMore money per car than foreign industryWages are higherHealthcare contributions

GM’s Attempt to RevampCompetition among engineers

Breaking down barriers

Attending weekly meetings

All come together to solve their differences

GM’s Attempt to Revamp cont.Work in partnerships, such as:

Car design Marketing Engineering Manufacturing

GM expects integrity and innovation

Spark consumer demand

Achieve ultimate satisfaction

Who to follow?Japanese industry

ToyotaHonda

Japanese non-unionized work forceLess money spent on wagesFree health care

The End