How EU Policy Affects the European Automotive Industry - Essay Example

How EU policy affects the European Automotive Industry The automotive industry is one of the biggest of all industries. It manufactured nearly 60 million cars and trucks a year and employs several million people around the world. It is a key indicator of economic growth and a main contributor to the gross domestic product (GDP) of several Member States and the EU (EMCC dossier). The main vehicle producing areas are Asia-Pacific, including Japan and Korea (19.3 million), Western Europe (17.4 million) and North America (16.8 million). These areas are also the largest markets with sales figures in the same year of 14.2, 16.7 and 19.9 million respectively (Trends and drivers). However, during the last five years, there has been a slowdown in economic output across the EU, and, while the forecasts are positive, modest growth of 2.0%-2.3% is expected in 2004. Weak growth has led to reduced consumer and business confidence. Industrial production has decreased, including the production of durable consumer goods. Levels of private consumption have fluctuated during early 2003, following modest growth in the previous two years. This is partly due to poor labor market conditions, with EU unemployment rising during 2003. Economic indicators are weak in some major EU economies such as Germany, France, Italy and Spain. Only the United Kingdom (UK) has managed to resist these trends (Trends and drivers). This has greatly affected the car industry, given the car's status as the ultimate consumer and fashion item, as well as the importance of engineering and design in the manufacturing process. Average profit margins have declined from around 10% in the 1960s to less than 5% today, and some volume car makers are actually losing money (EMCC dossier). Despite increasing competition worldwide, European automotive has maintained a strong position in exports and global sales. The strong bond between Europe's vehicle manufacturers and the sophisticated customer base in the largest car market in the world constitutes a prominent competitive advantage, while the notable presence of European producers in emerging markets, such as China and the Russian Federation, offers a potential for future growth and profits (info-crono-archivio). Furthermore, EU enlargement created new opportunities for the European automotive industry. The combination of expertise, affordable labor and the proximity to the large European markets has led to the emergence of a very dynamic cluster in the new Member States - especially Poland, the Czech Republic, the Slovak Republic and Hungary (info-crono-archivio). Despite these advantages, many challenges remain: the EU automotive industry lags behind the US and Japan in terms of productivity. Labor productivity in the EU-15 is 25 per cent lower than in the US and 30 per cent lower than in Japan; labor costs per hour worked in the EU-15 are comparable to those in the US, but more than ten per cent above those in Japan and almost three times as high as in Korea (data for 2001, converted using purchasing power parities). Annual working time in the automotive industry in EU-15 is more than 20 per cent shorter than in the US (in 2001); there are major technological challenges ahead, most prominently the fuel cell (info-crono-archivio). Influences of EU policies European legislation is one of the main drivers of the European automotive industry. Emissions and recycling legislation have a strong impact both on vehicle technologies and construction (Trends and drivers). EC, industry and consumer concerns for environmental sustainability, road safety and mobility have led to a number of significant technological developments. These have both positive and negative effects on profitability. For example, a limited number of specialist high technology suppliers might prosper while vehicle makers see their already narrow profit margins cut even further. Such a development would make vehicle makers vulnerable to further consolidation and restrict their investment in new market opportunities. An example is the concern shown by European manufacturers, including US-owned subsidiaries, at the EC's proposed limits on CO emissions. Alternatively, innovations developed to meet regulatory demands may have the potential to give European producers a lead vis--vis the competition (Trends and drivers of change). Environmental legislation The EU emissions standards are compulsory in all EU Member States. The current Euro IV standard must be reached by 2006. It covers emissions of CO2, N2O, and hydrocarbon particulates for both diesel and petrol engines. Sulphur emissions are not covered but are addressed through the introduction of low sulphur fuels, which will be mandatory by 2005. CO2 is not covered either but is subject to a voluntary agreement which commits automobile manufacturers to reduce CO2 emissions by means of improved vehicle technology. This requires more efficient vehicles and lower weights, and also the development of market-oriented measures such as improvements in the level of consumer information (Trends and drivers). Recycling legislation The other main area addressed by law is recycling and the End-of-Life Vehicle Directive (or ELV Directive). Member States are required to set legislation increasing re-use, recycling and other forms of recovery of 'end-of-life vehicles' (ELVs) and components, and phase out certain hazardous substances by 2007. About 25% of each ELV currently goes into landfills; the target is to reduce this to below 5% by 2015. A further requirement is 'free-take-back' of ELVs, which enables owners to take their vehicles to an authorized treatment facility at no cost to themselves. It is expected that the costs of compliance will be significant. Analysts estimate the regulations of the ELV Directive might result in an additional 20 to 150 per vehicle (Martin and Raes; Trends and drivers). However, recent experiences in the Netherlands, Germany and France demonstrate that increased professional regulations are likely to drive some players out of business, resulting in consolidation. This is of particular concern to small and medium-sized enterprises in the industry (Trends and drivers). Consumer demand Another driver of change is the consumer. There is a growing demand for more choice. Volume production may become similar to that for premium cars, with a greater number of vehicles being made to order on the basis of a multi-option choice, i.e. 'batches of one'. Online vehicle purchase will accelerate this trend. At the same time, the market for niche vehicles is growing, i.e. more variation of body shape and styling. This has led to a variety of body shapes being constructed on standard platforms. Examples include the Renault Scenic, Fiat Multipla, the Opel VX220, and the VW Beetle and Audi TT. Furthermore, there is an increased awareness of occupant and pedestrian safety, and tests of the New Car Assessment Programme (NCAP) have become the accepted standard in Europe. European consumers also look for greater fuel economy, exemplified by the growing popularity of diesel power units in Europe. This may not be the case in the US or Japan. Another trend has been a move 'up-market' in specifications and the inclusion of more on-board electronics and telecommunications systems. Through increased specification, carmakers can extract higher margins. Nevertheless, sales patterns have been significantly affected. Volume producers, such as Ford and Opel, have marketed models that overlap the price bands of premium producers. In this context, consumers have often opted for the prestige marques. Hence, sales of vehicles such as the Ford Mondeo and Opel Vectra have suffered. In 2002, the Mercedes C-Class and BMW 3-series sales exceeded those of the Mondeo and Vectra. (Trends and drivers). Conclusion The future of the European automotive industry will surely face more threats than opportunities. With intense rivalry, EU expansion is likely to bolster the automotive market. However, developments in recent years indicate that production bases are likely to shift from EU15 to candidate countries. During the period 1997-2003, the trade gap between EU15 and candidate countries reduced significantly (EU automotive at the crossroads). Foreign direct investment (FDI) registered significant progress from the western car manufacturers. The influx of FDI from Volkswagen, General Motors (Opel), Fiat, and Renault helped them to acquire almost the entire production capacity and facilitated modernization of the acquired plants. Daewoo, along with these four western manufacturers, dominated the automotive industry in the candidate countries and helped to reduce the trade gap with the European Union (EU automotive at the crossroads). The future of the EU automotive industry lies in converting threats into opportunities as at present, threats outweigh opportunities. While the automotive industry is caught between threats and opportunities, consumers are likely to enjoy the benefits of reduced prices and a better product range. Whether this encourages manufacturers to overcome their threats remains to be seen (EU automotive at the crossroads). The past decade has seen a number of significant technological advances driven by: competition and consumer demand for novelty; the need to increase margins on vehicle sales by fitting high value 'extras'; the demands of increasing concern for environmental sustainability - including better traffic mobility; increased pressure to improve occupant and pedestrian safety. As discussed in the mapping report, the industry finds itself at the beginning of a further major technology shift as mechanical control of functions, such as steering, braking and automatic transmissions, is replaced by electrical operation. Manufacturers will continue to improve technologies in order to meet both customer demand and the requirements of legislation (Trends and drivers of change). Competition The pressure of strong competition will surely increase. As new markets develop there is a strong possibility of companies from developing regions emerging as significant global players (Trends and drivers of change). Intense competition will necessitate maximum-efficiency operations. The key is large-scale production to reduce the value of fixed costs per vehicle. With increasingly sophisticated vehicles and rising investment costs, the optimum economic scale increases (Rees). Some companies have achieved economies by maximizing volumes and standardizing parts across their model ranges. This resulted in investment on high capacity, an on-going trend towards mergers and acquisitions, and a rising number of cooperative ventures, for example, sharing research and development (R&D) costs (EUCAR; Trend and drivers). Demand Demand conditions can be categorized into those inside and outside Europe. Demand outside Europe is likely to become the main driver of any expansion. Since the major companies have made large investments outside Europe, this will not lead to significant increases in European jobs. However, company profitability will be boosted, taking some pressure of cost-cutting (Trends and drivers of change). Outsourcing Another most likely trend is towards outsourcing, which is influenced by the economics of the industry. This trend will continue however, not in a consistent manner. A significant variable is the degree to which outsourcing will extend to the supply of pre-assembled modules and systems. Another is the scale to which high level design functions are outsourced. A certain level of concern exists for both. The loss of competence ('hollowing out') of the vehicle makers and sometimes of companies will bring functions back in-house. Nevertheless, the only variable is the pace at which outsourcing continues to develop - not the general principle of whether it will happen (Trends and drivers of change). As car makers seek to cut costs, they will outsource more and more to the supply industry. This externalizes a proportion of fixed (overheads) and variable (materials) costs, and shares the risk for new developments. Outsourcing also allows greater economies of specialization and scale, since suppliers are more experienced in certain functions and can supply several carmakers (Trends and drivers of change). Technology All of these issues have considerably influenced both vehicle and manufacturing technology (UK Department of Trade and Industry; MacNeill et al). Manufactures want to take advantage of sophisticated technology in order face the ever increasing competitive pressure and to meet increased customer appreciation on quality and cost; add value to their vehicles to offset the squeeze on costs and profit margins (Trends and drivers). Works Cited Department of Trade and Industry (DTI), Foresight vehicle technology roadmap, United Kingdom, HM Government, August 2002.http://www.foresightvehicle.org.uk/info_/FV/ init01_trm.pdf EMCC dossier on the European automotive industry. European Foundation for the Improvement of Living and Working Conditions. Jan. 02, 2006 European Council for Automotive R&D - EUCAR, Master Plan 2000, EUCAR website, 2000. EU Automotive Industry at a Crossroads Frost and Sullivan. Jan. 02, 2006. Info-crono-archivio. Sicurezzaonline.it. Jan. 02, 2006. Martin, C. and Raes, T., End of Life Vehicle Directive, PricewaterhouseCoopers, September 2002. Rees, G., Report on the economic prospects for the automotive industry in the UK and Europe and its impact on Ford ofDagenham, Cardiff University Business School, 1999. Trends and drivers of change in the European automotive industry:Mapping report. (2004). European Foundation for the Improvement of Living and Working Conditions. Trends and drivers of change in the European automotive industry: Four scenarios European Foundation for the Improvement of Living and Working Conditions. Jan. 02, 2006. Read More