British Motor Industry and Government Strategy - Essay Example

British Motor Industry and Government Strategy Introduction This paper will present an analysis of the UK motor industry with respect to its current status and the present government policy to revive this industry back to its old glory. A look at the structure of the global automotive industry will be presented first followed by an analysis of the present global trends in vehicle manufacturing. The next section will be about the major players world wide. Following that will be an analysis of the British motor industry looking at its skills, present challenges and the future. Structure of the Auto Industry The global auto industry is structured along 3 main levels. The “component suppliers” form the first level in this value chain. Next are the finished good producers or “assemblers” followed by the dealers and the after-sale-service people. The component suppliers, also known as the “up stream”, are again divided in to many sub levels. Usually they are classified as Tier 1, Tier 2 and Tier 3 suppliers etc., where Tier 1 represents the highest level of components such as the engines and the powertrains. At the assembler level, there used to only a handful of big players from countries such as the US, Japan and a few from the European Union (EU) countries. This situation, however, has now changed with many Eastern Europe countries and Asian countries such as China and India entering the automobile industry. The output side of the assemblers, also called “post-manufacturing” or “downstream”, consists of distributors, dealers and the service and repair shops. This level accounts for a significant volume of employment, where in UK alone, about 73% of the employees in the automotive industry come from the automotive supply and distribution chains. This is out of an approximate total of 780,000 employees (Parker & McGinity 4). Global Trends The world automotive industry has gone through several ups and downs from its inception to present. From the 1950s where the United States dominated with a 100% market share amongst the 3 giants General Motors (GM), Ford and Chrysler, it changed to a position where US lost its share to 52% while Japan cemented her place with a 43% share by 2005 (BBC “The Car Industry”). Since the beginning of this decade, the industry has seen the emergence of several new players predominantly from China and India and some Eastern Europe countries. The demand for energy efficient vehicles has gone up rapidly in the recent past and this has forced many auto manufacturers to invest time and money in more environment-friendly technologies. Context of Five Forces In analysing the present global trends, The Five Forces Theory (Porter 1979) offers sound criteria for an encompassing environment study. Rivalry among competitors Competition in the global auto industry has intensified with many new players entering the market. In fact, the European Foundation for the Improvement of Living and Working Conditions (EFILWC) states “global competition” as one of four main drivers of change for the European auto industry (5). There is stiff competition coming from the new Asian manufacturers, led from China. For example, “In North America, domestic automakers have seen a steady decline in their share of the market. In the ten months to October 2004, the market share of Asian-owned carmakers in the US rose to a record 34.5%” (Asia Pacific Foundation of Canada 5). Threat of new entrants The new entrants are again primarily from Asia with China and India in the forefront. Automakers such as the Chinese FAW, Chana and the Indian Tata and Maruti are fast catching the markets, especially in the Asian region. Their makes of small cars with high fuel efficiency are particularly appealing given the present situation in the world oil market. Threat of substitutes Sky rocketing fuel costs can push the customers more in to public transport with a direct consequence of shrinking the demand for personal automobiles. The car and SUV markets can get hard hit by this. There is speculation that the oil prices may rise up to US$ 150 per barrel by 2009. “The world will face an oil ‘supply crunch’ within the next five years, as demand outpaces the growth in production from non-OPEC countries, the IEA has stated in its Medium-Term Oil Market Report on 9 July. (EurActiv) Another possibility is for and more people to go in to alternative means of transport such as cycling and walking. Bargaining power of Suppliers The “upstream” of the car industry is formed by the component suppliers. So far, however, the giant assembler companies have dominated the industry. But, as these giants outsource more and more of the final product to the Tier 1 component suppliers, they will develop a formidable position from which they can bargain. Bargaining power of Customers Automobile customers in the future will bargain for more energy efficient vehicles. This will be coupled with protests from environmental organisations pushing for “greener” technologies. Automakers will have to listen to both customer demands driven by primarily financial considerations and legislative emissions standards set by governments around the world. Handling over capacity Overcapacity has been a major problem for the auto industry. For example “In western Europe, there is an estimated car capacity of 18.8 million against production of 15.2 million in 2002” (EFILWC 6). The planning of excess capacity, which is driven by inaccurate sales forecasts creates lot of troubles primarily in having to layoff redundant sales force. Such actions by auto makers can trigger strong reactions by worker unions. For example, the Amicus has started a campaign to “Save the UK Car Industry”. Tony Murphy, a national officer, is quoted there saying: “We need to put a stop to these morally bankrupt companies blackmailing UK and European employees to take massive cuts in terms and conditions just to stop production moving to another country. European unions need to get together to fight this on a united front.” Moving to lean production would be one of the best options of handling over capacity. This will enable the manufacturers to produce on-demand rather than based on future forecasts which tend to be inaccurate. Lean production, in fact, is another major trend in the global industry offering the prospective customers facilities such as “configure your car”. Major Players The top ten auto makers in terms of the number of units are listed below. Table 1: Top 10 auto manufacturers (Source: OICA) Manufacturer Volume GM 8,926,160 Toyota 8,036,010 Ford 6,268,193 Volkswagen 5,684,603 Honda 3,669,514 PSA (Peugeot Citroën) 3,356,859 Nissan 3,223,372 Chrysler 2,544,590 Renault 2,492,470 Hyundai 2,462,677 Though GM has been the leading auto maker in the world to date, “Toyota is set to overtake GM as the world's largest carmaker, ending 70 years of dominance” (BBC The Car Industry). UK Motor Industry The Challenge The British motor industry has a very vibrant past. However, since about the year 2000, it went through a very rough period resulting in many closures of plants and laying off of thousands of employees. The BBC in 2002 reported that “The UK car industry is said to be in trouble. Ford has stopped making cars at Dagenham, Vauxhall has closed its Luton car plant, and industrial relations at MG Rover's Longbridge factory are tense” (What's left of the UK car industry) The industry, however, recovered from this dangerous position and it has come back to life in the last year. “New car registrations this year seem to have bucked a trend at long last. … consumer interest in buying new cars has finally risen, and demand for new cars this year has exceeded expectation” (Haycock “Confidence Returns to UK Motor Industry”). The challenge now is to take the industry forward from this position and prepare for the demands of the next 10 to 15 years. The global auto industry is expected to undergo rapid changes in technology, stiff competition from new entrants, shifts in demand as advanced technology enables more functionality at lower costs and finally more pressure from legislation. (Parker & McGinity 3). Strengths Parker & McGinity states that the main strengths of UK in this field are: Engineers with good understanding of the production best practices Diversity of the component engineering and manufacturing landscape Flexible employment including supply of temporary labour The supply base with a “can do” attitude Further, according to a report by the former Department of Trade and Industry, there is a “long-established, independent, design engineering sector” which is “recognized internationally for its flexibility and responsiveness and for the innovative qualities of its engineers” and “UK is also strongly influential in vehicle styling” (The Driving Force 5) Present Strategy The present strategy of the British government is set inline with overcoming the challenges stated above whilst leveraging from the key strengths of UK’s motor industry. The present global trends must also be considered by any strategy put forward. Based on their research findings Parker & McGinity states that “The future of UK car production now rests with foreign manufacturers”. They recommend that the “Government must develop strong relationships with key international players such as Toyota, Honda and Nissan as well as Ford, BMW, Peugeot and GM” (16) This explains why the British government has invited these global players to setup R&D centers, new production plants etc. in UK. Some of the expected benefits of this strategy are to attract the technology know-how, especially in terms of advance technologies such as hybrid powertrains, benefit from lean production and process engineering practices of companies such as Toyota and to inculcate work cultures such as continuous improvement and Kaisen among the UK employers. Another key finding of the study conducted by Ricardo and Skill4Auto is the fact that UK cannot attain cost leadership either in the assembling or component supply domains. Cost cutting will not prove fruitful as the new entrants such as China and India will always set lower cost hurdles nullifying the effects of such lowered costs. Hence the report states that “growth through innovation and technology is the only viable route to a healthy and sustainable automotive industry”. (8) Parallel to providing incentives to the global players in the auto industry, the government is promoting Britain as a source for world class automotive technology with a highly skilled work force. (The Driving Force) The combined effect of all these will be the shaping up of the UK automotive industry to meet the challenges of the next decade by drawing upon the rich body of experience from the past and filling the gaps existing in know-how, management and process skills with the help of foreign auto maker giants. This will ensure that the manufacturing work force of about 221,000 and the downstream work force of about 550,000 (The Driving Force 4) will be safe and the UK motor industry will continue to contribute its economy as it does at present. Conclusion The world automotive industry is now passing a period of stiff challenges primarily led by rising oil prices and increased global competition. Rapid advances in technology have enabled the design of more energy efficient cars and the practice of agile production methods such as the lean production. The UK automotive industry is not isolated from these challenges and faces the risk of collapsing under the pressure from new entrants, if the government, industry and academia do not formulate a combined strategy. It could, however, be stated that government has formulated policies in the right direction to address these challenges to empower the industry to face next decade with success. Works Cited “Car Industry, The”. British Broadcasting Corporation. 10 Nov 2007. “Driving Force, The”. Department of Trade and Industry (former). April 2006. 09 Nov 2007. “East Asian automobile industry, The: Opportunity or Threat?”. Asia Pacific Foundation of Canada. Jan 2005. 10 Nov 2007. Haycock, Chris. “Confidence Returns to UK Motor Industry”. 05 Nov 2007. 10 Nov 2007. “Oil experts predict 'supply crunch' in five years”. EurActiv. 13 Jul 2007. 09 Nov 2007. < http://www.euractiv.com/en/energy/oil-experts-predict-supply-crunch-years/article-165370> Parker, Steve and Bryan McGinity. “Vision for the UK Automotive Industry in 2020”. 07 Mar 2006. Ricardo UK Ltd, Warwickshire and Skills4Auto Ltd, Birmingham. 09 Nov 2007. Porter, M.E. "How competitive forces shape strategy". Harvard Business Review. March/April 1979. “Save the UK Car Industry”. Unite the Union. 10 Nov 2007 “Trends and drivers of change in the European automotive industry”. European Foundation for the Improvement of Living and Working Conditions. May 2004. 08 Nov 2007 “What's left of the UK car industry”. BBC. 21 Mar 2002. 10 Nov 2007. Read More