There are many internal and external forces that affect an industry. Companies often do a situation (SWOT) analysis to discover what their external opportunities and threats, as well as their internal strengths and weaknesses are in order to tune their strategies accordingly. This report will focus on the environmental scanning of external opportunities and threats, including competitive, social, economic, regulatory and technological forces that affect the automobile manufacturing industry.
The main focus of this report is the automobile manufacturing industry. The NAICS code for this industry is 33611 and is referred to as the automobile and light-duty motor vehicle manufacturing industry. The SIC code that is assigned to this industry is 3711 and is referred to as the manufactures motor vehicles, and passenger car bodies industry. It includes products such as cars, pickup trucks, sport utility vehicles, and minivans. The base of this report is the automotive manufacturing industry in Canada. The report will concentrate on the opportunities and threats to the Canadian automotive industry as a whole.
Appendix A shows the breakup of the eight major competitors in the automotive manufacturing industry in Canada. The industry is becoming increasingly competitive with the amount of new manufacturers entering the lucrative automotive industry. The eight major companies account for ninety-two percent of the industry market share and every small amount that can be gained or lost, is a battle for these companies to sustain market share.
The automotive industry surprisingly flourished during the past year. In 2001, the automotive industry recorded its second largest sales records in history, with unit sales of 17.2 million. There are several reasons why the automotive industry is increasing its sales. First off, the average age in Canada is getting higher. With the increase in age, there is an increase in discretionary income, and therefore more Canadians are buying luxury items such as cars. Second of all, interest rates are very low and now is an ideal time to buy vehicles in Canada, with low and zero percent financing, it is easier for Canadians to finance cars and make lower monthly payments. Another reason that there was an increase in sales is that the prices of vehicles is getting lower (taking into account inflation) due to the fact that there is fierce competition in the industry. With many new companies coming into play, competition is increasing and firms are becoming price takers as oppose to the price setters they once were during the production auto sales eras.
As the years pass, the age of Canadians is increasing steadily. By 2011 the median age of Canadians will be over 40, while more than 34% of the population will be over 50, clearly indicating the graying of Canada. We found that as people reach the mature household age group, an overwhelming 86% will either be looking to purchase a mid sized sedan or a sports utility vehicle, Refer to Appendix C. The reason for this is that as these people age, they are more inclined to purchase a vehicle that offers greater comfort and ease of entry, as opposed to making a purchase based on price or economic efficiency. An automotive manufacturer that responds and adapts quickly to this trend, will reap great benefits. For example, Honda is now marketing its first SUV, which will be available for purchase in 2003.
As time passes, the percentage of people in the mature household segment is rapidly increasing and this could pose a threat to auto manufacturers. Although this group generally controls much of our countries accumulated wealth, they are highly unlikely to own as many vehicles per household as their younger counterparts. At the age of 50 and above, 60% of people surveyed expect to own just one vehicle. This drastically contrasts the age group of 25-40 years, with 84% of these people owning two or more vehicles (Refer to Appendix C). The group representing the majority of the population will be purchasing fewer vehicles, therefore auto companies must use caution when marketing and manufacturing for this age group. This is not to say that auto manufactures would be wise to ignore this rapidly growing age segment, but they shouldn't mass-produce for them either.
Over the past three decades the role women play in our society has seen a drastic change. More than 65% of the women in our nation now work outside the home. With this number increasing, the traditional family where men go to work and women stay at home is now being abolished. With men and women now going to work, and in many cases both commuting by car, women now have a greater interest and are purchasing more vehicles. One of our survey questions was directed to find out what percentage of married couples has both spouses working outside the home, See Appendix C. The response was an overwhelming 80% of couples both work outside the home, with 70% of these people commuting to work in separate vehicles (Refer to Appendices B and C). This shows that in our modern day more women have their own vehicles and therefore have an important say in which vehicles are purchased. All auto manufacturers can reap great benefits from this changing trend, simply by directing a portion of their advertising dollar towards females. When entering the Honda Canada website it is clear that they are one of the many auto manufacturers that have already adapted to the female market. A simple example is shown on the homepage where there is a large picture of a woman and her child, in some ways portraying the image that their cars are for men as well as women.
Value consciousness is the concern for obtaining the best quality, features and performance of a product or service for a given price. Today, as well as in the future, this is what will drive consumption behaviour. Auto manufacturers are undoubtedly hard pressed to produce a vehicle that looks good, is economically efficient, has good features, performs well, and can be sold for a low price. Although it is difficult to put all of this into one vehicle, most consumers won't make a purchase until they find a car that satisfies each and every one of these needs and wants (Refer to Appendix C). With this in mind, auto manufacturers have a difficult task if they hope to continue competing for the consumers' hard earned dollar. Honda, Ford, and GM are three manufacturers who are doing a great job so far of meeting all of these needs and wants, which is evidenced by their three vehicles, the Civic, the Focus, and the Cavalier, being the top 3 best selling cars throughout Canada in the year 2000 . All auto manufacturers will have to continue to adapt to today's value conscious customer if they hope to see an increase in sales and keep up with their competitors.
Canadian consumer spending has been steadily increasing. Figures reported a 1% increase in consumer spending in the month of January. This is an extremely positive sign that the economy is rebounding from the recent recession and September 11th terrorist attacks. Retail sales have been healthy, and durable purchases have been up in recent months. Housing construction starts increased 17.3 per cent in January; the largest jump in nearly a decade. Income growth in Canada is also currently very good. Wages have been growing at high rate of 3% per anum and are expected to continue growing at a similar rate. This is very important for the auto industry, as consumer spending and income are two of the most important factors when forecasting automobile demand. Industry forecasters look to these figures to ensure that consumers are willing, and able to purchase the new vehicles rolling off production lines. With these figures looking positive, the industry can be confident about future auto demand.
Interest rates are currently extremely low. The current target overnight rate is 2.00%, which is half of what the rate was in August of 2001. Experts consider interest rates as one of the most important factors when forecasting big ticket, durable sales. Low interest rates means a low debt carrying cost for consumers; this therefore increases the likelihood that individuals will take on more debt by, for example, purchasing a car. Auto companies are already using these low rates as a major selling point with financing deals on many of their products. Since inflation will not be a concern for most of the year in our recovering economy, interest rates should remain low for many months.
The average workweek in Canada has been getting longer. In January, the average workweek was 33.73 hours, which was up 0.4% from December 2001. This is an important economic indicator as it often leads the business cycle, especially in the manufacturing sector. When the average workweek is increasing, production and income will follow. With these numbers increasing, a recovery period can be expected in the near economic future. This is good news for the auto industry. With average workweeks increasing in length, it signifies some future growth will follow in the manufacturing sector of the economy.
Auto sales will fall in the months to come. Record auto sales have recently been recorded, mainly thanks to 0% financing and rebates offered by auto companies. The effect of these incentives has been to cannibalize future auto sales by bringing future sales forward. This means auto sales will fall over the next few months. Auto companies must ensure that their production is in tune with the falling demand to avoid an increase in inventories.
The inventory-to-shipments ratio is currently high. Currently the industry is at 1.50, which if considerably higher than the target of 1.3. This indicator is very important when considering the health of the automobile industry since their inventory turnover must be relatively high for durable goods. When the ratio is too high, companies are put in a precarious position since they must make room for new models despite large inventories of older cars. Though this rate has recently fallen from 1.54, future sales forecasts are low and companies must therefore ensure inventories are managed properly.
Consumer confidence has been anything but stable. After plummeting to a horrendous 73.5 in the wake of the September 11th terrorist attacks, consumer confidence recovered for 4 straight months. The index reached near pre-September 11th levels of 93 in December 2001. Since then, however, confidence has slipped to 90.9. This demonstrates the fragility of the current consumer sentiment. The weak stock market, Enron scandal, and continuing war in Afghanistan have clearly affected consumer's future economic outlook. This spells trouble for the auto industry because consumer confidence and auto production has a correlation coefficient of 69 per cent. If consumer confidence continues to fall, customers may put off purchasing thereby making future auto sales worse off than already forecasted. Auto companies need to play close attention to these figures to predict consumer purchasing.
Profit margins are way down. This comes as no surprise as recent 0% financing deals have cut deeply into company's bottom lines. Many corporations in the industry are undertaking an entrenchment strategy to protect vital market share while profits are down. This means that there will be plant closures and layoffs, with very limited investing. During this time, expansion of the industry will be extremely limited.
An oligopoly occurs when a few companies control most of the industry sales. In the auto manufacturing industry, this is true because over 80% of world car production is accounted for by six groups including the constellation of companies (Subaru, Suzuki, Fiat) in which General Motors has a significant minority holding. The auto manufacturing industry has many barriers to entry because of obvious reasons - such as the massive amount of capital that has to be invested to build an auto plant and maintain it. However, even if this is accomplished, most consumers wouldn't even dream to purchase a car from a manufacturer they have never heard of or are not familiar with (either through advertising or word of mouth). They report that, since lives can be at stake (both theirs and their loved ones) they would not take the risk of being the first to drive these new cars. This is a huge advantage for the current players because there is not much risk that new competitors will enter the industry and therefore they can focus their efforts on building a strong competitive advantage on their current competitors.
Many consumers have been very cautious with how they are spending their money because of fear of recession dampening the economy in Canada. The auto industry is coping with this condition by offering customers incentives to buy their automobiles such as increased warranties. However, these incentives have made an impact. Vehicle sales during the last quarter fueled by extraordinary zero and low percent financing, boosted total sales volume for 2001 to 17.2 million units, the second best year on record. Experts agree that GM will maintain about a 30% market share but no more, Toyota, Honda and Nissan all will gain share, Ford and Daimler Chrysler will be the biggest share losers. However, they also have reported that during the same period, automotive suppliers have laid off workers and cut spending, and the trend continues into 2002. Therefore, auto manufacturers will have to find new ways to cut costs so that suppliers can afford to stay in business and these cost savings can be reflected back to the ultimate customer.
Until the 1970's, technical collaboration involving the former Chrysler Corp., Ford Motor Co. and General Motors Corp. was unlikely because they dominated the U.S. market and viewed each other as primary competitors. However, this changed when other companies from Japan and Europe landed in North America, offering their diverse products to North American consumers. Over the past 12--15 months, we've seen a lot of consolidation in the industry. There's been the Ford/Volvo deal; the Daimler/Chrysler deal and Toyota took complete control of Daihatzu. This creates a huge threat to smaller manufacturers such as Kia because the big five obviously have far greater resources and capital to develop better products with lower costs that can be felt by the ultimate consumers. Globalization has created a survival of the fittest situation in the automotive industry - if smaller competitors cannot hold their current market share they will inevitably be swallowed up by its bigger competitors. Experts agree that the industry will continue to see more consolidation over the next 10 years.
Generally, consumers think that a Japanese car is of better quality and usually outlasts and has less maintenance problems than an American-made car. This word of mouth positive advertising has been quite advantageous to Honda. Consumers are more susceptible to buy a car that has had positive review from their peers. In the 1980s, it was not uncommon to have three or four times as many problems with U.S.-built cars as with Japanese-designed cars and from then on the reputation of Japanese products continues to be fairly strong. However the productivity gap is narrowing between Japanese and American industries. The Big Three now understand the principles of lean manufacturing and have been implementing them. However, if Honda continues to strive for customer value and increased quality in their products, then they will continue to have this competitive advantage over their competitors.
In the past few years, the Internet has drastically changed the way the world does business. Increased efficiency has led many consumers to try the Internet as their way of doing business. In terms of the auto industry, everyone in the United States who's going to buy a car already has some way to access the Internet but there is a different phenomenon occurring in Japan . There is a big difference between the number of people in Japan who now have Internet access as a way of purchasing a car and how many are expected to have access in the future. This statistic proves that Honda should continually add and develop their site while keeping it user friendly because there is going to be potential customers that are unfamiliar with the computer.
The recognition that air pollution is a leading concern to Canadians and their health has prompted the government to make tougher regulations regarding vehicle emission standards. These include the Drive Clean program, which requires the driver to have their car (or other passenger vehicle) take an emission test every two years in order to be able to renew their registration. These tighter laws regarding emissions from vehicles present an opportunity for the automotive manufacturing industry. Because of these laws, car-owners with older vehicles will no longer be able to drive their cars without considerable expense since they will continually need repairs. This brings an opportunity to manufacturers, since these drivers will be looking to buy new cars that are up to standard, but most likely in the lower-end price range. This is also an opportunity for manufacturers because it is their chance to use the societal marketing concept and show the public that they care about their health and the environment by going above and beyond regulations. Most auto manufacturers are "conducting research on how to use alternative fuels like ethanol, methanol, propane, natural gas or electricity derived from batteries or solar power." By showing their sense of social responsibility they have the opportunity to gain customers through publicity. For example, there is now an award to name the world's greenest car maker by obtaining the highest results in emission tests which simulate real world driving conditions, (which are much tougher than the regular emissions test). Obviously, by sending this sort of message, manufacturer's can build a reputation of being a good corporate citizen, which has great potential to increase sales.
Along with the tighter rules made in the amendments to the Canadian Vehicle Emissions regulations, the government has also formed a coalition with the Canadian Vehicle Manufacturer's Association (CVMA) to carry out the Pollution Prevention Project. This project brings the hope of finding innovative ways to keep our environment healthy and clean by working together for a better world. The CVMA works with its members as a form of self-regulation for the automotive manufacturing industry.
The Motor Vehicle Safety Act (1993, c.16) is, "An Act to regulate the manufacture and importation of motor vehicles and motor vehicle equipment to reduce the risk of death, injury and damage to property and the environment." It is in place to protect the consumer, and is periodically reviewed for improvements, such as the regulation that became effective in 1999 that required mini-vans, sport utility vehicles and light trucks to be fitted with tether anchors to improve the safety of children in child restraints.
The rules and regulations contained in the Motor Vehicle Safety Act can be seen as an opportunity for the automotive manufacturing industry. If it weren't for such stringent examinations and regulations for vehicle safety being enforced by the government , automobile manufacturer's would likely end up using cheaper, or faster production styles and would not spend as much time or money developing and testing for the safety of their vehicles. Since the Motor Vehicle Safety Act contains such high standards for testing, and the periodic inspection of the safety of a manufacturer's motor vehicles, corporations may actually save themselves money in the end. This is because by checking for defects early on, the company can avoid large expenses such as recalls of models for repair or replacement. They can also avoid expenses for other problems that could occur in their designs, which could damage their reputation through bad publicity. (For example with the child restraints, if there is a history of children being injured in their vehicle because of safety problems, families with children will likely turn to the competition.
Fuel economy refers to the number of litres per kilometer (or miles per gallon) that a vehicle consumes under specified conditions. Recently, under the Retail Sales Tax Act, a tax for fuel conservation now applies to new passenger vehicles using 6.0 or more litres per 100 kilometres and to sport utility vehicles using 8.0 or more litres of gasoline or diesel fuel per 100 kilometres of highway driving. This tax applies to all new passenger vehicles in Ontario and is a flat tax that is applied according to the schedule that can be seen in Appendix D. It is also referred to as the, "gas guzzler tax." The purpose of this policy is to promote the purchase of more fuel efficient and environmentally friendly vehicles.
Whenever prices rise, demand decreases. This means that any new tax like this one is bound to cause a reduction in sales and revenue. Most of the vehicles that are hit by this tax are the higher-end more expensive vehicles with more powerful engines. Automobile manufacturer's revenues could be threatened since the industry could see buyers switch to smaller, less expensive cars which are not taxed under the tax for fuel consumption. For example, each additional 125 lbs of weight results in a .3-mile per gallon drop in fuel economy, so sport utility vehicles are mainly affected by this tax, (this is also true because they have large and powerful engines which guzzle fuel.) This means that although SUV's are very popular, the potential for huge sales in this area is likely deflated since consumers switch to less expensive cars that are not taxed for fuel consumption.
Also, this tax does not appear to be accomplishing its main goal of being more environmentally friendly because it encourages people to keep their older vehicles since the price is higher to buy a new vehicle. This is counter-effective since the newer vehicles are really the ones with the best technology for environmental-friendliness. In comparison to vehicles made 8 or more years ago, new vehicles eliminate about 96% of pollutants. Light trucks and vans', including mini-vans, are currently exempt from this tax, but there has been talk of broadening the rates to include them. This would be even more of a threat to sales in the industry since any increase in price has the inverse effect of reducing sales. The fact that this tax does not include light trucks or (mini-) vans does not seem to make any sense either, since the fuel consumption should be the determining factor of whether or not a new vehicle is taxed because it is called a "tax for fuel conservation," not a "tax for the model of vehicle bought."
Since the terrorist attacks in the United States on September 11, 2001, security has been much tighter at border crossings. Tighter security means that there are longer waits. Since many automobile manufacturers' use "just-in-time" delivery for their inventory of parts from suppliers, this tightened security has the potential to slow down production and impact manufacturer's ability to keep up production if it is difficult for their suppliers to deliver on time. If terrorism and safety issues like that of September 11 continue to occur there is a huge probability for large problems in scheduling and sticking to production plans for these manufacturing plants. The automobile manufacturers will have to prepare themselves for these types of difficulties in order to avoid disaster.
The need for an industry to keep up with technology has never been as crucial as it is today. Technology, a major environmental force, refers to inventions from applied science or engineering research. The automotive industry faces many challenges, with the speed at which technology is being introduced in the world today. Technology creates many opportunities and threats to the automotive industry in the way the vehicles are designed, produced, and sold. Therefore, the importance of technology in the automotive industry is increasing as technology itself increases.
The research-design stage of automobile manufacturing has undergone a major makeover in the past few years. With the aid of technology, researching consumer's wants and needs has never been so easy. As the number of frequent Internet users increases, the use of e-mail is increasing at a rapid pace. With this increase the automotive industry can exploit the use of email to survey customers at a very low cost. These surveys can be used to find out the types of options that consumers' value in an automobile, as well as the type of automobile they are willing to purchase and the price they are willing to pay. Many people may overlook the importance of surveys, but to the manufacturer, the number one concern is getting increasing demand. In order to accomplish this a company must supply a vehicle that matches the needs and wants of its prospective consumers.
Electric vehicles are becoming a means for manufacturers to get an edge on their competition. The goal is to be the first company to mass-produce an electric vehicle for the ultimate consumer. The technology involved in developing these electric vehicles is state of the art. The cars run on batteries that store electric power, then the batteries transmit this power to the wheels. When the car is parked, the charger recharges the batteries, which takes power from a wall outlet. The advantage of these electric vehicles is that they run without emissions, they have fewer moving parts than conventional vehicles, and therefore require less maintenance. With these electric vehicles becoming closer and closer to reality, this poses a major opportunity for the automobile manufacturing industry. Also, with mandatory emission testing, the electric vehicles will save the consumer time and money not having to be tested every two years.
With technology growing at an exponential rate, companies will struggle to keep up with ever-changing consumers needs and the capabilities of its competitors. This can pose a major threat to the automotive manufacturing industry as keeping up with technology is very expensive and takes much effort. Vehicles have evolved a long way from Henry Fords original Model T. Cars in the new millenium have many new technologies that assist in the everyday driving and safety needs of their operators. For example, navigational systems such as Onstar are used to help drivers find their way to their destination without the use of maps or stopping to ask for directions. For companies to continue competing and offering their customers above and beyond what the competition has to offer, they must constantly be upgrading the technology in their vehicles and making new and exiting discoveries in the technological environment to set a benchmark for their manufacturing process within the industry.
Therefore, there are numerous factors that affect the automobile manufacturing industry. The events of September 11th have posed as problems in many areas of the auto industry, but it is evident that public transit will never be able to take over the auto industry. The threats and opportunities of the industry must be addressed and the industry will continue to flourish in the near future.
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