The Automotive Industry: The Case Of General Motors
Table of Contents
This is the start.
The Automotive Industry
The Automotive Industry’s Sensitivity to the U.S. Economic Cycle
Automotive Industry Structure and Performance
Threat of new Entrants
Substitutes
Rivalry
The bargaining power of customers
Suppliers’ bargaining power
Business Strategy for GM
In summary
Cites
This is the beginning
The automotive industry includes a number of companies that produce, market and sell motor vehicles. This industry generates revenues in excess of $4 trillion. This industry produces passenger vehicles, commercial vehicles and light trucks. Chinese, Koreans companies have been increasing their production of vehicles to satisfy a growing demand.
General Motors is one such company. Founded in 1908, it is today ranked as a top manufacturer, designer, and seller of vehicles around the world. GM is one of the largest revenue producers in the United States. In 2018, it had 173,000 staff and generated revenues in excess of $147.049billion. The company has brands such as Cadillac, Buick and Chevrolet. GM produces hybrid-electric vehicles, vehicles with extended ranges of electric power, vehicles that run on flexible fuels, and hydrotec-military vehicles. This wide range of products has allowed GM to establish itself as a global leader in vehicle manufacturing and sales.
The automotive industry is a global industry that manufactures, designs, and sells vehicles. The automotive sector does not include organizations responsible for vehicle repairs and maintenance such as petrol stations. The U.S. dominated production in 1860. Since 1929, there were about 32,028,500 automobiles worldwide. Most of these were manufactured in the U.S. But by 2010, this number reached one billion. China and Japan, who have been selling more cars than the U.S. for years, have now overtaken them. There are now many more automobile models available in America than ever before.
In developed economies, vehicles are used by most people as their primary mode of transportation. This has led to a high demand for them. McKinsey&Company (2013) reported that vehicle profits and sales would increase by 50 percent, with a rise in demand from BRIC (Brazil Russia India China). In contrast, there has been a slowdown in the development of the automotive industry. This trend could continue for a while. This is why it’s important that organizations in this industry realize the impact of challenges due to changing consumer habits, diverging marketplaces, digital demands and cost pressures resulting from platform sharing.
Toyota, Volkswagen Group and Hyundai are the top vehicle manufacturers in terms of production. Other major players include GM, Ford Nissan and Honda. Usually, manufacturers in this industry form alliances to boost their economies of scope, increase brand awareness, and increase revenues and profits. Daimler AG is a shareholder in Mitsubishi Fuso Trucks, the Renault-Nissan Alliance as well, and GM owns a piece of SAIC Group. The industry has been able to produce vehicles that are unique and diverse, meeting the needs of consumers.
The Automotive Industry’s Sensitivity to the U.S. Economic CycleEven if the automotive industry is a significant contributor to the growth of GDP in the U.S. economic cycle because of its connection to other sectors of the economy, the sector represents a small percentage of total GDP (OECD 2009). The auto industry has a greater impact than other manufacturing industries because of its reliance on the business cycles. Because it is so dependent on business cycles, the auto industry has a higher volatility than other industries. Recessions have had a significant impact on the automotive industry, reducing consumer spending. A positive shift in the market should improve car sales.
During the 2008-2010 financial crisis, many American and European vehicle manufacturers as well as Asian ones were affected. Additionally, the increase in fuel prices caused by the 2003-2008 Energy Crisis, the weak housing market, and the strict credit requirements further weakened the sector (Das 2008). The Big Three (GM, Ford, Chrysler) saw their sales of SUVs, pickup trucks, and other vehicles with low fuel consumption drop as customers switched to hybrids. In 2008, credit crunch made it more difficult for the industry to access affordable raw materials. To retain existing customers and to attract new ones at the bottom of the cycle, auto manufacturers adopted creative marketing tactics. The Big Three manufacturers and other companies offered huge discounts but that did not result in increased sales. The Big Three, in particular, were blamed for selling high-priced vehicles during a period when fuel costs were a problem, which forced consumers to choose smaller, more affordable cars from Europe and Japan.
Between 2008 and 2014, the U.S. federal government spent $80.7 billion to save the auto industry (Amadeo). The U.S. government stepped in to save the automotive industry at a cost of $80.7 billion between 2008 and 2014 (Amadeo, 2019). Industry felt that the losses they suffered were due to factors outside their control. This proves that automotive companies suffer as well when business markets fall. The U.S. car market declined during the recession. This affected both the domestic and foreign manufacturers. GM declared bankruptcy on June 29, 2009, but emerged the next month.
There is no doubt that the U.S. economic cycle and economy has a significant impact on the automotive industry. As a result of the recession, the consumer’s credit score was reduced. They were then unable to buy a vehicle.
In 2012, North America saw a sales increase of 17 million vehicles compared to the previous years. It is because the effects from the recession have been lessened, so the consumers’ spending power has increased. Due to the unstable job market and financial state of Americans, consumers who had a good car were discouraged from buying another. This impacted production.
As a result, vehicle sales fluctuate with time. In the early years of the recession, American vehicle production fell below 15,000,000 units. This figure rose to 17,000,000 in 2015. In recent years, concerns have been raised that vehicle sales may be dropping in the future. Analysts are worried about the economy because of the high cost of vehicles and the large number employed by the industry (Business Insider, 2018). The above factors can be used as a recessionary signal by the industry to gauge its position in the business cycle.
The industry has seen some companies go bankrupt or face challenges, but the normal downturns have little impact. Analysts believe that alternative transport and car-sharing have led to a reduction in the number of people who own cars. The industry will be affected by this even if the economy is good. But the U.S. cycle of credit is countercyclical. This allows car manufacturers to earn profits even in a U.S. economic recession.
Currently, American automobile industry is responsible for 28% (or $518.1 Billion) of GDP. U.S. car manufacturing ranks second globally, with an estimated annual production rate of 11,19,000,000 units (Investopedia, 2019). Accordingly, the market rises or falls in accordance with the American business cycles. It means that both the industry and the consumers benefit from a growing economy. This is mainly due to the same reason that all discretionary spending habits are increased when there is a surplus.
Automotive Industry Structure and PerformanceThreats of New EntrantsThis danger is extremely limited as the industry requires a lot of capital and therefore has high barriers to entry and departure. Manufacturers spend a great deal of money on infrastructure, personnel and financial resources. They also incur prohibitive costs in terms of compliance and legal issues. Due to this, it’s difficult for new businesses to enter the market and to build up customer loyalty like Mercedes or GM.
Threat of substitutesThis threat to GM is moderate because customers are able to switch from GM or use an alternative form of transport. Several manufacturers offer stylish and luxury vehicles. However, the threat from substitutes is lessened here as GM is a trusted brand. Even though the companies are in competition with each other, they can still maintain and attract loyal customers because of their product offerings. Customers are therefore looking for manufacturers with products that are fuel-efficient and durable, as well as less expensive. However, they are attempting to gain customers who have a high price sensitivity.
RivalryThere are many companies competing in this industry. They offer different products, based on their pricing strategies, designs and styles, and brand image. All companies invest significant amounts in innovation, R&D and marketing. In order to gain an advantage in the market and increase their share, firms are becoming more aggressive. The industry has a oligopolistic structure, where approximately 10 manufacturers control 70%. The competition between the five largest manufacturers is fierce, but could grow due to globalization which forces companies to expand into new markets.
GM uses an oligopoly with few manufacturers. Due to this, customers are able to easily swap products, but purchases are restricted to only a small number of companies. GM is not the only company that reacts to GM actions. This makes the rivalry between firms intense, as they must try to predict what their competitors will do. According to Nash Equilibrium one player is most likely to be the best response to another player’s tactics. Ford and GM, for example, offered rebates on SUVs that were popular. This led to a discounting battle with each firm having its own incentive.
Customer Bargaining PowerThis is an important threat as customers are able to switch companies and buy cheaper products. Prices are important to customers today, and they will do their research before buying a vehicle. Vehicle manufacturers offer discounts and customer service to both individuals and businesses, which ensures loyalty.
GM has been the subject of antitrust suits for many years. The federal government is promoting customer safety. The Federal Trade Commission found GM guilty of misleading advertising in 2016 and ordered it to recall all Certified Pre-Owned cars due to safety concerns. The Federal Trade Commission (2016) found GM guilty of deceptive advertising and ordered the company to recall its Certified Pre-Owned vehicles due to safety issues. Such enforcements enable customers to make informed decisions. In United States v. General Motors Corp. of 1966, GM was found guilty of colluding and attempting to eliminate a particular class of competition by GM.
Suppliers’ bargaining powerThis is a low threat because manufacturers have the option of selecting raw materials from many suppliers, and they can sell them at reasonable prices. Some companies make their own components which eliminates the need of a third party supplier. As a result, manufacturers have many options and can demand concessions from their suppliers.
Business Strategy for GMGM still holds the top spot in the U.S. auto industry, accounting for 17% of all sales. GM has a 9.5% share of the global auto market, despite not being among the top leaders. The market is competitive and diversified. GM’s market share will increase as the emerging markets develop.
GM’s strategy is based upon innovation, safety, quality, delivering a value-added product, creating measurable impact, and ensuring customer loyalty. These factors will help GM to achieve sustainability and customer satisfaction by offering renewable technologies, innovative products, and efficiency metrics. The company has a generic approach that gives it a competitive edge in a dynamic industry. GM leverages its economies scale to gain an advantage in the dynamic industry. GM’s strategy of cost leadership allows it to sell lower priced products than competitors like Mercedes, which is a great way to satisfy the needs of the majority and gain a competitive advantage.
GM uses differentiation to create energy-efficient vehicles that meet the changing needs of consumers and demand for fuel-efficient vehicles. GM is therefore required to maintain a positive brand image and offer innovative and user-friendly features in their products. The company also has a strategy for market penetration that allows GM to have a large number dealerships around the world, allowing customers easy access to their products. GM has also used vehicle financing and leases as part of their business model to help increase profits and revenues.
ConclusionGM needs to make sure that its marketing and business strategies allow it to maintain and grow its share of the market and retain its competitive edge. To maximize opportunities in the auto industry and to minimize threats, it is important to carefully assess its internal and exterior environment. It is important to note that the automotive industry will not only continue to grow but will also be evolving as market trends change over time.
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