__________________________________________________

The Global Car Industry: Coming out of

Recession and a Credit Crisis
N.S. Potter

The car industry went through an exceptionally turbulent period between 2008 and
2010. “The change that has hit the world economy is of a critical scale that comes
once in a hundred years” said Katsuaki Watanabe, announcing Toyota’s first annual
loss in its 71 year history. The firm said it had made a loss of 150 billion Yen (£1.1
billion) in yearly operating profits and confirmed that vehicle sales in the U.S. had
fallen 37% by December 2008.

The U.S. government provided GM with a total of $50 billion to see it through
restructuring and exit from Chapter 11 bankruptcy. In return the government got a
controlling stake. Canada became the second G8 economy to bail out its car industry.

The Global Car Industry in 2010 - An Overview.

Car manufacturing has been described as "the industry of all industries". Strong inter
dependence therefore exists between the economies of many countries and industry
performance. Governments rely on the sector as well as related suppliers and services
to a greater or lesser extent in terms of employment, taxation, GDP and balance of
payments. Car makers equally, require growing economies with rising levels of
disposable income and consumer confidence. The events of 2008/9 also demonstrated
the industry’s reliance on freely available credit to finance the purchase of its
products. “Credit availability has been the biggest issue in our industry this year”,
according to Mike Jackson, Chief Executive of the largest car dealer in America.

_____________________________________________________________________
This case was prepared by N.S. Potter of Birmingham Business School and is intended as a basis for
classroom discussion rather than to illustrate correct or incorrect handling of any administrative
situations - N.S. Potter, 2010.
Meanwhile, between 2008/10, Toyota recalled hundreds of thousands of vehicles for a
variety of faults, calling into question the implementation of its growth strategy.

The credit crisis has affected economies globally and reduced activity in a wide range
of industries, notably housing and the fall in property values, coupled with the fear of
unemployment has reduced consumer confidence around the world. Many analysts
now think that car sales will slowly recover during 2010 but may take until 2013 to
return to the level reached in 2007, (CSM Worldwide, Detroit).

China overtook the US during 2009 to become the biggest car market in the world as
government policy initiatives spurred demand. China sold more than 13.5m vehicles
during the year, according to the official Xinhua news agency and this compared with
10.4m cars and light trucks sold in the US, the lowest level in 27 years. China's
market grew by 45% year-on-year in 2009, providing a rare glimmer of hope for the
world's beleaguered car manufacturers, such as General Motors, Volkswagen and
Toyota. Total industry sales fell 21% in the formerly dominant US market, and
Volkswagen has said that China is now its biggest market.

Governments must balance these economic considerations with environmental issues,

as well as the aspirations of consumers in terms of mobility and materialism.
Politicians need to find a compromise between these opposing forces and the ways in
which they impact on the voting intentions of different groups in their respective
electorates. The effects of oil price volatility, the credit crisis and subsequent
recession on the environment appear to be mixed. Some environmentalists are
concerned that economic issues will dominate the political agenda, while others point
out that people are flying and driving less and that the car industry in particular, will
be forced to spend heavily on developing more eco friendly products.

Core industries base strategic decisions on the car industry as seen in the move by
steel makers to site manufacturing facilities in developing countries where car making
is starting to take place and demand for commodities was rising rapidly until mid
2008.

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The car industry may experience only low growth going into the second decade of the
21st century. However, this will be spread unevenly, both between countries and
individual companies. One of the key elements driving dynamics in the car industry is
ever increasing globalisation. Rapid change is taking place, continually altering
industry structure and attractiveness as well as the key success factors necessary for
both survival and growth. Japanese companies were forced to manufacture overseas
for much of the 1990s due to the continuous appreciation of the Yen and with its
currency at a thirteen year high against the dollar in early 2009, Japan has seen exports
to America fall by 33.8% and to the E.U by 30.8%, (BBC News). 40% of all cars sold
by Toyota in the U.S. are currently manufactured in Japan.

China and India, with combined populations of two billion, clearly have enormous
potential, but appeared to be equally vulnerable to world events. Chinese car sales fell
by 14.8% in the year to November 2008, before that strong recovery and sales in India
fell by 19.4%, (Society of Indian Automobile Manufacturers) due to credit problems
and high interest rates. The Society of Indian Automobile Manufacturers (SIAM),
released its first ever demand forecast for the Indian automobile industry in July 2010,
predicting growth for 2010-11 of 12-13%.

South America as a whole is set to become a significant market with Brazil now the
6th largest producer in the world, however annual sales fell 16.9% in the year to
December 2008, (Reuters). Brazil is projected to reach sales of 3.3 million units in
2010, an increase of eight per cent over 2009, however a new manufacturing facility
planned by Honda in Argentina was postponed until at least 2010, (Associated Press).

Europe also saw sales plummet during 2008, temporarily overtaking the USA to
become the largest volume market in the world, however, South East Asian markets
are becoming ever more significant. Tightly defined product segmentation has taken
place as traditional markets mature, while the rapid growth of emerging economies
has provided opportunities to extend product life cycles on a geographical basis.

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The pace of globalisation has varied considerably within the triad. Most European car
manufacturers have significant positions only within Europe. U.S. companies tend to
have major shares domestically and in Europe, while only two major Japanese
companies can claim to be truly global.

Although the industry is concentrating, no single company is close to dominating the

market and in fact seven companies have between 10% and 15% market share. The
level of acquisition activity has been reasonably intense but the other major feature of
the industry has been the degree of collaborative activity. A variety of alliances and
joint ventures have been utilised as a means of growth, as isolating mechanisms and
even to circumvent national political issues. In 1980, there were 30 independent car
manufacturers, by 2000 this had fallen to 13 and it is predicted that by 2015 the
number will have fallen to 10, a situation which could be exacerbated by the global
economic situation.

The industry value chain is also altering and becoming capability led, as companies
focus downstream towards the customer interface where the most explicit value is
increasingly being added. The Original Equipment Manufacturer’s (OEM’s) share of
total value creation stood at 36% in 2002 and this will fall to 23% by 2015. Despite
this, the component manufacturers face similar consolidation pressures with 8000
suppliers in 1998 expected to fall to 2800 by 2015.

Technology is changing the upstream supply chain as component suppliers split into
tiers and become total solution providers, often diversifying from previously unrelated
industries such as electronics, computer software and aerospace. Companies such as
Delphi, Bosch, Continental, Lear, Siemens, Thyssen Krupp and Visteon will become
dominant.

Summary of main conclusions

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• Demand will remain flat in Europe and America in 2010 but will increase sharply
in China. Supply will continue to exceed demand as production capacity
currently stands at 90 million units.

* India and China have become the primary battlegrounds for car manufacturers.

• Eastern Europe offers limited growth as well as high risk but will become a
significant market by 2015

* Apart from China and India, the ASEAN countries represent the greatest
opportunity and challenge to Japanese, U.S and European manufacturers, as long
as structural and governance reforms continue.

* Significant demand fluctuations will exist between country markets.

* Toyota, Honda and Nissan are truly global competitors and this trend will continue,
with around seven companies or collaborative groupings eventually dominating the
world market, each making between 5-7 million vehicles annually.

* The industry is driven by cost and technology with political and ecological
issues as a significant underlying factor and this holds for product and process
development.

* Manufacturers will integrate forward vertically into their distribution channels,

diversify and out source traditional activities.

* Collaboration between manufacturers, suppliers and even national governments

will become increasingly prevalent.

* Marketing strategies will focus on creating lifetime customer relationships, but in

the short term, availability of finance will be a critical issue.

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 * Time to market for new models will continue to reduce from 3.4 years in 1995 to
2.2 years currently.

Global Car Industry - Major Forces and Impacts

It is clearly difficult to generalise due to the enormous variation between countries in

the various stages of their development. It is however reasonable to conclude, that the
car industry within any given country is subject to opposing political forces.

* As a primary industry, it is a major contributor to GNP, balance of payments and

employment. Component suppliers and service providers represent important
secondary industries. Total global industry employment was predicted to reach
11.8 million by 2015, prior to the 2008 crash, with 78% of those jobs generated by
suppliers. This will heavily influence government policy during 2010/11 with
governments across the world expected to continue to support the car industry.

* Taxation of purchase and use represents significant government revenue. It is

estimated that global industry revenue will have reached 903 billion Euros by
2015.

* Transport is a major part of any countries infrastructure and is necessary to the

process of wealth creation.

* Congestion and safety are becoming increasingly important issues.

* Pollution and sustainable energy policies could dominate the industry in future.
Targets to reduce CO2 emissions and fuel consumption are making alternative
fuels, such as natural gas and electricity more attractive.

* The issues surrounding inward and outward direct investment affect strategies
adopted by companies as they seek to invest and grow in new markets. Cost of
labour as a factor of mobility is increasingly debated but government’s attempt

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 to attract investment with a range of grant aid as well as subsidising domestic
companies for a variety of reasons, including national prestige.

Demand for cars is very closely linked to a given country's economic performance
and this can be viewed in two separate contexts :-

1 - The wider process of the economic development of a country which results first
in selective ownership, leading gradually to mass market volumes.

2 - Short term life cycle fluctuations within mass volume markets leading to delayed
purchases or customers changing segments.

Consumer confidence is a key factor in the purchase decision as the product price is
significant in relation to most people's income. For every 1% increase in average
earnings, car ownership rises by 2%.

The important variable is private consumption. Growth and wage levels are expected
to be slower in real terms in the immediate future. Fiscal policies are already resulting
in higher taxation, particularly to service government borrowing, some of which will
be indirect and therefore industry specific. Interest and exchange rates are also
important as they affect disposable income.

Interest rates have been slashed by the majority of central banks in developed
countries and at the beginning of 2010 ranged from 0.1% in Japan to 1.0% across the
Euro zone. Currency markets will probably continue to be volatile during 2010 as
analysts assess which governments are following policies aimed at coming out of
recession earlier than other nations without driving borrowing to unsustainable levels.

Table 1 - World Economic Outlook 2010/11 – IMF

Year over Year Q4 over Q4
Projections Difference from Estimates Projections

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 April 2010 WEO
Projections
2008 2009 2010 2011 2010 2011 2009 2010 2011

World Output1 3.0 –0.6 4.6 4.3 0.4 0.0 2.0 4.2 4.3

Advanced Economies 0.5 –3.2 2.6 2.4 0.3 0.0 –0.5 2.3 2.6

United States 0.4 –2.4 3.3 2.9 0.2 0.3 0.1 3.2 2.6

Euro Area 0.6 –4.1 1.0 1.3 0.0 –0.2 –2.1 1.1 1.6

Germany 1.2 –4.9 1.4 1.6 0.2 –0.1 –2.2 1.3 1.7

France 0.1 –2.5 1.4 1.6 –0.1 –0.2 –0.4 1.5 1.7

Italy –1.3 –5.0 0.9 1.1 0.1 –0.1 –2.8 1.1 1.3

Spain 0.9 –3.6 –0.4 0.6 0.0 –0.3 –3.1 –0.1 1.2

Japan –1.2 –5.2 2.4 1.8 0.5 –0.2 –1.4 1.1 3.0

United Kingdom 0.5 –4.9 1.2 2.1 –0.1 –0.4 –3.1 2.1 1.9

Canada 0.5 –2.5 3.6 2.8 0.5 –0.4 –1.1 4.0 2.6

Other Advanced Economies 1.7 –1.2 4.6 3.7 0.9 –0.2 3.1 3.4 4.6
Newly Industrialized Asian
Economies 1.8 –0.9 6.7 4.7 1.5 –0.2 6.1 4.3 6.3
Emerging and Developing
Economies2 6.1 2.5 6.8 6.4 0.5 –0.1 5.7 6.9 6.8

Central and Eastern Europe 3.1 –3.6 3.2 3.4 0.4 0.0 2.0 2.3 3.5
Commonwealth of
Independent States 5.5 –6.6 4.3 4.3 0.3 0.7 ... ... ...

Russia 5.6 –7.9 4.3 4.1 0.3 0.8 –3.8 3.7 3.9

Excluding Russia 5.3 –3.4 4.4 4.7 0.5 0.2 ... ... ...

Developing Asia 7.7 6.9 9.2 8.5 0.5 –0.2 9.8 9.0 8.7

China 9.6 9.1 10.5 9.6 0.5 –0.3 12.1 9.8 9.6

India 6.4 5.7 9.4 8.4 0.6 0.0 7.3 10.3 8.0

ASEAN-53 4.7 1.7 6.4 5.5 1.0 –0.1 5.1 4.9 6.8
Middle East and North
Africa 5.3 2.4 4.5 4.9 0.0 0.1 ... ... ...

Sub-Saharan Africa 5.6 2.2 5.0 5.9 0.3 0.0 ... ... ...

Western Hemisphere 4.2 –1.8 4.8 4.0 0.8 0.0 ... ... ...

Brazil 5.1 –0.2 7.1 4.2 1.6 0.1 4.4 5.3 4.3

Mexico 1.5 –6.5 4.5 4.4 0.3 –0.1 –2.4 3.5 4.3
It is likely that persistently high levels of unemployment and reduced job security will
keep consumer confidence low and lead to an increase in the savings ratio. This could
impact in several ways on the replacement patterns of high value consumer durables.

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Replacement may be delayed, satisfied in the second hand market or by trading down
when buying new.

Global growth is expected to continue to moderate from the peak in 2004 but the
speed of the decline in output will vary from region to region as seen in table 1.
World trade will slow down, from growth of 10.1% in 2004, to 5.0% in 2007 and a
forecast of 4.3 in 2010.

Labour productivity and commodity prices are also key issues. Global demand for oil
exceeded supply for much of 2008 with prices peaking at $147 per barrel before
plummeting to $50 in early 2009 and then stabilising at around $75. In the longer
term, China has gone from being a net exporter of oil in 1995 to a position where it is
predicted that 55% of its demand will be imported by 2030.

There are clear linkages with economic factors as wealth generally leads to raised
expectations. In less developed markets, the consumer's initial aspiration is simply for
a convenient means of transport over longer distances and in this respect, the Nano
from Tata may provide particular advantage. Increasing levels of wealth and
confidence bring demands for more sophisticated equipment, greater choice of
versions, niche products, passenger safety and consideration of the environment.

The degree of nationalism within country markets can also be significant and a clear
example of this is the German market where buyers display a clear preference for
German cars. It is forecast that subsequent generations of buyers will think less along
national lines as education, travel and integration all increase. This process will also
be accelerated by local production, as demonstrated by Toyota, Nissan and Honda in
the UK and VW in China.

The need for transport is almost infinitely flexible in relation to its ease and cost.
Governments have the task of balancing this need against the economic and ecological
considerations as well as the prospect of increased leisure time for many people.
There are currently 500 million cars on the road throughout the world and by 2030
this figure is expected to rise to 1 billion with a further 500 million lorries and

9
motorcycles. Road transport accounts for 20% of the global CO2 output and this
figure could rise as traffic increases in developing countries.

Technology represents another significant industry specific driver and can be

considered under process cost, ecological pressure and increased consumer demands
for new products increasing choice, comfort, performance and safety. Smart cards
implanted in engine management systems will be capable of measuring the quantity of
polluting emissions with the results used to prepare individual tax bills. Road side
sensors or global positioning satellites will charge heavily for road use during
congested periods with reduced or waived charges at other times of the day.

The use of robots for assembly is increasing and it is estimated that 40% of the world's
610,000 robot population are used in the car industry. This is already affecting the
propensity of companies to relocate in areas of low labour cost, as the cost advantage
is being eroded.

Product development issues will include fuel source, the balance between design and
aerodynamics, automation of driver systems, satellite positioning and matching
vehicles or versions to individual lifestyles. Process development will be concerned
with flexibility, quality and cost issues.

Supplier relationships and internal value chains will change in two significant respects
due to these factors :-

1 - Car manufacturers increasingly lack capabilities in relation to new technologies

and are out sourcing total solution provision to first tier suppliers, who are in
turn responsible for relationships with second and third tier companies.

2 - Process technology is becoming so specialised that manufacturers are having to

develop in house capabilities in order to supply their exact requirements.

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It is also forecast that differentiation and the complexity of technology will tie
customers to authorised service dealers throughout the life of the vehicle. This will
alter the relationship between margins made on the sale of a car and those
subsequently derived from servicing and the sale of replacement parts.

Outlook for the Global Industry

The production and supply of cars has been concentrated in the three zones of the
triad until recently, however there will be a degree of fragmentation over the next ten
years as Eastern Europe, South America, China and India develop both in terms of
consumption and production.

The Chinese government welcomes foreign direct investment and has relaxed rules for
setting up businesses and realises that foreign capital and 21st century technology can
help the country to industrialise more quickly. There are five major indigenous car
manufacturers in China as well as many smaller companies. Their main problem is a
lack of both brands and designs. Shanghai Auto is number one in the domestic market
and ranks in the Fortune Global 500, but still only produces 800,000 cars a year
through joint ventures with GM and VW and this provided the rationale for the
purchase of MG Rover assets and the 2007 merger with the Nanjing Automobile
Company.

The motor car will increasingly be a target for environmentally motivated taxation and
legislation. Industry rationalisation is long overdue, but government and unions in
some countries will resist any attempt by manufacturers to cut large numbers of jobs
and this tension will be a feature of 2010/11 as governments attempt to counter rising
unemployment and balance public finances.

Much of the cost pressure being felt by OEMs is being passed onto suppliers or eased
by relocating manufacturing and sourcing to Eastern Europe and China. Currently,
33% of all suppliers have manufacturing facilities in Eastern Europe and 17% in
China and this trend will continue with Western Europe and the U.S. adding value

11
through marketing, engineering and design, though this raises the issue of technology
theft and intellectual property rights. Russia, Poland, Hungary and the Czech
Republic are the most important sales markets in Eastern Europe and also represent
important manufacturing locations along with Slovakia and Slovenia.

The Russian OEMs such as Moskvitch, Gaz and Ural tend to focus on the largest part
of the market which is for cars costing less than $4000. Other manufacturers with
plants already there, include Renault, GM and VW, with Nissan, Hyundai, Peugeot
and Mitsubishi currently constructing new facilities, (Business Week). Renault has
become partners with Avtvaz, paying $1 billion for a 25% stake in early 2008 and the
next phase, according to PWC will be the emergence of a powerful components
industry to supply as foreign brand cars manufactured in Russia are forecast to rise to
2 million by 2012.

Ford, VW and Renault all announced extended plant shutdowns during the early part
of 2009, (New York Times), however PWC still forecasts that despite these short term
difficulties, sales will continue to rise to six million units by 2014 and analysts at
Russian agency Avtostat, predict that Russia will be the third largest car market in the
world by 2012, behind only the US and China.

Eastern Europe is improving in terms of productivity and competitiveness, is close to

major EU markets and combines low wages with a skilled work force. Political
pressure will focus on the production of cars suitable for export markets in order to
earn currency, but government attitudes to foreign direct investment may improve if
Russia joins the WTO. Collaboration between Eastern and Western European
companies is growing rapidly, based on the mutual benefits of technology/skills
transfer and market entry.

Ironically, economic measures aimed at strengthening local currencies in order to

reduce inflation, are making it more difficult for exporters to remain competitive. GM
and Ford have invested in low volume production but many of the other OEMs have
adopted a more cautious approach, although Toyota, Daewoo, Mitsubishi and Renault
are successfully importing cars.

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Table 2 – Preferred Manufacturing Locations

Country Very attractive Attractive Total

Czech Republic 50% 44% 94%
China 71% 18% 89%
Hungary 40% 45% 85%
Poland 36% 46% 82%
USA 36% 33% 69%
Slovakia 40% 28% 68%
South Korea 16% 48% 64%
Mexico 21% 39% 60%
Western Europe 18% 23% 41%
India 15% 23% 38%
Brazil 14% 21% 35%
Ukraine 15% 18% 33%
Romania 10% 23% 33%
Slovenia 16% 14% 30%
Bulgaria 5% 19% 24%
Japan 11% 10% 21%
Argentina 5% 11% 16%
Thailand 5% 8% 13%
Vietnam 0% 10% 10%
Russia 4% 4% 8%
Australia 1% 3% 4%
Croatia 1% 1% 2%
Yugoslavia 1% 0% 1%

Source: Ernst and Young

Table 3 – 2009 Production Statistics – Source: OICA

Commercial %
Country Cars Total
vehicles change
Argentina 380,067 132,857 512,924 -14.1%
Australia 188,158 39,125 227,283 -31.0%
Austria 56,620 15,714 72,334 -52.2%
Belgium 524,595 12,510 537,354 -25.8%

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 Commercial %
Country Cars Total
vehicles change
Brazil 2,576,628 605,989 3,182,617 -1.0%
Canada 822,267 668,365 1,490,632 -28.4%
China 10,383,831 3,407,163 13,790,994 48.3%
Czech Rep. 967,760 6,809 974,569 3.0%
Egypt 60,249 32,090 92,339 -23.0%
Finland 10,907 64 10,971 -38.7%
France 1,819462 228,196 2,047,658 -20.3%
Germany 4,964,523 245,334 5,209,857 -13.8%
Hungary 180,500 2,040 182,540 -47.3%
India 2,166,238 466,456 2,632,694 12.9%
Indonesia 352,172 112,644 464,816 -22.6%
Iran 1,359,520 35,901 1,395,421 9.5%
Italy 661,100 182,139 843,239 -17.6%
Japan 6,862,161 1,072,355 7,934,516 -31.5%
Malaysia 447,002 42,267 489,269 -7.8%
Mexico 942,876 618,176 1,561,052 -28.0%
Netherlands 50,620 25,981 76,601 -42.2%
Poland 819,000 65,133 884,133 -7.1%
Portugal 101,680 24,335 126,015 -28.1%
Romania 279,320 17,178 296,498 20.9%
Russia 595,839 126,592 722,431 -59.6%
Serbia 8,720 1,355 10,075 -13.4%
Slovakia 461,340 0 461,340 -19.9%
Slovenia 202,570 10,179 212,749 7.5%
South Africa 222,981 150,942 373,923 -33.6%
South Korea 3,158,417 354,509 3,512,926 -8.2%
Spain 1,812,688 357,390 2,170,078 -14.6%
Sweden 128,738 27,600 156,338 -49.3%
Taiwan 183,986 42,370 226,356 23.7%
Thailand 313,442 685,936 999,378 -28.3%
Turkey 510,931 358,674 869,605 -24.2%
Ukraine 65,646 3,649 69,295 -83.6%
UK 999,460 90,679 1,090,139 -33.9%
USA 2,246,470 3,462,382 5,708,852 -34.3%
Uzbekistan 110,200 7,700 117,900 -43.3%
Others 302,450 110,109 412,559 -22.4%
Total 47,952,995 13,761,694 61,714,689 -13.5%
Corporate Strategies

Diversification is still common within the automotive industry, however the most
prevalent strategy is forward integration. Most of the added value is now derived
from finance, servicing and the sale of spare parts.

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Growth by acquisition has been used by G.M., Fiat, Tata and VW to overcome
mobility barriers and gain presence in the upper luxury segments, although G.M. in
particular is more focused on the U.S. market in this respect. Toyota and Honda
conversely, chose organic growth by establishing the Lexus and Acura brands
organically. BMW now has its own range in the important four wheel drive market
and it’s acquisition of Rolls-Royce leaves them with a more sustainable portfolio,
including Mini, which it retained when it sold MG Rover.

Mercedes on the other hand, is relying on brand extension and the rebirth of the
Maybach brand to increase volume since the end of its ill fated merger with Chrysler.
The successful merger between Renault and Nissan raises question about the two
remaining European independents, PSA and Fiat.

Collaboration

As markets mature, manufacturers are being forced to cut costs and increase scale.
The manufacturing process has had most of the possible cost squeezed out in the last
ten years. Companies already buy components from each other or share development
costs, for example the alliance between PSA and Renault to supply gearboxes.
Collaboration is based on mutual need and can either be used to spread costs or as a
market entry strategy. There appears to be a shift of emphasis from the interchange of
resources towards combining, as well as a more open attitude by Western companies
to close co-operation. It is becoming multi dimensional as manufacturers analyse
their value chains, not only with a view to outsourcing, but on a geographical basis.
Relocation, rationalisation and new bases for supplier relationships will dramatically
alter the profile of the entire industry by 2012.

There are a number of parallel developments occurring:-

* The component supply industry has tiered, with Tier 1 suppliers becoming solution
providers. They develop and supply whole vehicle systems such as brakes, engine
management, steering and suspension.

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* These suppliers have becoming knowledge partners and have taken on the
role of managing relationships with tiers 2 and 3, who have found themselves
isolated from the car manufacturers.

* Technology is increasingly complex and from outside the traditional automotive

industry. Electronics, currently constitute around 23% of the value of a car, this will
rise to 40% by 2012.

* As technology becomes more intelligent, components can be tailored to a wider

range of applications. Software can now be used to alter the power and torque
profiles of diesel engines using inbuilt codes, offering the opportunity to use one
engine across a wide range of model sizes. It could also be combined with GPS to
automatically limit speed to the legal maximum.

* For this reason, specialist suppliers are achieving greater economies of scale than
even the largest OEMs can hope to achieve in house.

* Car makers are reducing the number of varying components even at platform
level, but increasing consumer choice by offering more variants in terms of trim
and accessories.

* They are recognising the concept of "needlessly unique" components, where the
cost of developing many alternatives does not raise customer perceptions of value.

* Components which the customer perceives to be invisible will be standardised.

These will include chassis, steering, driveline and braking systems. Others
will be made common where possible, including instruments, controls and airbags.
Only variants required to be different by the customer will be specific to models
and examples of these include paintwork, exterior trim, fascia and glass.

* Component suppliers are being forced to grow, in order to stay within cost targets
set by their customers. Suzuki insists that all main suppliers with fewer than
100 employees must merge with other suppliers. Global car makers logically

16
 require global component suppliers.

* Car companies will increasingly become assemblers as they turn their main
strategic attention towards, design, marketing and their distribution channels.

Technology and Research and Development

It is becoming more difficult to sustain competitive advantage through product

differentiation. OEMs however, are continuing to invest heavily in research and
development in an attempt to attract customers and no detail is seen as insignificant.
Audi claims that its new V10 R8 is the first car in the world with all LED headlamps
and rear-view mirrors have become high tech, with power folding, photo chromic
glass and vision cameras aimed at pedestrian or occupant detection. It is likely
however that the technology focus will increasingly be on new fuel sources and lower
pollution levels as firms attempt to anticipate future customer demands.

Pollution and Resource Consumption

Pollution has evolved from a series of localised problems into a global issue. The
range of pollutants is also increasing and now includes CO2, CO, NOx, SO2, CFC,
Methane and Nitrates. Automobiles currently have 80% of the global personal
transport market and 55% of goods transportation. Their effect on the natural
environment is therefore significant and ranges from 5% of total SO2 emissions up to
70% of all CO2 emissions.

Noise and waste products also contribute to environmental deterioration. More than
500 kg of every car produced ends up in land fill sites, accounting for 4% of total
rubbish weight. Companies are beginning to take these issues seriously as it is
probable that eventually they will bear responsibility for disassembly and total
recycling. Renault for example spends 30% of total R & D budget and employs 1000
people on environment related issues. This is shared between compliance with future
regulation and attempting to gain advantage over competing companies. The Euro 96

17
norms mean much tighter controls over emission levels and these are mirrored by U.S.
legislation. No detail is too small to escape attention in this constant search for
technological advantage. In Europe for example, 180,000 tonnes of fuel evaporates
every year during the refuelling process and fuel tanks are being redesigned to
eliminate the problem.

Reduction in fuel consumption is a major research area and engines are being
developed with reduced friction, more efficient combustion and better ignition.
Diesel cars remain an alternative and work also continues on small electric cars.
Engines capable of using renewable fuels such as Soya oil have been in existence
since the 1970s, but unless governments deliberately favour these alternatives via
changes in taxation policy, they will only slowly gain acceptance. There are
encouraging signs however, in Sweden 66% of orders for the new Saab 95 are for the
version that runs on 85% bio ethanol derived from sugar cane and British Sugar is
considering building a bio ethanol plant in the U.K. Hybrid vehicles running on oil
based fuel and electricity are gaining in popularity and fuel cell cars will be on the
road by 2020

Companies are responding by investing in research to discover new materials. Weight

reduction is also a vital part of the process and new high strength steels, alloys,
polymers and composites will find their way into car bodies over the next ten years.

Recycling is now a major factor and will have important marketing implications in
certain customer segments. About 75% of the average car is steel and therefore easily
recoverable. The remaining 25% consists of plastic, glass and rubber. Legislation
reduced this figure to 15% in 2002 and further reductions to around 5% are likely in
the longer term. The whole industry is collaborating in this area along with chemical
companies, suppliers, re cycles and regulators. Green networks are being built to
collect batteries, catalytic converters and bumpers and recycle them directly in the
production of new vehicles. Alternatives to plastics include resin bonded flax, which
can be used as agricultural fertiliser when the car is eventually recycled.

18
Dealerships

Car dealerships are another part of the industry undergoing rationalisation and in
particular, concentration. The fundamental issue centres on how cars will be sold in
the future and clearly this is a vitally important part of the value chain to the car
makers. It is here that the customer interface takes place and increasingly where most
of the perceived value is added. As cars become more similar it will be dealers who
influence the replacement decision by the way they manage the customer relationship
during the entire period of purchase and ownership.

Manufacturers are turning their attentions to lean distribution, reducing stocks and
dealer's margins which are already down from 17% in 1985 to an average of 8%.
Distributors are increasingly demanding the right to sell new cars from several
different manufacturers on the same site. Their traditional income from servicing and
parts is under pressure as cars require less routine maintenance and fast fit chains
steadily erode the dealer’s share of the after market for replacement parts. Daewoo re
configured the conventional value chain completely, by selling direct to the public.

It has been estimated that a further 25,000 of the 50,000 dealers in Europe will
probably disappear by the year 2012. Research shows that consumers are willing to
travel 25 miles to buy a car, but only ten miles to have it serviced. The logical
structure in the future will therefore be a small number of multi franchise dealers, with
servicing carried out by local satellite centres.

Some car makers will integrate forward by buying dealerships or terminating

franchises as their agreements expire. Nissan and Toyota have both already taken this
step. Manufacturers are beginning to realise that with increasing concentration of
dealerships, the balance of power may be in danger of changing, in much the same
way as supermarkets gained control over the food industry.

Dealers are becoming increasingly critical of car makers and in particular their
product development and marketing activities. BMW is the most sought after

19
franchise followed by Jaguar, Mercedes, Land Rover and Audi. Much of this is due to
margins of between 12 to 17% compared with 7 to 10% in the volume segment.

Future Issues and Conclusions

The car industry is becoming increasingly global, concentrated and extremely

collaborative. As development costs escalate, it becomes increasingly difficult to
justify R & D expenditure on the volume scale of all but the largest producers. Much
of the new technology is also from outside the traditional engineering sector.
Competition by vertical and horizontal collaboration is the future of the industry.

Green issues will influence policy as governments struggle to balance extremist lobby
groups with macro economic performance and the requirement for mobility by the
majority of the population. Pollution is a massive problem and the consensus from
the Kyoto summit appeared to be that something must be done soon, but by other
people and at their expense.

Road transport does emit the vast majority of airborne pollutants and manufacturers
are beginning to include environmental criteria into the formulation of strategies.
New fuel sources, recycling of body parts and better design will all help and
alternative methods of communication may reduce the number of journeys people
make, but ultimately it is governments which decide on a sustainable environmental
policy, (or otherwise), and manufacturers will need to keep very close to this issue to
avoid very expensive mistakes.

Car makers not only react to political forces but increasingly influence legislative
processes. Normally protectionist politicians are competing to bring down tariffs and
taxes in the battle to secure investment and employment and to create border less
economic zones. Daewoo has overcome quota restrictions and a 35% import duty into
Poland with government connivance. Assembled cars are shipped to Slovenia where
the wheels and engine are removed. This allows the vehicles to be treated as new
parts for import purposes.

20
Europe and America have traditionally been the battleground for car manufacturers
but China and India will dominate the coming decade with Eastern Europe also
offering growth opportunities. Economic life cycle differences will create significant
demand fluctuations between country markets and therefore management will need to
focus on flexibility and speed of response based on very accurate market scanning and
forecasting. Emerging nations offer the additional opportunity of extending product
life cycles through the licensing of obsolete technology.

National manufacturers generally have strong domestic share but show weaker
positions abroad, with the exception of VW. Japanese producers will face increased
competition in their domestic markets as their government conforms to bilateral trade
agreements. The three major US manufacturers and European companies are
optimistic in this respect and overall, forecasts are that imports will rise from their
current level of 7% to reach between 20 to 30% of total sales.

Toyota and Nissan have emerged as the only real global competitors to date. By 2015
there will probably be seven global companies or collaborative groupings. The entire
industry is driven by cost and technology, with ecological issues as a significant
underlying factor. The entire relationship of relevant criteria is extremely complex
and requires constant scanning and enlightened strategic thinking in order to craft and
refine both direction and tactics in line with events as they emerge.

This holds for product and process development, as customers demand ever more in
terms of product choice and specification, cost, reliability and service. Distribution
channels remain a significant, but decreasing barrier to entry in Europe and Japan, as
the US system of mega dealers gradually replaces exclusive franchises. Anti Japanese
sentiment continues to be a factor, particularly in the US, but this can be diffused to a
large extent by local manufacturing and component sourcing. Some local customer
preference is balanced by the fairly universal nature of customer needs. National
taxation policy can be a significant demand factor and this will increasingly be driven
by ecological considerations.

21
Car manufacturers will re configure their value chains in order to move closer to
customers. This will include further diversification into areas such as dealer services
and finance. Resources will be allocated to these activities as first tier suppliers
become thinking partners, responsible for managing relationships with secondary
suppliers. Brand enhancement will concentrate on building lifetime relationships with
ever increasing switching costs aimed at long term customer retention. Some
companies will stretch their brands while others notably VW, Fiat and GM, manage a
stable of brands each aimed at distinct product segments.

Excess and increasing production capacity represents a major threat to all producers.
Government influence and support raises exit barriers, but in the long term, those
companies wishing to survive as global players need to establish their place in the
creation of value to increasingly discerning consumers.

Appendix 1

Strategic Groups within the Car Industry

Stage One

22
G 1 2 3
E
O Global
G
R
A
P 4 5 6
H
I
C International
A
L

S
P Domestic
R (Some exports) 7 8 9
E
A
D

Niche Narrow Broad

PRODUCT RANGE

Appendix 2

Strategic Groups within the Car Industry

Stage Two

23
 1 2 3

B High
R
A
N
D

P 4 5 6
E Medium
R
C
E
P
T Low
I (Some exports)
O 7 8 9
N

Functional Some Product Luxury

Differentiation

PRODUCT RANGE

Appendix 3

Strategic Groups within the Car Industry

Stage Three

24
C 1 2 3
O
M High
P Added
E Value
T
I
T
I 4 5 6
V Some
E Differentiation

A
D
V Cost
A Leadership
N 7 8 9
T
A
G
E

Little Collaboration Strategic Alliances Acquisitions

GROWTH METHOD

25
Appendix 4 – Major Automotive Groups and Independents

Top Producers with subsidiaries and brands

General Motors Ford Daimler Toyota Honda Renault Fiat Peugeot BMW Volkswagen Chrysler
Nissan Citroen
Vauxhall Ford Mercedes Lexus Acura Infiniti Ferrari Peugeot Rolls Royce Bentley Chrysler
Cadillac Lincoln Maybach Toyota Honda Nissan Lancia Citroen Mini Volkswagen Jeep
Chevrolet Volvo Smart Hino Dacia Alfa Romeo BMW Audi Dodge
Pontiac Mercury Mitsubishi Fuo Daihatsu Renault Maserati Bugatti
Buick Samsung Fiat Porsche
Oldsmobile Abarth Lamborghini
Saturn Seat
Opel Skoda
Daewoo
Holden
Isuzu

Independent and Part Owned Producers

Western Europe Eastern Europe Middle East & Africa Japan China India Rest of Asia Canada

Bertone Avtovaz BMC Turkey Subaru Dong Feng Hindustan Kia Magna
Caterham Moskvich Saipa Suzuki SAIC/ MG Rover Tata (Owns JLR) Perdua
Morgan Kamaz Iran Khodro Chonquing AG Eicher Proton
Porsche Gaz First Automotive Ashok Ssangyong
TVR Volga Beijing A IC Mahindra Daewoo
Sisu Zil Chery Lotus
Spyker/Saab JelC3 Brilliance Autos Hyundai
Lada China Motors
Raba Geely