Running head: WEEK 8 REPORT PROJECT 2

Week 8 Report Project 2 Brian McMullen American Military University ECON600B April 17, 2012 Professor Fereidoon Shahrokh

WEEK 8 PROJECT REPORT 2 Executive Summary The automotive industry has been in a transition period over the last decade. In this paper, I will discuss the current state of the industry and recommendation for improvement through the analysis and utilization of Porters Five Forces Strategy analysis. I will identify the strengths and weaknesses of the American automotive industry and the Big Three; Ford, General Motors, and Chrysler. The automotive industry is a major economic indicator. A strong industry is indicative of a healthier economy. The economic trends of recessions, unemployment, expansions, and contractions will cause suppliers to close shop, unemployment to increase, or plants to close. Recent company bailouts and Chapter 11 reorganization of GM and Chrysler have given the companies new life. The restructuring has enabled the refocusing of priorities and assessment of industry position and potential. Chrysler was bought by Fiat and has benefited through an introduction into new international markets. Future growth of all three companies will be based on understanding and integrating into the global market. A truly competitive company will provide superior alternatives. The Automotive Industry Introduction to the Industry The American automotive industry brings up iconic imagery of the early twentieth century and the great transition from the agrarian society to an industrial society. The growth of America in greatly indebted to the automotive industry, with the advent of the mass-market automobile presented a new image of the Americans and a new means of business. In the early twentieth century, Henry Ford created the first American automobile company to mass-produce the cars. In 1903, Ford developed the large-scale manufacturing plant that allowed the assembly

WEEK 8 PROJECT REPORT 2 line construction of automobile. The American auto manufacturing companies formed what is known as the Big Three. Ford, General Motors (GM), and Chrysler automobile manufacturers have dominated the industry for almost eighty-years. All massed produced the consumer automobile as well as the commercial vehicles that allowed America to become a mobile country. The horse and buggy where soon replaced by the car. The movement of America and the transition into an industrialized county soon created a completely new means of moving people and goods across America. Recent years for the American automobile industry have proven to be financially challenging. The recession has placed strain on consumers and businesses. The economic environment caused GM and Chrysler to file Chapter 11 bankruptcy reorganization in 2009 and seek federal bailout money or additionally, Chrysler case, create a partnership with Fiat in order to maintain operations. The automotive industry has proven to be a major indicator for economic change for the US economy. The growth and contraction of the economic indicators (i.e. employment, GDP, Industry Definition The automotive industry provides transportation of people and goods and service for consumers and businesses with vehicles ranging from the low-end transportation to high-end luxury vehicles, and trucks for all uses. The goods and services provided by the automakers The Big Three automakers: 1. Ford, 2. GM, and 3. Chrysler

WEEK 8 PROJECT REPORT 2 have dominated the automotive manufacturing for years. However, the international automotive market of Honda, Toyota, Volkswagen, BMW, and Nissan have garnered substantial market shares and in some cased surpassed the Big Three in volume sales and revenue. This has proven a major challenge to the Big Three and forced them to reconsider their industry positioning forced change through necessity of survival. Industry Profile The automobile industry provides goods and services that support a wide range of manufacturers, wholesalers, suppliers, and retailers. The industry is a multinational provider of vehicles and parts that are sold through third-party retailers throughout the world. The industry produces automobiles, cross overs, SUVs, utility trucks, heavy-duty commercial trucks (Bureau of Labor Statistics, 2011c) that support both consumers and commercial industry. In addition to the sales of goods, the industry provides maintenance services and wide variety of financial services. The industry functions through multinational manufacturing process that includes a vast number of suppliers and logistical support channels and manufacturing plants located throughout the United States and internationally. There are 5,784 businesses that providing employment for more than 415,180 workers (Bureau of Labor Statistics, 2011a) (see Figure 1). These businesses manufacture parts and provide services that contribute to the overall production process of for the industry. The manufacturing of vehicles is centralized through various plants located in the US and international markets. The parts for the vehicles are made by numerous suppliers and shipped to the plants for assembly. A majority of these businesses are located in the Midwest. They produce everything from interior, exterior, to engine components. The interconnected logistical support

WEEK 8 PROJECT REPORT 2 needed to produce one automobile requires high levels of efficiencies that minimize cost, resource waste, time, and redundancy. Figure 1.

The Big Three automakers are major supplies of vehicles in the world. Vehicles sales increased for Ford, GM, and Chrysler in 2011. The sales numbers are an increase compared to September 2010 to September 2011; Ford +13%, GM +20%, Chrysler +27% (Lorio, 2011) clearly show that the companies are on the right path after weathering a tough economic period. The sales have dramatically changed in one year: Company 2011 Sales YTD 2010 Sales YTD Ford 1,933,654 1,741,343 GM 2,269,446 1,986,944 Chrysler 1,231,095 984,509 Source: (Motor Intelligence, 2011) Change % 9.95 12.45 20.03

WEEK 8 PROJECT REPORT 2 The American automotive industry is creating vehicles that meet the need of consumers and providing innovative solutions through a new product. The advent of the energy efficient vehicles electric and hybrid vehicle are providing a challenge to the foreign car market (i.e. Honda, Toyota, and Nissan). Industry Structure The American automobile industry consists of an oligopoly of three major players in the market, that is, Ford, GM, and Chrysler. The shared nature of the auto industry and the changes that affect each company have a causation effect throughout the industry. This mutual interdependence of the companies is relative to pricing along with supply and demand and directly affects the decision-making process of each company (Samuelson & Marks, 2010). For instance, all three companies sell 300 units (100 for each company) of their midsize auto and charge $20,000 for each unit. Ford decides to lower the price of its midsize best seller to $15,000 and offer a rebate of $1,000 to veterans; this will result in Ford selling 150 units to GM and Chryslers 75 units respectively. GM and Chrysler may decide to match the pricing to gain back consumers, wait for Ford to revert back to the standard pricing, or do nothing. This interdependency of the three automakers drives the decision-making process. A company that acts alone in their pricing will gain or lose based on the other company reactions. Future Outlook The future outlook for the American auto industry looked good. Sales and revenue have increased over the last few years. Ford US auto sales are up 14% while revenue is $18 billion up $1.8 billion for the third quarter of 2011 over the same period in 2010 (Ford Motor Company, 2011). GM US auto sales are up 7% in the third quarter over the same period in 2010 (General

WEEK 8 PROJECT REPORT 2 Motors, 2011). Chrysler worldwide sales for third quarter are up 24% over the same period in 2010 (Chrysler, 2011). The future outlook for the Big Three is directly related to the economic recovery and the US and the European Union. The uncertainty of the monetary stability of both will influence the balance sheet through available financing and overall revenue. Furthermore, the economic conditions of unemployment and consumer positioning will limit the buying power of consumers. The current debt payoffs will allow the stabilization of the companies and allow reallocation of money for investment in growth opportunities. The future market opportunities of the companies look promising. Growth opportunities in Asia, Europe, and South America are promising. The increased efficiencies that drive the supply chain provide a value-added opportunity. The facilities that support the companies will need to be internationally and regionally based to meet the unique demands of each market. However, recent natural disaster have proven to greatly affect the production capability of competitors and must be considered in the operation of facilities. Product continuity and sustainment through contingency plans need to be part of the strategic business plan and model. The competitive regional marketing and brand identity will need to be incorporated into new and emerging market strategies. The green vehicles is a growth market the will need to be increased substantially in order to meet consumer and regulatory demands. This market provides an excellent opportunity to enhance the product line and show corporate responsibility through environmental concern. Economies of scale for this growth market will increase over time.

WEEK 8 PROJECT REPORT 2 Porter's Five Forces Strategy Analysis Bargaining Power of Buyers The buyers (i.e. consumers) are providing a wide variety of products from a limited number of automakers. The demand of new vehicles, product innovations, green cars, and regionally unique vehicles has broadened the product selection for buyers. This and the increase buyer knowledge of products through information availability has made the buyer very select in their purchases. This places pressure on the automakers and drives the competition to adapt to the buyers demands by providing incentives, discounts, and specials (i.e. product value retention and buy back guarantees that Hyundai offers). Buyer power comes from over production due to poor planning and over estimation of demand. The current world economic hardships have challenge automakers in insuring that production meets the market demand. Buyers have suffered from lost wages, unemployment, repossession of assets that have strained their purchasing power. The current economic recovery and unemployment finally less than 9%, currently 8.6% as of November 2011 (Bureau of Labor Statistics, 2011b) will increase the number of buyers. Though the need for a new vehicle may not be a primary concern for many buyers, a strong presence of brand identity, price sensitive models, and substitution that meet a lower income buyers need be considered. Product differentiation will prove to be a strong selling point for buyers. The introduction of new product lines and green cars are highly sought by consumers. Rebates and trade-in guarantees will gain customers. Brand loyalty and buy American ideas have brought the Big Three back from crisis points, financial uncertainties and government bailouts. The progressive increase in sales from 2009 to 2011 are making Ford, GM, and Chrysler profitable again. Competitors, such as, Honda, Toyota, and Nissan have struggled through natural disasters and

WEEK 8 PROJECT REPORT 2 product defects that have hurt sales. Taking advantage of a change in buyers perception of the American automakers and the product lines have breathed new life into and once stagnant industry. The quality differentiations and concerns of past of less defined and have leveled the playing field for automakers. Bargaining Power of Suppliers The suppliers to the automakers have suffered through layoffs, downsizing, and closures. Automakers have adapted to the economic crisis through assistance by the federal government; suppliers have not fared as well. He supply chain will suffer as the suppliers suffer. The strength of the distribution channel is based on a stable supply chain. Economic hardships will force automakers to reconsider substitutions and alternate resource outlets in order to meet production runs. Increasing the manufacturing efficiencies through technology advancements and modeling for a more unified, multi-model construction process will prove beneficial and cost effective. That is, create automobiles that utilize the same core product, but allow for model differentiation and uniqueness. The large number of suppliers allows for the negotiation of pricing that in fare and competitive. A philosophy of buying American should be implemented in the contracting of suppliers. This will enhance the companys economic stability through supporting small businesses, thus contributing to the overall economic recovery of the US. Competitive Rivalry in the Industry The automobile industry is very competitive. In order to gain a competitive advantage, the Big Three must adapt their product line to the very demanding consumers. Innovation of new models will increase product differentiation. Ford has the Sync with MyFord Touch, EcoBoost engines, electric vehicles, and amenities the enhance their products. GM has the Chevrolet Volt

WEEK 8 PROJECT REPORT 2 and hybrid SUVs that give green conscious buyers an excellent variety. Chrysler is proving highly fuel efficient vehicles and desirable design options that have proven successful. Product differentiation through brand advertisement and product placement are an important part of garnering market shares. The global emerging markets are growing are an opportunity to gain a significant market share. Toyota sales have dropped -10.4% (Toyota, 2011), American Honda drop -8% (Honda, 2011) in September 2011; this leaves an opening for American automakers to gain consumers that may find product quality and pricing more ambiguous than in recent past. The quality and innovation of American automakers is strong incentive to select alternatives over foreign products. Threat of New Entrants The threat of new entrants in to the auto manufacturing industry is low. The initial investments and logistical issues are too great for a new company to start. The Big Three automakers have been around for over one-hundred years. Brand loyalty and market shares would quickly force a start-up to reconsider. The oligopoly of the auto industry can be a daunting mountain to overcome. New companies or companies seeking additional market share in the US must adapt to capital demands, sunk costs, distribution channels, economies of scale, regulatory requirements, consumer demands, industry profitability and pricing points that may gain a small market share. Companys such as, Indias Tata Motors has met the demands of the Asian market by adapting product models to the specific needs of the region. The small vehicle profiles like the Tata Nano have been very successful. Along with unique products, the merger or acquisition of establish auto companies will increase revenue and market shares. Tata acquired Jaguar Land Rover in 2008, making them a global competitor. The Big Three must look into the long-term

10

WEEK 8 PROJECT REPORT 2 strategic plans and determine the opportunity costs of mergers and acquisitions that broaden the consumer base and the global market. Threat of Substitutes The competitive market of the auto industry has given buyers a wide variety of product to choices. This allows consumers to seek out substitutions or alternate brands. The lack of product differentiation, innovation, pricing benefits will drive consumers to competitors. The auto industry makes it very easy for consumer to substitute a buy decision between companies. Ford, GM, and Chrysler must prove strong options in an effort to retain and gain customers. The price of similar vehicles, trade-in value, product quality, and innovation must be selling point that draw in customers. Maintaining a competitive advantage through new innovative products that closely consider the consumers demands will gain market shares. A company that does not look as a buyer as a long-term relationship will suffer on the bottom line. Each automaker produces various sized autos that are comparable to one another. However, high-end auto distinguish them from competitors. Opportunities through product differentiation must be integrating into the product life cycle. This enables the consumer to better determine the value of a purchase. Conclusion The American auto industry is looking promising in the future. The stagnant past and dated design of American made vehicle is overt. The growth of emerging global markets provides American automakers a great opportunity to increase revenue. The China market is growing, Shanghai GM increased sales 10.4% in October (GM, 2011). As the economy gain its footing and unemployment decreases, the Big Three will increase revenue.

11

WEEK 8 PROJECT REPORT 2 Innovations will drive the industry and market. Designing vehicles that are green options and high mileage will provide appealing alternatives for consumers. Electric cars, hybrids, and multi-fuel vehicles are in greater demand and the consumers become more environmentally concerned. The foreign competitors have been producing green vehicles for years (i.e. Toyota Prius) the Big Three will need to invest more research and development into the future vehicle line. The economy is continuing to recover for hard times. Government bailouts and financial reorganizations have left automakers with abandoned plant, laid off employees and restructuring of business models. The long-term strategic plans will need to reflect the assumptions of economic trends and their impact on business decisions. Should a new plant be build and refit? What is the benefit of entering new and emerging markets? Are the economies of scale in line for pricing and demand in order to maintain profitability? These are just a few of the consideration in regards to future planning. The competitive market is global and dynamic. Meaning the ability to meet competitors on equal ground has never been less difficult. Ford, GM, and Chrysler will need to establish partnerships and relationship with foreign countries and business to ease the transition into a global economic model. The cultural differences are an opportunity to adapt vehicles to the specific needs of the market and utilize in-country resources (i.e. parts manufacturing, labor) to manufacture vehicles. The will prove to be a substantial cost savings for companies along with addition revenue streams. Consumers are seeking lower prices and higher quality products. This is a challenge, but not impossible. Companies should provide cost saving discount and specials to gain customers.

12

WEEK 8 PROJECT REPORT 2 Additionally, trade-in will need to have a higher value. Marketing a specific audience through multiple media outlets will provide visibility and brand recognition.

13

WEEK 8 PROJECT REPORT 2 References Bureau of Labor Statistics. (2011a). Automobiles: BLS spotlight on statistics Retrieved 12/29/2011, 2011, from http://www.bls.gov/spotlight/2011/auto/

Bureau of Labor Statistics. (2011b). Current population survey (CPS)- unemployment . Retrieved 12/30/2011, 2011, from http://www.bls.gov/cps/

Bureau of Labor Statistics. (2011c). Motor vehicle and parts manufacturing Retrieved 12/28/2011, 2011, from http://www.bls.gov/oco/cg/cgs012.htm

Chrysler. (2011). Q3_2011_PressRelease.pdf (application/pdf object) Retrieved 12/30/2011, 2011, from http://www.chryslergroupllc.com/enus/investor/PressReleases/financial/ChryslerDocuments/Q3_2011_PressRelease.pdf

Ford Motor Company. (2011). Ford motor company financial earning reports & SEC filings for ford investors Retrieved 12/30/2011, 2011, from http://corporate.ford.com/ourcompany/investors/investor-quarterly-results

General Motors. (2011). General motors sales & production reports Retrieved 12/29/2011, 2011, from http://investor.gm.com/sales-production/

GM. (2011). GM china sales set october record Retrieved 1/1/2012, 2012, from http://media.gm.com/content/media/us/en/gm/news.detail.html/content/Pages/news/us/en/20 11/Nov/1107_china

Honda. (2011). American honda reports september sales - honda.com Retrieved 1/1/2012, 2012, from http://www.honda.com/newsandviews/article.aspx?id=6254-en 14

WEEK 8 PROJECT REPORT 2 Lorio, J. (2011). September 2011 auto sales - automobile magazine Retrieved 12/29/2011, 2011, from http://www.automobilemag.com/features/news/1110_september_2011_auto_sales/viewall.ht ml

Motor Intelligence. (2011). New car sales. Retrieved 12/2011, 2011, from http://www.motorintelligence.com/m_frameset.html

Samuelson, W. F., & Marks, S. G. (2010). Managerial economics (6th ed.). Hoboken, NJ: John Wiley & Sons Inc.

Toyota. (2011). About toyota | our news | toyota reports september sales Retrieved 1/1/2012, 2012, from http://www.toyota.com/about/news/corporate/2008/10/01-1-sales.html

15