Car Industry: Threats and Business Vulnerabilities Essay

Salient features of the car industry

The twentieth century cannot be understood fully without discussing the impact of motor vehicles. According to one historian, “The development of the motor vehicle revolutionized American systems of production and patterns of consumption” and he added, “In 2000 the nation had more motor vehicles than licensed drivers” (Rubenstein, 2001, p.vii). All the success is credited to Henry Ford and his car the Ford Model T.

In 1913 the Ford Motor Company started the mass production of cars using a moving assembly line and by the year 1915 a million model T’s were built (Rubenstein, 2001, p.3). In 1925, the Ford Motor Company was able to manufacture more than nine thousand cars in a single day (Rubenstein, 2001, p.3). However, this was the heyday of the U.S. automotive industry. Starting in the 1980s this particular industry took a downturn as the American manufacturers had no answer to foreign competition.

Aside from the Ford Motor Company, there were two other giants when it comes to the manufacture of American-made cars. The first one is General Motors and the second one is Chrysler. Together they are collectively called the Big Three and for many decades no one thought that foreign companies can beat them in their own game. During the golden years of Ford, General Motors, and Chrysler, these companies and their CEOs were the envy of businessmen all over the world.

But the glory days are over. According to one commentator, “The Big Three have shed about 600,000 U.S. jobs since 1980, while about one-quarter of Americans employed in automotive manufacturing (nearly 300,000) work for foreign-owned companies – and that excludes Chrysler, which was acquired by Daimler Benz of Germany in 1998” (Cooney & Yacobucci, year, p.vii). This sums up the deplorable state of the U.S. auto industry.

If this was not enough the U.S. economy experienced a financial crisis a few years back and American automakers were one of the hardest hit. There came a time when General Motors – a company considered a U.S. institution – came dangerously close to being wiped out never to be seen again. They only survived because the company was rescued by the U.S. government. But it did not come cheap. Industry experts revealed that GM received $49.5 billion from taxpayer money to save the company from bankruptcy (Johnston & Dodge, 2010, p.1).

GM should have known because since 1979 the U.S. auto industry began to experience a trade deficit. It started with $9 billion and then it ballooned into more than $100 billion since 2000 (Cooney & Yacobucci, 2007, p.viii). As a result “most passenger cars that are sold in the U.S. were either imported or manufactured by foreign-based producers” (Cooney & Yacobucci, 2007, p.vii). In addition to that, it must be pointed out that the Big Three can only dominate in the manufacture and sales of light trucks, and yet, all the same, foreign brands are trying to get a slice of that pie as well (Cooney & Yacobucci, 2007, p.3). The Japanese auto manufacturing firms had proven their ability to adapt within the U.S. auto industry.

Amid the gloom, there is good news that came in recent months was the announcement that General Motors is back on track. Many quoted Barack Obama who said that “President Barack Obama said General Motors Co.’s return to the stock market shows the U.S. auto industry is on the rise…” (Johnston & Dodge, 2010, p.1). Obama was correct when he said that there is still more work to be done to rebuild the U.S. auto industry but at least this is a step in the right direction.

Entrepreneurship opportunity

The next best thing in the car industry is none other than electric cars. This means that there will be less dependence on fossil fuels as well as the reduction in pollutants in the air. Therefore, there are many future car buyers who will be very interested in this type of cars. There will come a time when the market will be saturated with electric cars that one will find it to be as common as the combustion engine that uses fossil fuel. On the other hand these changes will also result in the creation of customer needs that were non-existent a few years ago. There will be a demand for charging stations.

In the old way of doing things, cars with combustion engines will have to refill their tanks with fuel from a gasoline station. The owners of gasoline stations obviously make a profit but not everyone can set-up a business such as a gasoline station. First of all it will require a lot of money and second it requires training and other forms of investment for a businessman to be able to put up a gasoline station. But the same thing cannot be said of charging facilities.

The entrepreneur’s house can be used as the charging station. A few modifications will be needed to allow this particular house to provide the necessary voltage and the necessary electrical load. But the modifications will never be as expensive as constructing a facility for a medium-sized business. A charging station will be provided and this will require a roof of some sort so that there will be form of shelter in case of rain. A chair will also be provided so that the driver can rest while waiting. This basic design will spawn other forms of entrepreneurial opportunities similar to what one will find in a traditional gasoline stations.

Developing an export component to the car industry

American automakers will have to develop cheap but high-quality electric cars that will then be exported all over the globe. Electric cars will be in demand because of the problem with the supply of fossil fuels. Scientists are predicting that in few decades the ability of oil-exporting countries to supply the world’s demand for fossil fuel will be severely limited. As many are aware petroleum products is a finite resource and someday oil wells will be depleted. There will be a mad scramble for alternative sources of fuel but in the meantime the most appealing short term solution is electric cars.

The ability to export a valuable commodity is a critical component of the U.S. economy. This country cannot afford to simply import the things that its citizens needed. According to economists there is a general rule to consider when it comes to international trade: “In the long run, imports are paid for by exports” (Schmidt, Shelley & Bardes, year, p.616). A vibrant economy therefore requires for American businesses to be able to sell their products overseas. In this regard the automakers must also be able to strengthen their capability to sell a huge volume of electric cars to foreign markets.

However, this is not going to be an easy business proposition. In a global economy it is not only U.S. based companies that will have the capability to manufacture electric cars and export it to other countries. As a result of this the U.S. automakers will have to contend with their exports as well as cars that will be imported into the country. This has prompted many to ask for a limitation of the imports that are coming in from other countries. Obviously if Americans will limit their purchase of imports then there will be fewer obligations in the long run.

In other words a deficit will be avoided. The country will make profit from the products sold overseas and yet less money will flow out of the system because of the less number products were purchased from other nations. However, this is a not a good idea, “Economists point out that if we restrict the ability of the rest of the world to sell goods and services to us, then the rest of the world will not be able to purchase all of the goods and services that we want to sell to them” (Schmidt, Shelley & Bardes, year, p.616). Trade must not be limited or else the market will react in a way that negatively impacts the U.S. economy.

A good example is what happened in the early 1980s and the late 1990s. The United States and Japan entered into an agreement that the Japanese government will limit the number of cars that they will export to America (Schmidt, Shelley & Bardes, year, p.616). Obviously U.S. automakers lobbied hard for they felt threatened by the popularity of Japanese made cars.

But this strategy boomeranged on them because as a result the demand for Japanese cars rose while the supply dwindled. This resulted in a sharp increase in the prices of Japanese cars and created a domino effect that forced U.S. automakers to increase the prices of their own cars (Schmidt, Shelley & Bardes, year, p.616). The consumers suffered because they were asked to pay for a more expensive commodity.

The best way to deal with this is not to impose some sort of trade restriction. U.S. automakers will have to work hard to create a cheaper and yet of higher quality products. This is the only way that they will be able to export a significant amount of cars while at the same time satisfy the requirement of the domestic market that there will be less demand for foreign made cars. This will help the U.S. economy and more importantly it will revive the U.S. automotive industry.

An industrial engineering application in the industry

Lean Management Systems (LMS) is a strategic concept utilized by business leaders to initiate radical changes within their respective companies. The goal of every enterprise is to make a profit by increasing revenue while at the same time lowering production cost (Bell, 2006).

The correct use of LMS principles will allow a company to reduce waste, in terms of using the least amount of resources to accomplish a task (Bell, 2006). One way of doing this is for business leaders to be mindful of inventory control problems (Kim & Sigel, 2008). Another way to do this is the use of the the just-in-time inventory system or JIT. Just-in-time is a strategic move that can increase the competitive advantage of the firm. These principles are familiar to captains of industries especially those in the U.S. automotive industry.

The Japanese are not only famous for their cars but also for the industrial engineering concepts that they developed, pioneered and shared to the world. One of these impressive concepts is called the Just-In-Time system. It is a proven and effective strategy for reducing waste and reducing overhead costs in their manufacturing facilities. JIT can be simply defined as “…making only what is needed, when it is needed, and in the amount needed” (Toyota, 2009).

It does not require a financial wizard to realize that there is no sense in ordering excessive amounts of raw materials if there is no future demand for finished products. It does not also require a genius to understand that high inventory levels can increase the risk of obsolescence and these products sitting in warehouses for long periods of time are prone to damage. But streamlining operations and achieving JIT inventory is easier said than done.

The first major step towards creating just-in-time inventory levels is development of a system that can help business leaders predict future demand. The next best thing is to improve information gathering so that management can make quick and accurate decision when it comes to purchasing raw materials in advance and then producing the exact number that will meet market demands.

When inventory levels are reduced significantly the company will experience lower investments for their inventories making the firm more productive (Shim & Siegel, 2008). For many Japanese companies their inventory turnover ratios reached 41 to 63 while their U.S. counterparts can only achieve turnover ratios of 5 to 8 (Shim & Siegel, 2008). This means that American factories are producing way beyond expected demand.

This is not a good thing because U.S. companies will therefore be forced to increase the price of their commodities. If they will not do this then they will go out of business. The added financial burden will prompt many to look for alternative products and the main reason why Japanese made cars became very attractive in the first place. If waste and unacceptable overhead costs can be reduced then the prices of the cars produced in the U.S. will be very competitive. It can compete with foreign made cars of the same high-quality.

If U.S. automakers are slow to respond then they will continue to produce products that are unattractive to buyers. The companies will then experience a slow but painful death. There will come a time when foreign based automotive companies will simply walk in and gobble up U.S. automakers and incorporate it into their own. It is high time to really take a closer look at lean management systems and JIT system.

In a global economy there are many countries who are able to sell their products to U.S. consumers. The low cost of production in these countries is a real threat but U.S. automakers can reverse the trend by paying attention to industrial engineering concepts and trends that will allow them to be efficient producers of goods.

Considering renewable energy

With the increasingly high prices of gasoline in particular and fossil fuels in general there is a need to find an alternative source of energy. But this is not simply the reason why scientists and businessmen must be on the hunt and begin developing new sources of energy.

Another major problem when it comes to fossil fuel is the need to burn the said substance and therefore pollution, greenhouse gases and global warming are part of the realities of the 21^st century. Due to the enormity of the problem it would be foolhardy to develop only one type of alternative energy source. There is no silver bullet to bring down this beast of a problem and yet one of the most promising sources of alternative energy is solar energy, the power that comes from the sun.

One of the most promising alternative source of energy is the one that comes from the sun (Gordon, p. 291). For thousands of years man has learned to harness the power of the sun indirectly to support his energy requirements such as cooking, preserving food, warmth in the home etc. Man harnessed the power of the sun by burning wood – these came from trees that in its lifetime has stored and synthesized the sun’s power within its branches and trunks.

When man chopped the wood and burned it to cook his meal that is a demonstration of how solar power was used in an indirect manner. Then comes the fossil fuel age where it was discovered that plants and animals that long have died and buried underneath the earth formed oil and coal thus begins the use of fossil fuel.

Man used these substances in the same way as he used wood but this time the power output is greater, it can move locomotives, cars, and ships. Yet as mentioned earlier the supply of fossil fuel is dwindling. Surprisingly, it was discovered that there is no need to use the sun’s power indirectly, there is now a technology that will directly harness the power of the earth’s nearest star.

With regards to the utilization of the sun’s rays, John Berger writing about renewable energy sources made the following comments, “…modern science and engineering technology have of late made them much more efficient, convenient and economical. We could now for the first time provide for modern civilization’s energy needs virtually without pollution” (Berger, p.3). This is one of the most attractive aspects of this new technology.

Lakin and Patefield reported that solar energy belongs to the top of the renewable energy list. There are at least two major ways to harness the power of the sun. The first one is through the more popular method of designing photovoltaic cells. These are specially designed mechanisms that would convert the power of the sun into electricity.

The second method is a more direct approach. Thousands of computer-controlled mirrors will help focus a concentrated ray of heat that will heat-up water from a furnace (Lakin & Patefield, p. 239). After heating up the water, the boiling liquid will produce steam and therefore move turbines that would in turn create electricity.

The use of solar power as an alternative source of energy is very appealing because this is a renewable resource. It is readily accessible. There is no one who controls this commodity. Unlike hydropower energy where there is a need to construct dams and other huge structures to convert the power of the surging water into electricity.

But in the case of solar power energy can be captured by simply using solar cells. Thus, in the near future a sophisticated solar cell design can be incorporated into a regular sized and regular type of car and it is enough to power that car through solar energy. This is a cheap, renewable, and clean energy source.

The 4Ps (Product, Price, Promotion, Place) of marketing

The company must produce a viable product. This means that before manufacturing anything the company must have completed the necessary feasibility studies in order to determine the consumer needs and demand for this particular product. It will also include the necessary specifications needed by the consumers so that they will consider this product. If the company did not take these things into consideration then it will develop and then manufacture a product that no one is interested in.

However, it is not enough to have a good product that the buying public demands. It is also important for the company and its leaders to determine the price of the product. If it is too expensive then it will be unattractive to consumers. If it is too expensive then there is a possibility that the product will not move from the warehouse to the store and then to the hands of the consumers. If this will happen then overhead costs will pile up and the company will lose money. If the price of the product is low then the company will also lose money.

Promotion is a key factor in business because no matter how great a product is, if no one knows that it exists then no one will buy it. Promotion is also used in order to convince the consumers that this particular product will make their lives better. One has to understand that there are competitors out there who are selling the same type of commodity. It is through promotion that the company will be able to differentiate its particular product from the rest.

Place is also a critical component especially when it comes to manufacturing the product and delivery to consumers. There is a reason why many companies are setting up their factories in China and other parts of Asia because the cost of production is lower there. Aside from that there is a growing demand for their product in the Asian region. Thus, the 4 P’s are important.

Expanding to the international market (South America)

The first thing to do is to assess the market in South America. This is to determine the kind of cars that are available there and the type of cars that the public uses. It is also helpful if there is a vibrant racing industry in this region. Finally, it is imperative to determine the kind of synthetic oils that are popular in this region. The plan must be to offer a better alternative and using the main competitor as a gauge and as a basis for creating any marketing plan.

In order to achieve this, researchers must be sent to this region to study demographics, behavior patterns of the consumers etc. The best way to do this is to hire consultants who will develop a system that will enable the company to get hold of necessary information. Once this is done, the company will then have to hire an advertising agency to develop the promotion of the product in this region. The ad agency will convince the people that a better alternative has arrived.

The consumers must be made to understand that our product is better than the number one brand in the market. Aside from that the price will be cheaper than the best brand in the market. The company will work closely with the advertising agency hired previously and through them a series of TV commercials will be released. The company will also utilize print advertising and billboards will help spread the word, that a new synthetic oil company is in the region to sell a better product.

At the same time the company will determine if synthetic oil products will be manufactured in the region or if it will be exported from the U.S. At first it will be exported from the United States and when the marketing arm of the company already understood the intricacies of South America then it is possible to move in and manufacture from there.

Big threats to the auto industry and their prevention

The two most important threat to the U.S. auto industry are the cheap and high-quality imports as well as the instability of the supply of fossil fuel. It does not really matter which one will hit first because it will surely impact the state of the American auto industry. Cars coming from South Korea, Japan, and China are cheaper. In Japan the reason for their competitive pricing is the mastery of lean management systems and just-in-time systems that allow them to maximize their efforts. As a result they were able to produce high-quality products at a cheaper price. Unless their U.S. counterparts learn to do the same they will not be able to keep up with them.

China and South Korea on the other hand are able to produce cheaper products because of the low cost of production. This is especially true for China. This is a tremendous challenge because American companies are unable to drastically reduce the cost of labor. The CEOs of the auto companies may be looking at the possibility of transferring their manufacturing facilities in China at the detriment of the U.S. labor market. The solution therefore is to find a way to cut costs. The U.S. automakers will have to be creative in terms of developing systems that will enable them to radically reduce the cost of production.

One way to do it is to develop partnerships with other related industries in Asia. The companies in the U.S. can have subcontractors in Asia and allow these companies to create the components of the cars that they are making. They must ensure that it is cheaper to produce these components over there and then they will simply ship the component to America and the cars will be assembled and completed in the United States. This is not a perfect solution but it will help reduce the cost of making cars and hopefully the industry will survive.

Works Cited

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Berger, John. Charging Ahead: The Business of Renewable Energy and What it Means for America. CA: University of California Press, 1997.

Bloomberg Businessweek. 2010. Web.

Cooney, Stephen & Brent Yacobucci. U.S. Automotive Industry: Policy Overview and Recent History. New York: Nova Science Publishers, Inc., 2007.

Gordon, Jeffrey. Solar Energy: The State of the Art. London: James & James Ltd., 2001.

Johnston, Nicholas & Catherine Dodge. Obama say U.S. Auto Industry again on the Rise.

Lakin, Susanne and Patefield, John. Essential Science. Oxford: Nelson Thomes Ltd., 1998.

Rubenstein, James. Making and Selling Cars: Innovation and Change in the U.S. Automotive Industry. MD: John Hopkins University Press, 2001.

Shim, J., J. Siegel. (2008). Financial Management. New York: Barron’s Educational.

Toyota. (2009). “Toyota Production System.” Toyota. 1995. Web.