Restructuring of Car Industry in Europe
In the whole world, auto industry has undergone a lot of notable changes. There has been a revolution in the industry and it has changed in the process and the brands that are being produced. According to Carrillo et al., (2004), for a long time, the auto industry has been ruled by car brands from American industries but this seems to have changed. There is a rise of new car industries in other countries like Japan, India, China and European countries. Auto industry in America has reached saturation point.
According to Freyssenet et al., (1998), consumers have also changed and the concept of “greening the car” has surfaced as a major determinant in the auto industry. Consumers have become more aware of the environmental impact of driving and the industry is expected to go along with it. In any case, Japan has set the pace for development of the so called environmental friendly cars and the whole world in following the lead. Japan has been successful in producing cars which are fuel efficient environmentally friendly.
This is explained as one of the reason leading to fall of American auto industry as it has not been able to read the consumer demand of a fuel efficient and environmentally friendly car. These are the measures that are being introduced in the industry. According to Lung et al., (1999), this has been the major changes that have shaped the auto industry in the whole world that has helped it remain competitive and responsive to consumer demands.
GM has been the leading manufacture of cars in the world. For a long period of about fifty years, the world market has been dominated by the United States auto industry like GM, Ford and Chrysler. But since the 1980s, with the entry of Japan in the industry, their fortune has change dramatically. It is of our interest to look into this because companies like Ford started in Europe before they opened other branches in the United States.
Automotive industry in Europe
The automotive industry in Europe remained one of the main industries contributing to the income of most countries. The industry has a long history and is accredited to the mother of the automotive industry in the world. Europe is accredited with the growth and development of the car industry starting with the early invention of the Daimler car. According to Freyssenet et al., (2003), the industry has been able to maintain its competitiveness in the face of stiff competition from other emerging motor industries in America and Asia because it has remained competitive embracing the culture of innovation and quick response to consumer demands. The industry has developed by using the marketing forces of innovation and use of low cost labor in some parts of Europe.
Internationally the automotive industry in Europe has been a big contributor of cars in the world. In 2006, 69.2 million cars were produced all over the world. Of all these cars the European Union produced 27%, NAFTA countries produced 23%, and Japan contributed 17% while China contributed 10%. In Europe the industry employs 2.2 million people and has an annual turnover of more than 700 billion EUR. We have already seen that the industry makes a large contribution to the economic turnover of Europe. Ranking by countries Germany is the largest contributor to the industry with a share of 47% in out put and 39% in employment.
France follows closely with 14% in out put and 12% in employment. United Kingdom has a share of 9% in output and 9% in employment, with Italy contributing 5% in output and 7.5% in employment and Spain contributes 5% in output and 6.4 % in employment.
However the industry faces a lot of challenges. It is still behind in terms of development and productivity as compared to Japan and United States. The labor productivity in the industry is much lower as compared to other producers in United States and Japan.
The cost of labor is also very high which increases the production cost of cars. The labor cost per hour in the industry is at par with that of United States but it is 10% higher than in Japan and 30% higher than in Korea. In terms of innovation and adaptability to the changes in the market demands, the industry is still far behind others. These are some of the challenges that the industry has tried to move fast and address in the restructuring process.
Unlike auto industries in America which has suffered since the oil crisis of 1970s and 1980s, auto firms in Europe have been able to reestablish their operations and reclaim their market share. American firms have been struggling to recover from the shock but due to use of wrong policy. In deed it can be agreed that Japan revolutionized the car industry and utilized the oil crisis to position itself as a producer and marketer of more economical cars which are environmentally friendly, while the American firms responded by producing cars with a class and style. European firms have been able to respond by inter-marrying the concept of environmental friendly vehicles and at the same time incorporating style and comfort in the car.
Despite many claims that the industry has not recovered from the initial shocks of oil crisis, there has been remarkable growth in the industry in the last two decades. This has been boosted by the economic boom in the region and partly by the reunification of Germany which is one of the largest car producers in the European market. However the industry has remained competitive in the world for all this time due to the segmentation in the production process. The industry is segmented in such a way that of the ten large car producers in the region, six of them are mass producers competing in the same market. These are Fiat, Ford, GM Europe, PSA Group, Renault, and VW. The other four major players compete in the luxury industry and include BMW, Mercedes-Benz, Volvo, and Audi groups.
With the Japanese and Korean producers having pitched their tents in the European market, the situation is becoming more serious. It is feared that the European motor industry will reach a saturation point like that of America. Going by the figures released about the registration of new cars in Europe, this fear has already been confirmed. The reduction in the market has been contributed mainly by changing consumer view of cars as major polluters and the increasing awareness of the need to do physical exercise due to the surge of lifestyle diseases. These two factors have changed the consumer view of cars and have contributed to decreasing market demand of cars in Europe.
Over the last 20 years, the industry has undergone dramatic changes in the process of outsourcing which has led to the emergence of two connected subgroups. These subgroups have been the back bone for continued competitiveness portrayed by the industry in the world market. The industry has given rise to one subgroup dealing with original equipment manufacture (OEMs) and the other dealing with supplying of the car components (CS). These subgroups were as a result of the need to have the industry specialized into working departments.
The original equipment manufacture subgroup is perhaps the driving force of the industry. They specialized mainly in the production of original car parts and systems. In Europe there are eleven such subgroups including BMW, DAF, Daimler, Fiat, MAN, Porsche, PSA, Renault, VW, and Volvo. Other American companies like Ford and GM also have their headquarters in Europe. When it comes to the Component sector there are more than 30 companies in this sector.
Of the top thirty, thirteen of them are situated or their headquarters are in Europe. There are 7 in German, 1 in UK, 3 in France, and 1 in Sweden. All the firms in these two sectors have joined together and found umbrella bodies under which they operate. All firms dealing with the production of the original parts fall under the European Automobile Manufactures Association (EAMA), while all those dealing with the supplying of automobile parts falling under European Association of Automotive Suppliers.
For the last twenty years the OEMs firms in Europe has embraced structural changes in product and corporate organization. This has given the industry a competitive edge in the car industry in the world. As a result trade between Europe and other countries in automotive has grown at a remarkable pace. But it is also seen that the industry has experienced a lot of competition from other car manufacturer especially Japanese cars. Countries like Italy and France have experienced dramatic reduction in sales in their home market due to competition from outside. But it also to be appreciated that there has been increased Intra-Europe trade in cars.
Although the industry has remained competitive it has experienced challenge in competing with fuel efficient and environmental friendly cars from Japan and other countries even in the home market. For example between 1999 and 2005, intra-European Union trade decreased by 5% while the sale of cars outside the European Union grew by 75% as compared to 14% growth of cars produced in Europe.
On the other hand the CS firms are facing fierce competition from the mass produced care parts in Japan and China. The problem has been compounded by the rise of free market in china which has seen many companies contracting Chinese firms to produce automobile parts for them. The future of the CS subgroup remains in its ability to consolidate its operation in the fragile market and the need to be more innovative to respond to the market demand of consumers and other industrial players.
Due to the changing demand of motor vehicle in the market auto firms in Europe has responded by producing cars for the growing markets. In Europe the car market has recorded worrying decrease and hence the industry has shifted its attention to production of cars for other regions. According to records the registration of new cars in European market especially in European Union grew by an average of 0.9% per annum with majority of individual countries registering negative growth in registration.
Countries like France have recorded a decline of –0.75% per year. However since 2000, the market has shown some signs towards positive growth with countries like France recording a growth of 1% per year and Germany recording a growth of 0.1% in the same period. This has clearly reckoned in the industry and it has resulted to restructuring its mode of processing and operation. The industry has been restructured to target the new growing market at the fringe of Europe or outside where there has been remarkable growth in registration of new vehicles
According to Grabler and Stark (1997), to respond to this changing market demand the industry has been transformed in three major ways in order to tap the upcoming markets in the growing regions. According to Boyer et al., (1998), the industry has transformed car manufacture in Europe from low end, volume segment to the high end and more innovative segment. This has encouraged innovation in the industry in order to helps it compete effectively with other producers in the world.
The industry has also seen the need to move with other trader in accepting and enforcing the trade policy of opening some closed markets to European manufactures and protecting the intellectual property in those markets. This has come in wake of countries like China which has unregulated trade and accounts for majority of the counterfeited products in the world. This regulation is aimed at encouraging European car manufacture to become more innovative. The industry also aims at creating a regulatory framework which does not hinder or interfere with competition in the industry and which is aimed at generating solutions to the global demands of the automotive industry.
The industry has responded by intruding more cost cutting measures in the production process. According to Calabrese and Lung (2003), this led to increase standardization of the process and parts which saw the producing of interchangeable modules which makes up a car. There was the reconfiguration the production architecture and quality management in the production process. There was reorganization of the production line up which saw increased product range production.
Some car brands entered a lower value-added market segments like VW Polo and Lupo as examples. Some high class models like Mercedes C-Class and A-class have to move down to lower markets. This meant reorganization of the production process to produce the same brand aimed at low class consumers. These cost cutting measures led to decreased profit margin per car which at the end encouraged mass production amid the stagnant market. According to Schettkat (1996), it had devastating results employment since many jobs were lost.
Durrand et al., (1999), argues that, in restructuring the industry most car producers have tried to increase their capacity of production a notion that is being rejected by many economist. Economists are arguing that the industry should incorporate the aspect of the need and taste of consumers instead of engaging in mass production with a mere aim of competing with producers in Asia who have taken a large of the market. The governments have also chipped in by providing subsidies, aids and new car premiums. This has been aimed encouraging the producers to take advantage of newly emerging markets in South-East Asia, Africa and Latin America.
According to Humphrey et al., (2000), this policy may not help the mother industries in Europe since most other competing producer has moved with the market forces and has set up other sister industries in these new markets in order to reduce the marketing cost of the cars. This trend was initiated by Japanese car manufacturers who set a production plant in almost all major emerging market in the world which helped them to place their cars in the market at a much lower price.
The European car industry has good prospects for future prosperity of the industry. The Association of Automobile Manufacturers in conjunction with the government has made attempt to put the industry to its original market share. In line with that, in 2004 the association moved to set up Competitive Automotive Regulatory System for the 21st Century (CARS 21). The commission consisted of prominent persons in the automotive sector, parliament members, consumers and members of various trade unions. This commission was trusted with creating strategy for a sustainable development of the automotive industry and crating a regulatory framework for the industry.
References
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