Abstract
This study entails an analysis of the effects of climate change on the word’s automobile sector. Considering the broad nature of the sector, the study has taken into account the case of Toyota Motor Corporation which is one of the firms operating within the sector. To guide the research, the study has taken into account both the positive and negative effects of climate change. To ensure effective completion of the project, the study is organized into a number of chapters. The first chapter gives a comprehensive background study on the issue of climate change. It also outlines the research objectives, research questions, scope and limitations of the study. Chapter two entails a review of relevant literature and theoretical framework. The method used to conduct the study is outlined in chapter three. On the other hand, chapter four outlines the research findings for the study while chapter five entails a comprehensive discussion and interpretation of the research findings. Chapter six outlines the conclusion of the entire study, a number of recommendations and future research.
Introduction
Background study
Currently, climate change is being considered as a major global issue. One of the core causes of climate change relates to human activity such as combustion of fossil fuels which culminates in emission of Greenhouse Gases (GHGs) into the atmosphere. Greenhouse gases are considered as some of the emissions that cause climate change by increasing the rate of global warming (Hardy, 2007, p.22). The high rate of global warming is evidenced by the rising temperature levels on the earth’s service over the past decades. For example, during the period ranging between 1906 and 2005, the global average air temperature increased by a margin of 1.33±0.320 F. Greenhouse gases are considered to be the major cause of climate change (Parliamentary Office of Science and Technology, 2004, p.1).
According to the United Nations Framework Convention on Climate Change (n.d, p.2), the high rate of climate change that is being experienced is affecting firms in different economic sectors. On a global scale, business sectors are considered to be amongst the largest emitters of greenhouse gases (Gadesmann & Kuhnert, 2007, p.20).
Climate change affects businesses in different economic sectors irrespective of their size. According to Klynveld Peat Marwick Goerdeler [hereafter referred to as KPMG] (2008, p.1) which is a renowned international auditing firm, businesses are increasingly being confronted with diverse implications of climate change. Over the past few decades, businesses have acknowledged the fact that climate change presents both risks and opportunities (Jolly, 2010, p. 73).
There is a wide range of business risks associated with climate change. These risks are categorized into competitive, market risks, operational, supply chain, reputational, physical, and regulatory and litigations risks (Organization for Economic Co-operation and Development, 2010, p. 34). It is projected that these risks will increase in the future. According to Ryan & Turton (2007, p.1) climate change is widely recognized as one of the key issues within the automobile sector.
The automobile sector is a major contributor to the climate change that is being experienced today. Figures provided by the International Energy Agency (IEA) indicate that the transport industry is responsible for approximately 18% of the total carbon emissions. Light-duty vehicles account for about10% of the total carbon emission (Institutional Investors Group on Climate Change, n.d, p.1).The rate of carbon dioxide emission is relatively high in the US and other industrialized countries compared to the developed countries (Austin & Sauer, 2003, para. 1).
In an effort to mitigate the effects of climate change, different governments are adopting policies aimed at reducing carbon dioxide emissions. One of the ways through which this is being attained is by implementing the Kyoto Protocol (Parliamentary Office of Science and Technology, 2004, p.1). Based on its contribution with regard to greenhouse gas emissions, one of the sectors that different governments are emphasizing on is the automobile sector. For example, to attain this; there are a number of carbon constraints that are being implemented. These constraints are aimed at pressurizing Original Equipment Manufacturers (OEMs) to ensure that they manufacture vehicles that emit minimal carbon dioxide for every kilometer travelled.
To attain sustainable development, there are a number of issues that companies within the automobile industry have to consider. One of these relates to mitigating the effects of climate change (Mertz, 2007, p. 23). This arises from the fact that climate change has significant effect on the operation of firms. In order to achieve this, it is imperative for automobile companies to develop a comprehensive understanding on the effects of climate change on their operation. Understanding the effects of climate change will enable firms in the automobile sector to formulate effective operational strategies (Ryan & Turton, 2007, p.1).
One of the firms with the automobile sector that is affected by climate change is Toyota Motor Corporation. The company is ranked as the 3rd largest automobile producer globally. The firm deals with manufacturing, selling, leasing, and repairing various models of vehicles such as buses, trucks, cars and their related parts. The firm is also involved in development of electronic toll collection system, intelligent transportation system, home building and production of pressure boats.
Research aims and objectives
This study is guided by one main objective which entails investigating the effects of climate change on the world’s automobile sector. To develop a better understanding on the issue, this study takes into consideration the case of Toyota Motor Corporation.
In the process of evaluating the effects of climate change on the automobile sector, the study focuses on a number of issues. As a result, the specific objectives for the study are outlined below. These objectives are based on the fact that climate change presents both opportunities and risks. As a result, the main objectives for the study include:
- To determine the regulatory effects of climate change on Toyota Motor Corporation.
- To analyze the effects of climate change on Toyota Motor Corporation stakeholders.
- To evaluate the litigation effects of climate change on Toyota Motor Corporation.
- To analyze the reputation risks and opportunities faced by Toyota Motor Corporation as a result of climate change.
- To analyze the effect of climate change on the competitiveness of Toyota Motor Corporation.
- To determine the market threat faced by Toyota Motor Corporation as a result of climate change.
- To determine how the supply chain of Toyota Motor Corporation has been affected by climate change.
- To evaluate how the operations of Toyota Motor Corporation have been affected by climate change.
Research questions
On the basis of the above research objectives, a number of research questions as outlined below have been formulated.
- What are the regulatory effects of climate change on Toyota Motor Corporation?
- What effects does climate change have on stakeholders of Toyota Motor Corporation?
- What litigation effects associated with climate change does Toyota Motor Corporation face?
- What effect has climate change had on the reputation of Toyota Motor Corporation?
- How has the competitiveness of Toyota Motor Corporation been affected by the prevailing climate change?
- What market risks has Toyota Motor Corporation experienced as a result of the prevailing climate change?
- How has the supply chain of Toyota Motor Corporation been affected by climate change?
- What effect has climate change had on the operation of Toyota Motor Corporation?
Significance of the study
This study will be of importance to firms within the automobile sector in a number of ways. Firstly, it will enable management teams of firms within the sector to formulate strategies aimed at coping with the risks posed by climate change. Additionally, the study will also enable automobile companies and the shareholders appreciate the fact that there are opportunities emanating from climate change which can be exploited thus contributing towards improvement in their competitive advantage.
Scope and limitations
The analysis of this paper is aimed at evaluating the effects of climate change on the world’s automobile sector. Considering the fact that the automobile sector is broad, it is not possible to conduct a study on all the entire automobile industry due to time and resource constraints. As a result, the study focuses on Toyota Motor Corporation as one of the firms which operate within the sector. The study does not take into consideration other economic sectors but specifically focuses on the automobile sector.
Summary
The background study has underscored how climate change is occurring and how it is affecting firms within different automobile sector. From the above analysis, it is evident that failure to consider climate change as one of the market forces negatively affects automobile companies’ competitiveness. The next chapter entails a comprehensive review of relevant literature and theoretical frameworks.
Literature Review and Theoretical Framework
The business environment has increasingly become more challenging especially during the 21st century (Grunewalder, 2009, p.1). One of the factors that have contributed to this dynamism relates to the high rate of climate change that is currently being experienced. Lingl, Carlson and Suzuki (2010, p.1) are of the opinion that businesses irrespective of their size and sector of operation can play a critical role in minimizing their impact on climate.
In order to attain this, organizations have to approach the issue of climate change just like any other business strategy (Leary, 2008, p. 23). This means that firms’ management teams have to undertake risks and opportunities assessment, formulate goals, allocate resources and develop an implementation and monitoring plan (Lingl, Carlson & Suzuki, 2010, p. 1). However, the success with which businesses respond to climate change is dependent on the effectiveness with which they understand the effects of climate change on their operation.
According to Hoffman and Woody (2008, p.27), companies should conduct a comprehensive analysis on its greenhouse gas emissions in its entire value chain. This is an important element in predicting the degree of vulnerability faced by the business as a result of market shifts and climate change regulation. Hoffman and Woody (2008, p.27) further opine that some businesses can be severely disadvantaged while others may find that the carbon constraints present an opportunity. Firm’s management teams should not assume that businesses are equally affected by climate change. As a result, they should conduct a comprehensive analysis on the effects of climate change on their operation.
Calvello (2010, p.110) is of the opinion that there are different ways through which the effects of climate change on organizations can be viewed by businesses. One of these perspectives relates to risks. Some businesses such as the firms in the agricultural sector are directly affected. Secondly, re-insurance and insurance companies are affected indirectly. The other category of businesses relate to those which are neither directly nor indirectly affected by climate change. However, these businesses are faced by the risk emanating from the need to mitigate or adapt to the effects of climate change (America’s Climate Choices, 2011, p. 23).
Examples of businesses which fall within this category include firms within the energy and transport industries. Another perspective of the effects of climate change relates to businesses that do not perceive the effects of climate change as risk but as an opportunity. One of the ways through which this occurs is that they perceive the effects of climate change as a way of developing new products and services. Examples of businesses in this category include those that design climate change litigation services and those that finance green businesses.
Firms within the oil and gas and automobile sectors perceive the effects of climate change as both an opportunity and risk. For example, oil and gas companies can develop alternative forms of energy that result into minimal GHGs emission.
On the other hand, automobile companies can design green energy cars that have a higher efficiency and low carbon emissions (Calvello, 2010, p.111) Lingl, Carlson and Suzuki (p.2) are of the opinion that one of the ways through which they can attain this is by understanding the associated risks and opportunities. Additionally, understanding the effects of climate change can enable automobile companies to effectively formulate and implement programmes aimed at managing GHGs emissions.
According to Koivuroya (2009, p.1), issues associated with water scarcity, loss of biodiversity and global warming amongst others will continue to impact companies and societies. Therefore, firms’ management should foresee possible environment changes and implement strategies to deal with the associated problems. This arises from the fact that it is only companies that can best address the challenges posed by climate change that have a high probability of surviving (Grunewalder, 2009, p.1).
The business sector and the automobile sector are ranked amongst the largest emitters of GHGs both directly and indirectly (Rothenberg & Levy, 1999, p.1). The graph in Figure 1 illustrates the amount of greenhouse gas emissions by the automobile sector through vehicle use compared to other sectors.
It is also estimated that emission of greenhouse gases from the automobile sector will continue in the future. The table below illustrates the projected GHGs from the automobile sector (Ward-Jones, 2008, p. 282).
Additionally, businesses are also ranked as one of the major controllers of technological, organizational and financial resources that can be utilized to minimize the effects of climate change for example by reducing GHGs emissions (Rothenberg & Levy, 1999, p. 1). Through appreciation of these facts, the automobile sector has become one of the most active non-state actors with regard to addressing climate change. However, to enhance their commitment towards mitigation of climate change, it is imperative for the automobile sector to develop a comprehensive understanding of the various aspects through which climate change affects their operation.
In order to develop a comprehensive understanding of the effects of climate change on the world’s automobile sector, this study is guided by two main theories. These include the sustainable development theory and the organizational learning theory. These theories enable the study to better underscore the effects of climate change and how businesses within the sector can respond to these changes.
Theoretical framework
Sustainable development theory and climate change
Considering this, it is imperative for businesses to integrate the theory of sustainable development in their operation. One of the aspects of sustainable development that businesses should integrate relates to environmental sustainability (Dowden, 2008, p.33). According to the environmental concept of sustainable development, businesses must ensure that they implement an environmentally sustainable system (Harris, 2000, p.4). One of the ways through which they can achieve this is by maintaining atmospheric stability and biodiversity. Findings of a study conducted by PricewaterhouseCoopers revealed that environmental sustainability is a critical element in firms’ effort to attain profit. Attaining sustainable development can play a critical role in a firm’s effort to achieve a higher competitive advantage (Great Britain, 2006, p. 71).
The World Business Council for Sustainable Development (WBCSD) asserts that it is imperative for businesses to perceive the need for attaining sustainability as a risk management perspective (Grunewalder, 2009, p. 4). This arises from the fact that there are repercussions which businesses experience as a result of climate change. WBCSD is of the opinion that it might be challenging to measure the frequency and magnitude of climate change, however, the negative effects are evident. For example, high temperature may negatively affect businesses location, operational efficiency, marketing infrastructure and design. On the other hand, extreme weather condition may disrupt businesses logistics and damage the business infrastructure (Reuvid, 2012, p.34).
Additionally, climate change may also negatively affect key business stakeholders such as customers, regulators, investors and investment analysts. Climate change may lead into a decline in the customers’ disposable income as a result of the associated losses. Investors may shift their investment from a sector perceived to be contributing to climate change or to be of high risk due to climate change (Selin & VanDeveer, 2009, p. 12). Investment analysts may demand businesses to provide more disclosure on the risk management strategies that they have implemented. On the other hand, regulators may institute new measures aimed at ensuring that businesses comply with specific requirements which might culminate into cost increment. The framework below illustrates the business risks and opportunities associated with climate change.
Organizational learning theory
According to Puckett (2008, p.6), organizational learning theory is concerned with the ability of organizations to respond to changes that they experience in their operation. This is achieved through ensuring effective adaptations (Smith, Araujo & Burgoyne, 1999, p. 23. The learning process in organizations occurs through various organizational routines for example rules, technologies and procedures which are continuously repeated and modified. Organizational learning is first-order in nature and occurs through gradual change of organizational practices that is aimed at attaining the organizational goals. However, if the implemented routines or practices are ineffective, an organization may decide to make changes. Organizational routines are adapted in the event that the prevailing routines are unsuccessful.
Additionally, organizational routines may also be changed if alternative routines present a greater advantage for the firm’s operation. Berkhout( 2011, p. 5) asserts that organizational learning may be hindered by a number of elements such as a strong organizational culture, lack of organizational culture and a highly formalized and centralized organizational structure. The theory states that organizational learning can be considered to be a sequence which is composed of a number of steps. Changes in climatic conditions are considered as one of the main external signals for organizations within the automobile sector to respond to. In their quest to respond to climate change, organizations can integrate the above processes in their organizational learning so as to ensure effective adaptation. The following is an illustration of the theoretical framework that organizations should follow in an effort to adapt to external changes.
- External signal
- Signal recognition and interpretation
- Experimentation and search
- Knowledge articulation and codification
- Feedback and iteration
Summary
From the analysis of the literature review and theoretical framework above, it is evident that there are a number of effects that automobile companies experience as a result of climate change. The theoretical framework has illustrated that climate change can present both challenges and opportunities to automobile companies. The next chapter outlines the methodology used in conducting the study.
Methodology
This study was aimed at undertaking an in-depth analysis on the effects of climate change on the world’s automobile sector. The need for the study arose from appreciation of the fact that climate change is affecting businesses within the automobile sector in different ways. Considering the fact that the world’s automobile sector is large, this research incorporated the case study research methodology. Zainal (2007, p. 2) asserts that case study research method enhances the effectiveness with which a researcher explores data with regard to a specific context. Additionally, decision to use the case study research methodology arose from appreciation of the complex nature of the issue under study, that is, climate change. This methodology gave the researcher an opportunity to explore and investigate the issue of climate change which is increasingly being considered as a contemporary real-life phenomenon. This was attained by conducting a comprehensive contextual analysis on how climate change affects businesses.
Research design
To increase the probability of attaining the preset research objectives, it is critical for an effective research design to be incorporated (Saunders & Thornhill, 2009, p.23). There are two main types of research designs that can be considered based on the nature of the study being conducted. These include qualitative and quantitative research design. In conducting this study, quantitative research design was used. Through a case study research design, the study has been able to effectively illustrate how climate change affects the world’s automobile sector using quantitative statistical results. The case study gave the research an opportunity to explain the process of climate change and its outcome by evaluating the case under study.
Data collection, presentation and analysis
This study has incorporated secondary method of data collection. This has been achieved by reviewing reports, newspapers, books, academic journals and other published materials on the effect of climate change Toyota Motor Corporation. In the process of selecting the source of data, it was ensured that the secondary sources of data were credible and authentic. The data collection was presented and analyzed using statistical methods which entailed use of graphs.
Ethical consideration
In conducting the study, it was ensured that the sources of data used were credible. This increased the accuracy of the research findings.
Summary
The chapter outlines the research methodology to be used in the process of conducting the study. This is attained by outlining the research design, the method of data collection, presentation and analysis. The next chapter entails an illustration of the data collected from the various secondary sources.
Results
This chapter presents the secondary data collected from various published materials on the effects of climate change on Toyota Motor Corporation. The chapter is organized in a number of sections. The secondary data collected is presented using simple tables and graph to illustrate the effects of climate change on Toyota Motor Corporation.
Research findings
In an effort to attain its profit maximization objective, Toyota Motor Corporation has ventured into the international market. The firm has attained this by incorporating the concept of Foreign Direct Investment (FDI). Some of the markets it has ventured include Japan and Thailand. Over the past one year, Toyota Motor Corporation has incurred massive losses. Despite the fact that it was trying to recover from the effects of the earthquake and tsunami that hit Japan in 2011, the firm’s efforts were dwindled by the flooding that hit Thailand during the in December 2011 and February 2012 (Cassidy, 2011, p.1). The company lost more vehicles to flooding compared to the Japan Tsunami as illustrated by the chart below.
Units lost to tsunami
Currently, different parts of the world are experiencing an increment in the number of floods which are associated with the prevailing climate change (United Nations Framework Convention on Climate Change, n.d, p. 3). For example as a result of the high rate of global warming, different parts of the world are experiencing an increment in the rate at which the ice in some of the major mountains is melting. The resultant effect is that some regions are experiencing floods. The 2011 Thai flood was ranked as the worst to have hit Thailand.
In its disclosure, Toyota Motor Corporation revealed that it lost 230,000 cars in December 2011 and 240,000 cars in February 2012 in its Thai market. Some of these cars were ready for market while others were still under production. The chart below illustrates the number of cars Toyota lost as illustrated Thailand flooding.
Units lost to Thai flood
Thai’s floods also affected the firm’s production processes in some of its plants. A report by financial Times revealed that the firm halted production in some of its plants from October 2011 to November 2011 as a result of the Thai floods. These plants included Ban Pho, Samrong and Gateway. The firm was also forced to cut production in some of its Asian plants as a result of parts shortage. The resultant effect is that its production capacity reduced was by 150, 000 units.
As a result of Thai’s floods, Toyota was forced to change its production schedules and to reduce its output in its Pakistan, Malaysia, and Indonesia, Philippines, South Africa and Vietnam markets (Cassidy, 2011, p. 1). Additionally, the floods also led to a halt in the operation of more than 330 dealers. The flooding led to a decline in the firm’s net income with a margin of 18.8% (Whipp, 2011, para.1).
As one of the world’s automobile companies, Toyota Motor Corporation has increasingly come under a regulatory requirement to ensure that it makes effort towards minimizing occurrence of climate change. According to Pinkse and Kolk (2009), the firm has to ensure that its products do not contribute towards increased carbon emissions. In order to attain this goal, the management teams of Toyota Motor Corporation have incorporated the concept of hybrid technology.
In response to the prevailing climate change, the management team of Toyota Motor Corporation is committed towards ensuring that it reduces its contribution towards climate change. In order to achieve this, the management team of Toyota Motor Corporation has formulated a policy aimed at ensuring production of environmentally friendly cars (Kaizen, 2006, p.12).
One of the ways through which the firm has achieved this is by integrating the concept of green manufacturing (Zhang & Cooke, 2009). . For example, in its effort to manufacture the new Prius model, Toyota Motor Corporation was committed towards reducing energy utilization (Brand Neutral, 2007, p.3). Additionally, green manufacturing enabled the firm to reduce carbon emissions by 31% during the manufacturing process. The firm also used special eco-plastic materials which were made from plants to make the floor mats thus cutting carbon emissions further(Kaizen, 2006,p.12).The firm has invested a substantial amount of money towards the development of hybrid vehicles which can be operated on various forms of energy.
In 2010, Toyota Motor Corporation was the largest producer of hybrid vehicles. Out of the total 274,210 hybrid vehicles which were sold in 2010, more 69%of them were produced by Toyota Motor Corporation (US Department of Energy, 2011, p.1). Honda and Honda accounted for 20% while General Motors and Nissan accounted for less than 5% of the total sale. Other automobile companies such as Mercedes, Porsche, Mazda and BMW accounted for less than 1%. Therefore, one can conclude that change has contributed towards improvement in Toyota’s market for hybrid vehicles as illustrated by the graph below.
As a result of the increased concern regarding climate change, Toyota formulated a policy to re-examine the internal combustion structure of its vehicles engines. The objective of the policy was to enable the firm improve its diesel and petrol engines so that they can operate more efficiently by burning less fuel and emit carbon dioxide (Kaizen, 2006, p.13).
Toyota Motor Corporation has experienced a number of lawsuits both in its domestic and foreign market. On 3rd March 2003, the United States Department of Justice and Environmental Protection Agency ruled against Toyota Motor Corporation in a lawsuit charged against the firm to comply with the Clean Air Act (Alexander, 2009, para.2). During the period ranging between 1996 and 1998, the firm did not comply with the Certificate of Conformity which stipulates that all automobile companies within the US must comply with stipulations of the Clean Air Act in its manufacture of 2.2 million vehicles (United States Environmental Protection Agency, 2012, para.1). In its lawsuit, the US government claimed that Toyota did not comply with the diagnostic system that enables drivers to identify fuel vapor leakage problems which can contribute to ozone pollution hence increasing the rate of climate change (United States Environmental Protection Agency, 2012, para.2).
As a result of the ruling, Toyota Motor Corporation was to spend $ 20 million on an environmental project which was aimed at retrofitting more than 3,000 public diesel vehicles so as to ensure that they operate in a more environmentally friendly manner. The project would also result in extension of emission control guarantee on all the affected vehicles (United States Environmental Protection Agency, 2012, para.1). The firm was also required to pay $ 500,000 as civil penalty in addition to complying with the newly implemented emission control requirements. The entire lawsuit cost Toyota Motor Corporation $34.
The ruling also required Toyota Motor Corporation to accelerate its compliance with EPA’s evaporative emission requirements with 1 year (Alexander, 2009, para. 12). The requirement is aimed at minimizing gasoline vapor emissions. As a result, Toyota was required to ensure that the 1.4 million vehicles manufactured between 2004 and 2006 are fitted with evaporative emission control systems. To comply with this ruling, Toyota Motor Corporation would incur a total of $ 11 million (United States Environmental Protection Agency, 2012, para.5).
As a result of the Thailand floods, Toyota Motor Corporation experienced an increment in the cost of insurance (The Nation, 2012, para. 1-3). This arose from the fact that Thailand insurance companies demoted Thailand from being a safe zone with regard to catastrophes. This meant that companies were required to pay additional premiums. The resultant effect is that the automobile companies can be constrained.
Summary
This chapter has outlined the research findings with respect to Toyota Motor Corporation case. This has been attained by evaluating the various research objectives and questions for the study. The next chapter entails a detailed discussion and interpretation of these results.
Discussion and interpretation
Currently, climate change has become one of the major issues that local and global businesses are considering in their strategic management processes. This arises from the fact that there is a wide array of effects that businesses within different economic sectors experience as a result of climate change. The effects are of different nature and their magnitude varies from one economic sector to another. For example, the degree of physical effects on the automobile sector may be different to that of the restaurant sector. Despite the differences, the prevailing global climate change presents both risks and opportunities to different economic sectors. In order to understand the effects of climate change on the automobile sector, this chapter entails a comprehensive discussion and interpretation of the effects.
Physical risks
Companies in face numerous physical consequences as a result of climate change. One of the most important elements of businesses operating in different economic sectors is the supply chain (Pappis, 2011, p.104). However, organization’s supply chain can be adversely affected by climate change. For example, Toyota Motor Corporation’s supply chain was adversely affected by floods that occurred in Thailand in 2011. The floods made roads to become impassable hence making it difficult for transportation of raw materials to the manufacturing sites. This is evidenced by the fact that its production processes in some of its plants was halted. From the case of Toyota Motor Corporation, it is evident that the world’s automobile supply chain faces negative effects associated with weather-related events such as typhoons, hurricanes, floods, snowstorms and cyclone.
Occurrence of such extreme weather events may result into disruption of the firm’s supply chain such as the manufacturing processes. This arises from the fact that climate change may disrupt firm’s infrastructure, communication and personnel (Pappis, 2011, p.104). Automobile companies located close to the coastline face the highest exposure to physical risk in event of these risks occurring.
Occurrences of floods, snowstorms, typhoons and cyclones may result into physical damage of the property and plant. This may lead into numerous financial losses for the firm. As a result of the 2007 floods in Thailand, Toyota Motor Incorporation experienced a massive loss of its automobiles.
Effects of climate change on technological innovation in the automobile sector
It is projected that by 2020, there will be approximately 1.2 billion cars on the road globally which represent a 50% increment (United Nations Environmental Programme, 2010, p.13). In order to mitigate the negative effects of climate change, firms within the automobile industry has appreciated the importance of producing cars that do not contribute towards increment in the amount of carbon dioxide emissions (Whitmarsh & Kohler, 2010, para. 1). Therefore, one can say that climate change has resulted into an increment in the rate of technological innovation amongst firms within the automobile sector.
Technological innovations within the sector has also emanated from increased pressure on automobile companies by environmental conscious institutions such as the United Nations Environmental Programme (UNEP) and governments to shift towards production of environmentally friendly cars. Additionally, these institutions have implemented regulatory requirements aimed at ensuring that the environment is protected. One of the stringent requirements that these institutions have instituted relate to reduction of greenhouse gas emissions (European Commission Enterprise and Industry Directorate, 2006, p.13).
One of the ways through which firms have attained this is by integrating low carbon technologies. Toyota Motor Corporation’s approach towards attainment of producing environmental friendly cars is by exploring various alternatives through which it can develop cleaner and greener vehicles (Ward-Jones, 2008, p. 282).
One of the main aspects of research and development that automobile companies are focusing on relates to production of hybrid vehicles (Intergovernmental Panel on Climate Change, 2007, p. 761). Hybrid vehicles being produced by automobile companies can be powered by different power sources as illustrated by the figure below.
The research and development being undertaken is aimed at developing automobiles that generate zero emissions from their engines (Kohler et al, 2010, p. 1246). Toyota and Honda are amongst the companies which have become successful in the production and sale of hydrogen-gas electric cars. Figure 7 illustrates how the hydrogen technology will work. Additionally, Toyota has also introduced hydrogen fueled cars (Business for Social Responsibility, 2006, p.23).
Currently, Toyota Motor Corporation is ranked as the largest producer of hybrid vehicles. By 2006, the firm had sold 700,000 hybrid vehicles (Kaizen, 2006, p.13). This makes it evident that climate change is motivating technological innovation within the automobile sector. Different automobile companies are also investing substantial amount of money towards research and development of alternatively fueled cars. As a result of increased research and development on production of alternatively fueled cars, there has been an increment in the sale of alternatively fuelled cars as illustrated by the graph below.
Reputation effects
Over the past decades, companies were mainly concerned with development of the tangible elements of products such as the brand. However, this trend has changed over the past few decades. Currently, businesses have appreciated the fact that there is a strong direct relationship between brand and reputation which is one of the intangible elements of business. According to a study conducted by KPMG, corporate reputation contributes towards improvement in a company’s brand (Ireland, Hokisson & Hitt, 2008, p.182). Therefore, it is critical for businesses to ensure that their brand images are well maintained.
During the 21st century, consumers have increasingly become conscious to environmental issues such as climate change in their consumption patterns (Craig, 2009, p.1). This may either affect automobile companies positively or negatively. For example, competing firms may formulate strategies that are aimed at responding to climate change thus promoting the image of its brand (Walsh & Olin, 2009, p.13). Failure to respond to climate change can therefore lead to loss of market share.
If companies do not respond to such issues, various stakeholders such as employees, customers, shareholders’ and investors, may react negatively to such a company. A study conducted by Carbon Trust revealed that consumers are increasingly paying more consideration to organizations’ response to climate change in their purchasing patterns (Walsh &Olin, 2009, p.13).
Considering the fact that the automobile sector is one of the major contributors of climate change through emission of carbon dioxide, these companies are faced with the risk of decline in consumer confidence if they do not institute measures aimed at mitigating occurrence of climate change. Therefore, climate change has forced automobile companies to expand their Corporate Social Responsibility (CSR) policies by integrating climate change policies (Mullerat & Brennan, 2010, p.204).
As a result of increased degree of consumer consciousness with regard to climate change, automobile companies are increasingly perceive it as an opportunity to differentiate their vehicles from the competing firms. This is being achieved by implementing strategies that would contribute towards reduction in their carbon footprint hence improving their carbon footprint (Collier & Agyei-Ampomah, 2009, p.24).
Effect of climate change on the shareholder’s investment
Responding to the shareholders’ questions on climate change affects the firm’s strategic management processes in a number of ways (Walsh & Olin, 2009, p.8). For example, answering the shareholder’s questions contribute towards organizational teams uncovering critical operational and strategic issue associated with climate change. By responding to such issues, the reputation of such companies may be boosted significantly. In their investment processes, shareholders are increasingly demanding organizations to disclose a number of issues related to climate change. Some of these issues are outlined below.
- The actions being taken by the firm in order to maximize the shareholder’s wealth in relation to the current and projected climate change regulations.
- The policies and procedures that the firm has instituted in the process of assessing the financial effects of climate change.
- The volume of GHGs that the firm currently emits and the steps that it is taking in order to reduce emissions.
These issues present a number of risk and opportunities for the automobile companies. Walsh and Olin (2009,p.9) are of the opinion that if a company ignores the stakeholders questions such as the investors regarding its climate change policies, they may doubt its contribution towards climate change consequently reducing their size of investment in such companies. Additionally, automobile companies that do not respond to the stakeholders’ questions regarding their policies on climate change may publish the issue through the media thus damaging the companies’ reputation.
In an effort to improve their reputation, automobile companies are increasingly implementing programs aimed at promoting themselves as climate change-friendly. Companies which are successful at proving that their operations are climate change-friendly are faced with an opportunity of increasing their market share (Walsh & Olin, 2009, p.13).Findings of a survey conducted by Mercer Investment Consulting revealed that climate change is an important element of an organization’s risk and return.
Litigation effects
Over the past few decades, there has been increased awareness amongst various parties such as businesses, government officials and the general public that there are negative effects associated with climate change (Walsh & Olin, 2009, p.11). As a result, there is a high probability of increment in the number of lawsuits leveled against individuals and companies that contribute to upsurge of GHGs.
As governments and other agencies formulate policies aimed at mitigating climate effect, firms which do not comply or violate the instituted policies may incur significant costs in fines (Visser, 2010, p. 58). This is well illustrated by the case of Toyota Motor Corporation which was fined $ 3 million as a result of its failure to comply with the US Clean Air Act (Alexander, 2009, para. 3). Climate change may also make shareholders to become more sensitive on the effect of climate change on the firm’s financial performance. As a result of Thailand flooding, Toyota Motor Corporation lost approximately 20 to 25 billion yen (Yasu & Mukai, 2011, para. 8). If the firm has not implemented strategies aimed at mitigating the financial risks associated with climate change, the investors may file a lawsuit against the firm for the risk exposed.
Effects of climate change on automobile company’s competitive advantage
As a result of the negative effects of climate change, companies within the automobile sector are aggressively formulating strategies that would result into development of new environmentally friendly products (Walsh & Olin, 2009, p.13). According to Harvard Business Review (2007, p.233) automobile companies are incorporating climate competitive strategies in their production process. One of the ways through which automobile companies are formulating climate competitive strategies is by evaluating their position relative to that of their competitors.
If an automobile company is able to respond the negative effects posed by climate change such as by developing products that mitigate its occurrence, then there is a high probability of such a company improving its competitive advantage (Fusaro & Yuen, 2005, p.23).
With respect to companies within the automobile sector, this can be achieved by investing in research and development so as to aid in the production of greener vehicles. Such a development would significantly enhance the company’s competitive advantage compared to their competitors. The probability of this occurring is relatively high considering the increased degree of consciousness amongst the consumers toward climate change.
Investing in technology such as the hybrid technology as a response strategy to the prevailing climate change would significantly enhance competitiveness of automobile companies (Darrel & Anderson, 2010, p. 138). This arises from the fact that hybrid vehicles will appeal a large number of potential customers considering the excessive fluctuations in the price of gasoline over the past few years. On the other hand, if automobile companies do not respond to climate change, their competitive advantage would be damaged for example by being branded as environmentally unfriendly (Harvard Business Review, 2007, p.233).
Summary
This chapter has given a comprehensives discussion on the effects of climate change on the automobile sector. This has been attained by outline the various risks and opportunities posed by climate change to firms within the automobile sector. The next chapter entails a conclusion of the entire study and a number of recommendations and future research.
Conclusion, Recommendations and Future Research
Over the past few decades, climate change has increasingly been regarded as a market failure by firms’ indifferent economic sectors. Additionally, climate change has become one of the major market forces affecting the world’s automobile sector. There are positive and negative effects associated with climate change. Climate change can put the value of the world’s automobile sector at stake. This arises from the fact that there are a number of effects associated with climate change that automobile companies experience. In order to illustrate effects of climate change on the automobile sector, this study has taken into consideration the case of Toyota Motor Corporation which is one of the global automobile companies. From the case study, a number of effects of climate change on the automobile sector. Some of the effects identified relate to regulatory effects, reputation effects, litigation effects, physical effects and the companies competitive advantage. This chapter entails a conclusion of the entire study.
Conclusion
As a result of the high rate of climate change, automobile companies are experiencing an increment in the number of regulations from various parties such as governments and environmental regulatory agencies. The regulations being implemented are aimed at ensuring that the automobile companies comply with the formulated environmental requirements aimed at minimizing the occurrence of climate change.
Some of the regulations being implemented come at a high financial cost for automobile companies. There are two main categories of climate change regulations affecting the automobile sector. These include traditional legislation and market based legislations. The traditional legislations are making it mandatory for automobile companies to implement energy-efficient requirements. For example, automobile companies are required to ensure that they utilize minimal fuel in their manufacturing process. The legislation is aimed at minimizing carbon emissions. On the other hand, the market based regulations include legislations such as fuel tariffs and carbon taxes. Through implementation of these legislations, there is a high probability of the automobile companies incurring high financial costs.
With regard to legislation, automobile companies may also face litigations associated with climate change. These litigations may emanate from various stakeholders such as the government, customers and environmental protection agencies. The litigations may arise as a result of failure to comply with certain legislations aimed at ensuring at reducing occurrence of climate change. Stakeholders who have evidence that a particular automobile company is not complying with certain requirements may file a lawsuit against the firm
For example, the shareholders may file a lawsuit against the firm for any financial loss incurred due to the firm’s management team’s failure to plan against the negative effects of climate change. Considering the weight of climate change, a court of law may rule that the automobile company comply with the specific legislation. Such a ruling may result in the automobile company incurring high financial cost. This is well evidenced by the case of Toyota Motor Corporation which was sued by the US Environmental Protection Agency for its failure to comply with the Clean Air Act. The court ruled that Toyota Motor Corporation was under an obligation to comply with the Clean Air Act. In order to achieve this, Toyota Motor Corporation incurred a total amount of $34 million.
Currently, climate change is increasingly causing numerous physical effects which have significant effects to organizations and their investors. No company is shielded from the physical effects of climate change. As a result, there are numerous physical effects that firms within the automobile sector may experience as a result of climate change. For example, climate change may result into flooding which may disrupts the firm’s property, production processes and infrastructure. As a result of the floods that hit its Thailand market, Toyota Motor Corporation incurred a substantial loss. The company lost a number of vehicles from its plant some of which were ready for the market while others were unfinished.
Other weather related events that may occur as a result of climate change such as storms, avalanches, cyclones and tornados may cause physical damage to the automobile companies’ property and plants. Such damage may cripple the companies operations and hence their competitiveness. From the case study, Toyota Motor Corporation was forced to halt production processes in some of its plants in Thailand. The effects of climate change such flooding may also disrupt the supply chain of automobile companies. One of the ways through which this may occur is through the damage that may be caused by such events to the transport network which the automobile companies depend on for transportation of raw materials and the finished products. As evidenced from the case study, disruption of supply chain by climate change effects may result in the automobile companies adjusting their production schedules.
Over the past few decades, there has been a considerable change in consumer behavior. Currently, consumers have become more conscious to climate change in their consumption patterns. As a result, they are inclining towards companies which are more conscious to the prevailing climate change in their production processes. The reputation of automobile companies which do not take into account the effects of climate change in their operation are likely to be damaged in a number of ways. For example, customers may decide not to purchase the companies automobiles. This may adversely affect the company’s market share and hence its competitiveness. On the other hand, shareholders may reduce their volume of investment in such companies. Therefore one can assert that climate change can adversely affect automobile company’s financial stability and hence its ability to survive in a sector which is increasingly becoming competitive.
The case study has also illustrated that there are positive effects associated with climate change. Automobile companies can positive utilize the effects of climate change. From the case study, climate change is motivating companies within the automobile sector to invest in research and development. The objective is to produce environmentally friendly vehicles which emit zero carbon. To achieve this, firms within the automobile sector such as Toyota Motor Corporation are investing a substantial amount of money to improve their automobiles. One of the technologies that these companies are focusing on is the hybrid technology. Additionally, automobile companies are also incorporating green manufacturing technology in an effort to ensure that their products do not contribute towards increment in the rate of climate change. Through integration of these, technologies, automobile companies are able to enhance their competitive advantage.
Recommendations
The above analysis illustrates the fact that the effect of climate change on the automobile sector cannot be underestimated. This is due to the fact that it presents both risks and opportunities to automobile companies. Failure to respond to the effects of climate change may adversely affect the competitiveness of the automobile sectors. In order to survive in the long term within automobile sector considering the prevailing climate change, it is imperative for automobile companies to consider a number of issues. Most of these issues should be aimed at eliminating emission of carbon dioxide and mitigating the associated effects.
Management teams of automobile companies should also consider adhering to the climate change requirements implemented by various agencies. For example, in their manufacturing processes automobile companies should adhere to stipulated specifics. This is an important role towards ensuring that automobile companies do not face litigation costs which might emanate from various stakeholders such as environmental protection agencies. Adherence to climate change requirements would also minimize the number of regulations that the automobile companies face from governments and other regulatory agencies.
Considering the financial cost that automobile companies incur as a result of the effects of climate change, management teams of automobile companies should improve their risk management strategies. For example, automobile companies are faced with physical risks which may arise from phenomenon associated with climate change such as flooding. Such events may result in loss of the companies’ assets. The extent of physical risk faced for example from floods and avalanches may be mitigated by ensuring that their plants and properties are not located in areas which are prone to such risks. Physical risk may adversely affect the share price of automobile companies (Danni, 2007, p.2). The resultant effect is that the automobile company may not be able to access capital from the shareholders due to unattractiveness of the share.
Additionally, it is imperative for firms within the automobile sector to diversify their investments. One of the ways through which this can be achieved is by ensuring that all the critical operations are not undertaken in one plant. This will play a vital role in ensuring that the companies’ operations are not halted in the event of weather-related phenomenon such as flooding occurring.
Reputational risk is one of the most important climate change effects that automobile sector should consider. This arises from the fact that it can affect its recruitment and retention. An automobile company that has poor reputation may face difficulty attracting human capital. Failure to attract human capital may impede the firm’s ability to compete due to limitations with regard to research and development.
Therefore, the automobile companies’ response to the effects of climate change may adversely affect their reputation. In order to improve their corporate reputation, automobile companies should operate social responsibly. This can be attained is by formulating and implementing policies aimed at reducing occurrence of climate change. For example, automobile companies should adopt the concept of green manufacturing. Additionally, automobile companies should incorporate the concept of carbon-trading.
To achieve this, automobile companies should integrate the concept of carbon-foot-printing. This will enable the automobile companies to effectively monitor and determine the volume greenhouse gases they emit in their operation. This strategy will enable automobile companies to mitigate their contribution to climate change through carbon emissions. The resultant effect is that the automobile companies will be able to reduce the rate of global warming which is one of the major causes of the current flooding.
To enhance its reputation by responding to the negative effects of climate change, automobile companies should consider operating in an environmentally friendly manner. The automobile sector can attain this by considering climate change issues as business strategy issues. This means that automobile companies should consider identifying new market opportunities associated with the effects of climate change. One of the aspects that they should concentrate on relates to greenhouse gas reductions. For example, automobile companies should implement tree planting programs. Such programs would significantly contribute to removal of carbon dioxide emitted by the automobile companies in their operational processes. This will play a critical role in elevating the companies’ reputation amongst the investors and the customers.
The analysis above has shown that the effects of climate change such as physical risks may adversely affect the competitiveness of the automobile companies. However, it is important for automobile companies to perceive opportunities associated with climate change. This is a critical step towards improvement of the companies’ competitiveness through investing in research and development.
To achieve this, automobile companies should implement climate change competitive strategies. One of the elements that automobile companies should focus on is integration of hybrid technology. Incorporation of hybrid technology as a measure to mitigate the negative effects of climate change would also play a significant role towards improving the companies’ competitiveness. This arises from the fact that the hybrid technology automobile would appeal operate on alternative sources of energy. A large number customers and investors would consider the technology viable considering the prevailing constraints with regard to fuel. Therefore, to deal with climate change, the world’s automobile sector should focus on improving its competitiveness, enhancing its reputation and development of new products.
Future research
Currently, the automobile sector is ranked as one of the largest contributors to climate change due to its greenhouse gas emissions. This may affect the sector’s long term survival. In order to improve the probability of future success, it is imperative for firms within the sector to conduct continuous study on the effects of climate change on the sector. This will aid in timely identification of possible effects and hence responding in time. The resultant effect is that the firm will be able to enhance its performance in a sector that is increasingly becoming very competitive. For example, analysis of the effects of climate change will enable the firm to improve its share performance. As a result, investors will consider the sector to be a viable investment option.
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