US Automobile Industry Analysis


The US economy has suffered the greatest financial crisis since the great depression. After several years of strong financial growth, Economy is now facing serious challenges that prevent sustainable growth rates. Some of these factors are the end of the housing market bubble in the U.S real estate market, as well as the credit crunch. The devaluation of the U.S dollar against other major currencies and the continuous increase in oil prices were also factors causing the imbalance in the economy.

The US economy is started to gain back growth rates and sustain regular growth recently. This optimistic view of the US economy coming out of the crisis is extremely important in giving the world hope in coming out of its own crisis. The United States has the biggest worldwide economy, in which the economic crisis had the most effect on, with over than seven million jobs lost, families losing their homes, and banks and companies declared bankruptcy. This forced the government to intervene with public funds. There is a significant recovery in the banking sector, large banks that have been able to pay back the public funds. Stability is becoming gradually obvious in the United States Automobile industry, such as General Motors and Chrysler. These are the two companies which have just come out of bankruptcy. They have stated that they intend to increase their production in response to the increase in public demand for automobiles. There is also a noted increase in the real estate market; this predicts annual growth rates reinforcing the optimistic view of the United States economy coming out of its economic crisis. This growth did not come without a price; the United States borrowed nearly one trillion dollars and pumped it into the collapsing banks and companies, and forcing the central bank to reduce interest rates to nearly nil.

US Automobile Industry Analysis:

In USA automobile sector is dominated by mainly three big companies

1. General motors

2. Ford motors limited

3. Chrysler

These are the three companies dominate the US market only but also share the large proportion of the global automobile Industry. To know which type of competition exist in the automobile industry Michael porter five force models becomes very useful. Michael porter's five force model becomes helpful to understand industry context in which firms operates.

Porter's five forces analysis

Threat of new entrants:

It is not possible for everyone to start automobile manufacturing as it requires huge amount of capital, highly competitive technology and management skill to start the business. High concentration ration in the US market proves that there are less competition prevails in the US automobile sector. However Honda and Toyota proves this wrong by entering into the US market which create the problem for the big three companies of US.

Bargaining power of supplier:

In the automobile industry supplier have very less power because there are lots of supplier available in the market as compared to them there are very few but powerful buyers in the market. So that supplier has to agree with buyer terms and condition otherwise they may switch to another supplier which could be devastated for the supplier. There is a possibility of backward integration, as already seen in summer 2005 when ford purchased viston who makes the parts of the cars.

Bargaining power of customers:

Bargaining power of customers is very high in US automobile sector. As there are various brands available in the market customer may move to another brand, if they don't get their choice. Nowadays customers give more weight to quality of the car and attractive design model. There is a possibility that if customers not get their choice they may move to the foreign cars. Consumers are very price-sensitive which affects their buying decision, since there are many competitors in US market so that customers can get more choice to select cheaper and quality car.

Threat of substitute:

There are many substitute products available for automobiles like bus transport, train service and riding bike. The operating cost of vehicles can influence the people to take alternative transport facility. Price of the petrol, diesel and gasoline has large impact on the consumers' decision. Geographic location also plays a vital role in consumer's decision. In US people living in Upstate, New York and suburb area, car is the only transportation tool available.

The nature of competition

The Automobile Industry in US is dominated by a small number of Auto-makers (oligopolists), which is an oligopoly market form. Since there are few market players in this form of market, each oligopolist is conscious of the actions of the others. One company's decisions are influenced by the decisions of the other companies. The oligopolists strategic planning will always take into consideration the expected responses of the other market players. These events create oligopolistic markets and also create a highest risk for conspiracy in the industries.

Oligopoly is a regular market type. As a quantitative description of oligopoly, the four-firm concentration ratio is frequently utilized. This helps to expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%.

Oligopolistic competition can give rise to a broad range of different outcomes. In some events, the firms may collude to lift prices and limit production in the similar way as a monopoly. In some cases there is a formal agreement for such collusion, this is known as a cartel.

Interaction between the Market Players

Oligopoly competition applies in international automobile trade where there are so few global players that the predominant concern of each are with the possible behavior of its rivals, with the threat of new entrants and with the risk of substitutes emerging through new technology (e.g. Hybrid cars or Electric cars), changes in consumer taste (e.g. smaller cars, green theme) and external regulations. Therefore, the auto manufacturers will mutually depend, and this leads to their complicated behavior

In particular, certain states regulated the new auto carbon emission standard, according to Porter's five forces framework (Michael Porter 1980 cited in Johnson, Scholes and Whittington 2008:60), this is the evidence of new threat of entry built by government policy. These acts immediately cause a new entry barrier for existing auto manufacturers entering to green car market. Another barrier after financial crisis is new engine systems designed for green theme and economical purposes. For example, Toyota hybrid engine technology has successfully created a new barrier. After credit crunch, its hybrid engine has been commercialized than the peer automotive companies in American such as GM, Ford. The cost of R&D and advertisement in Toyota's hybrid engine is an unavoidable increase, if all things being equal in demand, in terms of cost, Toyota's hybrid product investment can create a significant barrier for those manufacturers who are not entering into mass production in green car market.

By contrast, the theory of games is “the study of alternative strategies that oligopolist may choose to adopt, depending on their assumptions about their rivals' behavior' (Sloman and Sutcliffe, 2001:241). After credit crunch, United States government bailed out the GM, Ford and Chrysler. In 2009, GM and Chrysler announced bankruptcy and began to restructure their business with the financial supporting from government. It is being seen that the government interfere with the automobile industry to protect the national interests and certain political purpose instead of the pursuit of market efficiency, which violates the free economy spirit but it successfully prevents the market failure in the automotive industry.

In addition, the government in this game is hoping that the bail out and financing debt can enhance the cash flow for GM to turn around, therefore it can facilitate the production of new generation green cars, but it is also an entry barrier for this game. The outcome of these government rescue plan will hurt the benefit of foreign automotive companies such as Toyota and Honda because of GM's stronger financial position and implementing green car projects

Intensity of rivalry among competitors

In US automobile industry rivalry among the competitors are very high. There are mainly three strong players in the market Ford, General Motors and Chrysler, Toyota and Honda also entered in 1980 which gave rise to strong competition among them.

We can see how the Big Three US OEMs (GM, Ford, Chrysler) responded to the varied competitive environment, how they overcame barriers to vie, or failed to do so, and how their entry of process and product innovations drove productivity growth. The Japan-based OEMs (primarily Toyota, Honda, and Nissan), with their fine "lean production" process, were competent to exhibit high quality vehicles at lower cost. This competitive dispute was the most determinative driver of higher productivity as the Big Three were affected to act by introducing their own versions of lean production, (The New York Times, 2010), (Hellwig, 2009).

The rise in oil price due to the oil crisis affected the US Big Three so badly as the customers turned away from SUVs and pickup trucks, which were the main market of GM, Ford and Chrysler. They also suffered from high labor cost than their counterparts which includes salaries, benefits, healthcare and pensions, (Gonzalez, 2009), (Faisal Islam , Nick Paton Walsh , 2003).

Chrysler like some other companies needs an improvement in American sales in the coming year as their market shares are falling. It has 7.8% of the domestic market and its sales for the rest of this year are likely to be down by a third compared with 2008. Hyundai has gained nearly as much as Chrysler lost. It is likely to outsell Chrysler in its domestic market in 2010. It is possible that Hyundai be the next year's winner of the auto industry race in US, (St, 2009) .

Hyundai and Ford got the most advantage of the $3 billion government incentive in August and the US auto sales boomed as a result but it didn't benefit GM, (David Bailey and Helen Massy-Beresford, 2009).

The industry is under this impression that Ford (NYSE:F) is going to be the biggest 2010 winner among its competitors which rely heavily on the US market. Ford's market share is going to increase from 15.5% to 16% by next year. Whereas Honda (NYSE:HMC) and Toyota (NYSE:TM) are hoping to hold their shares as it is now for the next year without any betterment in the same. Honda is sticking on to their 10.4% market share and Toyota at 17.5%.It is hard for GM to compete against these Japanese rivals. Ford is going to be the winner along with Hyundai as Hyundai is concentrating on low price and high quality (St, 2009).

The chance of GM for the next financial year is fairly poor even though they had cut the costs.

Nissan and Chrysler may be the most visible losers in the US market next year. Volkswagen is an invisible loser since its Beetle stopped selling well in US, (St, 2009) .

Value Creation

Value creation is the first priority of any business. Value creation for the customers helps sell products and services while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. Financially speaking value is said to be created when a business earn revenue that exceeds expenses. But there are more definitions for value creation that can be considered separate from traditional financial measures. (Bookrag, 2010)

Following are some factors which contribute to value creation of the automobile company.

1. Innovation:

Car manufacturers in the USA are competing in becoming leading innovators in the car industry. This task is becoming quite difficult especially when two new automakers are entering the US market. Companies are competing in innovative technologies, designs, safety features and quality. The Ford R&D team is announcing breakthrough technologies in 2010 such as using voice commands and intuitive controls. In addition, to safety features such as collision avoidance technologies.

2. Customer relations

Relationship with customers and type of service providing to them played major role in creating value for the company. All the top US auto companies emphasize on customer relations. For instance, they create value by providing the customer with the highest quality in service and in their vehicles as well.

3. Management Capabilities :

Management capabilities played vital role in value creation for the company. Management capability with respect to taking decision to overcome any problems and to deal with the competitor's strategy to remain competitive in the market and also to maximize the share holder's wealth played major role in value creation.

4. Alliances

Alliance can become very helpful to expand the business and to increase the geography boundaries of the business. Eventually alliance creates the value for the company among the people and also gets the advantage of that to increase the sales of the product and to establish strong reputation. E.g.-In March 2000, the Italian automobile company, Fiat SpA, signed an agreement with the US-based General Motors, the world's largest car producer, which provides for an exchange of shares between the two companies and the creation of two joint ventures for the purchase and production of engines and gear equipment.


5. Technology

One approach for the Big Three for value creation is accelerating innovation by buying new technology from start-ups, (Noyes, 2008).Automotive industry has a key role in technological advance like evolution of CAD/CAM (Computer aided Design, Computer aided manufacturing), laser technology, industrial robots which creates value for their products, (NAS,NAE,NRC and IOM, 1982, p. 11).Now the automakers like GM, Chrysler and Honda is working on fuel cell technology which brings fuel efficient vehicles on road powered by hydrogen which embraces a greener environment and adds value to their product, (California Fuel Cell Partnership Members) .

6. Environmental and community issues

Nowadays environmental and community issues are consider to be a significant by government. Many countries' government has set some standard for the automobile company to reduce the o2 omission in the environment. In order to achieve the reduction in CO2 emissions to meet the regulation and compete with the peer companies, the car manufacturers are focusing their R&D in green cars which can be hybrid car such as Toyota Pirus, Honda Insight in today and electric vehicles in the next generation.

7. Employee relation

The feature of the US automobile industry, as pressures for greater productivity and quality intensify, is a greater premium being placed on workforce skills. New technologies require a higher order of both analytical and behavioral skills. Firms are adjusting their payment systems accordingly, in order to attract and develop employees who have the required skills to ensure that the new production systems are successfully implemented and maintained.

8. Brand Creation

In US automobile industry, When consumers were surveyed recently, they indicated that Ford, overall, was a more stable and reliable brand, while GM was badly damaged by its bankruptcy filing so much so that they dropped the "GM" mark on their Chevrolet and other brands since it was more tarnished that the sub brands.

Brands that keep predictability and quality as their key focus actually build more brand value to consumers during lean times because they are seen as reliable and stand out in the morass of collapsing competitors willing to do anything to survive.

Drivers of change in the Industry

The American automobile industry has seen many changes in the past few years, which have been influenced by various macro environmental factors. By Using PEST analysis we understand the drivers that have a direct effect on the automobile industry.

I. Political factors

Environmental legislation

One of the most important factors that is quickly shaping the current automobile industry today is the environment. The United States government is taking steps towards lowering carbon emissions and preserving the environment. The Energy Policy and Conservations Act and the Vehicle Pollution and Control in the 1970's was triggered by the oil crisis in that decade. The Energy Policy and Conservations act demanded that by 1980 all cars must have the same standard of 20 miles per gallon. In addition, the Clean Air Act which stated that emissions must be lowered by 90% within six years.

In 2006, California enacted legislation that called for cutting carbon dioxide emissions by 80% by 2050 (Reuters, 2009). Part of a 15 billion dollar investment is for the development of more fuel efficient cars and bio fuels.


The U.S Department of Transportation has set a list of safety standards and regulations for car manufacturers. According to The National Highway Traffic Safety Administration "that the public is protected against unreasonable risk of crashes occurring as a result of the design, construction, or performance of motor vehicles and is also protected against unreasonable risk of death or injury in the event crashes do occur." (nhtsa, 2009)

Various safeties related acts have been passed since 1960. The first act was passed in 1966 providing car manufacturers a set of safety standards to abide by, such as passenger safety, breaks and visibility, to decrease the number of accidents and fatalities. Car manufacturers now have to alter their vehicles to meet these acts and regulations. Economical Factors

The U.S economy depends heavily on the three major car producers. After the recent world financial crisis, the market share of the three largest American car companies declined 17%, giving way to international competitors to gain that market share. The financial crisis also had an effect on the prices of raw materials especially steel. IS has caused many workers in these major car companies to lose their jobs, causing lower income per household.

The credit crunch has also taken a toll on the car industry. Consumers are unable to get loans to buy new cars which lead to the supply exceeding the demand for new cars. Above that, consumers view cars as the second largest purchase after a home. The consumer might find it difficult committing to a company that has declared bankruptcy and seeks government bailout.

II. Social

The consumer is one of the strongest drivers in this industry, customer tastes and preferences change very often. It is up to the car manufacturers to meet the needs and demands of their customers and more cars are customized.

The rapid changes in the U.S economy had a very large effect on the individual's income. The rising unemployment rates have lead the consumer to move from fuel guzzling SUVs to more economic vehicles.

III. Technological

The world today is going through fast technological changes. Companies are trying to meet the customers' demands and needs by higher R&D spending in order to increase efficiency and quality of their vehicles and reduce manufacturing costs. Many competitive car manufacturers are becoming more innovative, providing the customer with more choices such as keyless entry, ignition, anti heat glass, and audio/video systems. In addition to some more important technological features that concern safety like airbags on door frames, brakes, and frond /rear parking assistance.


Recently in sales report it seen that china has overcome US in respect to car sales. It will take some time to US to recover from the credit crunch, although US government as given full financial aid to overcome from crunch. The US government has also revealed its car scrap page scheme, aimed at influencing old car owners to exchange them for greener ones. This has acted as a stimulus to the economy by boosting car sales and production. It also seems that innovation of FCV cars and increasing demand of this car will help to boost the growth of US automobile industry over the long term period of time. This will also become helpful to reduce the effect of global warming by reducing the carbon emission.

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