Tuesday, June 4, 2013

Industry Analysis: Luxury Cars

Executive Summary Luxury products are defined as the products that are intended to bring honor and prestige to the owner rather than serve their purpose regardless of their genre i.e. cars, handbags, watches and wallets among others. This research paper will concentrate on luxury cars industry. With the development in technology, the luxury cars industry has been deteriorating i.e. they have been producing very poor outlook models. The objectives of the paper included analyzing the challenges faced by the luxury cars industry and the opportunities available, identify the key players in the industry, carry out some financial analysis as well as establishing some of the opportunities that GM can use to strength its market share in the global market. When it comes into manufacturing of luxury cars, the major players include GM, Chrysler Group, Nissan, BMW Group, Ford Motor Company, Jaguar Land Rover and Toyota Motors. In order to increase their sales and enhance competitive advantage, most of the players have focused on developing vehicles that consume very little gasoline. Utilitarian, affective and symbolism have been identified as the major reason s why people seek luxurious products such as cars. PESTEL analysis was performed on the industry and some of the political factors found to affect it included employee union activities and government taxes. The economic factors included global recessions, increase in the prices of gasoline, high rates of currency fluctuations and the huge economies of scale enjoyed by most companies. Social factors identified were customers focusing more on the brand, environmental factors such as cars with low emissions gaining higher demands, tastes and likes of customers can never be left out and social class. High efficiency was the major technological factor identified though with increased rates of technology imitation there is no a single player who enjoys the factor. Core competencies within the industry included strong corporate governance, deploying more resources to R&D and Mergers and Acquisitions. General Motors was identified for the study because of several reasons such as the location of the headquarters of the company, the role played by the company’s financials in the US economy and global economy as whole and the size of the company i.e. being present in more than 150 countries across the globe. Findings of the research included that Gm has high brand recognition in the global market making it easy for its products to be sold, the employees are highly skilled and committed, and that the firm allocates a lot of its resources into R&D. it was also found that the firm’s suppliers of products and raw materials have low bargaining power due to the size of the company. Introduction The luxury cars industry has continued to produce cars since the 1960’s with a very poor outlook for most of the firms in the formative years. Rover was one case which registered losses in its earlier years prompting its sale to BMW and later to Ford. Jaguar was another brand that was less than successful as following its acquisition by Ford in 1989; the firm did not receive any revenues from the venture for almost 2 decades. It should be noted that 7 per cent of the total number of cars that are sold globally fall under the luxury cars category. This percentage rarely drops even in the face of harsh economic conditions such as global recession or even currency crashes (Grant, 2005). The paper has three objectives which it seeks to achieve. They include: i. To analyze the main challenges arising from the current situations and the various opportunities of the luxury car industry; ii. To identify the key players in the global luxury car industry; and carry out an analysis of their financial positions and their various business practices; iii. To establish the opportunities that can be used in strengthening the GM’s luxury car market share in the global luxury car industry; The paper is divided into three parts; the first part of the paper basically contains the literatures that have been reviewed. The section contains the various definitions of luxury products and the reasons why they are bought by the consumers. The players and the trends in the industry are also considered under the literature review. The second part of the paper basically deals with the various findings and the final part is the conclusion. Literature review Introduction It is believed that luxury products irrespective of their genre are mainly meant to bring owner and prestige to the owner other than being of any good i.e. the honor and prestige they bring to the owner supersede any other utility good, there were times when luxurious products were defined as those which were rare and available only to the elite i.e. if a product was rare and available only to the elite, then it was luxurious. Luxury products are mainly characterized by being expensive and exclusive (Nia and Zaichkowsky, 2000). According to Bushman (1993) most of the people involved in purchasing of luxury products are the self-conscious people who are considerate about the impressions in the public. For example, most of the rich people would rather attend social gathering by being driven in very expensive cars in order to make certain impressions to their colleagues or to the other people. Luxury cars are also used as a way of communicating the social class an individual belongs to. In other words, people are more classified into social classes on how the amount they spend rather than how much they earn (Nia and Zaichkowsky, 2000). The economic growth across the globe has seen the number of people opting for luxury products also increasing. The growth of the cars’ luxury market is mainly being driven by social as well as economic factors. As advances are made in the field of technology, so are levels of luxurious products being raised. For example, there was a time when owning a car was considered to be a luxury but with time cars have become necessity and manufacturers have defined a new taste of luxurious cars i.e. by improving their functionalities and making them as comfortable and entertaining as possible (Vigneron and Johnson, (1999). Technology has led to rapid expansions of the businesses enterprises across the globe resulting to accumulation of wealth which has been used to raise the living standards of most people hence them seeking more and more luxurious products. It is also an undeniable fact that the development in technology has led to high and better levels of products being developed that define luxury in a different way than known. As already mentioned, luxurious products are mostly used by individuals to signify the sort of social class that they belong to more than the product might be of help to them (Nia and Zaichkowsky, 2000). Most of the people who seek to buy luxurious cars mostly concentrate on what the product has to offer i.e. the brand, producer, the country of origin and others go to an extend of ordering specifically from the company or consider the number of people in the market with the same type of product. To such people when the product has been purchased by a certain number of people it is then no longer prestigious. There are several reasons as to why people will seek to buy luxurious products, to some it is make a certain public impact while to others is to show the sort of class they belong to while others will seek to enhance their in-group. According to Vigneron and Johnson, (1999), there area bout five effects of purchasing luxurious products irrespective of whether they are cars, handbags or jewelry. Some of these effects include; bandwagon effects, interpersonal Veblen and Snob among others. Research studies have shown interpersonal factors to be the major reasons why people engage in consuming luxurious products and they include utilitarian where individual buy expensive products simply because they have a taste for quality, affective purposes such as hedonic love and for symbolism (Nia and Zaichkowsky, 2000). Methods of data Collection Secondary data Most of the data used in this research paper was secondary i.e. it is data that was obtained from the company reports, Euromonitor, published books and journals. Consumers were also surveyed on especially regarding what they considered luxury and the reasons why they chose to buy luxury goods for instance cars (Bryman and Bell, 2007). Of the luxury market, this research paper will concentrate on the luxury cars industry on a global market. The focus will be on how, General Motors with its various luxury brands can overtake BMW and Mercedes Benz as the luxury brands of choice. Industry overview Major players in the industry The major luxury car makers in the global car industry include; the Chrysler Group, Nissan, Honda, BMW Group, Ford Motor Company, Jaguar Land Rover, GM and the Toyota Motors (Schroeder, R. and Flynn, B. 2001). The Chrysler Group has its headquarters in Michigan US. The firm is engaged in the production of automobiles and the production of automobile parts. In 2010, the firm had total revenue of 41.946 billion dollars. The firm has a variety of car brands with Chrysler being the luxury brand. In 2009, 0.96 million Chryslers were sold throughout the world with 0.93 million being sold in the US. The firm has employees from different backgrounds who have enabled the firm to carry out its operations in a very smooth way to achieve high levels of innovation (Chrysler, 2012). Nissan which is headquartered in Yokohama, Japan has global operations. The products of the company include automobiles, Forklift trucks and outboard motors. The range of luxury car models produced by Nissan includes the Infiniti in the US but as Nissan in Japan. 103,411 units of the Infiniti brand were sold in the US in 2010 an increase of 19.58 per cent from the 2009 sales figures. Honda, the 6th largest automobile manufacturer in the world has its headquarters in Tokyo, Japan. The products of the firm include motorcycles, automobiles, jets, photovoltaic cells, jets and their engines. The revenues of the firm in 2011 stood at 107.82 billion US dollars. The Luxury brands include the Acura TL and Ridgeline. The company has focused on the production of small cars to meet the demand both in the US and the other emerging markets (Infiniti, 2012). The other players that will be considered under this analysis are Jaguar Land Rover owned by Tata of India. The firm was founded in 2008 with headquarters in Gaydon, UK. The revenue of the firm in 2010/11 financial year was 9.9 billion pounds (12.73 billion US dollars). During that period, JLR sold 240,905 units. 24.1 per cent of the sales were made in UK, 22 per cent in other parts of UK (excluding Russia), 12 per cent in china, 4.9 per cent in Russia, 20.9 per cent in N. America and the remainder in the other parts of the world (Jaguar Land Rover, 2011). General Motors (GM) is the world second largest maker of automobiles. It is headquartered in Michigan, US but with operations worldwide. Some of the luxury brands produced by the firm include Cadillac, Vauxhall and Buick. In 2010, the firm had a total of 209,000 employee working in their four divisions; Chevrolet, GMC, Cadillac and Buick. The revenues of the firm stood at 138.898 billion dollars in 2010. GM has 8.2 per cent of the market share of the luxury car market in the US (GM, 2010). Finally, Toyota is the world’s largest automaker by volume. The firm has its headquarters in Toyota, Japan. The revenues of the firm in 2011 stood at 235.89 billion dollars. The products of the firm include the production of automobiles and also financial services. Lexus is one of the luxury brands that are produced by the firm. In 2010, Toyota had a total of 317,734 employees working in the different countries throughout the world (Toyota, 2010). Trends in the industry Fuel efficient vehicle brought about by the rising cost of gasoline that has hit the world. Most motor vehicle sales in the period following the escalation of prices of oil have all focused on those that could be able to run on very little gasoline. Increased consumerism especially in relation to keeping down the levels of emissions has led to many luxury car buyers resorting to cars that use clean diesel. The industry is also characterized by a high level of outsourcing (Becker, 2010). Although the firms originally produced majority of their components, they have come to the realization that they can significantly reduce their costs if their outsourced the making of the parts. This trend has been going on for the last three decades (Grant, 2005). Impacts of environmental factors on the industry The external environmental factors which have an impact on the industry will require the performance of a PESTEL analysis. The political factors which affect the industry include the high union activities which have sometimes led to the disruption of the operations of the firms that are in the industry. When there are labor troubles, no or very little production tales place in the industry. Also, the firms may not b able to deal with all the labor unions due to the large numbers of unions whose actions may directly affect the operations of the firm. This arises from the realization that most of the luxury car makers outsource a huge volume of their productions and thus they have little control over the employees who are working for the firm they have outsourced the services to. The second political facto that is affecting the operations of the firm in the industry is the various forms of taxes and duties that are levied on the firm. These have achieved the goal of either encouraging firm to operate or re3locate to some other countries where the governing regulations are more conducive. The government deregulation of the control in the motor vehicle industry has led to the rise in competition between the luxury vehicles industry manufacturers. The deregulation first began in the US and has currently spread throughout the globe and thus many firms in the industry are now faced with more competition than they previously experienced (Pangarkar, 2011). Also, there are a variety of economic factors which are affecting the operations of the firms in the industry. To begin with, although the whole automobile industry was greatly affected by the economic downturn of 2008, the luxury cars were not affected as the consumption of the luxury cars was mostly informed by class and prestige and only slightly by the reigning prices. The recent increase in the global oil prices have led to a situation where most people prefer cars which are fuel efficient and thus for any firm to significantly establish itself in the industry, they must engage in the manufacture of cars which have low usage of fuel. However, the sector has also been affected by the high rates of currency fluctuations and the volatilities of the interest rates (Pangarkar, 2011). The overall effect of this has been the lowering of the financial conditions of the companies especially those that have operations globally. The huge economies of scale enjoyed most of the firms in the industry have significantly reduced their production costs and thus significantly increase their profitability. Moreover, the social factors that affect the luxury car industry include the element of car culture where most buyers are driven by the brand. Therefore, firms which have higher brand awareness in the industry will continue to post more impressive financial results as compared to those will lower brand awareness. Secondly, there is a growing awareness of the environment and the footprints of the various cars that are made by the different manufacturers (Pangarkar, 2011). Low emission cars have higher sales rates as compared to those that spew a lot of smoke and CFCs into the atmosphere. Due to the high end nature of the firms, the tastes and the fashions senses of the various prospective buyers. However, there is a current crop of rich people who are driven by their conscience which informs them that if they buy luxury cars, people will think that thy are flaunting their wealth. Technological factors include the opportunities that the firms have to engage in high engineering operations which would lead to the production of very high quality cars. The main problem is that there is a very high rate of technology imitation thus no one firm enjoys their innovation. Porter’s 5 forces model of the firm will be used for the structural analysis of the firm. The potential entrants are the Japanese automakers who have their advantage of current operations in other sectors. However, the threat is not high due to the high economies of scale, the huge differentiation and low access to channels of distribution. The threats of substitutes are high due to the availability of other ways through which fashion statement could be expressed. There is a high power of the sellers and the buyers as there is a no backward or forward integration except for some few parts. Buyers require quality and excellence (Grant, 2005). There is a high level of rivalry between existing firm for instance with those other firms which provide luxury cars for instance Lincoln, Jaguar, Mercedes Benz, Cadillac, BMW and Audi (Pangarkar, 2011). Core competences needed to survive in the industry. The core competences are used by the firms in the industry to increase their competitiveness and thus also help in increasing their market share. Firms in the industry need strong corporate governance which would allow them to shape the activities of the business as well as the behavior of the employees so that when there are changes win the global economy, the firm would continue to run smoothly. The use of R&D has also been an area of core competence for majority of the firms. Many auto makers have worked on ways through which they can produce efficient vehicles. Moreover, there has also been the mergers and acquisitions (M&A) which have helped the firm to work together with others which have resources which themselves they could not have (Pangarkar, 2011). Strengthening luxury car brands There are a number of ways through which a firm can reassert its place in the global luxury car industry. The players in the industry have focused on an increase in the use of R&D which has led to a high level of innovation in the industry for instance rechargeable cars. Value addition, for instance through extra comfort, is the surest way through which the firms in the industry will capture the market. Secondly, innovation will ensure that firms can maintain flexible and efficient production systems. The benefit to the firms would be the ability to be abreast with the demand as well as the various needs of the customers. The other opportunity that exists lies in the new consumerism where the customers need high quality as well as safe cars. Therefore, the development of technologies and their usage for instance the automatic breaking system (ABS) and other accident detection software usage will open new fronts for the luxury car manufacturers. Finally, the reputation of the firm should be maintained especially in regard to the effects that the products of the firm have on the environment (Pangarkar, 2011). General Motors GM was selected for the analysis for a number of reasons. The location of the firm’s headquarters was the first major reason why it has been selected. The locations are in Michigan US and thus would be very helpful in the research whose third objective is concerned with strengthening US luxury car industry. The second factor lies in the fact that GM is the world’s 2nd largest automaker after Toyota which has a very small number of products in the luxury car category. GM is on of the largest automakers in the world employing more than 200,000 employees across the globe and having branches in more than 150 countries. Despite the success of the company, it has been faced with some financial problems that led to its bankruptcy in 2009. The revenues outcome of GM in 2010 was 135.592 Billion US Dollars (United States Securities and Exchange Commission, 2011; Olson and Thjomoe, 2010). Indicators are physical signs that are used to forecasting the future by using the current data. It is argued that the performance of GM is an indicator the performance of the US economy i.e. when the performance of GM is high the US economy is also expected to be good (United States Securities and Exchange Commission, 2011). Value Chain & Supply Chain models Most of the players in the industry have been forced to develop new models in order to deal with a wide range of emerging customers. With the effect of globalization, the automobile companies across the globe have realized the importance of supply networks. This is because the supply networks will determine the revenues of the players i.e. how effective and diverse the supply chains of a company are will affect the number of units the company sells hence the amount of revenue it gets. Another supply model that has been adapted by almost all luxury car producers is setting up production units in different countries across the globe. This has been known to be effective as it greatly reduces the operation costs and in particular the costs incurred in importing some components from the headquarter factory (Becker, 2010). Most of the automobile companies based in the US made use of a three-tier supply chain in the early 1970s where those who were involve din the distribution of final products such as engines were referred to as Tier 1. Those companies that sold their products to Tier 1 were known as Tier 2 and those that supplied raw materials to Tier1, Tier 2 or both were known as Tier 3. Currently the automobile industry in US, make use of a closed supply chain where they design, manufacture and sell their own products (Olson and Thjomoe, 2010). With the increasing competition across the globe, it is believed that a secure and effective chain model is not only the blood line of the business but also used as a marketing tool. In the luxury good market, a secure supply chain is essential for it also aids in combating counterfeit products which may deny the company a good amount of revenue. GM makes use of the Authoritative Product Attribute Service (APAS) as a way of involving customers to enhance the security of the supply chain. Manufacturing & Selling: Most of the GM products are often manufactured at the market where they are sold as well as exported to nearing markets, for example, the products meant for China are manufactured by GM Shanghai while those meant for East Africa are manufactured and sold by GM East Africa located in Nairobi Kenya. Scope of the Company: GM is largely available across the globe in three major continents i.e. North America, Asia and Africa and was voted to be the second largest player in the Automobile industry in 2010. As already mentioned, the headquarters are in the United States. Branding: In an effort to remain relevant and enhance its competitive advantages, GM has been able to come up with some new models as well as discontinue some old models. The major luxurious brands that GM has developed include Buick, Cadillac, and Vauxhall (United States Securities and Exchange Commission, 2011). Findings From the analysis, it has been established that GM enjoys high brand recognition in the industry. Also, the global location in 32 countries has been very beneficial to the company. The workers of the firm have high skill level and are very committed towards the mission of the firm; developing combustion engines for the future, improving the communities as well as promoting diversity. The suppliers of the firm have a moderate bargaining power due to the fact that GM has the largest market share in the US. The weaknesses that the firm has include increased level of competition and a low product innovation du to limited investment in R&D. the investment of the firm in R&D as a percentage of the sales is lower than that of its competitors (Pangarkar, 2011). The firm can therefore strengthen its global luxury car industry market share through the engagement in the following activities. It has been established from the research that when GM, allocates more of its resources into research and development. Through this, the firm will be able to introduce new vehicle design concepts into the market. The firm can also concentrate on only few brands of luxury products which will help the firm to fight off the increased level of completion that it currently faces. The firm could also ensure that they cut down on any situations that could bring about labor problems in the plants. Any labor strikes would hurt the production operations of the firm and thus will affect its supply chain (United States Securities and Exchange Commission, 2011). It has also been established from the data collected that, a lot of resources are used in the distribution system for instance in the storage. There is a need to reduce this costs for instance through the use of Just In time (JIT) production which will ensure that only the materials that are needed for the ongoing operations are received into the firm. This will significantly reduce the space storage in the production stores. There is also noted high level of centralization of decision making. It is therefore imperative that the firm decentralize its decision making so that the different decisions could be made in time thus reducing delays which have hurt production in the recent past (United States Securities and Exchange Commission, 2011). The limited distribution system that the firm has, operations in only 32 countries, has also inhibited the global domination of GM in the luxury vehicle industry. If the firm is to achieve the goal of asserting its place in the global luxury car market, they have to increase their reach to other countries so that, whenever a consumer wants to have any of the cars produced by the firm, they do not have to rely on many intermediaries (Olson and Thjomoe, 2010). Conclusion Although the firm continues to operate in luxury car industry, they should capitalize on the various opportunities that exist so that they can strengthen their position, reduce the challenges that the firm faces; mostly resulting from both the external and internal environmental factors. From the research, it has been established that the firm has a very high potential to capture more market share in the global luxury car industry. Although the firm currently produces cars majorly for the North American and European market mostly UK. The enable that, the firm will use opportunities that are available to it such as a reduced barrier to access of various markets for instance through the deregulation that has been discussed in the report. It cannot go without, stressing that the firm can also capitalize on the opportunities brought about by the increased consumption of green products for instance products which leave very little carbon print. 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Appendix Revenues of the various companies producing luxury cars Company HQ location Number of employees Revenue of Billion USD Chrysler Group US 51,623 41.946 Nissan Japan 155,099 110 Honda Japan 179,060 107.82 BMW Group Germany 95,450 77.03 Ford Motor Company US 164,000 128.954 Jaguar Land Rover UK 17,000 12.61 General Motors US 209,000 135.592 Toyota Japan 317,734 235.89