- October 26, 2014
- Posted by: Treadstone Management Partners
- Category: Strategy
When the financial crisis hit back in 2008, the automotive industry was not spared from its reach. With the drying up of credit as a result of the financial crisis, lack in consumer confidence which in turn drove them to delay purchase of big ticket items, and emblematic problems that have plagued the auto industry before the crisis, the “Big Three” automakers (Ford, Chrysler and General Motors) had trouble in managing the crisis and were teetering on the brink of bankruptcy. With so much at stake, the U.S government in an effort to prevent the collapse of the automotive industry enacted the Auto Industry Financing and Restructuring Act. In July 2009, the government also introduced an incentive program called the Car Allowance Rebate System to help spur sales within the automotive industry. 5 years after the crisis, we are now seeing a resurgence in the American automotive manufacturing industry. A combination of factors that include but not limited to, low financing costs and pent up demand for new cars being released have contributed to the recovery of the industry. While a recovery is underway, there are still threats on multiple fronts that automakers will have to manage such as: changes in consumer preference, and emergence of disruptive technologies that could change the competitive landscape.
According to a report published by IBISWorld, revenue growth for the car and automotive manufacturing industry is projected to grow at an annualized rate of 1.6%, reaching an industry total revenue of $110.6 billion by 2019 (Ruiz). Several factors can be attributed to this growth, one of them is the pent up demand for new cars being slowly released as people replace their older vehicles. Couple this with the effect of a low interest rate environment that makes financing easier, sales in the industry is projected to grow. In a recent report, IHS Automotive a research company, has noted that the average age of light vehicle on the road in the US is at 11.4 and has forecasted that the volume of vehicles age 0-5 years will increase by 32% over the next 5 years (“Average Age of Vehicles on the Road Remains Steady at 11.4 Years”). The National Automobile Dealership Association has forecasted 16.4 million new cars and light trucks that will be purchased or leased in 2014 (“NADA Predicts 16.4 Million U.S. Light Vehicles Sales in 2014″). Fuel efficiency is one of the predominant reasons for consumers replacing their older cars with newer ones. With the price of crude oil steadily rising, it is important for automakers to continuously develop technologies to make their cars more fuel efficient.
The “Green Revolution” is also another trend that automakers need to capitalize on. Tesla Motors is riding this trend and has thus far been successful in pushing out their fully electric powered vehicles. Tesla Motors, while serving a niche market and only holding 2.2% market share within the US automotive industry, is growing to be a competitor for the traditional automakers in the US. Not only have they developed the technology for producing a vehicle that operates on electricity fully, but they have also proven that fully electric vehicles are viable for the mass market. In an effort to galvanize the progress of the industry in producing more electric cars, Elon Musk, CEO of Tesla Motors, has recently released the patents of his company. There are no caveats for others to use the patents because Elon Musk believes that Tesla Motors was created to advance sustainable transport and having patents is contradictory to the goal. While automakers like Ford and GM have alternative fueled cars in their portfolio, they only constitute a meager portion. Automakers should take advantage of the patents and beef up their portfolio offerings because there certainly is demand for alternative fueled cars. In a survey conducted by the National Association of Convenience Stores, consumers want to see more alternative-fueled cars emerge in the next decade and are willing to consider purchasing one of these vehicles (“Consumers Like ‘Green’ Car Options”). Their decisions to purchase are not only driven by environmental concerns but also economic benefits. As society becomes more concern for the environment, the green trend is poised to grow and influence consumer’s preferences. With a generation of car buyers now becoming more eco-conscious, automakers should anticipate their consumers’ changing preference and strive to meet them.
Besides focusing their strategy in developing more fuel efficient cars and also beefing up their alternative-fuel cars, there are threats that automakers should be taking into account when forming their strategic decisions. The rise of the car-sharing economy is one such threat that automakers should be aware of. Car-sharing is a system that provides members with short term access to a car when they require it. Members to these services can access these vehicles at any time contingent on them having a reservation, and they are usually charged a fee based on the amount of time or miles they used. The attraction of this option to a member is the ability to reap monetary savings by only renting a car when it is needed instead of owning one. In a research paper published by the Transportation Resource Bard, they found that each car-sharing vehicle available is estimated to take 15 private cars off the road (Millard-Ball, Adam, and Gail Murray 4-11). According to Alix Partners, a business advisory group, 500,000 fewer car purchases have been estimated to happen and another 1.2 million of them will be avoided by 2020 (“AlixPartners Study Indicates Greater Negative Effect of Car Sharing on Vehicle Purchases”). This alternative is rapidly gaining users and traction as more people switch from car owning to sharing. Frost & Sullivan estimated that car-sharing memberships will reach 26.2 million members worldwide (Leveque, Franck, and Moosa). As the car-sharing economy grows and gains more users, they could remove more cars off the road, leading to lower sales. This could potentially pose as a big threat to the automakers.
The automotive industry is showing promising signs of recovery after the financial crisis left a few major domestic players in the United States in undesirable positions. But as consumer confidence grows and with the aid of low interest rates set by the Federal Reserve, consumer demand for new vehicle will grow. While the industry has rebounded from the crisis, players in the automobile industry should still be on their feet in anticipating trends that may affect their business models. Advances in technology and changing consumer preferences are areas that companies should focus on. A decade ago, the thought of an autonomous car that can drive itself may seem like something out of a sci-fi novel. But Google’s self-driving car has shown that much can change in the span of a decade. If the players in the industry do not respond and react to these changes strategically, they face the risk of obsolescence.
“AlixPartners Study Indicates Greater Negative Effect of Car Sharing on Vehicle Purchases.” AlixPartners. AlixPartners, 5 Feb. 2014. Web. 20 June 2014.
“Average Age of Vehicles on the Road Remains Steady at 11.4 Years, According to IHS Automotive.” IHS. IHS Inc, 9 June 2014. Web. 15 June 2014.
“Consumers Like ‘Green’ Car Options – As Long as Green Means Money.” NACS. NACS, 14 Nov. 2013. Web. 22 June 2014.
Leveque, Franck, and Moosa. “Voice of Future Car Sharing Customer: It’s All about Wholly Sharing and Partly Pairing.” Frost & Sullivan. Frost & Sullivan, 6 Feb. 2014. Web. 20 June 2014.
Millard-Ball, Adam, and Gail Murray. “Car-Sharing: Where and How It Succeeds.” Web.
Millard-Ball, Adam, Gail Murray, Jessica Ter Schure, Christine Fox, and Jon Burkhardt. “Car-Sharing: Where and How It Succeeds.” TCRP 108 (2005): 4-11. Transportation Research Board. Transportation Research Board, 01 Sept. 2005. Web. 20 June 2014.
“NADA Predicts 16.4 Million U.S. Light Vehicles Sales in 2014.” Reuters. Thomson Reuters, 10 Jan. 2014. Web. 16 June 2014.
Ruiz, Brandon. Car & Automobile Manufacturing in the US. Rep. no. 33611a. IBISWorld, 2014. IBISWorld. Web. 15 June 2014.