Source: Neil Mullinieux The new car market in Europe; p. 28
The European Automotive Industry
ARENAS OF COMPETITION
Below we shall examine the nature of competition in the car
industry. This will be done using Richard D'Avenis theory of
Arenas of competition. We shall emphasise a long-term
perspective. Thus we will not focus on all the small factors,
that might provide a tempo-rary competitive advantage. An example
of this is an extensive product line. This is im-portant to
competitiveness, and provides a competitive advantage at the
moment. Howe-ver, in the long term this advantage would be eroded
as technological innovation makes the product line obsolete.
Hence continuous and effective R&D is a real source of
advan-tage, while existing product lines are only temporary.
Other temporary advantages include effective distribution, good
supplier relations and product technology.
THEORY
D'Aveni argues that traditionally competitive advantage arises
from cost and quality effi-ciency, timing and know-how,
strongholds or deep pockets. Cost and quality efficiency stems
from a low cost production or differentiated product strategy.
Timing and know-how deals with a competitive advantage that
originates from the possession of a unique inimitable asset that
allows the firm to charge the customers a premium price for its
pro-duct. To be unique, the firm has to be the first to develop
this asset. Competitive advanta-ges based on strongholds exist as
a consequence of entry barriers to some specific seg-ment of the
market. The deep pockets advantage relates to a large resource
base that al-lows the company to purchase potential competitors
and buy new innovations. Ultimately deep pockets will allow a
firm to operate at a loss for a period of time, until competitors
have been scared away.
D'Aveni argues that these sources of competitive advantage are no
longer sustainable. All sources of advantage are thus temporary,
and will sooner or later be circumvented by competitors. Hence in
order to keep earning economic profits a firm must establish a
seri-es of competitive advantages.
D'Aveni further argues that competition escalates over time in
any industry as strategic interaction ensures that competitive
advantages are build and eroded. In the article it is suggested
that this escalation of competition will follow the order of the
four arenas shown in the figure below. However there is no
empirical evidence that suggests that the escalation of
competition follow this specific order.
We have chosen to use the model in order to structure the
different elements of competiti-veness in the car industry. Thus
much like Porters five forces it is not our intention to use the
model to draw conclusions, but merely as a tool for structuring
our thoughts.
Indsæt figure 4.1 fra side 53
The specific model has been chosen due to its focus on dynamic
issues. It does not view competitive advantage as a static
factor, but rather argues that the factors that drive an
industry, change over time. In the automotive industry there is
no obvious market leader, and the manufacturers have had varying
success over time. This indicates that competitive advantages in
the car industry is dynamic, and that the advantages are
established and eroded over time.
Below we shall examine the nature of competition in the car
industry through the four arenas. To keep in touch with the
dynamic perspective, we shall further argue that the existing
competitive advantages will erode over time. It is not easy to
find empirical data for such an analysis, and hence we shall
instead use the knowledge we have gathered in chapter 3.
COST AND QUALITY
Competitive advantage stemming from cost and quality is closely
linked to the choice of Porters generic strategies, low cost or
differentiation.
Low cost production is very important due to the specific market
structure in the car indu-stry, where the heavy competition has
led to very elastic demand. In such a situation the ability to
produce at costs that are not significantly higher than those of
competitor's, is of vital importance. This is so because the
price range in which a manufacturer can sell its products is very
small in a situation of inelastic demand. Thus any cost increase
tears di-rectly at profits, and in a competitive industry with
low margins this often leads to losses.
The importance of low costs puts pressure on the decision to
produce with a focus on fi-xed or variable costs. In a situation
where there exist a number of firms with different ratios of
fixed to valuable costs, a change in demand can have dramatic
consequences to the industry. An increase in demand will lower
the average cost of the producers with high fixed costs. This
will lead to price pressures throughout the industry, and
eventually the producers with high variable costs will be forced
to exit. In case of a decrease in de-mand, the exact opposite
will happen.
To escape the limitations of low cost production, a manufacturer
can try to differentiate its product, thus allowing a premium
price. Examples among the larger producers are BMW or Mercedes,
which produce executive cars at a high price under a well
established brand name. Thus as mentioned in section 3.5.4,
marketing becomes an important aspect in dif-ferentiating the
product, which reduces cost pressures slightly.
An example of differentiation among broad line producers is
Volkswagen that has succe-eded in differentiating both through
brand identity and superior technology. In the latter case we
think of the VW Golf that has received several awards , due to
its superior per-formance. The vehicle has been a massive sales
success over the past few years, with sales of more than 4,5
million units in the period from 1991 to 1996 . In spite of
difficulties in keeping production up to demand, leading to long
delivery times (In some cases close to a year), customers have
been willing to wait, which shows their attachment to one
specific model.
The launch of the new VW Beetle demonstrates how an established
brand name can be used to differentiate a car model. Through
marketing Volkswagen AG is trying to estab-lish clear links to
the old beetle, which was a large success in its days.
However, even in case of superior products and marketing
nostalgia, there are limitations to the premium companies can
charge for differentiated products. As mentioned earlier this is
an effect of elastic demand and well informed consumers. Thus low
cost production remains an absolute necessity to stay competitive
in the car industry. Hence low cost pro-duction has already been
eroded as a competitive advantage, and is now rather a
competi-tive necessity.
TIMING AND KNOW-HOW
The timing and know-how arena is closely connected to R&D and
new model introducti-on in the car industry.
As mentioned above, such an advantage stems from the ownership of
an asset that is uni-que to the firm, and provides value to
customers. In the car industry unique assets usually stem from
knowledge and technology. This allows the manufacturer to produce
a vehicle with characteristics that can't be copied by
competitors.
Also in this arena R&D is very important, as it allows firms
to build new advantages and erode competitors advantages in this
arena. As mentioned above the basis of such an ad-vantage, is to
be the first to develop the asset. Examples in recent years
include ABS breaks, airbags, electric vehicles etc.
In the car industry the most obvious evidence of competition in
the timing and know-how arena is the rapid introduction of new
models. This is necessary in order to reap the bene-fits of new
innovations by constantly incorporating the latest technology
into the products. Thus in the period from 1997 to 2002, the
Volkswagen Audi group plans to introduce 17 new models . This is
a lot when considering the enormous amount of resources a model
introduction requires with respect to design, testing and
marketing costs.
Table 4.1
Source: Neil Mullinieux The new car
market in Europe; p. 28
Today many models are only produced in few years, before newer
models replace them. This puts high pressure on the needed sales,
since a model only has a short period of time to recapture the
R&D investment. Table 4.1 shows an example from Ford's new
model Programme.
An example of competition escalation within this arena is the
introduction of airbags. This new technology allowed an immediate
competitive advantage, which was quickly eroded as other
manufacturers copied the product. Initially the airbag was found
only on the dri-ver's side, but soon it was introduced at the
passenger side and later in the sides of the car, protecting
passengers from non-frontal impacts. This is an example of how a
competitive advantage is quickly eroded by competitors, and then
a new one is build which is again eroded.
STRONGHOLDS
At the moment there doesn't seem to be much competition in the
strongholds arena. Earli-er the European markets for motorised
vehicles were highly protected by tariffs and quo-tas .
With the emergence of European integration, and the globalisation
of the industry, where manufacturers set up production plants in
different countries, such stronghold advantages have been eroded.
Today strongholds are likely to stem from patents of some
specific part, component or process, used in the industry.
However there is little tradition for patents in the car
indu-stry, as a consequence of the fact that patents require
manufacturers to disclose details of the innovation, while it
usually only protects them from similar products made in the
e-xact same way .
DEEP POCKETS
Deep Pockets are likely to be of increasing importance in the car
industry. As we will ar-gue in chapter 8 a restructuring is
happening in the industry, and there is no indication that this
trend is slowing down.
In a restructuring industry access to large resources can be an
invaluable advantage. These resources may allow a manufacturer to
operate at a loss during the process of restructuring thus
avoiding exit from the industry. Also large financial resources
permits the company to take over smaller competitors that may
pose a threat.
Further deep pockets are very important, in order to sustain the
high R&D costs in the industry. A firm with many financial
resources is in a better position to take the risk con-nected to
large R&D projects. Further deep pockets, has allowed large
industry actors to set up financial subdivisions, which helps
dealerships and individuals to finance purchase of cars (See
section 3.3.4)
This competitive advantage may be eroded by smaller competitors
through strategic alli-ances.
SECTION SUMMARY
In this section we have argued that low cost production is one of
the major industry dri-vers. It cannot be seen merely as a
competitive advantage, but rather as an absolute neces-sity to
survive in the industry.
R&D is a very important factor in the industry, as it affects
both the cost and quality as well as the timing and know-how
arena. The importance of R&D has led to a very large rate of
introduction of new cars. R&D can also help to limit the
effect of low cost pressu-res by differentiating the product.
Strongholds have very little effect in the car industry today,
whereas deep pockets will remain important while the industry is
restructuring.
All in all long term competitiveness in the car industry seems to
stem from efficient low cost production and successful R&D.