BMW and Toyota in the race for global supremacy

Time was when Chrysler, General Motors and Ford ruled the world market. But today, seven major players are vying for supremacy as Asian companies like Honda, Toyota and Nissan have entered the fray. The global market offers more options to consumers than ever before, and Indian and Chinese companies are in the ascendancy. The takeover of Jaguar Land Rover by the Tata Group and the great success the firm has had since is just one example of increasing prominent role carmakers from these two countries will be playing in the future.

Despite this increased competition, executives in North America remain upbeat about future prospects. After the debacle of 2008, when GM and Chrysler had to face the ignominy of government backed bankruptcy, prospects are looking positive for the auto industry, at least in the short term. The global auto industry is in a period of transition, Europe is still suffering from weak demand. In 2013 car sales in Europe were the lowest they’ve been since 1995. Companies are relying on profits from North America and Asia to balance the books.

The benefit of this increased competition however, has been an increase in quality and productivity. Analysts expect this resurgence in the auto industry to continue as the market benefits from low interest rates, longer-term loans and rebounding consumer confidence. A total of 376 new models will be introduced in the United States in 2014; a remarkable improvement given this figure was just 88 in 2011. There are worries in some quarters however, about whether firms will be able to maintain their pricing discipline the face of this increasing competition. Carmakers have been notorious for introducing discounts on new models in the face slowing sales to keep their production lines running. This was one of the primary reasons why a lot of them required bailouts during the financial crisis.

Those who showed discipline in the face of the crisis have benefited, BMW being the prime example. BMW slashed production at the peak of the recession and ended up with a clear inventory unlike its competitors. While companies were struggling just to survive, BMW was able to focus on a range of new products and services and had what can only be described as a ‘good recession.’ It is benefiting the most from the recovery of the automobile industry and its UK brands Mini and Rolls Royce registered record sales last year.

The long term challenges facing the auto industry are numerous. Consulting firm McKinsey has estimated that $3 trillion needs to be invested in the next 10 years to combat these issues. McKinsey describes these challenges as “complexity and cost pressure.” This includes the need to invest in a wide range of engines to meet tightening fuel regulations. “Diverging markets,” the idea of emerging countries boosting global demand and playing an increasingly more important role has also gained traction. Profits are expected to be 65% higher in 2020 compared to 2012 in emerging markets like the BRICS. The corresponding figure for established markets is 20%.

Firms today are also facing what McKinsey describes as “digital demands” as consumers are increasingly using the internet to develop their views on products. Companies need to re-adjust their marketing ploys to make an impact in the digital sphere. The shifting industry landscape is the final factor, and suggests that emerging markets, especially China, will be the hub of new and innovative automotive firms in the future.

It is clear to most executive that the majority of opportunities lie in emerging markets. Europe suffers from over capacity and as long restructuring does not take place, sales will stagnate. Fierce competition has kept prices, and as a result profits, down. North America remains in good shape but must keep investing. Japan and South Korea have already begun restructuring capacity but a lot needs to be done to prevent profits from stagnating.

Firms from emerging economies are only going to add to this competition and unless some of these global brands are willing to produce on site with the support of local supply bases and chains, they will not be able to compete. Overall, the future opportunities available to manufacturers outweigh the challenges, but the reaction to these challenges will determine which firms will come out on top and dominate the market.

 

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