1. What are the basic attributes of the auto industry in the era of globalization; which dynamic changes in the industry influence companies’ strategies? During the era of globalization, the auto industry, like many industries, saw an increase in marketplace growth. The case throws out a perplexing statistics that one in seven people own an automobile on a global basis, equating to roughly 900 million cars and light vehicles. The Exhibit 1 of the case points out that the compound annual growth rate (CAGR) of Global Automobile Value ($USD) from 2002 to 2006 grew at 4.
7% and the CAGR of Global Automobile Volume (units) from 2002-2006 grew at 3. 5%. The marketplace was strong and advancing. Exhibit 2 of the case validates our thinking that the U. S. marketplace is still the leading revenue-generating region with 38. 1% of the global value; however, the Asia-Oceania has been the cause of much growth globally in recent years. Overall, the entire sector was estimated to be worth over $2 trillion or the equivalent to the United Kingdom’s GDP.
This is a staggering amount, but even more staggering is that the top five auto makers represent about 50% of the global market. After reading further into the case, the stronghold of top companies in the auto industry was justified by the significant capital that was required to enter the industry. The cost of a new model car was estimated at $1-2 billion and a 3-5 year timeframe for development. Of the same importance as capital were the relationships that firms must build.
It requires roughly 15,000 parts per vehicle, which equates to about 70% of the wholesale cost. A typical firm would source supplies from 30 direct suppliers and 70 indirect suppliers. As with the ever changing environment around us, the auto industry was motivated to adjust its strategies and internationalize. Some of the motivators we discussed in class that apply to this case are secure key suppliers, access to low cost factors of production, and global scanning and learning behaviors. One such item that propelled change was the oversupply
of cars that could be made. This oversupply caused car makers to engage in price wars and unintentionally destroyed their margins thus reducing profits of the entire industry. The case points out that nearly all manufacturers operated with profit margins under 3%. In order to counteract the reduced profits, auto makers attempted to reduce their costs by setting up factories in Emerging Markets. Not only did production costs drop, the industry gained access to growing marketplaces. These marketplaces created opportunity for collaboration.
We learned in class about the scenarios of the future which included common ground, survival of the fittest, tempestuous times, and worlds apart. The growing marketplaces that the auto industry began expanding into came at a high cost, so alliances were formed to battle these costs as well as reduce labor, energy, and raw material costs. Through comparative analysis, alliances could adjust their strategies to specialize in what others lacked. The more common ground that companies could find, the better the alliance could develop.
2. Why Fiat does global? Why Fiat targets Indian markets? Which arguments (economic, geographic, cultural, political/administrative) explain opportunities and threats for Fiat when entering Indian market and competing in India? The entry of foreign automakers, especially Japanese companies, has greatly reduced Fiat’s once dominant Italian market share of 60% in half to 30% over 10 years. Fiat’s overall European market share has also been reduced from 13. 8% down to 6. 5% over a 15 year period starting in 1990.
This erosion of Fiat’s domestic and European market share has put great stress on the company contributing to its loss of $12 billion from 2001 to 2004. In recent years Fiat has attempted to create partnerships with various other automotive companies all of which have been related to increasing efficiencies and reducing costs and while some have helped they have not allowed Fiat to penetrate new markets. Fiat is in the position where it needs to find a new market for it’s products and the recent growth in the industry is coming from the Asia-Pacific market.
The Indian automobile market specifically is valued at $23 billion in 2006 and consists of 1. 5 million cars annually at its current state. While vehicles have been around in India for over 80 years only 7 out of 1000 people in India own a vehicle and that number is expected to grow to 11 in 1000 by 2010, an increase of more than 60%. India has a population of 1. 1 billion people and while cars have been in India for over 80 years it is still a relatively untapped market for personal vehicle ownership. Historically it has been very difficult to do business in India.
Foreign companies had to license their products to Indian owned companies and had little to no control over the Indian operations. In 1991 changes to Indian laws allowed Fiat to open a wholly owned subsidiary in India giving them a more direct access to the Indian market. During Fiat India’s operation there had been many problems. Labor disputes had halted production for long periods of time, their plant was flooded and their products meet with disappointing sales due to low fuel efficiency and poor service from the dealers.
In addition to these issues the geographic distance made it difficult for people to travel from Italy to India, and rules requiring Indians to be quarantined prior to entry into Italy made it almost impossible to travel from India to Italy for business. However, due to the potential for growth in the Indian automobile market made these obstacles did not deter Fiat from attempting to increase their penetration into the market. 3. Why Fiat entered into strategic alliance with Tata? Which companies’ strengths and weaknesses should be considered in collaborative relations?
In 2005 Fiat Group and Tata Motors signed a memorandum of understanding that was the beginning of a joint venture in which the companies would jointly manufacture pickup trucks and share distribution channels from production to sales activities. When firms partner together the collaborating companies have to understand how to capitalize on strengths and mitigate weaknesses, both existing and those derived from the partnership. If this is not planned out in the early stages the partnership will be doomed from day one.
With previous American companies (such as GM) the partnerships ended due to the management structures of the joint ventures. The mutual joint ownership had no autonomy and decisions had to be approved by each company’s executive board. This created the “too many chiefs” scenario and timely decision-making was non-existent. To mitigate this with the future endeavor Fiat and Tata created a management team for the joint venture with execs from both companies, and while those execs reported to both companies, a newly created board of directors had majority say on what went on.
This minimized the approval chain and created a faster decision making process. Fiat had a minimal distribution presence in India. When looking for partners they needed someone who had the existing infrastructure to sell Fiat products countrywide from day one. If a partner were selected that didn’t have the capacity to sell cars nationwide the partnership would be defeated. Tata motors had the capacity and resources to sell cars for Fiat throughout India. Tata as an established company had a physical presence nationwide to sell cars.
Tata needed from the partnership the ability to get competitive technology to create better drive trains. If Tata partnered with a company that lacked the technology, the main reason for them to undertake the joint venture would be defeated. Fiat was known for some of their innovative technology and complimented Tata’s need for technology. When considering a partnership you need to examine the strengths and weaknesses of the existing companies and then the strengths and weaknesses of the new partnership created.
Existing weaknesses and strengths are easy to identify and it was determined early on between Fiat and Tata that each company could contribute to the partnering company’s needs, such as Fiat’s need for distribution or Tata’s need for technology. Due to Fiat failings with previous partnerships they anticipated some of the new weaknesses that would be created and knew how to mitigate them, such how to create a seamless management structure. The new weaknesses that are created are the problems that usually end partnerships as they cannot be easily anticipated.