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Auto Industry
The auto industry is in the maturity stage where competition and price cutting is fierce. The US auto market remains flat and companies are struggling to make vehicles reliable and efficient at a reduced price. Supplements for vehicles such as oil and auto parts are increasing in price putting pressure on profit margins. Prices of oil and steel are changing the type of vehicles demanded and the way they are designed. These components are responsible for many of the problems that the industry faces today.
Oil Prices
Oil prices have risen in the Middle East due to demand and difficult oil refineries. Oil is used both to make gasoline and in tire production. Gasoline prices in the US have increased dramatically during the last few years reaching averages over $3.00 a gallon. The auto industry has to meet new demands for more fuel efficient conscious consumers. The big three motor manufactures GM, Ford and Chrysler combined have over a 90 percent share of the heavy-duty truck market in the US. The heavy-duty truck segment is known for its inefficient fuel consumption but until recently gas prices in the US been relatively cheap compared to the rest of the world. Foreign competitors such as Toyota and Nissan are stealing market share because they offer heavy-duty trucks with better fuel economies.
Steel Prices
Another major supplement to the auto industry is the steel. China has increased the demand for steel and increased the price. The steel industry is also consolidating into larger companies that limit the bargaining power of auto makers resulting in more price increases. Steel prices are important to the auto makers decisions on the ratio of steel to add to their vehicles. The price increases has caused the auto industry to shift their ratio of steel used in production. The ratio has changed from 60 percent steel in 1977 to only 54.5 percent steel in 2004. This trend has just increased the price of other lighter materials now used in production.
Resulting Problems
The source of the problems really stem from one word “Demand”. Demand for oil has crippled the industry forcing price cuts in all areas such as labor and supply chains. While Asian motor companies are small and can make these cuts; larger US auto companies are caught in extensive supply and labor contracts.
General Motors Industry Position
GM holds the title as the number one auto manufacture in the world. General Motor employs over 325,000 people around the world with international sales accounting for 25 percent of total sales (Smith 106). The US is the biggest market for light weight vehicles with annual 2006 sales of 16.5 million. This is the reason that 75 percent of GMs business remains in the US. This number while big is a drop from 16.95 million in 2005 (Auto Industry 9). Decline in sales is a result of foreign competitors closely matching vehicles with the needs of the US consumer.
Moving Down
General Motors in the short run has already lost its title as the market leader. Toyota announced in April 2007 that it had sold 2.5 million vehicles in the first quarter compared to GMs 2.26 million (Kageyama 2007). General Motors has been a market leader in the auto industry for 76 years but now this title is challenged by Japanese carmaker Toyota.
Reasons for the Change
Record breaking gas prices in the US has pushed General Motors the most from its top position. The damage caused by these fuel increases could have been offset by adapting a collaborative management style in the early 1990s. General Motors tried to compete against foreign auto manufactures not by matching quality and price but by negative market campaigns. These “Buy American” ads did not work but keep them from implementing new technologies. Presently changes are not easy for GM because they have grown since the 1990s.
Re-engineering Problems for GM
General Motors is a large complex company and the best means to understanding GM and its problems comes by looking at four different dilemmas. The first dilemma is the Delphi-spin off in 1999. The decision to eliminate previous vertical integration strategies while agreeing to a large benefit protection clause was a big mistake in the Delphi-spin off. GMs estimated long-term liability in labor and benefit cost could exceed 12 Billion dollars because of Delphis failure. This leads into the second dilemma where labor and pension costs are twice as high as the average in the US. The ability to cut labor cost is expensive because of the labor union contracts with employee buyout policies. The next dilemma is the new emissions laws being passed in the United States. The Clean Air Act allows any state to ratify the same strict emissions standard set by California. The cost to comply with these standards adds thousands to the price of each vehicle. In order to cover these additional costs occurred by new emission laws many workers could be cut over the next few years. The last dilemma is the competition with foreign auto manufactures but primary with Toyota.
Delphi spin-off impact on GM
Delphi Overview
Delphi, one of the worlds largest suppliers of automotive parts, has a great impact on General Motors. Its activity provides strengths and weaknesses, opportunities and threats for GM, significantly affecting GMs financial position and value chain activities such as operations and HR.
Since 1991 Delphi operated as a separate business sector subsidiary established by GM. Over the years, both companies depended on each other. At the same time, both companies made steps to appear more independent to take advantage of the global market opportunities. Delphi changed its name to Delphi Automotive Systems to be recognized in the automotive parts industry. Two years later, GM separately disclosed Delphis financial information.
GM Strategy
Historically, General Motors strategy was to vertically integrate its operations, relying on its own subsidiaries, such as Delphi, to have a steady supply of components. However, this competitive advantage/strength became a weakness when the market share started declining. The company missed an opportunity to outsource its components from vendors that can afford to make those parts cheaper. In order to stay competitive, GM recognized the need to change its strategy with regard to vertical