The automotive industry is distinctive because of its extremely concentrated firm structure: a small number of giant companies exert an extraordinary amount of power over smaller firms. In short, it is an oligopoly.
Ten lead firms from five countries – China, Germany, Italy, Japan, and the USA – dominate production in the main markets and the global scope of both the lead companies and their largest suppliers has been enhanced by a wave of mergers and acquisitions, as well as equity-based alliances undertaken during the 1990s and 2000s.
Concentration ratios and indexes are used to measure a firm’s concentration in an industry at one point in time and they assist in gauging the competitive or monopolistic environment in a given industry. One of the most well-known concentration ratios is the four-firm concentration ratio, or CR4. This ratio measures the percentage of sales of the four largest firms in the market divided by the total market sales.
The larger the ratio, the less competition there is in the market; the smaller the ratio, the more competitive the market is. More specifically, a ratio of less than 40% is considered competitive while a ratio of more than 40% is considered an oligopoly.
The following equation shows how to calculate the ratio:
CR4=w1+w2+w3+w4, wi= Si/St
(Where Si is equal to the individual sales of the firm and St is equal to all firm’s sales.)
What else is a hallmark of the industry?
A second distinguishing feature of the automotive industry is that final vehicle assembly and parts production has largely been kept close to the end markets or points of sale because of highly charged political sensitivities. Market saturation, high levels of motorisation and the tendency for automakers to build where they sell has encouraged the dispersion of final assembly, which now takes place in many more countries than it did 30 years ago.
A third distinctive feature is its strong regional structure. Although the automotive industry has become more integrated globally since the 1980s, it has also developed strong regional scale patterns of integration.
A greater degree of global integration in the automotive industry has developed at the level of design as global firms have sought to leverage design efforts across products sold in multiple end markets. This is not a return to the failed “World Car” concept of the early 1980s when it was assumed that one generic design in, say, mid-sized family cars would work in all markets. However, the work of vehicle design and development continues to be concentrated in or near the headquarters of the leading firms.
General Motors headquarters in Detroit; the 'Motor City' remains
a significant node in the global automotive industry. Photo: iStock
One spinoff from this is that suppliers of parts have taken on a larger role in design and have established their own design centres close to their major customers to enhance commercial collaboration.
Because centrally designed vehicles are tailored to local markets and parts are manufactured in multiple regions to the degree possible, design activities and buyer-supplier relationships tend to straddle multiple production regions.
This has resulted in value chains in the automotive industry be they local, national or regional being nested within the global organisational structures and business relationships of the largest firms.
Deeper cooperation, higher concentration
Sergio Marchionne is an Italian-Canadian best known for his turnaround of the Italian automotive group Fiat SpA and more recently for steering US automotive group Chrysler from bankruptcy to profitability.
He currently holds several roles of major importance, including serving as CEO of Fiat SpA, Chairman and CEO of Chrysler Group LLC and Chairman of CNH Industrial N.V. and its principal subsidiary CNH. He was also elected chairman of the European Automobile Manufacturers Association for 2012 (first elected in January 2006).
Last week, Marchionne said that he had not given up on his quest to push the auto industry to increase its profitability, even though carmakers are enjoying some of their best sales ever. He suggested that the large automakers to look combine and reduce costs by exploiting efficiencies of scale.
Most industry analysts have agreed with his view of reducing long-run average costs by increasing the minimum efficient scale of production. However, his argument has been rejected so far by his fellow CEOs. Perhaps the soaring sales in the US, Europe and emerging markets have eased the pressure to restructure.
Global vehicle production has soared from 1975, from 33 million to a projected 91.3 million in 2015. The opening of new markets in China and India has helped to drive the pace of growth. While seven countries accounted for about 80% of world sales in 1975, 11 countries will account for the same sales share in 2005.
Five years after China became the world’s largest automobile market, the pace of growth has been relentless. In 2013, Chinese consumers bought about 2.7 million more new domestic and foreign brand vehicles than did American buyers. Major car producing firms such as Toyota and Volkswagen have set up many plants in China and it is clear that these companies are dependent on the well-being of China.
Source: www.reportlinker.com and IHS Research
A broader vision of the automotive future
Speaking at the opening of an Alfa Romeo and Maserati dealership in the Toronto area, he said:
“We need to find a way to get this done, If they think these comments are going to deter me from the objectives, I’ve got news for you: It just reinforced my conviction it needs to happen. I haven’t had a guy tell me it’s not true. Not one.”
Marchionne said last week he wants consolidation that helps cover development costs for expensive components like engines and advanced technologies, as well as more mundane things like parts. If companies can combine and thereby broaden such costs of production over more sales volume, they can boost returns.
Marchionne said he understands the reluctance of the industry to change decades of thinking as he said:
“I could give you list of reasons as to why you would be scared of doing it, I get it… but you have to be able to take leadership. You have to be able to stand alone when you make these calls. Make the bloody call. That’s what they pay you for. They pay you to lead. Not to execute somebody else’s will.”
Fiat Chrysler's Marchionne has been outspoken about the need for reform. Photo: iStock
He said he has heard from investors, both in private conversations and through his investor relations department.
“We have provoked the dialogue,…There are a lot of people who have raised the issues.”
Fear of the five forces
I think that what Sergio Marchionne is doing is an open expression of concern about the business concepts known as Porter's Five Forces:
1. Threat of new entrants
2. Power of Suppliers
3. Power of Buyers
4. Availability of Substitutes
5. Competitive Rivalry (especially numbers 3, 4 and 5)
Although only a few firms dominate the auto oligopoly, it is possible that many small firms may also operate in the market and that is why Marchionne is looking to Elon Musk and Tesla. The future of Tesla is founded on the disruptive quality of its high-performance models which will help the company to succeed where other electric carmakers have failed to succeed.
Tesla is today progressively breaking the barriers that held other electric car companies back. This disruptive force has echoes of Nokia in the mobile phone market; Tesla’s opportunity to revolutionise the electric car market is huge and real. So it's no wonder that Marchionne wants to have a serious conversation.
If GM, Ford and other automakers don’t want to merge with Fiat Chrysler, Marchionne told analysts on the earnings call last week that he wouldn’t rule out a collaborative overture to technology giants Google and Apple, indicating the increasing amount of technology that is going into electric vehicles and the advent of the self-driving car.
— Edited by Michael McKenna