Bob Cleever
4 October 2011
Professor Andac Arikan
AACSB Case Report

The car industry is a very powerful industry worldwide. Though it has faced many challenges through the decades, car manufacturers have managed to create strategies needed to keep their firms afloat. This report will touch on the different forces that affect the industry and what manufacturers have done to counter them. The most interesting factor about the global automobile industry in the last decade is that the economic challenges that it faced were not even caused by the industry itself. The housing market crash of 2008 and the recession that U.S. went under during this time was what affected the automobile market the most, decreasing sales and creating billions of dollars in losses that had not been seen since the 60’s. Even the biggest manufacturers that we never thought would fail like GM and Chrysler faced bankruptcy and received government aid to survive the recession. The case illustrates the affects and reactions that took place in the automobile industry for its survival against bankruptcy. Although the housing market is different from the automobile industry, it took the automobile industry on the same downward spiral.
Threats of New Entrants
The threats of new entrants are relatively low in the automobile industry. Not many companies start a brand new car line from scratch. However, many existing companies create new car lines that target a brand new segment or buy another company and profit from their production in that particular segment. Car manufacturing includes very high fixed costs in production. Without economies of scale and a significant market share a new entrant would not be able to keep up with the already in place companies that have efficient strategies and high market share of loyal customers.

Bargaining Power of Buyer
The bargaining power on the automobile industry is very strong. One’s goal immediately after entering a car dealership is to drive the ticket price as low as possible. Usually, this would be a concern of profit loss, but manufacturers can drive down the price of their cars lower than the competitors to attract more buyers and resulting in a bigger and more powerful market share. Also, dealers constantly have sales and discounts and counter this by formulating contracts with financing terms that favor them.
Threat of Substitute Products
The threat of substitute products in the automobile industry is high. It is hard for car manufacturers to predict what customers will demand. One of the biggest traits that affect demand in the car industry is the shift in demand for a different vehicle market. In the early 2000’s, America’s “big three” car manufacturers experienced a major decline in their sales. This was due to a shift in customers demand for lighter, more fuel efficient cars, instead of big trucks and SUV’s. Now, the demand shift was due to the fast rising gas prices and the environmentally friendly trend that evolved in these years. This proves that the car industry can be easily affected by many outside forcers, when it comes to demand, that can drastically make or break manufacturer’s balance sheets. The shift for the new smaller cars climbed to be a global trend. With china and India as fast growing markets in the automobile industry, the U.S. was now losing major worldwide market shares, from 37% in 2000 to 25% by 2008. Car manufactures in the U.S. were forced to quickly adjust to the shift in the car segment. Manufacturers like the “big three” started to produce new lines of cars including hybrids and smaller fuel efficient cars to keep up with the demand of the fuel efficient era.
Bargaining Power of Suppliers
To car manufacturers, suppliers are a vital factor of production and operations that need to be efficient. At one point, American car manufacturers produced most of their parts and materials for their cars in house. In the last decade American manufacturers have outsourced many of their parts productions to independent suppliers. The technology and relationship between manufacturer and supplier has also changed. Suppliers are now locating their factories near by the manufacturer’s plant that they supply. This strategy reduces costs like transportation and order time between the buyer and supplier. Also, suppliers are collaborating with designers much earlier and more intensively in the design process of vehicles. This allows engineers to design their cars in ways that are more cost efficient and easier to produce for the supplier. These strategies entail longer contracts and relationships between buyer and supplier which give the suppliers a more dominant role (more power).
Rivalry
As car manufacturers compete for market share and profits they are forced to keep their competitive edge against other brands. Not only this, but they are also forced to keep up with the customer demands and shifts in market segments. One competitive strategy that has increased during the last decade has been cutting costs in the manufacturing process of vehicles. Things like the Kappa platform allow different car models to be produced in the same line and use similar a chassis lower costs. This means higher profits and more money for investment, expansion, or use for marketing.
The automobile industry is not an attractive industry to get into as a newcomer. The advantages, market share, and economies of scales that already existing firms have are too strong to compete against as a small firm who is just starting. The prices for vehicles of a new firm would have to be so low to break the customer loyalty of other brands that no profits would be attained. However, there is also room for improvement in the big manufacturers like the American and Japanese “Big three”. Many have focused on cutting cost in production and have had the technological improvements to do so. However, wages, salaries, and pensions still account for much of the costs in manufacturing. Firms need to innovate strategies to cut wages and pension costs. Also, since the last market crash big names like GM need to formulate recession proof strategies in case of another economic crisis.