The Effect of the Recession on the Automakers Industry

The Effect of the Recession on the Automakers Industry and general trends

The automakers industry experienced a global decline of overall demand during the 2008-2010 periods due to a global financial crisis which seemingly started off in North American mortgage crisis. The financial downturn affected auto manufacturers all round the globe, but the worst hit automakers were the American “big three” consisting of Chrysler, Ford and General Motors. These three felt the effect more than most other international producers such as Toyota, due to their deficiencies in competitiveness in terms of production and design (ILO, 2010).

Despite the decline in demand the rest of the global producers especially in the far East nations such as Japan, China and Korea and European nations still managed to competitively remain a float without bankruptcy threats because they had a better competitive edge enhanced through efficient production processes such as the ‘lean production process’ by Toyota. Companies from these nations had also managed to create hybrid engine designs that consumed less fuel and produced less environmental pollution and thus introducing technologically distinct models that were attractive to the market and thus maintaining their overall sales at a higher level. The recession period was worsened by the rapid increase in the prices of fuel.

The high rise in fuel prices was associated to the 2003-2008 crises in the energy market. As the economies declined and fuel prices soared people began demanding automobiles that were fuel efficient so as to cut on their expenses (Hoffet, Ronkainen & Czinkota, 2010). Additionally, people intending to make additional automobile purchases had to put them on hold because of the economic uncertainty that characterized the recession period. Apparently, the ‘big three’ lost a large chunk of their market share due to the demand of low fuel consumption makes such as those offered by Toyota (Prius and Ford focus).

The ‘big three’ were also dependent on the local market because of its higher demand of SUVs which were highly preferred by Americans. These sports utility vehicles consume a lot of fuel and therefore, their demand declined during the recession. The demand of SUVs prior to global recession was high in the U.S and as such the big three had made them their local model of focus, and they declined in popularity due to their low fuel economy the big three lost a big deal of what was their market (Hoffet et al. 2010).

Notably, the demand in the United States, most of Europe and other developed nations sharply declined during the 2008 global recession, but interestingly the demand in other nations such as China, India and Brazil rose to unexpected heights. According to the anticipations of many the demand would have globally declined in all nations due to the recession, because virtually all economies were affected. However, this trend showed otherwise by implying that there was a global shift the demand of automobiles in the in the world, and particularly in the fast developing nations because economic expansion.

The automobile demand rise in the developing economies can be attributed to three major factors. These factors include the low levels of automobile ownership, fast growing population and high developing economies that have increased the ability of their citizens to purchase automobiles (Hoffet et al. 2010). This new trend implies that these markets are least saturated and probably ready for takeover by any automobile manufacturers that can be quick to reach these economies with the right models of automobiles to suit their demands. It is also an implication that the focus of automobile makers should be shifted towards these new economies as niches to be conquered if they would like to expand their market share and enhance their competitiveness. Re-capturing old market niches that any automaker was pushed out of is a challenging task that requires a turnaround and great innovation that can re-direct the demand trends.

However, establishing in a new market is relatively easier especially when demand in that market is rising. As result, it is expected that big automakers may soon be shifting to these markets and producing models that customized to suit the local preferences and demand. Therefore, most automakers that were hard hit by the recession are likely to shift their focus to the developing nations hoping to capture their markets and create a revival that can allow them to stay afloat in the mainstream of automakers competition.

The new trend in the global shift of demand requires the big automakers to respond accordingly with a shift in production, design and market focus in order to capture these new markets and capitalize on their rising demands. The best response should include a design of automobile models that are suited for these markets and match the preferences. The global trend of demand actually shows some kind of preference to certain models and these preferences vary in nations-an example would be the greater demand of SUVs in the past in America-and in order to sale it would be prudent for the big automakers not simply replicate their current models for these markets, but rather seek a way to localize their designs for local uptake of models from the big automakers (Hoffet et al. 2010).

Another potentially beneficial response would include establishing local production units in the developing nations in order to take advantage of low labor costs and avoiding threats of import control. This strategy has worked out positively for Toyota which established local production units in the U.S.A after detecting the potential threat of import controls that would render its exports expensive and restricted in foreign markets. As a result, Toyota strategically located plants in nations with great demand and larger markets for its automobiles (Shimokawa, 2010). This would work well for any automaker wishing to position itself in the emerging markets. Additionally, these developing foreign nations not only posses a large market potential but they offer cheap labor and various other market conditions and incentives that make establishing businesses in such areas very lucrative.

The first strategy as cited is to localize production to emerging and already occupied markets. This will provide a way round challenges associated with exportation of manufactured automobiles to these foreign markets and cut on costs associated with importation. Additionally, it would allow the automakers to take advantage of favorable market conditions in these localities such as cheap labor and thus cut on its costs of production (Aswathapa, 2010). General demand trends point towards an increase in the demand of fuel efficient automobiles and since emerging markets constitutes of populations still undergoing the transformation of development there may tend to a high demand for fuel efficient vehicles as well as any models that may rely on alternative sources of fuel (Aswathapa, 2010).

This trend implies that the making of hybrid vehicles such as those popularized by Toyota would be more preferable for such markets (Shimokawa, 2010). The adoption of ‘lean production’ and improving on manufacturing techniques may also go along way in improving the efficiency of production and cost reduction. Streamlining design costs through the use of current design technology such as that implemented by General motors helps cut on design costs that actually very significant in any production process. This could be harnessed through the use of digitalizing computer technology that allows much of the design to be undertaken on computers.

Finally, a quick response in takeover is necessary, this is a very important factor in today’s dynamic economy in which companies make adoptions to local situation to live up to the competition and lead in production and sales. The effect of a fast response may be seen in the success of Japanese and Korean automakers take over of the American market, where the nations big three lagged behind in initiating quick responses to new challengers and thus lost out (Jansson, 2008).

References

Aswathapa (2010),. International Business 4E, 4th edition. Tata McGraw-Hill Education

Hoffet, H. M., Ronkainen, A. L. and Czinkota, M. (2010),.International Business, 8th edition, John Wiley & Sons

International Labor Organization (ILO) (2010),. The crisis and the future of the automobile industry: Putting the spark back into the automobile industry, retrieved on 21st April, 2011 from http://www.ilo.org/wow/Articles/lang--en/WCMS_115469/index.htm

Jansson, H. (2008),.International Business Strategy in Emerging Country Markets: The Institutional Network Approach, Edward Elgar Publishing

Shimokawa, K. (2010),.Japan and the Global Automotive Industry, Cambridge University Press

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