Make your own free website on

The European Automotive Industry


Below we shall examine the nature of competition in the car industry. This will be done using Richard D'Avenis theory of Arenas of competition. We shall emphasise a long-term perspective. Thus we will not focus on all the small factors, that might provide a tempo-rary competitive advantage. An example of this is an extensive product line. This is im-portant to competitiveness, and provides a competitive advantage at the moment. Howe-ver, in the long term this advantage would be eroded as technological innovation makes the product line obsolete. Hence continuous and effective R&D is a real source of advan-tage, while existing product lines are only temporary. Other temporary advantages include effective distribution, good supplier relations and product technology.

D'Aveni argues that traditionally competitive advantage arises from cost and quality effi-ciency, timing and know-how, strongholds or deep pockets. Cost and quality efficiency stems from a low cost production or differentiated product strategy. Timing and know-how deals with a competitive advantage that originates from the possession of a unique inimitable asset that allows the firm to charge the customers a premium price for its pro-duct. To be unique, the firm has to be the first to develop this asset. Competitive advanta-ges based on strongholds exist as a consequence of entry barriers to some specific seg-ment of the market. The deep pockets advantage relates to a large resource base that al-lows the company to purchase potential competitors and buy new innovations. Ultimately deep pockets will allow a firm to operate at a loss for a period of time, until competitors have been scared away.

D'Aveni argues that these sources of competitive advantage are no longer sustainable. All sources of advantage are thus temporary, and will sooner or later be circumvented by competitors. Hence in order to keep earning economic profits a firm must establish a seri-es of competitive advantages.

D'Aveni further argues that competition escalates over time in any industry as strategic interaction ensures that competitive advantages are build and eroded. In the article it is suggested that this escalation of competition will follow the order of the four arenas shown in the figure below. However there is no empirical evidence that suggests that the escalation of competition follow this specific order.

We have chosen to use the model in order to structure the different elements of competiti-veness in the car industry. Thus much like Porters five forces it is not our intention to use the model to draw conclusions, but merely as a tool for structuring our thoughts.

Indsæt figure 4.1 fra side 53

The specific model has been chosen due to its focus on dynamic issues. It does not view competitive advantage as a static factor, but rather argues that the factors that drive an industry, change over time. In the automotive industry there is no obvious market leader, and the manufacturers have had varying success over time. This indicates that competitive advantages in the car industry is dynamic, and that the advantages are established and eroded over time.

Below we shall examine the nature of competition in the car industry through the four arenas. To keep in touch with the dynamic perspective, we shall further argue that the existing competitive advantages will erode over time. It is not easy to find empirical data for such an analysis, and hence we shall instead use the knowledge we have gathered in chapter 3.

Competitive advantage stemming from cost and quality is closely linked to the choice of Porters generic strategies, low cost or differentiation.

Low cost production is very important due to the specific market structure in the car indu-stry, where the heavy competition has led to very elastic demand. In such a situation the ability to produce at costs that are not significantly higher than those of competitor's, is of vital importance. This is so because the price range in which a manufacturer can sell its products is very small in a situation of inelastic demand. Thus any cost increase tears di-rectly at profits, and in a competitive industry with low margins this often leads to losses.

The importance of low costs puts pressure on the decision to produce with a focus on fi-xed or variable costs. In a situation where there exist a number of firms with different ratios of fixed to valuable costs, a change in demand can have dramatic consequences to the industry. An increase in demand will lower the average cost of the producers with high fixed costs. This will lead to price pressures throughout the industry, and eventually the producers with high variable costs will be forced to exit. In case of a decrease in de-mand, the exact opposite will happen.

To escape the limitations of low cost production, a manufacturer can try to differentiate its product, thus allowing a premium price. Examples among the larger producers are BMW or Mercedes, which produce executive cars at a high price under a well established brand name. Thus as mentioned in section 3.5.4, marketing becomes an important aspect in dif-ferentiating the product, which reduces cost pressures slightly.

An example of differentiation among broad line producers is Volkswagen that has succe-eded in differentiating both through brand identity and superior technology. In the latter case we think of the VW Golf that has received several awards , due to its superior per-formance. The vehicle has been a massive sales success over the past few years, with sales of more than 4,5 million units in the period from 1991 to 1996 . In spite of difficulties in keeping production up to demand, leading to long delivery times (In some cases close to a year), customers have been willing to wait, which shows their attachment to one specific model.

The launch of the new VW Beetle demonstrates how an established brand name can be used to differentiate a car model. Through marketing Volkswagen AG is trying to estab-lish clear links to the old beetle, which was a large success in its days.

However, even in case of superior products and marketing nostalgia, there are limitations to the premium companies can charge for differentiated products. As mentioned earlier this is an effect of elastic demand and well informed consumers. Thus low cost production remains an absolute necessity to stay competitive in the car industry. Hence low cost pro-duction has already been eroded as a competitive advantage, and is now rather a competi-tive necessity.

The timing and know-how arena is closely connected to R&D and new model introducti-on in the car industry.

As mentioned above, such an advantage stems from the ownership of an asset that is uni-que to the firm, and provides value to customers. In the car industry unique assets usually stem from knowledge and technology. This allows the manufacturer to produce a vehicle with characteristics that can't be copied by competitors.

Also in this arena R&D is very important, as it allows firms to build new advantages and erode competitors advantages in this arena. As mentioned above the basis of such an ad-vantage, is to be the first to develop the asset. Examples in recent years include ABS breaks, airbags, electric vehicles etc.

In the car industry the most obvious evidence of competition in the timing and know-how arena is the rapid introduction of new models. This is necessary in order to reap the bene-fits of new innovations by constantly incorporating the latest technology into the products. Thus in the period from 1997 to 2002, the Volkswagen Audi group plans to introduce 17 new models . This is a lot when considering the enormous amount of resources a model introduction requires with respect to design, testing and marketing costs.

Table 4.1
Source: Neil Mullinieux The new car market in Europe; p. 28

Today many models are only produced in few years, before newer models replace them. This puts high pressure on the needed sales, since a model only has a short period of time to recapture the R&D investment. Table 4.1 shows an example from Ford's new model Programme.

An example of competition escalation within this arena is the introduction of airbags. This new technology allowed an immediate competitive advantage, which was quickly eroded as other manufacturers copied the product. Initially the airbag was found only on the dri-ver's side, but soon it was introduced at the passenger side and later in the sides of the car, protecting passengers from non-frontal impacts. This is an example of how a competitive advantage is quickly eroded by competitors, and then a new one is build which is again eroded.

At the moment there doesn't seem to be much competition in the strongholds arena. Earli-er the European markets for motorised vehicles were highly protected by tariffs and quo-tas .

With the emergence of European integration, and the globalisation of the industry, where manufacturers set up production plants in different countries, such stronghold advantages have been eroded.

Today strongholds are likely to stem from patents of some specific part, component or process, used in the industry. However there is little tradition for patents in the car indu-stry, as a consequence of the fact that patents require manufacturers to disclose details of the innovation, while it usually only protects them from similar products made in the e-xact same way .

Deep Pockets are likely to be of increasing importance in the car industry. As we will ar-gue in chapter 8 a restructuring is happening in the industry, and there is no indication that this trend is slowing down.

In a restructuring industry access to large resources can be an invaluable advantage. These resources may allow a manufacturer to operate at a loss during the process of restructuring thus avoiding exit from the industry. Also large financial resources permits the company to take over smaller competitors that may pose a threat.

Further deep pockets are very important, in order to sustain the high R&D costs in the industry. A firm with many financial resources is in a better position to take the risk con-nected to large R&D projects. Further deep pockets, has allowed large industry actors to set up financial subdivisions, which helps dealerships and individuals to finance purchase of cars (See section 3.3.4)

This competitive advantage may be eroded by smaller competitors through strategic alli-ances.

In this section we have argued that low cost production is one of the major industry dri-vers. It cannot be seen merely as a competitive advantage, but rather as an absolute neces-sity to survive in the industry.

R&D is a very important factor in the industry, as it affects both the cost and quality as well as the timing and know-how arena. The importance of R&D has led to a very large rate of introduction of new cars. R&D can also help to limit the effect of low cost pressu-res by differentiating the product.

Strongholds have very little effect in the car industry today, whereas deep pockets will remain important while the industry is restructuring.

All in all long term competitiveness in the car industry seems to stem from efficient low cost production and successful R&D.

Nadarasa Subramaniam 1999, Copyright ©, All rights reserved.