The European Automotive Industry
In this report we have analysed the factors that influence the level of competition in the European automotive industry.
The features that facilitate competition are overcapacity, low industry growth, supplier dependency and high fixed costs. The factors that limit competition are the lack of close substitutes, moderate concentration, insignificant exit barriers, dispersed buyers, R&D and product differences. However, the factors that limit competition only provide margi-nal market power, whereas the facilitating factors are very significant. Here we think especially of the combination of overcapacity and low industry growth. Thus we can con-clude that the automotive industry in Europe at present is highly competitive, and that the individual firms faces elastic demand and little market power.
An additional feature of the industry is segmented markets, which cannot be labelled as a catalyst or limitation of competition. Nevertheless it has caused the market actors to price discriminate on the basis of national markets. The conduct of the actors has also been affected by the nature of sunk costs in the industry. These costs can make a credible commitment to the industry, and hence investment in sunk cost assets can help to deter competition. This has caused market actors to overinvest. Finally the existence of market power differentials due to specialised assets in the component industry has led to vertical integration
In our analysis of factors that contribute to long term competitiveness, we have argued that the most important factors are low cost production and effective R&D. Low cost production is an absolute necessity in an industry with elastic demand, while R&D con-tribute to competitiveness by providing a small relief from cost pressures, and by facilita-ting new model introductions.
Further we have presented the seven largest actors and divided these into strategic groups. This has been done on the basis of market segmentation. Thus market actors have been divided into strategic groups, based on the criteria of diversification across segments, and primary segment focus. The market actors within each of the strategic groups are likely to constantly face each other in different parts of the markets. Consequently they are also likely to follow similar strategies in these markets. We have further argued, that in the car industry, competition also occur across strategic groups. Hence the strategic groups are less dispersed compared to many other industries.
In our financial statement analysis we have examined vertical integration, cost structures, R&D and marketing. From the analysis we can conclude, that value added is between 25% and 37%, which demonstrates the importance of external suppliers. Further we have shown, that the industry is characterised by very high investments in production plants. In spite of this, labour costs still far exceed depreciations. The analysis also revealed the large R&D investments made in the industry. The reason for this can be found in R&D's role in competitiveness, but can also be contributed to the industry structure of intense competition with slightly downwardsloping demand.
Finally we have examined how some of these features are likely to change in the future. We have argued that the scene is set for further concentration, as a consequence of incre-asing R&D costs. We have also argued that the increased concentration is unlikely to de-crease competition due to continued overcapacity and low growth.
European integration will eliminate the opportunity for price discrimination, and lead to lower costs with respect to testing and adapting cars for different markets. There seems to be a trend towards lower vertical integration, in spite of the increased requirements for specialised assets in the component industry. The future is unlikely to bring about a change in the factors that shape competitiveness.