SM Report - UNIVERSITY OF TECHNOLOGY SYDNEY FACULTY OF BUSINESS ASSIGNMENT ONE THE BIGGEST CRISIS IN THE RECENT HISTORY OF GM HOLDEN REPORT BY UDAY

SM Report - UNIVERSITY OF TECHNOLOGY SYDNEY FACULTY OF...

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Unformatted text preview: UNIVERSITY OF TECHNOLOGY, SYDNEY FACULTY OF BUSINESS ASSIGNMENT ONE: THE BIGGEST CRISIS IN THE RECENT HISTORY OF GM HOLDEN REPORT BY: UDAY VANAPARTHY (11354230) [ASSIGNMENT1: ESSAY] April 2, 2013 EXECUTIVE SUMMARY This report articulates the detailed analysis of the car manufacturing industry in Australia and General Motors Holden in the industry. The report includes PESTEL analysis of the driving forces impacting the Australian car manufacturing industry and the strategies the companies employ to make the manufacturing industry viable. The report also includes a five forces analysis and the strategy Holden should uses to position itself to gain a competitive advantage. The report also covers a SWOT analysis of GM Holden and analyzes whether Holden’s current strategy is competitive enough to be sustainable with its present resources, capabilities and competencies. The later part of the report sheds light on GM Holden’s competitive advantage in the Australian market place and its sustainability as a business. Finally the report concludes by making recommendation as what Mark Reuss of GM Holden should execute to be a successful local manufacturer in Australia. Uday Vanaparthy |Student ID-­‐ 11354230 2 [ASSIGNMENT1: ESSAY] April 2, 2013 AUSTRALIAN CAR MANUFACTURING INDUSTRY The Australian car manufacturing industry is an important part of the economy in terms of employment, skills, innovation and exports it generates. The vehicles manufactured are mainly cars, SUVs, vans and trucks. The industry has gone through significant structural changes and has declined over the years. The production has surged to nearly half since the 1970’s. Companies like Chrysler, Mitsubishi, Volkswagen and Nissan have left the manufacturing industry in Australia. The industry has been affected by a number of factors like globalisation and changing consumer preferences. The three major players in the car manufacturing industry are General motors Holden, Toyota and Ford Australia. Toyota dominates the market share with 40.4% followed by GM Holden with 22.2% and Ford Australia with 17.1% (IBISWorld Report 2013). According to IBISWorld forecasts the sales in the industry contracts by an annualized 3.8% over five years through 2013-­‐14. The major setbacks to the industry started due to changing consumer preferences as consumers shifted to fuel-­‐efficient cars. High fuel prices and environmental concerns influenced the consumers to shift to fuel-­‐ efficient cars. This was a problem mainly to domestic companies like Uday Vanaparthy |Student ID-­‐ 11354230 3 [ASSIGNMENT1: ESSAY] April 2, 2013 Holden and Ford, which mainly manufactured large and fuel-­‐inefficient cars. Also the consumers switched to imported cars, as they were cheaper due to the high Australian dollar. This made the situation worse by decreasing the demand for domestic car manufacturers and it was difficult for the manufacturers to maintain the bottom-­‐line in the past five years. Ford has announced recently that it will exit the industry in 2016. Although the Australian government has pumped billions of dollars into the manufacturing industry over the years the three manufacturers are not doing well as the overall sales plummeted in the domestic market. Industry profits have increased in the last five years and operating margins increased to 4.7% in 2013-­‐14 as salaries have decreased. The following graph from IBISWorld represents the percentage change in growth of the car manufacturing industry revenue in Australia. Uday Vanaparthy |Student ID-­‐ 11354230 4 [ASSIGNMENT1: ESSAY] April 2, 2013 The key driving forces of Australian car manufacturers are: • Price of crude oil • Import tariff • Consumer sentiment index (Changing household expenditures) (See Appendix 1) • Domestic price of raw materials like iron and steel • Trade-­‐weighted index (Changing value of Australian dollar impacts international competitiveness) (See Appendix 1) • High labor costs • Government support General Motors Holden General Motors Holden is one of the three major car manufacturers of Australia. The company has a poor financial performance over the past five years and was the worst performer in 2012 compared to the industry. The company had a loss of 158.8 million in 2012 as sales fell by an annualised 8.3% over the period and had poor profits with negligible profit margins. Although Holden’s profitability has improved in 2010 and 2011 before 2012 other factors like fall in import tariffs, rising petrol prices and appreciation of the Australian dollar has led consumers switch to other brands leading to affect the sales of Holden. Consumers switching to fuel-­‐efficient cars have made Holden change its strategy in the market. In the recent years Holden has made efforts to follow the trend by manufacturing small cars and cater the needs of its consumers. Holden has performed worst than the industry in 2012. Based on the IBISWorld report in 2012 Holden had negative growth rate Uday Vanaparthy |Student ID-­‐ 11354230 5 [ASSIGNMENT1: ESSAY] April 2, 2013 of 7.2%. Even the financial ratios like interest coverage ratio and profit margins were negative which shows the bad financial performance. (See Appendix 2). The graphs below show the falling revenue and NPAT of GM Holden: Uday Vanaparthy |Student ID-­‐ 11354230 6 [ASSIGNMENT1: ESSAY] April 2, 2013 PESTEL ANALYSIS OF AUSTRALIAN CAR MANUFACTURERS POLITICAL • Under the current Labor government the car manufacturing industry has been provided direct tax subsidies and tariff support of A$ 5.4 billion over 13 years from 2008 to 2020. • Comparing to the world Australia’s assistance to the industry is one of the lowest. The Labor government has promised recently that it will bolster the industry with additional A$500 million. • Recent changes to the fringe benefits tax (FBT) regime (decision to end the use of statutory formula method) have negative consequences on the car manufacturing industry and employment. Ford, Holden and Toyota have expressed their concern that the operation of the fringe benefits tax regime is crucial to the sustainability of the local manufacturing industry. • On the other hand changes to the FBT indirectly reduces carbon emissions and number of vehicles, which is good for a cleaner environment. The changes to the FBT regime may be good for the environment but its impact on the car manufacturing industry and the Australian economy is questionable. ECONOMICAL • The manufacturing industry contribution to the economy is crucial in terms of employment, skills, exports and innovation. The industry has contributed around A$ 4.5 billion in 2009-­‐10. • As mentioned before the high Australian dollar and increasing petrol prices are the factors that are driving customers to switch Uday Vanaparthy |Student ID-­‐ 11354230 7 [ASSIGNMENT1: ESSAY] April 2, 2013 to smaller cars and imported cars as they are cheaper compared to locally manufactured cars. SOCIAL • Australians preference towards a healthy lifestyle has an impact on the industry. Environmental concerns are influencing the consumers to shift to greener cars and cars with less carbon emission. • Consumer preferences and lifestyle have an impact on their choice of automobiles they want to use. TECHNOLOGICAL • Technology is one of the major driving forces of the car manufacturing industry. The companies invest in research and development, innovation and automation to manufacture better cars. • There has been immense competition and pressure in the industry to improve the standards of the engines and parts of the vehicles to reduce gas emissions, use of resources to provide a better quality of life through technology of cars that are environmentally friendly. • Holden and Toyota designed their first hybrid concept car to reduce fuel consumption, air pollution and use of resources. • Investment in technology has increased rapidly, especially in robotics and fuel cell technology. Uday Vanaparthy |Student ID-­‐ 11354230 8 [ASSIGNMENT1: ESSAY] April 2, 2013 ENVIRONMENTAL • Another big challenge for the manufacturing industry and the government is to ensure that the demand for vehicles should be met in a environmentally responsible way to mitigate the effect of climate change. • For a safer environment the car industry is investing in a broad range of technologies that include: Ø Development of electric cars with advanced battery technologies. Ø Development of hybrid vehicle technology. Ø Development of alternative fuels like renewable biofuels. Ø Manufacturing hydrogen fuel cell vehicles. • There are substantial opportunities for Australian car manufacturers for further development of these technologies. STRATEGY OF THE AUSTRALIAN CAR MANUFACTURERS On the whole soaring petrol prices, low import tariffs and the appreciation in the Australian dollar, changing consumer preferences had a great impact on the industry. The current strategy of the industry is to manufacture cars according to consumer preferences. Ford, GM Holden and Toyota have been manufacturing small and medium sized cars that are fuel efficient and environmentally friendly to match consumer demand and be competitive. In terms of technology the industry is in a strong position but the main concerns are economic and political factors that are responsible for the decline in sales. Although government’s assistance to the industry is increasing over the years the Uday Vanaparthy |Student ID-­‐ 11354230 9 [ASSIGNMENT1: ESSAY] April 2, 2013 lifecycle stage of the industry is declining. The industry is in a dangerous position that it cannot sustain in the long run. FIVE FORCES INDUSTRY ANALYSIS THREAT OF NEW ENTRANTS: The threat of new entrants is very less as the barriers to entry are high because: • The industry’s growth pattern is cyclical with high fixed costs and low levels of profit, excessive number of participants within the industry. • The size of the domestic market is small with increasing imports. • Competition with multinational companies. BARGAINING POWER OF BUYERS: • The bargaining power of buyers is high, as customers are tending to be price sensitive. • Cheaper and small imported cars are turning to be substitutes for domestic manufacturers making it easy for customers to switch products. BARGAINING POWER OF SUPPLIERS: • Most of the suppliers are price takers and the bargaining power of suppliers is very low. • Companies like ABT and WABCO vehicle control systems have built plants in Asian countries. Uday Vanaparthy |Student ID-­‐ 11354230 10 [ASSIGNMENT1: ESSAY] April 2, 2013 THREAT OF SUBSTITUTE PRODUCTS OR SERVICES: The threat of substitutes is high because of increasing fuel prices and car prices there is a possibility that people prefer reliable public transport that is easily accessible and cheaper to travel. COMPETITION WITHIN THE INDUSTRY: • Competition in the industry is high and is increasing. • The factors that are increasing competition are pricing, imports, exchange rate appreciation and branding. Imports in the last five years have been soaring because of lower tariffs and increased demand for cheap foreign vehicles. The small gap in price and quality between imported small cars and used cars has enlarged the market for cheaper small cars. • In the long run, competition may increase as Chinese car manufacturers are expanding their operations with low price strategy. HOLDEN’S FUTURE POSITION TO GAIN A COMPETITIVE ADVANTAGE Holden’s created an image as the “Australian icon” which is its core Competitive strategy. Due to increase in demand for smaller vehicles Holden can come with a strategy to manufacture smaller and medium sized vehicles with magnesium instead of aluminum that will increase fuel savings. Magnesium is a metal is lighter as well as stronger Uday Vanaparthy |Student ID-­‐ 11354230 11 [ASSIGNMENT1: ESSAY] April 2, 2013 compared to aluminum and can be used to build smaller and lighter cars and are generally economic and efficient. These cars also release less pollution. Currently Holden has been adding vehicles to its “Eco line Portfolio” by manufacturing economical vehicles that have fuel saving technology or use alternative bio-­‐fuels other than petrol (Holden Business Report 2011). Holden should increase their production in greener cars as they are receiving funds from the government under “Green car Innovation Fund” (IBISWorld report 2013) and consumers prefer to buy environmentally friendly vehicles. From my analysis GM Holden has to restructure its business model and compete globally. Holden is known for his large vehicles worldwide and it has also been good in exports. Holden should expand its international operations by starting manufacturing cars in countries with low labor and export cars around the world. GM Holden has got broad range of technologies to create innovative cars and environmentally friendly cars. GM Holden should also start exporting its green cars and gain a global market share. IS HOLDEN’S STRATEGY SUNSTAINABLE? Holden’s skilled resources, capabilities, innovation and technology are competitive enough to sustain in the Australian market place. The factors affecting the Holden and the industry are overvalued dollar and government funding. The current strategy of GM Holden is focusing mainly on consumer demand and is manufacturing small and medium sized cars with different engines, which have incorporated fuel-­‐saving technology. As Holden has invested in a broad range of technologies it is Uday Vanaparthy |Student ID-­‐ 11354230 12 [ASSIGNMENT1: ESSAY] April 2, 2013 also manufacturing cars that can use alternative fuels. One of the alternative fuels Holden supports is E85 and in 2010 it has released Holden Commodore that runs on high-­‐blend ethanol fuel. It also has a partnership with Caltex, which helped to make bio-­‐ethanol fuels available at 100 stations by 2012 (Holden Business report 2013). This fuel also emits 40% less carbon dioxide compared to others. The current strategy to produce green cars may sustain only in the short term if Holden does not get subsidies from the government. Lower domestic demand for larger cars in the recent years had a great impact on its financial performance. If the government funding increases in the coming years Holden’s strategy will be sustainable in the long term. Uday Vanaparthy |Student ID-­‐ 11354230 13 [ASSIGNMENT1: ESSAY] April 2, 2013 SWOT ANALYSIS OF GENERAL MOTORS HOLDEN STRENGTHS: • Australian Brand image. • Specialising in SUVs and large vehicles. • Successful sales of alternative fuel vehicles. WEAKNESSES: • Few models of small and medium sized cars compared to Toyota. • Overall financial performance in the last five years was worst than the industry. • High labor costs and bad financial performance in 2012. OPPORTUNITIES: • Using lean design that reduces the weight of the vehicles. • Manufacturing greener and cars. • Investing in broad range of sustainable technologies. • Increasing trend of government assistance. THREATS: • Change in consumer demands. • Rise in fuel prices and prices of raw materials like iron and steel. • Further appreciation of the Australian dollar that will lower international competitiveness. • Axing government subsidies will stop companies from manufacturing environmentally friendly cars. Uday Vanaparthy |Student ID-­‐ 11354230 14 [ASSIGNMENT1: ESSAY] April 2, 2013 CAN HOLDEN BE A VIABLE BUSINESS? Yes Holden can be a viable business if it is provided with sufficient long-­‐ term funding and keeps innovating and attract all market segments. In 2012 GM Holden announced it would invest more than A$ 1 billion until 2022 through federal, Victorian and South Australian government support (Australian financial Review 2012). This investment will lead to economic and environmental benefits, as Holden will ensure it will retain thousands of jobs, bring new fuel-­‐saving technologies and build more number of greener cars. This investment will also give the company the chance to change its purchasing strategy to provide future certainty and also increase its competitiveness. The government accepted the investment proposal to contribute to the sustainability and viability of GM Holden and further increase the competitiveness of the Australian automotive industry. Federal chamber of automotive industries (FCAI) and Business monitor International (BMI) forecast 2013 sales to contract by 1.7% due to slow consumer demand and decline in investment boom. It also believes that slowing economy will lead to fall in commodity prices and domestic demand will grow at a small pace. The forecast is bearish on the Australian dollar in the medium-­‐term and sees it as a overvalued currency and this will lead to expensive imported cars. On the whole BMI forecasts that beyond 2013 the sales will grow at 2.2 % over 2014-­‐ 2017 period (Australia Autos report Q2 2013). So with government funding, slow increase in sales and fair value of Australian dollar the Holden seems to be viable Uday Vanaparthy |Student ID-­‐ 11354230 15 [ASSIGNMENT1: ESSAY] April 2, 2013 RECOMMENDATIONS Mark Ruess should restructure the business model of GM Holden and the restructuring should align with its future operations. Mark Ruess should expand the global operations of GM Holden and should make Australian cars competitive globally. As Holden’s strength lies in its technology and large cars it should also increase its production in greener cars to compete globally. The brand has got the image of Australian brand that will be helpful to compete domestically and also increase its production of greener cars domestically. It should build cars like Cruze and Commodore and new models according to consumer preferences to be viable and competitive in the industry. Uday Vanaparthy |Student ID-­‐ 11354230 16 [ASSIGNMENT1: ESSAY] April 2, 2013 APPENDICES Appendix 1-­‐ Consumer weighted index and Trade weighted index Appendix 2-­‐ Financial growth and Financial ratios (IBISWorld Report 2013) Uday Vanaparthy |Student ID-­‐ 11354230 17 [ASSIGNMENT1: ESSAY] April 2, 2013 REFERENCES IBISWorld Industry Report 2013, Motor vehicle manufacturing in Australia, Australia Industry reports (ANZSIC). Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, The Automotive Industry, viewed 5th September 2013, < motiveIndustry.aspx> Holden Business Report 2011, viewed 5th September 2013, < 2011.pdf> 'Australia Autos Report', 2013, Australia Autos Report, no. 2, pp. 180. Henderson, H. 2011, 'Achieving sustainability in the automotive industry', Manufacturers' Monthly, pp.1. Australian Financial Review 2012, How The GM Holden Investment will benefit Australia: Fact Sheet, 5th September 2013, < ; The Conversation 2013, A view on: Australia’s Manufacturing Industry, < ; Uday Vanaparthy |Student ID-­‐ 11354230 18 ...
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