Tutor: Joe Connor

Module: Strategic Management

Student ID: 0710104

Assignment: Using the most recent information available, critically discuss the
statement that

“The introduction of new legislation to reduce CO2 emissions for new passenger
cars poses a threat to the European car industry”
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This paper will take a critical view on the following statement

“The introduction of new legislation to reduce CO2 emissions for new passenger
cars poses a threat to the European Car industry”

To make an informed judgement on this statement the following will be discussed,

firstly a taking a look at the key drivers that are currently affecting the European car
industry, with the aid of a PESTLE (Political, Economical, Social, Technical, Legal
and Environmental) analysis. This paper will then focus on an industry analysis,
using Porters five forces model, a highly regarded framework. Then this paper will
look at the external issues in regards to a SWOT (Strengths, Weakness,
Opportunities and threats) analysis. The frameworks used show what is happening
within an industry at a particular point in time. Then consider is the legislation on
CO2 emissions a threat. The European car industry employs thousands of people
and not to mention the main industry who supply car manufactures are the steel
industry, which again employ thousands of people. The European car industry is a
multi million pound industry that accounts for “35% of all European manufacturing
employment and nearly 380billion Euros of tax revenue” News Europe (2010) so it
comes to no surprise that the government offered them incentives when the credit
crunch hit their industry hard. ACEA (2010) refer to the European car industry as “the
backbone of Europe’s manufacturing base, over 250 plants in 18 EU countries. A
supply chain involving metals, plastics, chemicals, textiles and electrics &
electronics”.

The two main key drivers from a PESTLE analysis are thought to be Economical and
environmental. For the car industry to be successful, then so does the economy.
However with the current economic climate looking bleak, and has been for some
while now, and not showing any clear signs that things are on the up, the car
industry has most definitely struggled, and has had to rely on financial support, the
UK government for one, as well as a few other European countries, offered
incentives such as the UK scrappage scheme, which gave consumers a discount of
£2000 if they purchased a new car and traded in their old car, that was at least ten

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years old, unfortunately for the UK car industry this scheme ended in March 2010,
there was however a restriction on the amount of cars that could be sold under this
scheme, which was 400,000 (2010) Car scrappage scheme. The UK car industry, as
did many other businesses, also benefited from the cut in the VAT rate, down to 15
% from 17.5 %, this has also ended.

Then there are the constant environmental issues regarding how economically
efficient cars should be. The car industry is said to be the only industry that’s C02
emissions have risen year on year. In 1990 the EU’s CO2 emissions from road
transport was 750 megatonnes, in 2003 that figure had reached 950 megatonnes
(2005) European environment agency. That combined with car users predicted to
raise over the next 10 years by 30 per cent (2010) BBC Focus Magazine; seems
obvious that something has to be done. With pressure groups lobbying for more to
be done and constant news reports, that the increased dramatic weather changes
are due to environmental damage, the world is looking to their governments to see
what they are going to do to tackle these issues. The new legislation wants all
European passenger cars to comply with emitting no more than 130g/km (grams per
kilogram), which is causing slight friction between individual car manufacturers,
some manufacturers’ that produce smaller cars have gone beyond this target
“Toyota, Fiat and Mini now boast figures under 130g/km, at 124.55g/km, 124.61g/km
and 129.98g/km respectively” (2010) Clean Green Cars

Porter’s five forces framework provides an industry analysis, as suggested by the

name from five different forces, Potential entrants, Buyers, Substitutes, Suppliers
and Competitors. On completion the framework should provide an analysis of how
the business stands at current times, what threats to be aware of, what opportunities
are available, and also a greater understanding of how an industry is competing as a
whole. Furthermore how they are going to proceed with future strategies. “The task
facing managers is to recognize how changes in the five forces give rise to new
opportunities and threats, and to formulate strategic responses” Hill & Jones
(2002:80) It is suggested that companies can manipulate some of the forces to
enable them to gain competitive advantage. This is argued by Hill & Jones (2002:80)
who state that “it is possible for a company, through its choice of strategy, to alter the

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strength of one or more of the five forces to its advantage”

The first of the five forces to be discussed will be Substitutes. As of yet there is no
mode of transport that can wholly compete as a substitute for a car. However one
should not overlook public transport, which comes as a close contender for being a
substitute. If car prices were to rise considerably, along with the costs associated
with running a car, such as road tax, petrol or diesel, and at the same time public
transport significantly reduced its fares and became more reliable and accessible,
then consumers may just way up the costs and consider trading in their cars and use
public transport instead. However, with the government lowering tax on economical
cars, even if fuel rises further, if cars are more fuel efficient, which some
manufacturers’ already claim their cars are, then this could work as an advantage for
the car manufacturers and could well sway consumers to invest in new cars, and
continue to see consumers with older cars trading in, even without government
incentives.

Due to the extremely high costs associated with entering into car manufacturing, it is
thought highly unlikely that new competitors will be able to enter the market easily, if
at all. It is more likely that now government help has ended, car manufacturers may
be forced to merge in an attempt to cut labour costs and sell off assets, to release
equity. The current economic climate would also prevent possible new completion to
enter the market, why would a company enter a market that has been heavily
affected by the credit crunch. The possibility of non EU manufacturers entering into
the EU to waive restrictions on the quantity of cars they are permitted to sell, is also
thought to be unlikely, the whole world is feeling the effects of the credit crunch, that
many feel was caused by the banks, it is thought that they would not want to enter
an un stable market

Within ACEA (the European automobile manufacturers association) there are fifteen
members’ three of which manufacture trucks, buses and vans, the remaining twelve
include at least ten more brands, such as Volkswagen, who have under their
umbrella Audi, Seat, Skoda and Bentley. Now some of these cars are sports cars,
and are not the issue of this paper, however most of the cars compete in the
passenger car market. The majority of car manufacturers make small cars, estate

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cars and so on, they sell new and old, and their sales come from fleet, business and
private users. The different types of consumers all have different wants, needs and
tastes, so there is something in the market that will suit every need. So the rivalry
within the European market itself is huge. Then there are the non European car
manufacturers who as already stated, have restrictions on how many cars they can
sell within the EU, they are still competitors. However now the EU has imposed the
new legislation on the European car industry, they may decide to put a block on any
cars manufactured outside of the EU that do not comply with their new requirements.

The main buyers within the car industry are thought to be private buyers, who buy for
personnel use. Although cars can be purchased as fleet sales, and for business
users, these types of buyers may be able to negotiate some discount on the price,
due to bulk buying, however most sales are for individual cars. Depending on what
the consumer is looking for in a car, will depend if they receive some form of
discount, most consumers would be happy with special offers such as 0% finance, or
a limited interest free period. However due to the economy at present, consumers
may be hard pushed to make a huge purchase of a car, and may prefer a holiday
abroad instead, or consumers may simply not have as much of a disposable income
as in previous years. So car manufacturers may look to reduce the cost of new cars
now that government help has ended, “Some European markets saw car sales rise
in 2009 after governments introduced incentives, prospects for 2010 are less than
certain as subsidies reduce or end” Automotive News (2010) but with the CO2 being
big on agendas and the cost of creating greener technology, realistically is it possible
for manufacturers’ to heavily discount car prices to encourage sales. According to
Johnson et al (2010:2)

“Competing on price was not beneficial to anyone in the medium term, as it

depressed the profitability of the whole industry; Customers expectations would
become a very powerful barrier to increasing prices later”

On the upside, as already suggested, car users are predicted to increase, and with
the current ageing population in some European countries it would appear that there
are many buyers in the market; the manufacturers just have to make the right deal

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available to individual segments of the markets. Maybe car manufacturers may see
an increase in sales from second hand cars. Manufacturers need to be looking at
their branding position to gain competitive advantage.

Now focusing on supplier power, which is thought to be more favourable towards the
car industry, whom are suggested to choose fewer suppliers that provide all of their
parts, giving them the advantage of dictating prices to suppliers, so the cost to the
supplier if the car manufacturers were to switch suppliers would be huge. They
would have to then find new customers to supply to. It is thought that suppliers
should be flexible and have the ability to innovate and change operations quickly, to
compete. Another issue facing the car industries suppliers are the rising cost of raw
materials, if they continue to increase, will the suppliers look at cutting back on their
own costs and services or will they be forced to pass the price increase onto the car
manufacturer.

From the industry analysis this paper shall look at the external factors drawn from a
SWOT analysis, the strengths and weaknesses. There must surely be a huge
strength in the fact that all European car manufacturers have been given permission
to join forces, to enable them to work together, the costs associated with developing
new ideas would be spread. It is reported that of all the industries, car industries
spend the most money on research and development, although this amount could
decline if the economy fails to recover sooner rather than later. There is the thought
that the EU government may offer financial support when looking for greener ways
for transport, particularly if it could provide more jobs. This could put them at an
advantage with non EU car manufacturers. There is also a huge interest from some
consumers who are worried about the environmental impact cars have. The EU or
individual governments may again offer incentives for purchasing greener cars.
Lowering car tax rates for those cars that meet the requirements would also be
beneficial, for consumers are considering the costs associated with maintaining a
car.

It has been suggested that to allow the car industry to fail would have devastating
affects throughout Europe, “millions of Europeans rely on vehicle manufacturing and
the associated supply-chains to support their families” ACEA Report (2010;10) so

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can the EU government really take a back seat and hope that the car industry can
make big changes to the technology of their cars, without government help and
support. Maybe the government will do a campaign on educating drivers do that they
are more aware of the environmental effects caused by older cars, and the benefits
from buying a greener car. The car industry has the ability to produce 21 million cars
per annum whilst at the moment it only produces 14.4 million, Wells (2000) so they
have the facilities to make more cars if needed, or if they are unable to reach these
numbers then maybe they should look at cutting costs to reduce this number, if they
are unable to reach maximum capacity. Then there are the predictions of how many
car users they will be in 20 years, currently there are 800 million cars worldwide,
however that amount is expected to rise to 2.5 billion. Automotive (2010)

The current threats to some of the larger car manufacturers in Europe are the mere
fact that the smaller car manufacturers seem more prepared for the new legislation,
and already have cars on there forecourts that are more fuel efficient and meet the
criteria of C02 reductions. “One of the big arguments in the coming months is likely
to focus on the possible cost of exploiting technology to bring down emissions”
Mulvey (2007) The worst threat is thought to be the current economic climate, the
sheer timing of the legislation, maybe the legislation should have been introduced
when car manufacturing was more profitable, or even continued with a voluntary
agreement until the economy has fully recovered. Although some do predict that it
may be years of, and unfortunately climate change will not stop because of the
recent economic downturn. The car industry is also facing rising raw material costs,
as well as fuel and oil prices rising. The car makers whose models do not comply by
2012 will receive fines that will increase over the following years. Then there is the
argument of the increase of cost associated with these greener cars “one study
suggests that the cost of a car would go up by between £1650 - £2,600” Mulvey
(2007) although this is thought to have been exaggerated slightly because other
studies suggest only a £400 rise in greener cars Mulvey ( 2007). There is also the
issue that producing these cars would give less choice to the consumer and may
result in a lack of sales.

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Due to the enormity of the car industry, a lengthier discussion on the issues within
this paper would have been preferred. It is difficult to conclude on the car industry as
a whole, whether or not the new legislation is a threat, due to the opportunities that
exist for some of the European car manufacturers. The current economic climate is
more so the threat. Some could argue that now is not a particularly good time for car
manufacturers’ to be concerning themselves with developing sustainable technology,
for CO2 emissions. It is presumed that they would much rather focus their attention
on staying in business, rather than investing more money into research and
development. So those car manufacturers, who are most vulnerable, may well view
the legislation as a threat, and for those manufacturers who produce larger vehicles’
with bigger engines. However it does seem apparent that there are opportunities
available.

It would appear that there are arguments for and against the new CO2
requirements. Also the affects from car emissions on the environment is not a new
issue, so surely the car industry must have been aware that there would come a
point in time, where they would be forced by legislation to reduce emissions from the
automobiles they produce. Which is why some EU manufacturers are already
producing cars that meet these requirements, maybe the other car makers could
argue that due to the recession they have not had the resources to focus on
environmental issues and newer technology, but if others were able to. The best
opportunity must surely be that that they are allowed to work together, if they wish to
do so, “under the legislation, several manufacturers will be able to group together to
form a pool” Europa (2010) it is thought that if they combine their current
technological ideas and there intelligence, then surely they can come up with the
best solutions that will reduce car emissions whilst spreading the initial research
costs. It is paramount that the individual companies within the car industry should
compile an industry analysis, if they have not done already “to investigate how the
organisation needs to form its strategy in order to develop opportunities in its
environment and protect itself against competition and other threats” Lynch
(2002:125).

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Bibliography

ACEA (2010) European Automobile Industry Report

http://www.acea.be/images/uploads/files/20090519_ACEA_Industry_Report09FULL.
pdf

Automotive News (2010) EU transportation

http://www.autonews.com/apps/pbcs.dll/search?Category=SEARCH

BBC (2010) 2020 vision, BBC Focus magazine.

http://www.bbcfocusmagazine.com/feature/tech/2020-vision

Brierly, D. (2010) End of car scrappage scheme marks a tough year for
manufacturers. The Independent

http://www.independent.co.uk/news/business/analysis-and-features/end-of-car-
scrappage-schemes-marks-a-tough-year-for-manufacturers-1905606.html

Car scrappage (2010) Car scrappage Scheme extended.

http://www.carscrappage.co.uk/about

Clean Green Cars (2010) http://www.cleangreencars.co.uk/jsp/cgcmain.jsp?lnk=100

Europa (2010) Reducing CO2 emissions from light - duty vehicles

http://ec.europa.eu/environment/air/transport/co2/co2_home.htm

European Environment Agency (2005)

http://www.eea.europa.eu/themes/transport/multimedia/curbing-co2-emissions-from-
road-transport/view

Hill, C. Jones, G. (2002) Strategic Management, An Integrated Approach. Houghton

Mifflin Company, Boston

Johnson,J. Scholes, K. & Whittingham, R. (2010) Exploring Corporate Strategy,

BMW case study http://webct.bolton.ac.uk/SCRIPT/BAM3003-2009-10-
S2/scripts/serve_home

Lynch, R (2000) Corporate Strategy 2nd ed, Prentice Hall: Essex

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Mulvey, S. (2007) EU CAR CO2 fight only beginning, BBC News.

http://news.bbc.co.uk/1/hi/world/europe/6337057.stm

Wells (2000) Analysis: Europe’s car industry, BBC News

http://news.bbc.co.uk/1/hi/business/746306.stm