The Automobile Industry

The bigger they are, the harder they fall

The automobile industry has evolved a long way since Henry Ford’s Model T. When Ford Motor Company was founded in 1903, mass production of cars were unheard of. It was the because of Ford himself that cars first became affordable for the masses instead of remaining just playthings for the rich. Although Ford was not the first to use standardized parts and assembly-line techniques, his company was by far the most successful in automating production.

“You may have any color you like, as long as it’s black.”

~ Henry Ford

By 1914, Ford had incorporated the first automatic conveyor belt that could churn out a car in just 93 minutes. This is a huge leap from the 728 minutes required by the usual manual assemblyline of cars. Eventually, Ford would further develop mass production techniques that would slash the production of a Model T to just a mere 24 seconds. As the cost for each vehicle was significantly reduced, both demand and profits for the Model T soared to new heights.

Demonstrating that he was as brilliant a marketer as an inventor, Ford would introduce the dealer-franchise system to sell and service his cars. Furthermore, Henry Ford would revolutionized the auto industry by paying high wages (a minimum of $5-a-day wage) in 1914. It seems ironic that the once successful Ford would be on the verge of collapse today.

“Success always makes obsolete the very behavior that achieved it. It always creates new realities. It always creates, above all, its own and different problems.”

~ Peter Drucker

Barring the troubles that Ford is currently facing, General Motors find itself in almost an identical position. Taking the leadership of the automobile industry from Ford in the 1920s, the century old General Motors is now on the verge of bankruptcy (GM would have gone bust by now if not for the US Government bailing it out). Being the first firm in the world to make $ 1 billion a year, General Motors controlled 50 percent of the market share in the United States in the mid-1970s.

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

~ Bill Gates

What goes up however, must come down. The next 30 years (after the 1970s) proved that even General Motors could not escape the laws of gravity. The problem was that it cost too much for GM to manufacture a car. Coupled with that, GM also faced severe quality problems that made their cars unreliable in comparison to what Japanese cars had to offer. For GM, little has changed since the start of its decline. The economic crisis is simply the stamp of its long written death warrant.

Challenges in the Automobile Industry

  • Political
  1. Carbon emission regulations on vehicles
  2. Protectionist policies set barriers to entry in certain markets
  • Economic
  1. A global economic slowdown
  2. Volatile oil prices
  3. Entry of foreign competitors into the local market
  • Social
  1. Aging population due to declining birth rates in advance countries
  2. The shift of preference from bigger cars to smaller more fuel efficient cars
  • Technological
  1. The emergence of hybrid cars
  2. China and India acquiring the technology needed to manufacture their own automobiles
Notable Global Auto Industry Mergers
  • Chrysler buys 15% stake in Mitsubishi for US$28.3mil.
  • France-based Citroen buys 90% stake in Peugeot.
  • French automaker Renault buys stake in American Motors Corporation.
  • Ford acquires 25% stake in Mazda, raising its stakes to 33.4% in 1996.
  • Ford buys controlling stake in British luxury carmaker Aston Martin.
  • March: Chrysler buys American Motors Corporation for US$800mil.
Dec 1989
  • General Motors acquires 50% of Saab, buys the remaining half in 2000.
Feb 1990
  • Ford buys British carmaker Jaguar.
  • May: Daimler AG announces a US$36 billion deal to buy Chrysler, creating DaimlerChrysler.
  • June: Volkswagen buys Rolls-Royce and Bentley.
  • Nov: Chrysler and Daimler Benz announce US$38bil merger.
  • GM buys controlling stake in Isuzu.
  • Jan: Ford buys Sweden’s Volvo.
  • March: Renault and Nissan form alliance, maintaining distinct brands but holding shares in each other’s companies.
  • Ford buys Land Rover from BMW, the later retains Mini brand.
  • March: GM buys stake in Italian automaker Fiat while DaimlerChrysler buys stake in Mitsubishi.
  • June: DaimlerChrysler buys stake in Hyundai.
  • GM buys failed South Korean automaker Daewoo Motors.
May 2007
  • DaimlerChrysler sells 80.1% of Chrysler to Cerberus Capital Management for US$7.4bil. Daimler keeps 19.9% stake in Chrysler.
June 2008
  • India’s Tata Motors buys Jaguar and Land Rover from Ford.
Jan 2009
  • Fiat announces it would acquire 35% stake in Chrysler.

Source: The Star

Proton – General Motors on a smaller scale with a bigger problem

Proton is similar to General Motors in every sense except size. Virtually incorporating every known problem that General Motors has into its inventory, Proton has now become more of a burden to the common Malaysian than ever before. When I see the steps taken and the regulations bended to protect Proton, I can’t help but shake my head in horror.

The same goes for the entire local automobile industry. Some Malaysians think that Proton is cheaper and more affordable for the average citizen. They are wrong. In fact, all cars are expensive in Malaysia because of Proton! In order to protect the local car industry, the Malaysian Government is indirectly taxing every citizen without their knowing!

If protectionism really protects, this would not be a problem. However, the more we continue to protect Proton, the worse the quality of their cars get. Fundamentally, Proton is selling old technologies at highly inflated prices in order to churn out cash from the people. Knowing full well that they would be under the umbrella of protectionist policies, Proton has never gone up the value chain and has resisted all changes necessary to compete globally.

When we see the stakeholders in the local car industry, we would find it not surprising that the Government is protecting the local car industry. Proton is essentially controlled by Khazanah Nasional Bhd while Perodua is controlled by Permodalan Nasional Bhd. On the other hand, Inokom is controlled by Sime Darby Bhd which is itself owned by Permodalan Nasional Bhd. The similarities? All of the local carmakers are owned by Government linked companies.

According to a Malaysian author:

  1. Proton lacks scale. After 23 years, it has still not managed to get the scale necessary to get significant earnings from exports. Until today, it relies on the local, protected market for the bulk of its revenue and profits, whenever that comes.
  2. It does not have the necessary technology. Developing new models is hugely expensive and unless one has the scale, these become prohibitive. The only way profits can be made under such circumstances is to push relatively inferior products at inflated prices to the Malaysian public.
  3. Continued protectionism will hinder it from seeking a solution. If Proton and the other local car manufacturers continue to operate in a protected market where they can still make profits despite inefficiencies, poorer products and higher prices, there is no incentive for them to change.

Further Reading:

The Proton Problem

Protectionism does not Protect

One Response to “The Automobile Industry”
  1. pochp says:

    This is exactly what happened to him, isn’t it?

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