Automotive Industry and Fiat Essay Example

hard with the credit crisis and now chief executive, Sergio Marchionne, has the task of developing a strategy in order to help rehabilitate the damaged company (Betts, 2009). President Obama has faith that the Fiat chief will be able to instil stability back to the depleted firm (Betts, 2009). Fiat also had its eyes set on the acquisition of German giant Opel. It was bidding along with RHJ International and Magna. Eventually, General Motors decided to pull out of the sale of its subsidiary, Opel (Robinson, 2009).If this acquisition had been achieved it would have meant a massive market share in Europe for Fiat and market dominance (Wiesmann, 2009).

Due to the size of the Fiat group, this report will only focus on Fiat cars and the car market. 2. 0 - External Environment 2. 1 – PESTLE Analysis Political * Governments and institutions across the world are imposing sanctions on companies in terms of their CO2 emissions.

Two treaties; the European Climate Change Programme and the 1997 Kyoto agreement have both been set out in order to reduce emissions and slow global warming (Europa, 2009).This means an increase in spending from companies on reducing their CO2 emissions with no additional return of capital employed. * Because Fiat is a global company, there is a great deal of trade between different countries all over the world. Although the EU and Japan have good trade links, there are still significant tariffs in place that are being worked on being reduced or abolished (European Union, 2008).

There is the bonus of free trade for Fiat between the EU 27 bloc where there are no trade tariffs which

allows easy movement of goods. The Corporate Average Fuel Economy (CAFE) regulation is a piece of legislation which requires all participating car-makers to manufacture automobiles with a 27. 5mpg average (NHTSA, 2007). For car manufacturers who do not have the technology to or research and development capacity to be able to make engines at this economy, it will require money and time to be able to hit the targets. * The recent expansion of the European Union (addition of Bulgaria and Romania) means that there are more countries available for Fiat to trade with within Europe without barriers. Economic At present, the global economy is experiencing a downturn.

This has meant that businesses are experiencing loss of profit and downsizing issues. This has been seen in Fiat's operating profit falling by almost a third from October 2008-09 (Financial Times, 2009). * Volatile fluctuating exchange rates mean that for exporters, returns can be hard to predict. Hedging can be applied but this costs money in the form of commission and can be a gamble if the exchange rates become more advantageous (BBC, 2008).

Social * Consumer tastes and preferences play a massive part in the car industry and supply is led by demand.Consumers can be so fickle. What is popular one year or in one country will be ridiculed in the next. An example of this is General Motors changing the rear lights on their Buick LaCrosse for the Chinese market. They were changed to the shape of the numeral 8, a symbol of wealth (Webb, 2006).

Manufacturers need to assess the market thoroughly in order to maximise sales and profits. * There is evidence that

consumers are becoming more aware of the power that they hold over the market and are practicing negotiation skills more frequently (Bonser et al. 2006). This behaviour can potentially decrease profit margins for suppliers. Technological * Because of developments in information communications technology, companies can readily check on their competitors' performance and weaknesses (Bonser et al.

2006). These can be capitalised on, making the marketplace a much more fiercely competitive place. * According to Millward (2008), there will be a major global oil shortage in the future. Car manufacturers need to turn to alternate fuels in order to survive through such shortage. Legal The legal issues surrounding Fiat and the automotive industry include the Kyoto agreement mentioned in other areas of the PESTLE. * Government tariffs and legal requirements in countries can make it more difficult for companies to invest overseas.

Environmental * Global warming and pollution reduction are becoming ever more prominent on the world stage. This ties in with the Kyoto agreement. * Natural resources such as oil are thought to be running out, which means that petrol prices are increasing. This opens a new market for fuel efficient and alternative energy cars. .

2 - Porters 5 Forces for Fiat The model uses the 5 forces of competition as developed by Michael Porter and is a tool that "helps managers evaluate industry competition" (Enz & Harrison, 2009, p. 60). Rivalry Within the Industry * Because the competition is so fierce in the industry, Fiat has recognised this and a large stake in the North American manufacturer, Chrysler, (Betts, 2009) in order to broaden its scope and increase market share. Fiat also looked

like a promising bidder in the sale of GM's European subsidiary, Opel, but this did not come to pass.

Barriers to Entry * Due to closely placed competitors, there is little room for new entrants. Also changes in consumer tastes and preferences mean that the incumbents are constantly monitoring these and adapting appropriately. The only chance a new entry would have is if it found an unfulfilled desire or a niche in the market. This is similar to the SMART car, who emerged by developing really small, economical city car but is owned by Mercedes Benz so had the capital to create the company (R;amp;D costs, marketing etc.

).Power of Buyers * Due to the constant changes in consumer tastes and preferences, new distribution channels have had to have been established in order to satisfy these tastes. There is so much choice, that proximity is becoming more important to the customer when buying. Power of Suppliers * Due to Fiat outsourcing more of its materials, this gives more power to suppliers as there is not as strong a mutual respect between them. Fiat still uses Magneti Marelli, a wholly owned and prolific Italian auto part manufacturer.This also has political implications as it is also an Italian company and fuels the Italian economy.

Threat of Substitutes * Because of the closeness of the rivalry and large number of incumbents offering similar products, there is a greater need for Fiat to flaunt its Italian passion and spirit which makes it unique against its competitors. This is unique to the brand and cannot be copied. 2. 3 - Opportunities and Threats Opportunities| Threats| * Form alliances with companies such

as PSA Peugeot Citroen, who produce cars of similar price and size and quality. Potential to expand operations in emerging markets such as India, and China.

* There is an absence of market penetration in developed markets such as the U. S. | * Exposure to exchange rate volatility due to the economic crisis. * Strength of Korean and Japanese car makers is increasing and becoming more prominent in the automotive market. * Italians are less loyal to domestic brands which undermines Fiats loyalty to domestic customers * According to the IMF (cited in Data Monitor, 2009), the global economy will slow down sharply in 2010.

This will cause a slow in sales and revenue from all fiats markets. | 3. 0 - Internal Analysis 3. 1 - SWOT Analysis Strengths| Weaknesses| * Fiat has had a long experience of the auto industry and aided the development of the industry (Fiat, 2009). * They have control over 5 historic Italian firms – Ferrari, Alfa Romeo, Lancia, Maserati and Magneti Marelli (Fiat, 2009). * It’s strength in design – Italian style which differentiates itself from competitors.

* Strong management team including Sergio Marchionne * According to the Reliability Index (2009), Fiat cars re more reliable than the industry average. | * Fiat could be seen to rely on the European market too much in terms sales and production with only one plant outside of the region (Brazil). * The above point also shows a lack of scale compared to their peers and still have Italy as their biggest market (24. 1% of revenue for fiscal year 2008) (Data Monitor, 2009).

* Although Fiat finished 2008 with its

best trading profit ever, the group made a loss of 410m Euros in the first quarter of 2009 (BBC, 2009). | 3. 2 - Fiat Value Chain AnalysisUsing the value chain analysis framework (pictured left), the capabilities and resources within the business can be identified and evaluated as to how they add value to the goods and products. Primary Activities * Research and development - The research and development for Fiat is carried out at two centres: CRF and Centro Stile. In June 2009 (EIB, 2009), Fiat attained loan finance to fuel it's most recent research and development project, costing 900 million Euros, compared with 751 million in 2007 (Fiat S.

p. A, 2007).The purpose of this R&D is for: "(i) the optimisation and further development of fuel-efficient conventional powertrain technologies including the investments in machinery and tooling for the launch of a new family of more efficient transmissions, mainly for smaller vehicles application; and (ii) the development of new more fuel-efficient exhaust systems, powertrain and electronics components, aiming mainly at CO2 reduction" (EIB, 2009). * Components - Fiat's main component manufacturer is Magneti Marelli, who is one of Fiat's subsidiaries. This keeps costs lower than if the goods were outsourced.Magneti Marelli also sells to third parties which creates profit to be used for production or Fiat car components (Fiat S.

p. A, 2007). The company also uses FPT Powertrain Technologies for the production of engines and transmissions. This is also a subsidiary of Fiat S. p. A.

* Final assembly - Comau, the global industry leader, assembles most of the finished components to complete the manufacturing process. Because Comau is the market leader, it

can be assumed that the quality of service is high. * Marketing and service - The Fiat brand is now more reputable than it once was.It is no longer associated with poor quality and reliability.

Since the arrival of the new CEO, Sergio Marchionne, in 2004, the company has gone from strength to strength and transformed it's brand image (Marchionne, 2008). Support Activities * Infrastructure - Good infrastructure in Europe, but not elsewhere, except Brazil, and 7 plants located in Italy. This could be seen to keep the brand image "Italian", in keeping with the design and "flair" still coming from Italian roots. Distribution in America should be aided through the 35% stake in Chrysler and the use of their distribution channels. Logistics - Because Fiat has many suppliers, the way in which these come together has to be of great efficiency or it will cause lags in production. Fiat powertrain technologies have recently created a partnership with CEVA Logistics, who are a reputable supply chain company, in order to ensure efficiency in inbound and outbound logistics (CEVA, 2009).

* Human Resources - The high quality of the management team, especially Sergio Marchionne, who has a long successful past in non specific management. 4. 0 - Current StrategyIn light of the research brought forward, it appears that Fiats currently employs a global business strategy. This occurs in an international business environment where the pressures for cost reductions are high and the pressures for local responsiveness are low. This is true due to the squeezed profit margins experienced by all incumbents of the automotive industry and also the fact that most cars are replicated globally.

Some

may change due to legal requirements but these are minor issues. In evaluation, this strategy is no longer suitable for the changing environment of the automobile industry.Consumers are gaining more bargaining power, which means that the need to be more locally responsive is higher than it has been. Pressures to keep costs low are also higher than ever, which is highlighted through the number of mergers and acquisitions that have been made with other incumbents. Recently, in the case of Fiat, these have been Chrysler and Opel.

The abundance of mergers and strategic partnerships has increased significantly in the last few years with the global economic downturn meaning the reduction in consumer demand and reduction of profits.A global alliance could mean sharing resources in order to reduce costs in both parties. Although the global strategy keeps cost low, which is essential for any car manufacturer, it does not sufficiently address the needs of consumers in different markets. The increasing need for local responsiveness to achieve customer satisfaction means that Fiat will need a different method of keeping costs low or even increasing sales to counterweight the balance on the profit and loss account.

Responding to local markets may be especially difficult for Fiat to implement due to its style and design being part of it's uniqueness as a brand.It has a well developed R&D department that uses its expertise to produce the cars looking like they do. To change that Italian flair to be more conducive to the market of sale would dilute the unique selling point of the cars. The adaptation could, instead, take the form of marketing and sales, not just in the

actual product. 4.

1 - Current Strategic Implementation The current operations are formulated predominantly around Italy and the head office in Turin. All the plants are located in Europe except for the plant which operates in Brazil.This could be a reason for the firm not performing very well outside of its domestic market or at most, Europe. A majority of its production still emanates from Italy. This means that production can be closely monitored but it also means that export costs will be higher and the ability to be locally responsive is low.

This is in keeping with the Italian design being a key theme through the brand image and keeping production Italian helps towards that but it doesn't have to. As long as the research and development centre is based in Italy and has the same Italian designers, the style can be implemented into the vehicles around the world.Since the appointment of the new CEO, Sergio Marchionne, the company seems to be a lot more structured in the way that it is run. It seems as though the decisions come from the top in a clear cut way. The profitability has increased dramatically from the appointment and Fiat has looked like expanding once again incorporating a stake in Chrysler in 2009 and a bid to buy Opel from general motors in order to secure a large market share in Europe. At present the car industry is in tough times with demand slowing and costs rising.

Fiat have realised this and tried to increase their size in order to achieve etter and more efficient economies of scale. Although this is good, Fiat has not been

able to secure another global strategic alliance in recent times as other manufacturers have. It would benefit Fiat to attain an alliance with a Japanese car company such a Honda or Nissan in order to gain knowledge of local tastes and consumer preferences so as to expand operations there. Also, the Chrysler alliance needs to be used to its full potential. The American market has been notoriously hard for Fiat to crack, seeing their exit from the marketplace in 1984 (LA Times, 2009).Apparently, Fiat is to re-launch itself into the US market using the 500 as its weapon.

The New York Times (2009) is quoted as claiming that Fiat plans to take the model into Chrysler dealerships as soon as 2010. This shows the reasoning behind Fiat forming the alliance with the struggling Chrysler. If these plans go ahead and the 500 is a success like it has been in Europe, it will be a breakthrough in Fiat history and the dawning of a new age. The vast U. S market will be opened up and with help from its alliance with Chrysler, can start producing cars for American consumption.

5. 0 - Issues of attentionAlthough the global strategy is good in that it keeps costs low, it cannot be sustained. If Fiat does enter the North American market, then it means that their cars will most probably have to be modified for the penetration in the market to be sustained. Fiat left the market in 1984 due to the lack of sales. It seemed that the European style of the car was not in keeping with the tastes and preferences of the American people.

It is still yet to be seen whether the style of 500 be a success, especially due to the fact that the 500 very much resembles the old 500 released in 1957 (Life In Italy, 2009).If the sale of the new 500 is not fortuitous for Fiat, it will mean that Fiat will need to change to a transnational strategy so that the vehicles can be tailored to the tastes and preferences of the American consumers. The transnational strategy is most effective where cost pressures are high and the need to be locally responsive is also high. As Becker stated, since 2000, the proportion of profit yielded from each car produced has seen a significant decline (Becker, 2006). Combine this with weak capital markets, stock exchange crises, political insecurity, decrease in disposable income and increasing job risk driving down demand and global iscount competition between manufacturers competing in the non-luxury car market, and it stresses the intensity of these price pressures (Becker 2006).

This strengthens the prominence of cost pressures and, the re-entrance of the American car market, highlights the need adapt to local tastes and preferences. The implementation of this new strategy relies heavily on the partnership with Chrysler. As Fiat took a 35% share in Chrysler, this is likely to be a deal on Fiats’ terms, so the feasibility of the strategy is of a high level.The implementation will involve Fiat using the Chrysler dealerships in the U.

S. to stock their cars. This will aid brand recognition and trust as it is associated with a major American car manufacturer. Under the terms of the deal, in return, Chrysler will have access to

Fiat fuel efficiency technologies (BBC, 2009). As highlighted in the PESTLE analysis section of the report, environmental issues are becoming ever more important to consumers, manufacturers and governments. This may be the cause of the American consumer interest in the new Fiat 500.

6. 0 - ConclusionIn conclusion, the future of Fiat rests on the ability of the car industry to recover from the current downturn in demand and is also dependent on the success of the imminent exploits in the U. S. , primarily, in the form of the launch of the 500.

According to the IMF (cited in Data Monitor, 2009), the world economy will decline further in 2010, which suggests that the car industry will not pick up until after the global economy has begun to recover. In addition to this, the fact that the distribution channels belonging to Chrysler can be used, does not mean that the new model will sell in America.