PEST analysis for the car industry

The Car Industry is changing its structure quickly. While Toyota earned some 124 billion SEK last year, GM lost about 65 billion SEK. Many mergers have happened and more changes are bound to happen. Write an essay pointing out the PEST-factors you find having a strong impact and causing these changes in the car industry. Also, reflect on the changes you think will happen in the years to come.

1.Introduction [1]

PEST analysis is a process of checking and analyzing information relating to the environment. The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business as a business measurement tool. It involves monitoring the changes taking place in the environment and forecasting the future position. The PEST analysis could be a framework reviewing a strategy or position, direction of a company, a marketing proposition, or idea. It helps the firm to formulate its corporate strategy in line with the opportunities emerging in the environment. Strategic response to environmental changes is the end purpose of PEST analysis. PEST is made up of the first letters of the four key factors: political, economic, social, and technological factors. It assists in identifying the key environmental influences, predict the changes in environment, and understand the interconnections between influences pertaining to macro environmental factors and environmental factors specific to the industry. Most industry firms would carry out a PEST analysis to assess the prospects of their business and viability of their investment.

Specifically, these four PEST factors cover all aspects of external environmental analysis. Political factors changes involve government rules such as on planning. Economic factors changes include the health of the economy, how likely people are to be able to afford property, and changes such as the rate of interest rates, currency exchange rate. Social factors changes include changing lifestyles and attitudes in population trends. Technological factors involve changes such as creating opportunities for the new products and product improvements and marketing techniques.

Car industry makers nearly 60 million cars a year, and employs millions of people around the world. Its products are responsible for almost half the world’s oil consumption, and their manufacture uses up nearly half the world’s annual output of rubber, 25% of its glass and 15% of its steel. No wonder the car industry accounts for about 10% of GDP in rich countries [2]. In this paper, above four PEST factors involved in car industry are detailed explained and investigated in order to provide a clearer developing trend for global automotive industry.

2.Influences of political factors on car industry

1)WTO and China [3]

Since I come from China, the Chinese auto industry is more familiar for me to investigate. As is known, China becomes one of the great growth areas for the industry. Recent figures show that in 2003, China built over 1.4 million passenger cars, a volume closely comparable with, for example, Italy, Spain or the UK. As China has entered WTO (World trade organization), this important political policy change has caused large impacts on auto industry in China. China’s WTO entry has a good deal of positive influence on the domestic automotive industry. WTO accession may advance the rapid growth of the auto market.

Losses in terms of resources and social welfare caused by excessive government protection over international trade is reduced and then eliminated. Entering the WTO may lower the prices of products used in the automotive industry. Trade liberalization spurs the development of international trade and stimulates automobile exports. The WTO entrance accelerates the development of the private auto market, as individuals could become the major force behind auto purchases. Due to a change from a political policy, car industry is indeed affected to develop and auto firms should also take responding strategies to adapt to such changes.

2)Government regulations

Source: BEA and BLS data as reported in Ward’s (annual). [4]

Government sometimes announces a variety of regulations that could cause impacts on industry. As to automotive industry, government regulations, such as improving protection for safety and fuel consumption and improve emission against air pollution, have increased total cost to car products. As is seen from above figure which is statistically made by the U.S. Bureau of Labor Statistics (BLS), the middle part shows the average price of a car with no regulated improvements in 1967. The lower part represents the value of added protection for safety and polluting emissions equipments. The upper part is the price due to non regulated improvements together with other quality and price increases. It is obvious that the government regulations have brought large influences on the price of car products.

3)Vote for new president [5]

In early days, automobile manufactures hope governments to build public roads to stimulate customers’ demands. Road building was sometimes also influenced by political ideologies. If the government could take policies and actions to improve transportation system, the auto industry could be benefited very much. That is why the voting of president could affect car industry. Once the new elected president who supports to increase government spending on roads wins on voting, whole auto industry in this country could have a brilliant future.

3.Influences of economical factors on car industry

Now nearing its 100th birthday of auto industry, it has long been central to the health of the global economy. The auto industry is a very significant employer among all kinds of industry. An expense is often delayed if buyers are apprehensive about the economy. From the close relation between economical situations and car industry, it is obvious that economical factors could affect car industry very much.

1)Top car firms with global economics

Among the top auto companies in the world, it is quite often to observe that these world-wide firms take strategies following the international and domestic economical situations. U.S. car companies are seeking stronger international ties in response to what appears to be global economical trending. Chrysler’s merger with Daimler-Benz is already boosting profitability while reducing each company’s exposure to the whims of national economic cycles. And the consolidation trend continues: negotiations are under way between Sweden’s Volvo and the Ford Motor Company which already owns Jaguar in the United Kingdom regarding a potential link-up to face the recently downing global economic phenomenon.

2)Close relation with fuel economy

Actually, car industry is very dependent on the fuel industry and keeps close relation with the fluctuation in fuel industry. Against a background of rising oil prices and increasing dependence on politically unstable oil-exporting countries, the issue of fuel consumption continues to gain in significance. The extent to which the car industry is able to find good way to keep away from the trouble due to fuel industry determines the development of car industry. The goals which some auto firms have set for themselves are to reduce the average fuel consumption.

3)Different approaches for Japan and USA facing global downturn economical situation [6]

Japanese continuous economic decay in last decade has dealt its industries harsh ebb and that includes its automakers. Domestic Japanese car sales are downing and the prognosis for a big turnaround is not obvious. Across the Pacific, America’s economic crisis is impacting its auto sales as well. The reality of this year’s continued sluggish economy is causing consumers to suspend with regard to that kind of discretionary spending. Facing to this trouble situation, two different auto markets take different approaches to boost demand in their domestic market as well as the global markets that they serve. Japanese firms tend to add technology, expand into new segments or find ways of rethinking car systems to make them cheaper. In contrast, American companies keep the product the same and cut the price taking the margins out of the car. Finally, American companies inevitably find that they have lost market share to Japanese automakers.

4.Influences of social factors on car industry

1)Shift of social system

As social forces continue to reshape the world, so has the automotive industry had to learn to adapt. In a view of social aspect, the last two decades have seen the former East European bloc, the area of former Soviet influence, shifted from the socialist attitude that ownership of a car conferred a rather dangerous degree of mobility and freedom, towards the idea that anyone who can afford a car should have the right to own one. In parallel with that shift, many of those countries have, in a manner of speaking, shifted westwards to joint, or apply to join the EU. The car industry should find it fascinating to see the way in which the major companies, especially those in Western Europe, are re-defining what constitutes their ‘European home market’.

2)City plan and car industry

Since the outward growth of cities is accelerated, suburbs began developing rapidly for a long time. Before factory workers lived either close to the factory or in a high density community further away, connected to the factory by streetcar or rail. Now they live in low density communities far from the city center and have to depend on the car as a traffic tool. The developing suburbs created few local jobs, and most residents commute elsewhere to their jobs. Thus overall, a decentralization of cities accelerates the development of car industry.

3)Personal attitude to wealth

Nowadays, people more and more like to show off their properties. Large division of income becomes an inevitable social phenomenon. The automobile rapidly became a symbol of social status, and in some cases, a fashion item. The automobile, more than almost any other possession, allows people to flaunt wealth. Not only was the ownership of an automobile demonstrative of a certain level of income and prestige and still is, especially in poorer nations where the automobile isn’t ubiquitous, it is also highly visible. It must cause carmaker to produce higher level car products to meet customers’ higher and higher requirements.

5.Influences of technological factors on car industry

1)Production of car industry [7]

As the assembly line and other methods of mass production were developed when car industry began seeking ways to produce more automobiles at a lower price. Here Japanese auto companies were leading all over the world with their advanced lean manufacturing technology and JIT (Just-in-time) in 1960s. The idea of using many small identical parts that could be exchanged for each other was engendered. Once other automobile makers realized the value of small identical parts that were interchangeable, they hired many small machine shops to make identical parts that were then put together at assembly plants. With this more flexible technological trend, replacement parts could easily be sent to car owners. This greatly prolonged the life of the automobile, making it even more attractive to consumers and could become global auto strategy.

2)Car products [8]

Car companies are investing heavily in new car products with new technologies which make products cleaner and more energy efficient. Among these new technologies, the trend in terms of improved fuel consumption and emissions reduction has become more focused. Almost every mew technology development strategies regarding car product is following the central goal of improving fuel economy. Light weighted car products could be the best way to reduce the fuel consumption in a direct way. According to Patterson [8], vehicle downsizing, redesign for weight efficiency and material substitution would become three major strategies to reduce the weight of car products. But in future the car manufacturers have to face a contravention: pressure for cost reduction to select cheaper products or lower standards against meeting the requirement of emission standards which are released by government to improve the air pollution. There might be a trend that economical incentive provides car manufacturers a market signal to develop new technologies and produce less-polluting car products.

6.Conclusion

This paper made an attempt to analyze environmental changes in automotive industry with PEST four factors: political, economical, social and technological factors. Based on theses four different types of factors, the global trends of auto industry could be covered and forecasted. The wide reaching effects of automobiles on everyday life have been a subject of many issues. If taking into account above discussed external environmental factors for auto companies to make development strategies, the auto industry might be have a brilliant future.

Reference

1 Robert M.Grant. Contemporary Strategy Analysis. Fourth edition , 2002.

2 Thomson Datastream. Automotive News. March 2004.

3 Lin Gan. Globalization of the automobile industry in China: dynamics and barriers in green of the road transportation. Energy Policy 31 (2003) 537-551

4 Daniel Sperling; Analysis of Auto Industry and Consumer Response to Regulations and Technological Change, and Customization of Consumer Response Models in Support of AB 1493 Rulemaking; June 2004;

5 Gary Witzenburg; President Kerry? How would a Kerry victory affect the auto industry? July 2004 ; Automotive Industries.

6Yoshikawa, H. The Japanese Economy in the Next Decade. (March 2002) Journal of Japanese Trade.

7Siegfried Hohn. The European Automobile Industry- Three Possible Scenarios; Aug 1980 Vol.13; Long Range Planning.

8W.C.Patterson. Technological Trends in the Automobile Industry and Their Impact on Aluminum Usage; Technological forecasting and social change 18, 205-216 (1980).