Question

German Car Industry

The luxury cars industry is one of the most prestigious mass-production industries in Germany. The country is recognized by many as the native land of the automobile; in fact in 1901, 900 vehicles a year were already produced. Throughout the century the sector turned out to be the pillar of the national economy. Germany's famous premier brands such as Porsche, Audi, Volkswagen, Mercedes-Benz and BMW are enviable all around the world. We are now going to tackle the question of why Germany is the home base for so many successful international competitors in the automotive cars industry.

Porter's Diamond Model will be used in analyzing the key factors that led these firms to be both nationally and globally competitive, and the nation to become one of the three leading automobile-producer together with the USA and Japan. Michael Porter focused for four years in ten important trading nations and then discovered four interlinked advanced factors for competitive advantage for countries or region which are: factor conditions, demand conditions, related and supporting industries, firm strategy, structure and rivalry. To these four key elements the Porter added the role of government and the role of chance. German car manufacturers and suppliers are world leaders in innovation with more than 3,500 registered patents every year. With 47 Original Equipment Manufacturer of components and assembly plants, 32 industry-related innovative clusters and Europe’s most experienced workforce, Germany is the primary location for technology-driven companies active in all stages of the value chain. Applying the factors of the Porter’s model, the competitive advantage of the German car industry has shown the following results:

The first determinants of global advantage we are going to look at are factors of production which can be grouped in several categories, arguing that a more advanced factor conditions in the home market will positively impact a firm's global competitiveness. In the case of human and knowledge resources, Germany highly-qualified, available and motivated labor force has been determinant in the success for the car industry, helped by the educational system which provides on-the-job training.

Moreover around the area of Berlin-Brandenburg we can find 7 universities and 21 other higher-education institutions with almost 200,000 students that make the capital region one of the densest research network in Europe and help to ensure a steady flow of engineering to assure continuity in the business. German companies bet on research and development projects annually spending a considerable amount of money on it. As a result of the highest research facilities, the country turns out to be a leader in innovation.

As a matter of fact, BMW opened a forum on its website to invite users to submit new ideas about design or additional features. In addition, we can find above-average productivity of labor and working flexible hours. Transportation is another key factor for the German automotive industry. Germany is the geographic and economic center of Europe: any part of the continent can be reached in one day by truck or three hours by plane. The transportation system is well structured and railways are connected with a network of ports and delivery points all over Europe.

Besides having excellent transport, the country is in the forefront in telecommunications infrastructure. Germany not for nothing took first place for infrastructure in the World Economic Forum‘s (WEF) Global Competitiveness Report 2008. Three-dimensional concentrations of the automobile firms and their suppliers can be found in Lower Saxony, North Rhine-Westphalia, Baden-Wurttemberg, Hesse and Bavaria.

The second element of the model is known as demand condition which arises from buyer needs. The demand for cars is subject to strong fluctuations. During the year, sales tend to increase in spring and droop in winter. Most importantly, the market follows the general business cycle. With growing car ownership in industrialized countries the proportion of replacement purchases in the car market is increasing, cyclical fluctuations are likely to become more highlighted in the future.

The existence of economies of scale is another strength point in favor of the home market. Sophisticated costumers push car companies to innovate and create new features to satisfy the buyers need. For instance in 2007 BMW presented a retrofitted IPod connection which put them at the leading edge compared to other manufacturers. Consumers in Germany and Europe and in the USA and Japan as well have become more demanding about fuel efficient cars.

Germany automobile producers were not the first to introduce hybrid cars but Mercedes, Daimler AG, Chrisler and BMW recently joined General Motors in The Global Hybrid Cooperation in order to build next-generation, hybrid powertrain technology which was an important step in addressing the steadily increasing demand. Strong and dynamic related supported industry have a strong impact on competitiveness. Moreover suppliers play an important role in the car industry. Today, components are more complex and advanced in order to cope with the diversified demand and the need for heterogeneity in car industry.

Some suppliers are large and produce various goods for other industries as well. Most suppliers are, however, small and medium-sized firms. There are two types of suppliers. The first type of firms works in close cooperation with the final producers. This makes both sides dependent on each other. The second type of suppliers produces large volumes of standardized low-value parts. These firms are not competitive in international terms and rely on car producers ‘decisions and strategies. Regarding the relationship between car producers and suppliers we can notice two different kind of relationship.

Some buy from several suppliers, often worldwide, but do not stay with any one firm on a permanent basis. Others buy specialized, compound components from one or two suppliers, with whom collaboration must be good and close in three-dimensional terms. Germany is in an advantageous position in terms of related and supporting industries. It is the home land of ThyssenKrupp, one of the biggest steel producers in the world and steel turns out to be very important in the car manufacturing process. Tires are another decisive part of the industry and Goodyear Dunlop, one of the major firms in the sector, is located in Berlin.

Local conditions affect firms’ strategy. As Porter reports, in Germany the engineering and technical background of many senior executives produces a strong feeling towards methodical product and process improvement, avoiding focus strategies. This kind of feature mostly affects sectors with a high technical or engineering content such as the automotive one. Banks play a key role in the sector we are analyzing. Indeed in the German cooperative economy there is a close relationship among banks and car industry which gives strength to the structure.

In order to be more secure about the future, long term loans are guaranteed. Germany has got a comprehensive centralized and covering group structure; companies are hierarchical in organization and management practices. This is typical for countries that have suffered an institutional breakdown in its past. As a matter of fact the state has for centuries been deeply involved in many aspects of social life and its early and continuing involvement in industrial relations conformed to a general pattern.

It is very hard to join the German automotive industry since there are high fixed cost to entry and discouraging startup cost. Furthermore a strong supply chain is required and it is very difficult to break in to the long-term already existing chain of suppliers, manufacturers and customers. Competition is very cruel mainly in this particular time of economic crisis. The most vital strategy to survive in this market is innovation. The industry is supported by an active innovation policy and significant public investments.

The German Federal Government provided 15 billion euros for R&D projects in innovative technologies such as .alternative fuels, fuel cell technology, alternative powertrain and energy

storage systems, active safety, vehicle-to-X communication and traffic management systems. In history chance events also played a major role and this is the case for Germany.

Giving an example the origins of Volkswagen go back to the period of the fourth Reich. In fact the organization which owned Volkswagen was called kraft durch freude (strength through joy) and was part of the Nazi device. Its principle purpose was to guarantee government-controlled mass tourism on a large scale and to arrange other recreational activities such as summer camps or sport events. The second important function of Volkswagen was to ensure motor transportation for the German army, and this was the aim that led the company from 1939 till the end of the war.

From the beginning highly advanced methods were used, as much of furniture and technical know-how were imported from Ford in Detroit. The Volkswagen plant was established in 1938 in a rural community in Lower Saxony, together with the construction of a whole town (Wolfsburg). Mercedes-Benz, Opel (since 1927 part of General Motors) and BMW were the principal firms. At the end of the Second World War, the car industry was badly damaged. New assembly and components plants (for example Opel in in Bochum) were built by surviving companies and new firms like Audi were set.

The new plants were established around congested areas or in adjacent rural areas with close ties to resource industries and suppliers. With the growth of the car firms, numerous suppliers opened up or shifted plants into their vicinity. Along with that, employment steadily increased. The postwar expansion of Volkswagen began in 1948, closely after production restarted. During the 1950s and especially the 1960s, the company set up new plants in Germany and abroad.

The final variable is the role of government, the degree of access and the support provided by the state. Germany's government grants unlimited access to foreign firms and discriminatory intervention in favor of domestic producers. Furthermore the government offers investment incentives up to 50 percent of capital expenditure and additionally extensive support granted for employment and R&D. Political support to invest in Germany is assured.

The cash incentives package consists of loan programs offering reduced interest rates and public guarantees at state and national level (investment grants are offered in several incentive regions). The government offers several incentives programs targeted at reducing the operating costs of R&D projects. Moreover the Federal Employment Agency and all German states offer a range of different labor-related incentives programs. To see how the German government takes part in the economy we can easily look at the recent facts concerning Opel.

General Motors was about to close down its European Opel branch because of bankruptcy. The disappointment was high because of the 25,000 Opel workers in Germany plus all the suppliers that work for it and the German state banks provided GM with some €1.5bn ($2. 2bn) in bridging loans. GM cancelled the deal after Fiat, the Italian carmaker; Magna, the Canadian auto parts and contract carmaker; and RHJ International, the Brussels-listed investment firm entered bids for GM Europe because it wanted the money the government would pay to save Opel.

All these factors contributed to extend the nation’s reputation for quality manufacturing with brands internationally recognized for high standards. Despite this, German industry car is suffering because of the credit crunch. The German Finance Ministry, Peer Steinbrueck, said that the domestic economy is increasingly suffering from a decline in foreign demand and the global financial crisis shows no sign of ending soon and this is an issue since it is estimated that every seventh job in the country depends directly or indirectly on the automotive sector.

The crisis has accelerated the merger between Volkswagen (VW) and Porsche, while the future of Opel, one of industry's major players, remains undecided despite the emergence of its parent General Motors Company (GM) from bankruptcy. The current crisis will probably accelerate structural changes taking place in the car industry across Western Europe. In the coming years, German car makers are likely to move more production out of the country and closer to their customers in Russia, the U. S. and Asia. Assuming, that is, that they still have a growing customer base in those places.

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Required Question:

Q.2. Describe the relevance of Demand Conditions, which is one of the factors of Diamond of National Competitive Advantage in the context of Car Manufacturing Industries in Germany.

Answer 1

The satability of every market conditions is completely depends upon the demand, in every case, there should be a sufficient demand for that particular product which they are produced.

Eg: A car company produce maximum number of cars with their avialable resources for getting profit, the level of profit of thet comany is based o the demand which have the cars they produced.

A company should be crucial about their market conditions and nature of demnad.

The first paragraph shows that Germany has a premier face in their car production when compared to other countries. Which means that the types of cras which are produced by german car companies has a great demnd in the world.

Now we are going to discuss about the National Competative Advantage of Industries, the theory behind the competative advantage theory is that the stratagies and policies which is created by the companies should be in high quality for sell them at good price. Healthy Competitions are useful for making better profit to the companies. If there are competetion with the suppliers it will incraese the quality of the product and the demand willbe naturally improved.

National Compitative Advantage of Industries is a theory proposed by Michael Porter, so which theory is also known as Michael Porter' s Diamond Model. this theory shows that why the industries in a prticular nation are compitative internationally, while others might not.

In Germany, there are tough competition is happend, just because of that the suppliers are ready to take risk and made different models of cars and take it to te market depends upon their requirement. Now those cars have great demand in world market. Today, sales of german made cars have a great role in the economic condition of germany. So the govt gives maximum support for making new inventions in the field of car making. German Car companies are move out of the country, it shows that the level of demand of the cars they made.

There are mainly four conditions in Porter Theory, they are ;

1. Firm Strategy and Structure.

2. Related Industries.

3. Demand Conditions.

4. Factor condtions.

  

The above conditions are the factors which effecting the competitive advantage of industries.

Firm Strategy : This Includes that the policies and strategies of industries in a compitative market. If there is lot of competation in the market it should effect the innovation qulaity of a firm.

Related Industries : Supporting industries are the inputs for a country and its makes the success of an another company.

Input Conditions : Factors of production which include labour, capital, infrastrcture, and climate.

Demand Conditions : This include the demand of homebuyers conditions, which create competition in internatonal level.

The Govt has played a mojor role in the industraial competation, and funded for the new innovation and scientific experiments, satisfying by all these factors in Porter’s Diamond and  this is explain why Germany’s luxury high power car manufacturing industry has a regional advantage.