SCENARIO 3

U.S. Automotive Industry

The Big Three – GM, Ford, and Chrysler – ruled the U.S. carmarket for most of the 20^thcentury. Highly profitable GMhad over half of the U.S. market to itself, but Ford and Chryslerboth did well too. Then, in the 1960s and 1970s, foreign carmakersentered the U.S. market, at first mainly by importing vehicles fromoverseas plants. Foreign makers included the German brandsVolkswagen (also owner of the Porsche and Audi brands), Daimler,and BMW, and the Japanese brands Toyota, Honda, and Nissan. By the1980s, these foreign entrants had intensified competition andthreated the Big Three’s market share, such that the U.S. Congresspassed significant import restrictions. Not to be stopped, the newplayers responded by building U.S. plants to comply with the newrules. More recently, Korean carmakers Hyundai and Kia have begunmaking and selling cars in the United States.

Otherwise, the worldwide car manufacturing industry has seen fewnew entrants in general. In fact, no new major car manufacturershave emerged in the past couple of decades simply because fewindustrial products, save for jet airplanes and nuclear powerplants, are as complex to build as traditional cars powered byinternal combustion engines. Large-scale production is necessaryfor car manufacturers to be cost-competitive. In addition, theprice for crude oil declined steeply from over $110 per barrel inthe summer of 2014 to about $40 by spring 2015. With it, prices fora gallon of regular gas in the United States fell from over $4 inthe summer of 2008 to less than $2 by 2015.

Taking a different approach, serial entrepreneur Elon Musk, whocreates and runs new ventures to address not only economic but alsosocial and environmental challenges, has entered thishighly-competitive industry with his all-electric car company,Tesla. Although his other companies include SpaceX, the firstprivate company to deliver a cargo payload to the InternationalSpace Station and SolarCity, basically the Walmart of solar panelinstallations, Tesla currently receives most of Musk’sattention.

Compared to complex gasoline engines, electric power trains userelatively simple motors and gearboxes with few parts. The TeslaRoadster, a $110,000 sports coupe with faster acceleration than aPorsche 911 GT, served as a prototype to demonstrate that electricvehicles can be more than mere golf carts. After selling some 2,500Roadsters, Tesla discontinued its production to focus on its nextcar: the Model S, a four-door family sedan, with a base price of$71,000 before tax credits. The line appeals to a larger market andthus allows for larger production runs to drive down unit costs.The Model S received an outstanding market reception. It wasawarded not only the 2013 Motor Trend Car of theYear, but also received the highest score of any car ever testedby Consumer Reports (99/100). Tesla manufacturesthe Model S in the Fremont, California, factory that it purchasedfrom Toyota. Tesla has committed to building a $5 billion, 980-acrefacility near Reno, Nevada, to produce its own lithium-ionbatteries for its automobile assembly plant in Fremont.

1. The restrictions that led to the relocation of foreign firmsin the United States is an example of which part of the externalenvironment?

a. technology b. political c. economic d. international

2. The complexity of producing an internal combustionengine and the large scale production necessary for profitabilityreduces which of Porter's Five Forces?

a. threat of subsitutes b, intensity of rivalry c. threat of newentrants d. power of buyers

3. Tesla building its own battery production facility inReno reduces which of Porter's Five Forces?

a. power of buyers b. threat of substitutes c. threat of newentrants d. power of suppliers

4. From the perspective of U.S. automakers, entry into theU.S. auto market to compete with GM, Ford, and Chrysler is anexample of which threat in the external environment?

a. political b. environmental c. legal d. international

Answer rating: 100% (QA)

1 Political Congress imposed higher import duties which is a political decision 2 C Threat of ne... View the full answer