Benefits of Trade Liberalization Measures on Automobile Industry

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Introduction

Businesses seek to remain in operation and prosper in the future. However, their operations are subject to policies implemented by governments and other international bodies such as the World Trade Organization (Hackett 2001). The policies adopted by these parties aim at creating an environment conducive to conducting business. Some of these policies relate to the environment, trade liberalization, and competition (Font & Cochrane 2005). The policies affect diverse industries amongst them being the automotive industry. This paper entails a detailed evaluation of the environmental, trade liberalization, and competition policies implemented by governments and their impact on the automobile industry.

Policies implemented by governments and their impacts on the automobile industry

Environmental sustainability policies

The automobile industry has a significant impact on the economic growth and development of a particular country (IHS 2012). However, operations within the sector can also result in devastations in various economies. One of the ways through which the automobile sector can affect the economy is through climate change (IHS 2012). In the 21^st century, climate change is one of the main issues threatening society, and this issue would have adverse effects on the future survival of businesses (Mikler 2009). Consequently, the automotive industries have come under intense pressure to ensure that they operate sustainably (Wells 2010). According to IHS (2012), governments influence the automotive industry through legislation of new standards and regulations.

The implemented policies may cause firms to experience an increment in their operational costs or come up with strategies to promote innovation. For example, the US government, through the Environmental Protection Agency (EPA) and the Department of Transport (DOT), implemented several federal rules that aim at minimizing greenhouse gas emissions by heavy and light trucks in the US (the United States Environmental Protection Agency 2012).

Additionally, the National Highway and Traffic Safety Administration (NHTSA), in collaboration with the DOT, implemented stringent rules that aim at incorporating stringent fuel standards. The US government has also implemented the Clean Air Act whose objective is to minimize the emission of greenhouse gases by the automotive industry (Butcher 2010). Implementing these costs would increase the costs of operation to auto dealers. Complying with these regulations would result in an increment in the cost of new cars with an average margin of $1,000 by 2016 (Butcher 2010). Consequently, there is a high probability of the auto dealers experiencing a decline in their sales revenue.

The Chinese government has also integrated a consumption tax whose objective is to ensure low-carbon emissions by passenger vehicles. The consumption tax will result in automobile companies that specialize in the manufacture of large automobiles and thus experience a decline in sales revenue (Xiao & Ju 2011). On the other hand, automobile companies that specialize in the production of small cars will experience an increment in sales due to their effectiveness in saving energy and low carbon emissions (Xiao & Ju 2011). Similar to the Chinese government, the US government has implemented the guzzler’s tax. Provisions of the gas-guzzler tax aim at discouraging automobile companies from manufacturing fuel-inefficient passengers’ automobiles. Such a tax is likely to promote the production of fuel-efficient cars, hence reducing the occurrence of climate change due to greenhouse gas emissions (the United States Environmental Protection Agency 2012).

Competition policies

Competition is another major factor that influences the operations of firms in diverse economic sectors. Martinuzzi, Kudlak, Faber, and Winman (2011) opine that competition in the motor industry is evidenced by intense market saturation, fixed costs, overcapacity, need for intense research, development, and innovation.

In a quest to survive in such an industry, most automobile companies are adopting diverse strategic management practices such as the formation of mergers and acquisitions. This aspect leads to the creation of major entry barriers thus allowing few players to dominate the industry (Martinuzzi, Kudlak, Faber, & Winman 2011). Most developed and developing countries have implemented diverse competition laws to promote the contribution of the automobile sector to their countries’ economic growth. For example, the US has implemented the Anti-trust law whose objective is to prevent major corporations from adopting anti-competitive behaviors such as price-fixing and from becoming too large. Similarly, the European Union has implemented the European Union Competition Laws whose objective is to promote free competition (Martinuzzi, Kudlak, Faber, & Winman 2011).

Implementing the above policies affects the automobile industries in the US and European Union in a number of ways. Firstly, the policies lead to the creation of a fair environment for conducting business. The competition prevailing in a particular industry determines its attractiveness to investors. By nurturing fair competition, there is a high probability of growth in the automobile industry.

Trade liberalization policies

The high rate of globalization is making governments implement trade liberalization policies (Dieter 2007). Adoption of such policies is likely to promote the growth of the automobile industry. The growth will emanate from the fact that automobile companies will access a larger market. For example, Renault and Audi Corporations in Romania have accessed the benefits associated with transnational production networks and cross-border trade due to trade liberalization (Dieter 2007). Trade liberalization is providing automobile companies with an opportunity to expand into the international market by adopting various policies such as by entering into joint-venture agreements. Implementation of such policies will significantly enhance the probability of firms in the automobile industries to attain their profit maximization objective (Dieter 2007).

Policies implemented by International bodies and their effects on the automobile industry

The World Trade Organisation (WTO) is very much committed to ensuring that the world is a safe place to live in and do business (Andreas 2011). Consequently, the automobile industry has integrated environmental protection and sustainable development as one of its core goals. Consequently, it has formulated policies aimed at minimizing carbon emissions (Andreas 2011). The automobile industry is one of the economic sectors that WTO focuses on in its quest to ensure sustainability (Friends of the Earth International 2005). One of the ways through which WTO influences the automobile industry is by formulating policies aimed at ensuring that automobile companies embrace the concept of green energy (Andreas 2011). Moreover, WTO has been pushing for the development and incorporation of the green economy in the automobile industry (Kumar & Sutherland 2008). The WTO intends to achieve this goal by formulating policies aimed at ensuring that firms operate in a manner that promotes environmental protection by encouraging companies to be conscious of the environment (Mitchell & Tran 2009).

So far, the WTO achieved this goal by developing the Multilateral Environmental Agreements (MEAs), which aim at ensuring effective environmental protection amongst other issues. The WTO has also implemented environmental policies aimed at discouraging trade-in carbon-intensive products (Mitchell & Tran 2009). The organization has achieved this goal by integrating various instruments such as Border Carbon Adjustment (BCA) (Friends of the Earth International 2005). This policy is likely to influence automobile companies to produce vehicles that produce low carbon emissions. Ultimately, automobile companies will invest in the production of low-carbon automobiles to ensure that the scope of their market is not limited (Henry & Arbor 2011).

The incorporation of such policies is likely to influence the automobile industry indirectly. One of the areas of influence relates to research and development (Selivanova 2012). For example, the implementation of such policies will stimulate automobile industries to develop auto technologies that utilize various forms of renewable energy. Some of the forms of energy that the automobile companies will focus on to enhance the attainment of environmental sustainability include biofuels, nuclear energy, solar power, natural gas, and electricity (Selivanova 2012). Currently, approximately 20 percent of the world’s transport is dependent on petroleum sources of energy. This aspect will influence the operations of firms in the automobile industry positively through the incorporation of alternative propulsion systems (Henry & Arbor 2011).

Strategic options open to large automobile manufacturers in their international operation

Low-cost strategy

One of the strategies that large automobile companies should consider is a low-cost strategy. According to Porter (1998), firms that adopt a low-cost position achieve this goal by defending themselves against powerful buyers. A low-cost strategy enables firms to drive prices down to a point that is more efficient as compared to their competitors (Hill & Jones 2012). Additionally, a low-cost strategy enables firms to defend themselves against the effects of powerful suppliers (Hill & Jones 2012). This aspect is realizable via enabling firms to have the necessary flexibility to deal with the increase in the cost of output. A low-cost strategy enables firms to attain global standards and high economies of scale as illustrated by figure 1. By incorporating the low-cost strategy, large automobile companies can create substantial entry barriers (Kaplan & Norton 2003). The incorporation of a low-cost strategy enables firms to attain operational efficiency by attaining large economies of scale or cost advantage.

Porter (1998) further asserts that the adoption of a low-cost strategy enables firms to develop a higher competitive advantage by dealing with all the five competitive forces. By developing large economies of scale, large automobile companies will be in a position to deal with the high cost and competitive pressures. In a bid to achieve a low-cost strategy, large automobile companies should have several capabilities such as manufacturing and product diversification.

Global strategy

Large automobile companies should also adopt global strategies to survive in the international market. This strategy entails considering the total world market as a single market and one that has a single source of supply (Peng 2009). Additionally, global strategies consider the global market as an entity characterized by minimal variations. Firms that have adopted global strategies derive their competitive advantage out of the global market (Adler & Gundersen, 2008, p. 9).

The global strategy also incorporates other areas, which include multinational, international, and global strategies. Global strategies are designed to enable organizations to achieve effectiveness and efficiency in attaining their international expansion (Strategic Management Society 2011). Global strategies enable organizations to consider every location as a potential market in addition to being a source of competitive advantage. The adoption of global strategies will enable large automobile companies to be efficient in their quest to attain international expansion (Strategic Management Society 2011).

As illustrated in figure 2, adopting a global strategy will enable large automobile companies to attain operational efficiency. One form of efficiency will emanate from the firm’s ability to exploit factors of cost differences emanating from national differences. The global strategy will also enable the firms to attain operational efficiency emanating from scope economies. The firms will be in a position to share costs and investments (Stonehouse 2004).

Other benefits that multinational companies can gain by incorporating global strategies entail the ability to develop, exploit, and protect their capabilities resources. The resultant effect is the attainment of global efficiency and the ability to deal with cost as illustrated by figure 2(Strategic Management Society 2011). The charts below illustrate the strategic choices that large automobile companies should consider in their operation.

High-Cost pressure	Global standard products and economies of scale:	Community of affiliated companies that manage global learning:
Low-Cost pressure	Core product architecture defined centrally, marketing local:	Product customized for local needs based on shared competence (s):
	Low pressure for local responsiveness	High Pressure for local responsiveness

Figure 1: Strategic choices available to large automobile companies, low-cost strategy.

*Figure 2: Chart showing the strategies available for large automobile companies.*

Implications for the strategies and policies adopted

Implementing the above policies will impact automobile companies both positively and negatively. In a bid to operate in an environmentally sustainable manner, automobile companies will be required to implement new technologies. This move will lead to an increment in the cost of their operation (US National Research Council 2010). On the other hand, adhering to such policies will culminate in the automobile companies being more innovative hence enhancing their competitiveness (Kuik 2006).

Secondly, the competition policies will contribute towards the automobile industry being more attractive to investors for the policies will eliminate unfair trade practices such as the establishment of monopolies, which hinder competition. The competition policies will limit the establishment of barriers to entry by reducing the establishment of large entities (Martinuzzi, Kudlak, Faber, & Winman 2011). Additionally, the competition policies will culminate in firms seeking to develop a higher competitive edge by manufacturing high-quality automobiles that lead to a high level of customer satisfaction.

Trade liberalization policies will culminate in automobile companies accessing large markets hence increasing their sales revenue (Dieter 2007). This will arise from the fact that automobile companies will engage in cross-border trade.

Despite these benefits, the flipside of trade liberalization arises from the fact that it will lead to an increment in the intensity of competition (Dieter 2007). Trade liberalization increases the probability of foreign investors venturing into a particular industry, which may lead to a decline in the firms’ profitability.

Adoption of a low-cost strategy will enable automobile companies to nurture their competitive advantage given that the firms will achieve large economies of scale in the course of their operation. A low-cost strategy will enable automobile firms to undertake their manufacturing more cost-effectively, and ultimately, they will enhance their competitive edge with regard to pricing (Kaplan & Norton 2003). This aspect will in turn result in an improvement in the effectiveness with which the firms’ products penetrate the market.

References

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