The main content of the essay concerns the German automobile industry. Combining with Porter’s diamond theory, the competitiveness of this sector is analyzed in detail. The essay is divided into two sections. In section one there is a brief outline for the German automobile industry regarding diverse factors in production, employment, export and innovation. In section two, the specific analyses for the German automobile manufacturing in terms of determinants of the diamond theory is illustrated explicitly. Furthermore, it is imperative to explain the European economic background concerning policy, market, labor force, technology and infrastructure.
Finally, the influence of cultural function is illuminated with respect to the German vehicle industry.
As a key manufacturing industry in the twentieth century, the automobile industry has seen its competitiveness distinctly. Dicken (2007, p.278) mentions that the significance of this industry not only embodies in the scale but also the correlation of other industries and fields, such as oil consumption and related employment.
The European automobile industry grew rapidly compared to their counterparts in the United States and Japan.
According to Altshuler et al. (1984, p. viii) France, Italy, Japan, the United Kingdom, the United States, and West Germany occupied three-fourths of the auto production in the world and two-thirds of the vehicle sales. In addition, the production rate is 30 percent which is ahead of Japan and the United States during 21st century (Layan and Lung 2004, in Julien 2008, p.70). In 2003, the European automobile market increased by 0.4 per and reached a value of $267.8 billion (Datamonitor, 2004).
Among European countries Germany was the largest manufacturer of automobiles in 2003 (EIU, 2005), with market reaching a value of $54.02 billion (Datamonitor, 2004). The famous German companies BMW, Daimler Chrysler and Volkswagen stand for the world’s standard and quality of vehicles. In addition, Volkswagen holds the largest market share in this industry, accounting for about 0.2 per cent of the European market value (Datemonitor, 2004). Moreover, the turnover of the German automobile industry is €226bn. and an export surplus of €80bn (ACEA, 2010).
Indicators of Competitiveness
The automobile production is a chief component of the German economy (EIU, 2005). According to the figures of VDA (2010), the production of German vehicles was 6.0 million in 2008 and 5.2 million in 2009, which stood the first place among other European countries.
The figure (SMMT 2005, in Dicken 2007, p.305) above illustrates the pattern of European automobile production. It is evident that Germany held the considerable position in this industry.
The German automobile industry is a crucial contributor in employment. According to the data from ACEA (2010), around 1.4 million people work in the automotive sectors or relevant sections. Additionally, the workforce has experienced an upward trend over the past decade.
Germany addresses the abroad market constantly. The rate of export of light and heavy commercial vehicles increased by 4.2 per cent and 11 per cent respectively (EIU, 2005). In 2009, the rate reached to 68.8 per cent (VDA, 2010). Compared to Japan, which concentrated in business with the United States, Germany altered its interests to North America (Dicken, 2007, p. 301). The massive success has been achieved in the automobile export (Herber and Eva Vega, 2000).
The chief factor concerning innovation caters to the auto industrial advancement in Germany. This manufacturer provides the leading innovative technology for environment protection in terms of air quality, noise reduction and recycling, etc. As reported by ACEA (2010), the research expenditure is over the average of the EU’s, accounting for 2.5 per cent in Germany, whereas 2 per cent of GDP in the whole of EU.
Ultimately, the German automobile industry dominates the economic prosperity and holds the competitiveness among the European countries (Abelshauser, 2005, p.141).
According to the “Diamond Model” created by Michael Porter (1998, p. 1), the competitiveness of a nation has dominated the advancement of the entire country. As stated by Porter (1998), “the only meaningful concept of competitiveness at the national level is national productivity.” (Porter, 1998, p.6) Germany is a typical example in this aspect. It is reported that Germany has the third largest economy and car manufacturing turnover all over the world (EUROPA, 1995). To illustrate its competitiveness in combination with the “diamond” theory, the nation’s advantages are clarified.
The “Diamond Model” by Michael Porter
The competitiveness of a particular nation in one industry is determined by four basic factors according to the “Diamond Model”. The four elements are as follows (Porter, 1998, p.71): 1. Factor conditions: Qualified workforce, infrastructure, natural resource, etc. which are considered as basic factors of production in a country. 2. Demand Conditions: The home demand for the industrial products or services. 3. Related and supporting industries: The suppliers and related industries in the nation. 4. Firm strategy, structure, and rivalry: The method by which the firms are created in the nation in terms of the structures, organizations, management, and domestic rivalry.
Furthermore, there are two determining parts of the Diamond—chance and government (Porter, 1998, p.73) 5. Chance: The element is out of the control of companies, such as battles, wars and natural disasters. 6. Government: The influence of policies to every part of the determinants mentioned above.
In order to illuminate the German factor conditions meaningfully, the element is classified into five groups (Porter, 1998, pp.74-75):
Human resources: the educated and qualified labours in the companies. Physical resources: the natural conditions and resources in the nation, including the climate and time zone. Knowledge resources: the education standard in the country, such as universities, research institutes and statistical agencies, etc. Capital resources: the support fund and research investment of scientific development to the industry. Infrastructure: the essential part that influence competition, involving transportation system, the communications system and basic constructions in the nation.
Depending on the statistics reported by OECD (2010), the land area of Germany is 356,000 sq km, 53 per cent of which is constituted by agriculture and 30 per cent by forest. Along with its population, which has reached 82,120,000 including 43,420,000 labour forces, compared to other European countries, the population of Germany supplies the competitive advantage in the industrial development. In addition, the amount of employment in the German automobile field is the largest (Datamonitor, 2004).
While lacking in natural resources, Germany holds other merits to keep its competitiveness for the automobile industry in Europe. Highly educated, qualified and motivated employees are the crucial part of its factor conditions (Porter, 1998, p.368). It is notable that German products obtain the best quality and services in the world, especially in high-technological production. For seeking another way to maintain the competitive position, Germany overcame the demerits by developing the factor creation. High quality of the public educational system has paid more attention to mechanisms. Education in Germany is relevant to local industry requirements, particularly in science and high-technology (Porter, 1998, pp. 368-369). In this case, German workers are better educated in theoretical knowledge, which enhances their skills in practice for specific areas.
On the other hand, the expenditure of research and development (R&D) in Germany has grown considerably compared with France, UK, Japan and the United States. The investment on R&D in Germany was the greatest during 1986 to 1989, accounting for 2.7 per cent to 2.9 per cent of GNP (Nelson 1993, in Jacobson 1994, p.201). Additionally, the R&D of Germany as a percent of GDP surpassed that of the United States in 1987 (Porter, 1998, p.371). For example, the largest German vehicle manufacturer Volkswagen has won the “Golden Drop of Oil 2008” award because of its innovation in the new engine gearbox. This recent technology provides conditions for solving environmental contamination and contribution for reducing fuel consumption (Albawaba, 2008). Furthermore, in the International Motor Show in 2009, among 100 world premieres of the automotive manufacturers, there are 55 companies coming from Germany, which proves its competitiveness in car industry (States News Service, 2009).
The gross domestic product (GDP) in Germany exceeded that of the United States, increasing 3.7 per cent in 2006, and from 1.5 per cent to 2 per cent in 2007, playing an essential role in the European economy (Wesbury, 2007). The largest part of its home demand in Germany is industrial productions. Meanwhile, confronting the saturate domestic market, Germany had a different issue compared to other countries which had colonies to export goods. To conquer the disadvantage, Germany turned its interests to produce higher quality and tougher products. In automobile industry, the extreme success of Germany is that there are powerful domestic buyer industries because of the clusters business (Porter, 1998. pp.371-372).
Moreover, as mentioned by Murray and Fahy (1994), the improvement of product’s quality supports the sustainability of firms in terms of consolidating trades. Companies are anticipating the merits of a unified market by integrating to the European scale. For instance, Ford manufacturing in Germany allots dealerships across Europe to avoid locally held and ensure the efficiency regarding car repairing. In addition, the impact of the Single European Market (SEM) enhances the connection among its members. The trade among the European countries tends to be continuous, and it promotes the economic growth. The success of Germany in the vehicle industry is attributed to the macroeconomic effects of SEM. According to the Monti Report of 1997, there is 1 per cent growth of internal investment and 900,000 extra jobs. The German internal market is boosted by SEM, i.e. (Mercado, Welford and Prescott, 2001).
Related and Supporting Industries
German automotive field is eminent in its industrial clusters all over the world. The region around the city of Stuttgart is the core of Daimler-Benz and its supplier, the other related area boosts near BMW’s facility in Regensburg, and the largest automaker-Volkswagen has explored its product net in Germany (Bennett, 1994). All these leading brands in vehicle manufacturing have benefited from their industrial clusters.
The clusters beget production process efficiently. The sophisticated suppliers around automakers’ areas are supported by smaller components providers, such as metal, plastic, iron and steel producers, which are out of Germany’s historical position. Porter (1998, pp. 373-374) states that consumers and suppliers reinforce each other to enhance their trades. As the technical-oriented German firms, their business connections tend to be closer. Therefore, there are various opportunities for buyers and suppliers to cooperate regarding new productions and improving them, which dominates the competitiveness of the particular industry.
Firm Strategy, Structure, and Rivalry
In contrast with other types of companies, the common structures of German firms are small and medium. To some extent, this scale allows the firms to economize the production cost. Furthermore, the concentration of high quality cars, innovative products and undeniable services of the German auto manufacturing has taken the first place in customer’s loyalty (Porter, 1998, pp. 374-375).
The German automakers put attention to the international market and their dominance is embodied in dealing with the relationships among industry, strategy and firm performance (Daniels, Radebaugh and Sullivan, 2009).
As the automobile industry has seen its competitiveness in the international market, German firms confront the challenge from other automakers. Take Volkswagen as an example, the competition between Volkswagen and General Motors in the United States is dramatic. Nevertheless, after altering the management strategy, VW produces 40 per cent of components, which is beyond other European car manufacturers (Stein, 2006). The transformation of plans offers potential for VW to keep its overriding position in the auto industry.
The Role of Government
The German market is one of the most open markets all over the world. The conception of international trade is different from that of the other countries–it is the role of companies, instead of government. The German firms are required to face the competition independently and have been enhanced in this process (Porter, 1998, p.378). Meanwhile, the government still plans a vital role in industrial advancement. The auto manufacturing requires technicians and scientists to improve the production quality, and the German government supports the industry in terms of education and research investment. That is the determinant of the German auto manufacturing’s competitiveness. Besides, the function of the government is vital in respect of the context of globalization (Campanella, 1993). The German auto producers are beneficiaries from this point concerning both in home and international markets.
The Role of Chance
Germany suffered hardships and great losses due to the two world wars. Yet the positive effects outweigh the negative and it was evident that Germany obtained immense achievements in postwar industrial competition. Porter (1998. p.179) mentioned that the wars created challenges in producing high technology products and complex components. Moreover, the educated population has seen a massive growth after rebuilding. For example, The World War Ⅱ created the chances for Germany to develop their technology in machinery production.
The Determinants as a System
The diamond theory not only works on an individual, but also affects each other. To some extent, the effects existed among each part of the “diamond” determining the competitive ability of the nation (Porter, 1998). The sophisticated manufacturer like the German automobile industry keeps its competitiveness through the function of the whole system instead of the partial effects. For instance, Germany is short of natural resources, which is included in the factor conditions; however, the factor creation has been developed such as innovative projects focusing on environment protection and energy conservation. To ensure the new technology progress, the government concentrates in education and research investment, which is illustrated as a function of government in the diamond. Furthermore, the advancement of innovation in the auto industry enhances its competitiveness versus the rivalry in the international market. The development of automobile manufacturing activates the related industry, such as automotive components production, fuel consumption and car services, and it leads the enhancement of Germany domestic economy.
The Role of Culture
As crucial as the determinants in diamond structure, culture is a cardinal factor of the competitive capacity. Hofstede (1983) holds that national and regional cultures influence management, involving multinational, multicultural organizations in both public and private sectors. The German automobile companies keep the capacity owing to their efficient management. On the other hand, culture affects other determinants such as government’s policies and cost of production. The competitive advantages like technology can be duplicated by other rivalries, whereas culture is the unique characteristic of the particular individual and the nation. Therefore, the culture supplies conditions to hold the specific factors of the competitiveness.
By analyzing the German automobile industry with regards to the diamond theory, it is evident that German vehicle manufacturing keeps its competitiveness in the field compared to other manufacturers, even though lacking in natural resources. The whole system functions efficiently in German car industry for holding its competitiveness although there is
necessity for the automakers to keep the pace of the international market progress.
To sum up, Germany occupies a significant position in the automobile industry in the world and holding advanced technology, great services and customer’s loyalty is prosperous to the future of the industry.
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