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Problems with over capacity in the car market
The car industry is such a good place to go for examples of Business Studies in action. Here, the problem under discussion is capacity utilisation. This concept is very closely linked to the idea of a breakeven point.
If car producers have vast factories, production lines and huge workforces they are often stuck with high fixed costs. To breakeven (and eventually make a profit), the manufacturers have to sell lots of vehicles to cover their costs. For many car firms, this simply isn’t happening and losses are mounting.
This Economist article explains the woes of Europe’s carmakers. The euro-area crisis has aggravated an ongoing oversupply of cars in Europe and prompted a brutal price war. Peugeot is burning cash at a rate of €200m a month. Its shares have slumped. Investors wonder whether it can survive more than another year or two. The answer would seem to be trying to cut back on costs. Peugeot said earlier this month that it would cut 6,500 jobs and close its factory near Paris, but President François Hollande insisted that its plan “will not be accepted”.
Ford said its losses this year in Europe would be far worse than expected, at more than $1 billion. Opel-Vauxhall (whose boss was replaced this month, for the second time in eight months) is expected to lose more than $1 billion this year, on top of the $14 billion lost since 1999. Not every company is suffering. Daimler said its first-half profits were up slightly, to €2.9 billion. Jaguar Land Rover, British-based but Indian-owned and enjoying record profits, said it would create a further 1,100 jobs at a factory near Birmingham, on top of a similar expansion at a plant near Liverpool. On July 26th Volkswagen announced record profits of €6.5 billion for the first half, up 7% on a year earlier.
Western Europe’s car market is, overall, in its fifth year of falling sales. But in some markets, such as Britain and Germany, sales are slightly up so far this year and premium brands such as BMW and Land Rover are enjoying strong export demand from emerging markets. But the central problem seems to be over-capacity. There has been massive restructuring in most industries since the financial crisis five years ago – but only two European car factories have closed. One analyst quoted in the article argues that only drastic cuts in capacity, with up to 12 assembly plants closing, will be enough to restore the fortunes of Europe’s car market.
The article is well worth a look, and you might like to also ckeck out Honda’s response to the problem and a video clip about the approach favoured by General Motors from earlier this year.
Revision Quiz - Breakeven Basics [13 May 2013]
BUSS1 - Profit and Breakeven Calculations [8 Jan 2013]
Revision Presentation - Breakeven Analysis (Introduction) [31 Dec 2012]
Revision Presentation - Cost Basics [30 Dec 2012]
Technological Change & Innovation - Insights and Quotes [28 Aug 2012]
6 Essential M&A Cases: Tata Group buys Jaguar Land Rover [21 May 2012]
Revision Presentation - Making Operational Decisions [17 May 2012]
BUSS2 Magic Formula [15 May 2012]
Vodafone takes over Cable and Wireless Worldwide [23 Apr 2012]
How will General Motors respond to the problem of over-capacity? [16 Apr 2012]
Vestas – has the wind gone out of their sales. [14 Feb 2012]
How to turn threats into an opportunity at Ryanair [31 Jan 2012]
Revision Presentation - Workforce Planning [26 Dec 2011]
Pandanomics - Can Edinburgh Zoo Get a Return on its Cuddly Investment? [7 Dec 2011]
Sing Along Revision - The Break Even Song [4 Dec 2011]
Cut price cup cake deal goes wrong…... [23 Nov 2011]
Revision Quiz - Breakeven Basics [15 Oct 2011]
Revision exercise - Chantelle’s Jigsaws [2 Oct 2011]
Break Even Simulator - Spreadsheet [2 Oct 2011]
The breakeven simulator [2 Oct 2011]
Messy Contributions…. recipe for success? [29 Sep 2011]
Skype CEO on Aims, Growth, Risks and Motivation [5 Sep 2011]
Spotify - Five Years to Break-even [28 Aug 2011]
McDonalds - Making a Meal out of the Olympics [20 Jul 2011]
Where there’s muck there’s brass [6 Jul 2011]
Cash flow crisis at Saab: what went wrong? [23 Jun 2011]
Retrenchment in action - Comet turns off the retail lights [12 May 2011]
Jaguar goes for NPD investment with £5bn plan [10 May 2011]
Lesson Worksheet - Capacity Utilisation [5 May 2011]
Capacity cuts at Toyota UK as production still hit after Japanese earthquake [20 Apr 2011]
Strategy and bargaining power - food for thought [22 Mar 2011]
CSR - The Mega Dairy, Economies of Scale and Cornflakes [25 Feb 2011]
Q&A - What are the main issues in operating a multi-site business? [29 Dec 2010]
Q&A - How important is location in determining business success? [29 Dec 2010]
Euro Disney - an HRM & Finance Nightmare? [24 Nov 2010]
Cash flow Clue-doh! The Mystery is Revealed… [2 Nov 2010]
Nissan Goes for it In China [20 Sep 2010]
Would you stand for it? [14 Sep 2010]
Adding value…to the humble toilet roll [2 Sep 2010]
Dark days for the UK nightclub market [21 Jun 2010]
Sir Richard Branson on Virgin Atlantic Business Strategy [26 May 2010]
Strategy Case Study - Vauxhall/Opel restructuring [25 May 2010]
Revision Quiz - Using Breakeven Analysis in Decision-making [5 Apr 2010]
BUSS4 Research - a Corus of Disapproval [1 Mar 2010]
BUSS4 and British Airways - a marriage made in heaven [1 Mar 2010]
Strategic reaction to the UK recession - notes and observations [9 Feb 2010]
Flexible working thrives in the recession [1 Feb 2010]
Video case study - New Balance quality in a successful UK factory [28 Jan 2010]
Retrenchment and capacity cutting at Blacks Leisure - and then expansion again? [12 Jan 2010]
Capacity Utilisation - When Operating at Full Capacity is Bad News for Customers [2 Jan 2010]
Bottom Line - Keeping Overheads Low [28 Dec 2009]
Revision Presentation - Capacity Management [19 Dec 2009]
Operations in Action - Video Tour of the Amazon Depot [23 Nov 2009]
Brompton Bicycles - Guardian Profile [9 Nov 2009]
Auto Warriors - the Capacity Management Reality Show [28 Oct 2009]
Q&A - How are businesses affected by unemployment? [27 Oct 2009]
Managing Cash Flow - Beware the Economic Recovery [26 Oct 2009]
Entrepreneur takes advantage of the postal strike [24 Oct 2009]
More trouble in the skies [27 Aug 2009]
Strategic business decision-making - Network Rail [27 Aug 2009]
Standing room only - on Ryanair? [7 Jul 2009]
Spare capacity prompts a fall in business investment [4 Jul 2009]
U2 on Tour - Investment appraisal and capacity utilisation rolled into one! [2 Jul 2009]
Stock control - de-stocking was over £5bn in Q1 of 2009 [2 Jul 2009]
Flexible unemployment [19 Jun 2009]
From crisps to vodka - what else can you make from potatoes? [31 May 2009]
Q&A - What is a sales forecast? [31 May 2009]
Q&A - What are the main things to consider when obtaining finance for a start-up? [26 May 2009]
Q&A - How can a business handle a loss? [26 May 2009]
Q&A - How is profit used by a business? [26 May 2009]
Why businesses fail - an interview with Pepita Diamand [24 May 2009]
Ansoff helps with the school lunches [12 May 2009]
Swine Flu Vaccine - An Interesting Example of Batch Production in Action [1 May 2009]
Video case study - Wind turbine production is stalled [1 May 2009]
International trade in action - on board the container ship [14 Apr 2009]
Celebrity chef had the recipe wrong after all [5 Apr 2009]
Are we motoring towards electric avenue? [5 Apr 2009]
Football finances under the spotlight [5 Apr 2009]
Customer Service and Capacity Utilsation: Stenna Line versus Ryanair [3 Apr 2009]
Hotels feel the squeeze from low capacity utilisation and pricing [9 Mar 2009]
Revision Quiz - Capacity Management [8 Mar 2009]
Q&A - What are fixed costs? [1 Mar 2009]
Video case study - inside the Easter egg factory [28 Feb 2009]
How the car makers responded to the downturn [17 Feb 2009]
Cost-cutting made simple for small businesses [17 Feb 2009]
Flexible employment at Mini - the upside and the downside [16 Feb 2009]
Video case study - Living Salads [9 Feb 2009]
Could 2009 be a boom year for UK holiday destinations? [2 Feb 2009]
Q&A - What is meant by production capacity? [2 Feb 2009]
Q&A - Operations - What is spare capacity and does it matter? [1 Feb 2009]
A good example of the capacity utilisation calculation [23 Jan 2009]
Cutting capacity in the service sector [17 Jan 2009]
Excess stocks build as car demand falls [17 Jan 2009]
Ripple effects of a brutal outlook for the car industry [16 Jan 2009]
Highest Productivity in the Industry - But Still Crippled by the Crunch [9 Jan 2009]
A Devastating Blow for the Irish Economy [8 Jan 2009]
Video case study - warehouse expansion for fashionable growth [21 Dec 2008]
Revision Quiz - Operational Decisions [9 Nov 2008]
Breakeven exercise - cosmetic surgery while you wait [23 Sep 2008]
For sale: airport with 1 runway and 35.1 million customers [17 Sep 2008]
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