The Decline of European Car Manufacturers

The European automotive industry has suffered over the past three years with declining revenues across multiple manufacturers, and now with growing popularity for Asian car manufacturers there is a greater competition on the pricing of cars, and a grab of market share in a continually diversifying market. PSA Peugeot Citroën is the second largest European based automaker. In regards to market share, the firm was the eighth largest in the world as of 2010. However a decline in car sales, and increased foreign competition, the company reported an annual loss of €5 billion. This goes to exemplify the monopolistic competition nature of the car industry in Europe & America.

Definition “Monopolistic Competition”:

It can be defined as the existence of monopoly power for a firm within a certain period of time in the short run. The firms in the long run will compete on price and other factors (e.g. branding, quality, etc.) eventually losing monopoly power over time as firms begin to differentiate less and create products of homogenous nature.

Main Factors:

  • There are Car Manufacturers, No Firm Has Total Control Over Market Price
  • Asymmetric Information
  • Independent Decision Making
  • High Barriers to Entry & Exit

Analysis:

The article goes on to establish the monopolistic nature of the European car industry, and takes a close look at the performance of PSA Peugeot Citroën. The article reveals the monopolistic nature of the market, as it mentions the “sizeable” cash pile the firm maintains, and the fact that the firm reported an annual loss of €5 billion. The graph below displays the current short-run situation that the firm exists in.

Picture1

The firm is running at a loss because of the declining market share, as there is greater competition from Asian manufacturers such as Kia entering the European market. The Asian firms are taking market share from the smaller range of cars (PSA target market) and then moving upmarket to medium luxury vehicles. European manufacturers such as Mercedes-Benz and BMW have also begun to produce small size vehicles similar to PSA to try and enter this particular section of the automotive industry, as they can use their economies of scale to effectively compete in this partition of the market.

Evaluation:

Another factor attributing to the firm making an annual loss can be noted in the operational cost of the factories. 40% of the firms manufacturing is completed in France, and due to this the firm has to deal with strong unions keeping worker wages high. As well as the influence of the government pushing PSA to keep factories open even though demand for cars has dropped over the past two years or gone over to Asian car manufacturers. The firm can be compared to Renault which is the direct French rival firm, as Renault moved the majority of its manufacturing overseas to reduce the cost of workers’ wages and general operations. The French government has already supported the group with €7 billion in assistance, helping the firm maintain the loss.

PSA’s main rival is the Volkswagen Group, which have an advantage over PSA as they have greater economies of scale. Volkswagen is able to offer consumers similar cars but at a lower cost, this can be noted in the differences between the Volkswagen Golf and the Citroën DS5. The DS5 starting price is £22,700, whereas the Golf starting price is £16,285. This identifies Volkswagens economies of scale, but also identifies another monopolistic characteristic of Citroën since they cannot compete on price, they compete on advertising and aesthetics of their car range. It also establishes the existence of asymmetric information as the Golf has a smaller engine, and less space compared to the DS5.

It is evident that the French firm cannot continue to operate at a loss in the long term as eventually the cash reserves will run out. This means that in the long term the firm may seek government assistance, or it will have to reduce high fixed costs such as factories, and the salaries of workers. This would lead to a reduced unit production and as a result there may be a dwindling market share, but a possible return to normal profit.

The firm is likely to remain loss making unless there is resurgence in the demand for cars, as the market has become increasingly competitive and exiting the market is unfavourable due to the high barriers of exit.

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