Explain how Industry Joint Ventures and Common Vehicle Architectures Enable car producers to economise on costs of production and comment briefly on the limitations of these practices

Joint ventures and strategic alliances have become viable alternatives to traditional mergers. Even with a scarcity of capital, a company can enter into a joint venture to expand into new markets, fund research and development and market new or existing products. The relationships in joint ventures provide the partners with access to additional resources such as technology, management, brands, distribution systems and customers, also by sharing the risks and costs a company is able to pursue and uptake multiple opportunities, thus creating better odds for overall success. Another major economisation on costs of production are common vehicle architectures, where by the manufacturer can achieve huge savings on developing new cars by sharing floor plans, engines, chassis and other parts from different models or brands. Industry Joint Ventures and Common Vehicle Architectures are two main ways that car producers have discovered to cut there fixed and variable costs of production. However with these advantages come additional disadvantages. An example of joint ventures is the New Venture Gear Company created by General Motors and Chrysler linking up their transmission plants. These two companies are two of the biggest car manufactures in America and should eventually witness reduced average costs from the downward slope of the long run average total cost curve (LRATC). As a firm gets larger and starts gaining a higher income, although its total costs may be higher its average total cost will be lower. This is due to certain advantages known as economies of scale, which can be classified as External, or Internal economies. There are many different economies of scale but they may be grouped into several categories:

-Technical economies: Indivisibilities, The firm will have a large output which means it will be able to fully utilise its machines enabling the overhead costs to be spread. A larger firm can also buy more sophisticated machinery, which can help bring down the cost per unit.

-Marketing Economies: These are advantages that occur in the area of buying and selling. The firm will be able to achieve bulk-buying discounts. The cost of advertising for the firm would be spread over many units reducing the advertising cost to a minimum.

-Financial Economies: The firm will be able to obtain loans more easily and at preferential rates of interest, as they will have greater reserves.

-Managerial economies: Since the firm is larger it will have the scope to employ specialist managers.

-Risk bearing economies: Because the firm is larger and will have a larger output it will be in a better position to possibly produce a range of products.

-Administrative Economies: The larger firm will be able to utilise the best-computerized systems.

The transmission firm will also benefit from combining because its output will eventually equal or surpass the Minimum efficient scale (MES). From the Dunnet and Rhys 1988 text the MES for research and car development in the industry was 5 million units per year and GM produced 4.8 whilst Chrysler produced 1.4. This shows they were both below the MES, yet by combining the Transmission plants they will achieve an output of 6.2 million units which is well above the MES. However the firm cannot always expect to achieve economies of scale when it expands, there are limits. It is likely that the company will eventually reach a scale of production where a further increase in size does not produce any reduction in the average cost per unit. This is known as the MES and from the graph can be identified by the point where the LRATC first becomes horizontal.

There can as I aforementioned be disadvantages with companies going into Joint Ventures and a good example of that was when Saab had the problem that one of its new cars shared parts with models from a lesser brand called Opel, so customers were put off because they didn’t think they were paying good value for money. This was one of the issues, which stopped BMW from joining other companies and retaining its individualism because, although costs may be higher, customers know they are getting all BMW parts. Other problems such as the fact that the two companies are in direct competition and there can be strong arguments over which way the business should go, that is why joint ventures only last approximately 5-7 years with 80 percent of most joint ventures being bought out by one of the companies.

Common vehicle architecture is the second main aspect in car industry, which allows companies to economise on costs of production. Companies reduce the number of platforms and then use the same platform for different models because in industry research and development into creating a new floor plan and engine component alone makes up one third of the design costs. So by using less it would reduce the design costs and spread them over a higher output, reducing average costs. An example in industry of this is VW Golf platforms can be found in Audi’s, Seat’s and Skoda’s. There is a VW engine in every Seat Alhambra and GM makes the seatbelts in Vauxhall Corsa’s. The problem with sharing vehicle Architecture is that it can lead to a risk of little innovation with producers creating basically the same car in different variations. A case that proves this would be the Pontiac 6000 and Chevrolet Celebrity, both producers benefited from reduced production costs on the model but couldn’t sell the car. Furthermore when Rover and Honda came together to produce the Rover 200 and Honda Concerto, they cut the research and development costs in half by combining but struggled to sell the cars because they were both so similar. Sharing Platforms and parts between manufacturers reduces the production costs greatly and is a regular practice in the industry.

As I have said there are disadvantages with these two mainstream cost saving techniques but it is obvious that the advantages greatly outweigh the disadvantages so long as companies are careful in electing who they want to team up with and also considering consumer respect. Overall for lots of people cars are a very symbolic item being bought by the consumer because it reflects their needs and desires so companies need to remember this and not produce cars that are to common or alike.