The automobile industry has high barriers to entry due to large capital requirements for manufacturing facilities, economies of scale of existing players, and brand loyalty. Rivalry between existing companies is medium to high as they compete for market share in segmented markets. Buyers have increasing bargaining power due to more options that meet their needs for performance, quality, and cost of ownership. Suppliers have low bargaining power due to dependence on a few automakers. Substitutes like rail, metro, and used cars present a low to medium threat. Complementors that can benefit the industry are road infrastructure, urbanization, and supportive government policies on emissions and financing.
The automobile industry has high barriers to entry due to large capital requirements for manufacturing facilities, economies of scale of existing players, and brand loyalty. Rivalry between existing companies is medium to high as they compete for market share in segmented markets. Buyers have increasing bargaining power due to more options that meet their needs for performance, quality, and cost of ownership. Suppliers have low bargaining power due to dependence on a few automakers. Substitutes like rail, metro, and used cars present a low to medium threat. Complementors that can benefit the industry are road infrastructure, urbanization, and supportive government policies on emissions and financing.
The automobile industry has high barriers to entry due to large capital requirements for manufacturing facilities, economies of scale of existing players, and brand loyalty. Rivalry between existing companies is medium to high as they compete for market share in segmented markets. Buyers have increasing bargaining power due to more options that meet their needs for performance, quality, and cost of ownership. Suppliers have low bargaining power due to dependence on a few automakers. Substitutes like rail, metro, and used cars present a low to medium threat. Complementors that can benefit the industry are road infrastructure, urbanization, and supportive government policies on emissions and financing.
Porters Five Forces and Complementors: The Automobile Industry
Threat of New Entrants: LOW
The automobile industry has been one of the most dynamic industries that greatly depend on the external preferences of the masses that direct the profits of the investors in this market. Market segmentation as well as market positioning are valuable inputs that a possible entrant could traverse in relation to the number of possible competitors that are ready to receive them in whatever segment they choose. It should also be considered that these established companies have already marked themselves with the mass of customers that are most likely to continue their buys on the brand. Achieving economies of scale is a major challenge for any potential new entrant in the automobile industry. Huge capital outlays to establish manufacturing units result in very high fixed costs. Owing to the cyclicality and hence the volatility of demand in segments (strong correlation with industrial productivity), even the incumbents with all their experience are finding it difficult to achieve economies of scale, which makes it extremely difficult for a company to enter the industry. Barriers to exit for the existing players are also high owing to their existing investments in fixed assets and technology. The next consideration is the investment that is needed to be invested in the manufacturing processes of this kind in order to compete with the prices of other established companies because of the big economies of scale. The investment is a big hindrance to any investor, in that if it turns out to be a bad one it will generate much losses to the investor. So, the overall threat is low. Moreover, strong brand identification of the incumbents brands and their diversified product portfolios which already have differentiated positioning catering customer needs of safety, comfort, total cost of ownership etc. make it difficult for the new entrants to establish brands as well as to differentiate their offerings from the existing players vehicles. The existing players have either developed extensive R&D capabilities or have entered into joint-ventures with global OEMs providing them with cutting edge technology. A new entrant will find it extremely challenging to avail either of the two advantages. Stringent emission norms and uncertainty in government stance over them exposes new entrants to business risk which the existing players are largely able to overcome through their existing reputation and experience in dealing with the policy decisions. The wide-spread service networks which the existing players have across India, enables them to offer a product-service bundle which a new entrant cannot offer immediately at the time of market entry. Entry of Foreign OEMs: The foreign OEMs having a globally reputed brands, cutting edge technology, ability to invest, and compliance to strict norms are in a position to overcome the above mentioned points A, B, C, D. They can overcome the threat due to point E (distribution network) by initially entering into JV/alliance with existing players till they gain sufficient market knowledge and experience.
Intensity of Rivalry Among Established Companies: Medium to High
In the global automobile industry, rivalries are broken down into the sectors of each brand. Ferrari does not compete with BMW and the latters market is not the same with Toyota. The segmentation of market, however, does not diminish the number of firms in a certain market sector. A lot of firms compete with each other in a certain market segment which contributes to increase competition as the industry is noted for having firms of equal strength. This could lead to firms engaging in competitive battles and attack and retaliate as they strive for market leadership. Further, the growth in the industry is slow and the only way for firm to grow is by capturing market share from each other, which leads to increased competition. The industry is also described as having high fixed costs, having undifferentiated products, having diverse competitors, and having high exit barriers. All these factors contribute to an increased competition in the industry. Bargaining Power of Buyers: MEDIUM to HIGH The customer preferences have been evolving from being extremely price sensitive, willing to trade-off performance to willing to pay premium for performance owing to rising disposable incomes. The existing players with access to technology from global Original Equipment Manufacturers (through Joint Ventures or otherwise) are adapting international products to serve customers. These products score highly on the performance, safety and comfort parameters, increasing the bargaining power of the customers. With rising fuel and service costs, customer is more focused on the total cost of ownership instead of just the acquisition cost. Thus the customer is increasingly basing the buying decision on the quality of service bundle (after sales). Customers have shown an increased adoption of newer modes of transport such as metro-rail, negatively influencing the demand for buses, in turn affecting the buying decisions of State Transport Units. Further, in recent years, this seems to have weighed heavily towards buyers with industry players needing to be more vigilant regarding consumer preferences. Because of the current global economic conditions, there is a smaller number of buyers at global levels. This is most evident in Europe currently with Ford having to close plants, cutting 6,200 employees, or 13% of the European workforce to stem losses exceeding US$1.5 billion (Barr, October 25, 2012). Consumers are also keeping their automobiles for longer periods of time and are being more prudent and judicious when buying new ones. This may effectively signal lower demand and higher-than-expected bargaining power of buyers. Bargaining Power of Suppliers: LOW The Industry Analysis Handbook 2012 describes the automobile supply business as fragmented. Many suppliers rely on one or two automakers for the purchase of the majority of their products. Moreover, switching costs of suppliers of component parts are high. Because of this, suppliers hold little power and are susceptible to demand and requirement of automobile manufacturers. The exception within this is the world price of steel where automobile manufacturers holds no or little influence to them.
Threat of Substitutes: LOW to MEDUUM
Railway network is a substitute for Medium & Heavy Commercial Vehicle and Light & Intermediate Commercial Vehicles (trucks, trailers, etc.). Railway networks has become a compelling alternative to mass transit especially for a border to border or state to state travel. Aside that it cost you less, its also faster. Despite the trend in railways as mentioned, it does not suffice to consider it as a strong threat to the automobile industry. The betterment of roads and highways have mitigated this threat as consumers are happier to drive in smoother paths. Another threat is from the Metro-rail networks which offer a substitute for passenger vehicles and buses. But in terms of penetration in the market, they still have a long way to go to compete with buses as the latter is still more mobile and convenient. Thus, this threat is presently low but may become medium in the near future. Lastly, the Used Car Market may also be a threat. Cars sold in the used car market are relatively cheaper than newly manufactured and furnished ones. However, the higher costs of ownership (i.e. repairs and maintenance) associated with purchasing cars and the lower confidence in durability and reliability of product quality almost counterweight the lure brought about by lower prices of used cars and thus making this substitute not so threatening. Complementors The Road Infrastructure Industry can be a complementor for the automobile industry. Proper infrastructure on roads contributes to the value of cars. People would consider buying more cars if roads are better. The government should be the main initiator of this complementor but they should be able to create meaningful partnerships with the private sector to be able to maximize the creation of better roads. Further, urbanization on a certain area can also complement the growth of the automobile industry. As cities become more urbanized more activity is going on within and cars becomes more of a necessity. People tend to buy cars in a more urbanized area to meet immediate demands from their different activities. Automobiles gives convenience to people in a highly urbanized area. Lastly, the government is a key complementor the automobile industry. The role of government as a complementor to the car industry is broken down into two parts: 1) Policies on emission norms, and 2) Ability to control interest rates. With Global Warming being an issue which is debated fiercely at the global level, international treaties and resolutions may bring about sudden and sweeping revision in the present norms of emission, requiring steep technology up gradation (and investments). This may provide edge to foreign new entrants who already possess technology for this. Further, the government can influence the availability of financing options and the easing of interest rates. Governments economic policies also influence the index of industrial productivity to which M&HCV (heavy trucks, trailers) demand is strongly correlated.
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