Porter’s Five Forces of the Automobile Industry

The past five years were tumultuous for automobile manufacturers. Skyrocketing fuel prices and growing environmental concerns have shifted consumers' preferences away from fuel-guzzling pickup trucks to smaller, more fuel-efficient cars.

Some automakers embraced the change by expanding their small-car portfolios and diversifying into the production of hybrid electric motor vehicles. Other automakers were more reluctant to shift their focus from big to small cars, expecting the price of fuel to contract eventually, bringing consumers back to the big-car fold. When fuel prices did fall during the second half of 2008, it was due to the US financial crisis ripping through the global economy. This had a domino effect throughout the developed and emerging worlds, with many Western nations following the United States into recession. Industry revenue fell about 15.4% in 2009.  Pent-up demands will aid industry revenue growth, estimated at 2.1% in 2013, thus bringing overall revenue to an estimated $2.3 trillion. 3 Overall, the large declines followed by recovery are expected to lend the industry average growth of 2.2% per year during the five years to 2013. Throughout the past five years, growth in the BRIC countries supported production. Rising income in these countries led to an increase in the demand for motor vehicles. Also, Western automakers moved production facilities to BRIC countries to tap into these markets and benefit from low-cost production. Over the next five years, the emerging economies will continue their growth, and demand for motor vehicles in the Western world will recover. Industry revenue is forecast to grow an annualized 2.5% to total an estimated $2.6 trillion over the five years to 2018.

Threat of New Entry (Weak):

Capital Generation: Huge capital is required. So, if someone plans to come up with the company of automobiles, they have to make huge investment and bear huge risk.

Legal Barriers: Few legal barriers protect existing companies from new entrants. There are various Government Rules and Regulations that makes the differences.

Goodwill Earned: All automotive companies have established brand image and reputation

Quality and design: Products are mainly differentiated by design and engineering quality

Economies of Scale: It is very hard to achieve economies of scale for small companies

Taxation Policies: Governments often protect their home markets by introducing high import taxes

Supplier power (Weak):

Many Suppliers: Large number of suppliers are there, if not Suppliers.

Different Suppliers: Some suppliers are large but the most of them are pretty small

Parts are available: Materials widely accessible

Forward Integration threat: Suppliers do not pose any threat of forward integration

Buyer power (Strong):

Many buyers: There are many buyers in this field. The purchase rate has been growing in increasing trend.

Organizational Buying: Most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices

Alternatives: It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation.

Force Down Prices: When they are into buying more than one unites, they can compel for drawing down the prices.

Flexible buyers: Buyers can easily choose alternative car brand

Price Sensetive: Buyers are price sensitive and their decision is often based on how much does a vehicle cost

No backward integration threat: Buyers do not threaten backward integration

Threat of Substitutes (Weak):

No easy substitute: There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes

Low chances of getting with substitutes: Substitutes can rarely offer the same convenience and hence the customer cannot easily move towards the substitute.

Competitive Rivalry (Very Strong):

Limited competitors: Moderate number of competitors

Difficult Quit: If a firm would decide to leave an industry it would incur huge losses, so most of the time it either bankrupts or stays in automotive industry for the lifetime

Target segments: Size of competing firm’s vary but they usually compete for different consumer segments

Brand Loyalty: Customers are loyal to their brands in this regard.

Being Acquired: There is moderate threat of being acquired by a competitor

References:

http://www.scholar.harvard.edu

http://www.wikipedia.org/