A Five Forces Analysis of the Automotive Industry
The great recession had hurt the revenues and profitability of automobile manufacturers deeply. Some of the most well known brands had reached the verge of bankruptcy. Had not the government intervened, it would have been quite difficult for these brands to survive. However, now that the recession has passed and things are back on track, the automobile industry is flourishing again. Apart from great technology and design, now the focus is on passenger safety and environment friendliness. Pretty soon, it will be an era of autonomous vehicles. There are several factors that affect the vehicle industry globally. Here is a five forces analysis of the automobile industry that discusses the five important forces which affect its competitiveness and attractiveness in any market. This analytical model was developed by Michael E Porter and is used industry wide to keep track of competition and to build sources of competitive advantage.
- Key Points:
- Threat of new entrants: Low
- Bargaining power of suppliers: Low
- Bargaining power of buyers: Moderately high
- Threat of substitute products: Low
- Competitive rivalry among existing players: High
Threat of new entrants: Weak
It is difficult for new brands to enter the automobile industry which is because of the large investment required for establishing a car brand. At the initial stage, a huge investment will be required to set up the manufacturing facilities, distribution network and for hiring skilled staff. Another major barrier is the level of competition from the existing brands. Unless a new brand brings an innovative and differentiated product to the market, chances to gain a significant market share are low. While law was not a barrier for the new entrants earlier, legal requirements have grown in recent years, creating one more barrier to entry.
Brand image and reputation can also be major challenges before new players. Brand image and equity are some major advantages for the existing brands. Any new brand would have to focus a lot upon engineering and product quality. Getting access to raw material can be easy but then achieving economies of scale is difficult for small players. Moreover, penetrating new markets is not easy either. Some governments have applied high import taxes to discourage foreign brands. So, there are several factors that minimize the threat from the new players. Apart from Tesla, there is hardly a new brand that has been able to make a significant mark at the international level in the automobile industry.
Bargaining power of suppliers: Weak
The bargaining power of suppliers in the automotive industry is weak for most of them are small players. Only few of them are significant in size. The threat of forward integration is minimum from the suppliers for the reasons discussed in the first category. These suppliers have to play according to the rules set by the car brands. The vehicle brands like BMW, Ford, Toyota and VW hold immense clout because the raw material is always available in plenty and switching from one supplier to another is not difficult for them. In this way, the bargaining power of suppliers is considerably low.
Bargaining power of buyers: Moderately strong
A large part of the buyers are the small individual buyers that buy single vehicles. However, there are corporations and government agencies that buy fleets of vehicles. Such buyers are in a position to bargain for lower prices. Whether small or large buyers can easily switch to a new brand. There are no big costs involved in switching to another brand or to an alternative mode of transportation. The buyers are price sensitive mostly and would switch to another brand that offers a better product at lower price.
However, none of the buyers whether big corporations or individual small buyers poses a threat of backward integration. Based upon the overall picture their bargaining power is moderately strong. Brands focus on building customer loyalty through design, quality and by offering competitive prices. Competition in the automobile industry has grown intense and changing consumer trends have also led to growth in the bargaining power of customers.
Threat of substitutes: Weak
There are several substitutes and alternative modes of transportation including taxis, buses, trains and planes. However, none of them can provide the kind of accessibility and convenience that owning an automobile does. Your own car will serve you round the clock but if you missed a train or bus you have to wait for another. However, in case of the alternative modes you do not need to worry for maintenance. Still, owning a car is both a matter of convenience and prestige for most. So, the threat of substitutes is weakened. Still, there is some threat from the substitute products where daily commuters may find it cheaper and easier to take a train or bus.
Competitive Rivalry in the industry: Very strong
The number of recognized and influential brands is low and the exit barriers very high. Any brand trying to exit would have to bear large losses. The level of customer loyalty is high and while the industry is large, it has matured. This intensifies the competition for market share. However, different brands target different market segments but yet they overlap. Brands compete on the basis of price, design, quality, technology, customer safety and several other points. Overall, competition in the auto industry is a strong force or rather very strong. Auto firms are investing aggressively in research and development, digitalization as well as marketing and overall customer experience to grow sales and customer base.
Whether in the premium category or the small car segment and SUVs, level of competitive rivalry among leading brands is strong. With higher competition, brands are trying to maximize customer satisfaction and competing to provide the best customer experience. They are also investing in growing their sales and distribution network as well as focus on after sales service is higher now.