A PESTEL Analysis of the automotive/automobile industry
The global automobile industry is a multi billion industry with several large brands competing for market share. Since its foundation in the 19th century, this sector has grown to become an important part of the world economy in terms of revenue. Due to the large size of the auto industry, it’s growth and revenue are impacted by several forces. The recent financial crisis had hit this sector really hard. However, since the global recession has passed, the sales of automotives are again back on track. Apart from the manufacturing of vehicles globally, this sector is also involved in the marketing and sales of automotives. During the recent years, the Asian markets have proved highly lucrative for the automotive brands. China has particularly grown to become the world’s largest market for vehicles. In the 21st century technology and innovation have become the main basis of differentiation for the vehicle manufacturers. Apart from it, the focus is on fuel efficiency and environment friendliness. The pressure on the industry with regards to pollution control and carbon footprint has gotten high. All the major players are trying to bring more fuel efficient and low emission vehicles to the markets. The sales of electric vehicles that are emission free has grown fast in recent years.
The pandemic has hurt vehicle sales globally. While China emerged fast from the impact of the pandemic, in several other markets too including the US and India, sales of vehicles have grown fast since the end of 2020.
Presented below is a PESTEL Analysis of the automotive industry that shows how the political, economic and other factors impact this industry.
Political factors play an important role and have a direct impact on the profitability of the automotive industry. Governments around the world are favoring low emission vehicles. Moreover, taxes on the luxury vehicles and fuel guzzlers have grown higher. The markets like EU and UK are providing government subsidy for the low emission vehicles. Environment friendly vehicles have grown in demand globally. They are also receiving higher government support for their low environmental impact. As such the government rules and regulations heavily affect the revenues of the vehicle brands. Technology that is fuel efficient and low on emission can easily pass government rules. Moreover, the import rules and taxes vary from country to country.
Overall, there are so many political factors affecting the auto industry. Changing government regimes as well political regulation of the market can from time to time cause favorable or unfavorable fluctuations. However, the political factors are generally outside the control of the businesses except for lobbying. Still, their importance can be understood from the fact that companies have shifted their manufacturing bases to countries where the wage related regulations are lenient. Companies have to manage their costs and the political factors can have a significant role in this area. If China has become a favorite of several brands then the reason is the low labor cost which is because of the lenient wage regulation. The import and export laws that vary across nations can also be a headache for automakers in case of the nations where import laws are stiff. Thus, the government policies to a remarkable extent affect the fortunes of the auto companies.
Economic forces are also of particular importance in the context of the automotive industry. This sector was hit hard by the recent economic crisis. When the economic conditions are not good, the sales of vehicles fall. The demand for luxury or high priced vehicles is also affected poorly during poor economic conditions. Moreover, the taxes on the high priced vehicles are high in several markets. If the economic conditions are good, the sales of vehicles can remain high. The sales are generally higher in the developed countries. In the developing and under-developed markets, they are comparatively low.
The developed markets see higher sales as the purchasing power of the customers is higher. In these markets, the sales of the higher priced variants is also higher. The lower priced variants are generally in demand in the developing and underdeveloped markets. Thus, the size of the economy and the economic conditions globally, have a major impact on the profitability of the auto industry in various markets. There are various angles to analyze the importance of the economic factors for the industry. The most used angle is the purchasing power of the customers. It dips during economic downturns. Industries are dependent heavily on the purchasing power of the customers. If a large number of brands have focused on bringing low cost cars to the market, it is because they know they can tap into a larger customer segment this way.
The market is influenced deeply by the socio-cultural forces. The automotives industry is also affected by the changing socio cultural trends and people’s preferences. Vehicle makers have to adopt to these forces. Every year new models are released keeping people’s preferences in mind. Moreover, specific styles are preferred in certain cultures. In some markets while the SUVs might be in higher demand, in the others the sedans might be preferred. Age distribution in the various populations is also an important factor that vehicle makers have to keep in mind while targeting the consumers. They should release vehicles based on the preferences of their target population. Apart from it from culture to culture, people’s style and preferences also differ. The result is that while a particular model will sell in a market, it might not be as popular in the other. Social trends also keep changing continuously affecting the popularity of brands and models. Changing trends may some times make the older models obsolete or go out of fashion.
Technology and innovation have become important determinants of market share in the automotive industry. The more innovative the company, the higher is its market share. Given this fact, all the major players make huge investments in research and development. Brands like Toyota, Hyundai and Ford are investing in low emission and environment friendly vehicles. Toyota is even planning to release a driverless car in the coming years. Not just this, the major technological players are trying to enter this sector of the industry. In the recent years technological innovation has remained a major basis of differentiation for the automotive makers. It is because the customers’ focus shifted towards fuel efficient and high mileage vehicles. The sales of the low emission and fuel efficient vehicles is always high. It shows that technology is one of the most important factors affecting the sales and profitability of the automotive industry.
The laws related to environment friendliness and carbon emissions are growing stiffer around the globe. Given that all the major players in the automotive industry had to focus upon low emission vehicles. The vehicles which are low on emissions and fuel consumption receive tax subsidies and are favored by the government and law. The pollution tests have grown stricter and the vehicles passing these tests only are allowed in certain markets including EU and UK. Environment friendliness has become an important test for the vehicle makers in the 21st century as governments have started focusing heavily on pollution control.
The pandemic has again brought the focus on environment. Since the pandemic, the level of awareness among people related to health and environment has grown and so has the demand for electric vehicles. Now, companies need to be even more cautious regarding compliance with environmental laws throughout the globe in all the markets where they operate.
Law is another important factor that gets to affect the profitability and performance of the vehicle brands. Vehicles selling in the international market are subject to laws related to product quality and safety. The pollution laws have grown stricter. The vehicles being exported overseas have to pass strict emission controls. Next are the laws related to product safety that have an important impact on the sales of the vehicles. Recently, Toyota had to recall its vehicles because of its faulty airbags. There have been similar cases in the past putting passenger safety under question. Due to such accidents, governments have made laws related to passenger safety stricter. Apart from it, there are environmental laws, tax laws and several other laws that the vehicle companies have to deal with while operating in the international market.
All the factors discussed above are of importance in the context of the trillion dollar automotive industry. The relative importance of the economic, environmental and legal factors has grown in the 21st century . More and more vehicle makers are now focusing upon low emission, high mileage and low cost vehicles. The socio-cultural factors and consumer preferences also have a major and direct impact on the auto industry. However, above all it is the emergence of the new markets that has affected the intensity of competition in this sector. Every major player is investing in technology and innovation to grab a larger share of the market.