International Automobile Manufacturing Industry
Introduction
The International Automobile industry is one of the biggest industries across the world. It has a wide range and top of automobile companies in terms of production including Toyota, Volkswagen, General Motors, Nissan, and Ford. It is expected that by 2020, around 90 million cars and commercial vehicles will be produced (Barnard). Top car manufacturing countries around the world including Japan, Germany, and the USA.
(Statista a)
Cars, as well as commercial vehicles, are being produced across the world. The following graph shows the proportion of car and commercial vehicles producing worldwide from the year 2000 to 2015:
(Statista b)
Profitability of the companies is low as compared to past years due to intense competition in automotive industry. The companies are facing problems in determining the profits because the top 5 players have a market share of 49 percent jointly (Kallstrom a).
Porter’s analysis is used for the assessment of the competitive assessment of the industry. With the growth in the automobile industry, the competition is also increasing over the years. The main purpose of the following Porter’s analysis is to identify the key points that affect the industry’s profitability.
Supplier Power
Traditionally, supplier power in automobile industry was low to moderate because companies had defined their specification and supplier could not deviate from it. Also, suppliers were large in number so the company could switch the supplier and the suppliers in automobile industry were holding a little power and bargaining power of suppliers was low to moderate on the general raw material. Moreover, suppliers were extremely vulnerable to the demands and requirements of the automobile manufacturer. The majority of suppliers were relying only on one or two automobile companies to buy the majority of their products. If an automobile company refuses to take material from a supplier, then it could be highly destructive for supplier’s business. For example, Toyota UK has more than 800 suppliers in UK and Europe. The main specifications of the suppliers are cost, quality, and delivery of the product. If suppliers cannot meet the output with the product specification of Toyota, then it may be devastating for the supplier’s business (Toyota).
Today, the scenario is changing and suppliers are now like manufacturers while the automobile companies are more concerned to assemble the parts. Supplier power is increasing because the role of suppliers and companies depend on suppliers. So overall it is moderate to high as any issues with the supplier or the supplies can affect the final car and influence the business negatively. The proportion value addition of supplier is shown below:
(Statista c)
It requires the intensive communication and strong cooperation between the supplier and automobile manufacturing. The importance of suppliers is increasing over time; traditionally the suppliers were divided into 3 or 4 tiers. But now they have a direct relation with the companies and many suppliers have become the large firms including Bosch Auto Parts and ZF. Suppliers are expected to design according to company’s specification and to manage the supply chain necessary for the manufacturing of the company. Therefore, the bargaining power of suppliers tends to remain high because there is high technical dependence on suppliers. So the supplier power can positively affect the profitability of the industry and the competition.
Buyer Power
The bargaining power of buyer affects the profitability of the automobile industry, and it tends to remain on moderate to high. Appearance, price, brand and quality affect the buying decision of the customers and the companies highly depend on the customers’ trend and preference. There are multiple brands in the market; it has low switching cost because the competitors also offer their quality brands with similar specification and same prices. Moreover, customers usually switch to other brands because they have alternatives to buy a car. Thus, the bargaining power of automobile manufacturer is unchallenged (Fingleton). The main reason for bargaining power is not completely high is because different brands cater different target markets. For example, Audi targets upper-class and status conscious people (Marketing91) while other domestic brands target niche market.
In some cases, bargaining power of the customer is also affected by the rules of car leasing companies because car leasing companies or enterprises purchase cars in bulk from company’s franchises, and sometimes they get a discount on this purchasing. Some companies issue the new car on zero deposit loans and installment can be extended up to 130 months.
In some cases, customer loyalty not matters because the company makes an effort to earn more and maintain it. In this case, the companies have to struggle to earn a profit and to get high customer satisfaction. Moreover, the majority of the customers are price sensitive, and they usually buy used cars instead of new cars due to the incapableness to buy a new car or the customers are being offered by other automobile companies with comparatively low prices. Therefore, buyer power in automobile industry varies from brand to brand, and it positively affects the competition in the industry and negatively affects the profitability of the industry.
Threat of Substitution
If the prices of one vehicle increase then the chances of substitution may increase and people may find other alternative for their needs. The higher the cost of the car, the more likely customers will seek public transport. The substitution in the automobile market ranges from small players to big players. There are multiple forms of transportation are available. For example, a daily visit to office is less expensive by using public transports than to consume fuel, car insurance, parking charges, and maintenance.
The possible and relevant substitutes of automobile industry can be public transport including buses, airplanes, and trains but public transports do not provide door to door services, and they have different and fixed routes. Motorcycles and bicycle are not appropriate substitutes of the car because it cannot provide the safe travel and comfort as compared to a car.
The rise of oil prices in the global market affects the automobile industry. For example, the global oil prices increased from $50 to $60 per barrel then it decreases the demands of the car and it positively impacts other possible substitutes like passenger cars (HIS). On the other hand, most of the people do not give up using a car due to the little percentage increase of oil prices. Therefore, threats of substitution depend on upon the oil prices and increase in vehicle prices.
Threats of New Entry
In the automobile industry, it is very hard to enter into the expensive and competitive market because it requires a huge investment and start-up capital to run the business. High levels of barriers are involved in this industry, and labor, technical staffs, machinery, technology are highly required. It requires years to grow the business due to intense competition and foreign big automobile companies like Toyota, Volkswagen, and Hyundai have undermined the market share of the automobile industry.
In the low competitive market, there is a high chance of new entrants. For example, American big three automobile companies including General Motors, Fort, and Chrysler were holding the whole U.S. market but later Honda opened its business operations in Ohio and market share of General Motor, and Fort fell from 28.2 percent and 24.1 percent in 2000 to 17.6 percent and 14.7 percent respectively in 2014 (Peterson). The rising companies with huge investment, technology, and capital have started to undermine the big automotive companies.
Moreover, another reason for a low chance of threat of new entrants is because all existing car manufacturing companies have opened their own franchise retail distribution networks. These franchises sell a car by giving complete information about their product with a warranty of maintenance so the customers won’t go anywhere.
Competitive Rivalry
There are hundreds of players in automobile industry worldwide and generally this industry is considered to be the oligopoly. Oligopoly based industry have a price based competition while automobile industry focuses on the quality, reliability, and feature based competition. Today the companies are giving the financing policies on the vehicle and long term warranty which affect the profitability of the business and keep low profit margin comparatively from previous years.
The number of companies is increasing year by year while the pace of growth of automobile market is high. Profit margin is moving towards declining from the past 15 years. Japanese automobile companies including Toyota and Honda have the highest profit margin of 13.8 percent and 13.1 percent respectively (Kallstrom b).
(Kallstrom b)
The top three companies including Toyota, Volkswagen, and General Motors have their headquarters in Japan, Germany, and the USA respectively. This situation is supported by the Porter’s theory of national competitive advantage that government and related supporting industries support the firm to fulfill the needs of the company and to enhance the global competitiveness. Hence, the competitive rivalry negatively affects the profitability of the automobile industry.
Is the industry Profitable or not
The automobile is a complex market with intense competition. Some players are leading the industry for decades, and they have captured a large market share. The importance of suppliers is rising in the industry, and their importance will continue to increase in the future. Now there is a trend of outsourcing which benefits in labor cost reduction and low start-up cost. China and India automobile industries have shown incredible growth and the worldwide structure of the industry is changing (Sasuga 286-291). Automobile industry’s sales are expected to increase in the near future. Hence, the industry is profitable as it is expected that the overall sales will increase. If the organizations work on creating sustainable competitive edge then they can increase the overall sales and profitability.
Works Cited
Barnard, Mike. EVs could cut global gasoline use by 2040. 2015. Online. 1 May. 2016. <http://reneweconomy.com.au/2015/evs-could-cut-global-gasoline-use-by-2040>
Fingleton, Eamonn. Same Car, Different Brand, Hugely Higher Price: Why Pay An Extra $30,000 For Fake Prestige? Forbes. Jul. 2013. Online. 1 May. 2016. <http://www.forbes.com/sites/eamonnfingleton/2013/07/04/same-car-different-brand-hugely-higher-price-why-pay-an-extra-30000-for-fake-prestige/#57de83dd49ee>
IHS. Low oil prices: Boom or doom for the global auto industry? 2015. Online. 1 May. 2016. <https://www.ihs.com/country-industry-forecasting.html?ID=1065997792>
Kallstrom, Henry. a. What makes the auto industry highly concentrated? Feb. 2015. Online. 1 May. 2016. <http://marketrealist.com/2015/02/makes-auto-industry-highly-concentrated/>
Kallstrom, Henry. b. Intense competition leads to low profit margins for automakers. Online. 1 May. 2016. <http://marketrealist.com/2015/02/intense-competition-leads-low-profit-margins-automakers/>
Marketing91. Marketing strategy of Audi – Audi marketing strategy. Online. 1 May. 2016. <http://www.marketing91.com/marketing-strategy-audi/>
Mercedes-Benz. Corporate History. Online. 1 May. 2016. <https://www.mercedes-benz.com/en/mercedes-benz/classic/history/corporate-history/>
Peterson, Kim. The Big Three aren't so big anymore. 2014. Online. 1 May. 2016. <http://www.cbsnews.com/news/the-big-three-arent-so-big-anymore/>
Sasuga, Katsuhiro. "The Impact of the Rise of Chinese and Indian Automobile Industries." The Scale of Globalization. Think Globally, Act Locally, Change Individually in the 21st Century (2011): 286-291.
Statista. a. Leading automobile manufacturers worldwide in 2015, based on vehicle sales (in million units). 2016. Online. 1 May. 2016. <http://www.statista.com/statistics/271608/global-vehicle-sales-of-automobile-manufacturers/>
Statista. b. Worldwide automobile production from 2000 to 2015 (in million vehicles). 2016. Online. 1 May. 2016. <http://www.statista.com/statistics/262747/worldwide-automobile-production-since-2000/>
Statista. c. Automotive suppliers' proportion of value added to worldwide automobile manufacture from 1985 to 2015. 2016. Online. 1 May. 2016. <http://www.statista.com/statistics/269619/automotive-suppliers-share-of-worldwide-automobile-manufacture-since-1985/>
Toyota. Supplier Relations. Online. 1 May. 2016. <http://www.toyotauk.com/toyota-in-the-uk/supplier-relations.html>
