The American Automotive Industry’s Five Forces Analysis
Abstract
The American automotive industry s highly occupied with the four well-doing companies that take the larger part of America’s market shares. The trade has been subjugated by General Motors, Ford, and Chrysler for a long time. Nevertheless, with the development and expansion of worldwide manufacturers, the industry is universally and locally losing its market shares. The entry of Honda and Toyota as foreign competitors has decreased the supremacy and profitability of the automotive sector. This essay emphasizes the American locomotive commerce using Porter’s Five Forces Model.
Introduction to the Auto Industry
The automotive industry started in the 1890s in America and expanded globally. General Motors, Ford, and Chrysler dominated the automotive industry by 1920. America’s automotive industry contributes widely to the United States economy, ranging from domestic production, Research and Development, and employment creation. The business generates approximately $ 500 billion for Americans and supports more than 7 Million professions in the private sector (Abolhassani et al., 2018). In addition, the business has contributed to approximately 4% of America’s Gross Domestic Product (GDP) (Abolhassani et al., 2018). Particularly, around 30 years ago, America’s automotive industry faced various crises, which made the industry experience a low market in 2008. Government interventions contributed to the improvement of the American automotive industry and showed important Development, with General Motors, Ford, and Chrysler leading internationally.
The American automotive industry is among the biggest automotive trade universally. In 2018, America’s vehicle sales had hit 17.2Million units, which was the fourth decade Americans sales had exceeded 17Million units (Abolhassani et al., 2018). Generally, America’s automotive industry is the second biggest firm dealing with the production of vehicles. Since the opening of Honda’s initial plant in 1982, nearly every Korean, European, and the Japanese automaker has developed vehicles and made investments exceeding $75Billion in America (Abolhassani et al., 2018). The majority of US foreign preserved US affiliates in automotive organizations support more than 400000 jobs in the US (Abolhassani et al., 2018). In addition, various automakers possess US-based transmission plants and engines, conduct testing, design, and R&D. America’s entire foreign direct investments increased in 2018 due to the industry’s forefront innovations.
New Research and Development initiatives have been transforming commerce to better answer 21st-century opportunities. Rendering to Americans Auto Alliance, out of the $105 billion used in Research and Development worldwide, nearly $18billion was spent by the American auto industry. America exported approximately 1.8M light automobiles and 131,200 hefty and standard busses that had a value exceeding $60 billion to markets exceeding 200million over the world, with extra automotive parts exports worth $ 88.5billion (Abolhassani et al., 2018). With open investment policies, large consumer markets, highly skilled employees, availability of infrastructure, and state and local government incentives, America is the 21st premiering market in the automotive sector.
Industry Definition
The automotive trade comprises all the actions and corporations in motor-powered vehicles production, including their mechanisms, such as bodies and locomotives, exclusive of fuel, series, and exhausts. The US automotive industry has approximately 200 motor vehicle production, maintenance, retailing, and wholesaling. These firms are included in developing light trucks, vehicle chassis, and passenger cars. The regular dictionary defines the automotive industry as the collection of automobile manufacturers. Currently, the American automotive industry faces challenges due to financial struggles resultant from COVID-19 epidemic (Dirani et al., 2020). The pandemic negatively impacted the generation of revenues in the automotive industry since sales declined due to the lockdown of nations to control the spread of the virus.
High unemployment levels have also contributed to a decline in automobile sales and cost-sensitive customers due to the low automobile demand in the previous years. Unemployment has led to the bankruptcy of manufacturers and suppliers while others are re-engineering to retain the market. Various manufacturing companies have inhabited the automobile sector as entry barriers increase. Extra overhead costs have eliminated existing entry barriers. Thus, the automobile business requires more effort to retain its market shares, indicating that the American automotive industry is highly competitive (Dirani et al., 2020). Brand and corporate reputation have developed entry barriers and buyer loyalty in the American automotive industry. New companies entering the market require sufficient resources to evade complexities during accessing appropriate distribution channels.
High capital is a requirement for obtaining and maintaining expertise and automobiles during manufacturing processes. The American automotive industry is the major economic Development with various interconnections across America’s industrial and cultural fabric. The automotive industry is among the main American sectors, contributing approximately five percent of the US GDP. The industry has developed more job opportunities that have engaged individuals in selling cars, designing parts, engineering, manufacturing, supplying parts, gathering vehicles components, and servicing new vehicles. The American automotive industry remains the largest products and services consumer from different businesses. These businesses include construction, healthcare, raw materials, advertising, computers, semi-conductors and financial.
Industry Profile
Chrysler, Ford, and General Motors are the three big domestic market frontrunners in America, whereby Nissan, Hyundai, Honda, and Toyota are America’s foreign competitors. After the Second World War and the Great economic Depression, suppliers started prospering in the American automobile industry, producing more automobiles. Nevertheless, stiff competition from foreign automobile manufacturers and high oil prices impacted Chrysler, Ford, and General Motors. Due to the present state of the global economy, including high oil prices and technological advancements, the US automotive industry is undergoing transitions (Abolhassani et al., 2018). Technological innovations, fuel efficiency, and hybrid vehicles are becoming paramount. Larger trends comprise moves to minor, extra fuel-efficient automobiles and moves to more robust technical frameworks on manufacture and product heights.
The global business is exceedingly capital and rigorous, with the American domestic industry being moderately hampered by substantial historical inheritance costs. Labor, supplies and promotion are all important costs; sales happen through separate and high-volume convoy auctions, with periodic depressions in April to June and slumps from November to January. At about 17% General Motors apprehended the largest auto market share in America in 2020; it retained its success as the US automotive manufacturer (Abolhassani et al., 2018). However, the company lost its market share in 2019 while Toyota rose due to its increased emphasis on light truck replicas in the listing. In 2020, the American automotive industry experienced low sales due to the COVID-19 outbreak March 2020, which impacted global sales since most people were restricted against traveling.
Industry Market Structure
The American automotive sector is an oligopolistic market subjugated by manufacturers whose actions impact each other’s profit generation. It consists mostly of three main firms, Chrysler, General Motors (GM), and Ford. The effect of this oligopolistic structure can be realized in the amounts and the expansion and establishment of novel car models to the American market. The wide-ranging effort has been completed on the ground of complicity performance in the American auto market. Furthermore, the outline of the minor car in the 1950s displays how the companies conspire when it derives to the overview of new cars. An oligopolistic market denotes a defective competition market dominated by few big firms, differentiated or homogenous products and complex market entry.
Oligopoly automotive industries’ fate mutually interdepend, which may be depicted during the 2020 COVID-19 crisis that impacted the three automotive manufacturers in the US who went into economic strains. While there are resemblances in that all the main auto manufacturers generate vehicles for transport, option, prices, and product features vary (Abolhassani et al., 2018). Due to the variances, marketing and advertising to different market portions become extremely vital. High entry barriers in introducing new products such as infrastructure, marketing, advertising, vehicles, and product facilities protect the automotive industry in America.
Future Outlook
The automotive industry will diversify and increase towards data-driven and on-demand services hence creating additional revenues by 2030. The automobile sales growth will increase in the coming years due to the increasing customers’ demand for commodities. Since employment recovery within the American automobile industry has declined, the industry may not achieve pre-recession levels. Autonomous and connectivity technology will permit the automobile industry to become a podium for passengers and drivers to use transportation time to consume services and media forms.
The rising innovation speed, specifically in software-based companies, will require upgraded vehicles. Since mutual mobility explanations with short life cycles will be famous, customers will be continually conscious of technological changes, increasing their need to upgrade vehicles. Generally, the automotive industry will advance. Nevertheless, the yearly growth rate is estimated to decrease from 3.6% to approximately 2% in 2030 -probably because of macroeconomic factors and the emergency of unfamiliar mobility services, including e-hailing and carsharing. Most people currently use vehicles for all purposes, including commuting to work or touring with family members. In the future, families may prefer the flexibility to select the best solutions for specific purposes.
Porter’s Five Forces Strategy Analysis
Industries possess various competition forces that aid in defining the structure of an organization and assessing an industry’s strategic position. Porter argues that the five forces model should be used in similar products or services (Bruijl, 2018). Porter’s five forces that help in the structuring and shaping industries include buyers’ negotiating power, dealers’ trading power, new entrance threats, modest competition, and substitute threats.
Bargaining Power of Buyers
Buyers should not have an overstating bartering power since the determination of goods prices depends on the nature of a customer, and the bargaining strength of buyers may contribute to the seller’s failure. Buyers in America’s automotive industry have high bargaining power (Bruijl, 2018). The restricted bargaining power of buyers can be accredited to the availability of the three largest firms in America that occupy most of the nation’s market share. Hence, buyers buy most of the firm’s outputs which are important revenue portions of the business. In addition, consumers had truncated switching charges when they were annoyed.
The customers in America’s automotive industry are less and hence have low bargaining power. Additionally, the buyers lack the power to assimilate the American automotive industry since they purchase their cars using dealers. Other organizations such as Toyota have generated competition in global markets, making a few manufacturers monitor the industry. New entrants have impacted the buyer’s bargaining power even though the power is not large enough to affect the industry prices (Bruijl, 2018). Almost all US citizens are required to own automobiles, and customers have to transact with dealers, hence, minimizing the bargaining powers of buyers.
Buyers do not have much pressure on the automotive industry and lack the power to impact the cost of the commodities. Currently, bargaining power has overweighed buyers since the industry requires to be vigilant about customer preferences (Bruijl, 2018). The current global economic circumstances have contributed to fewer buyers globally. Customers maintain their vehicles for a long time and are reasonable and prudent when purchasing new vehicles. Deliberately, the automobile industry’s chance to emphasize price-sensitive and fuel efficiency techniques more to shift from production and profits previously centered on SUVs and trucks.
Bargaining Power of Suppliers
Few suppliers have high bargaining powers that can control high prices compared to several suppliers. Suppliers in the American automotive industry have low bargaining powers; automotive production requires various parts, thus requiring various supplies. The existence of several suppliers in the automotive industry contributes to the low bargaining power of the suppliers (Bruijl, 2018). Automotive suppliers include dealers and automobile components (seats, tires, and screens) providers. The industry’s high dependence on automakers develops challenges from suppliers, including pricing pressures and production cuts.
The availability of countless suppliers in the automotive industry enables manufacturers to switch suppliers with ease. Having low bargaining powers pushes suppliers towards selling their raw materials and services at low prices. Outstandingly, the providers never set high prices on components since the sector has various suppliers (Bruijl, 2018). Consequently, the automotive industry regulates the prices of raw materials and components offered by suppliers, enhancing the industry’s profitability. Additionally, suppliers have scarce choices as the largest thee brands occupy the American automotive industry. Hence, suppliers do not have other organizations to supply their components and raw materials at high charges.
Competitive Rivalry in the Industry
The entry of new establishments into the American automotive business has contributed to increased rivalries. Foreign producers have started launching their services in America, contributing to declining the nation’s market shares (Bruijl, 2018). The industry’s competitions seem to contest in dimensions that do not rely on prices, leading to commodity differentiation. New trends such as fuel-efficient and hybrid versions have further impacted the comparative advantages of the American automotive industry manufacturers.
Customers in America’s automotive industry are easily substituting for other brands due to their low costs. Conspicuously, the rivalry among General Motors, Ford, and Chrysler primes to profits reduction for all the competitions. Intense contention in commerce leads to exaggerated budgets, which mark truncated profits. American locomotive industry has accomplished to diminish the price-based opposition effects due to its oligopolistic nature. Factually, the business has circumvented the price-based war, but recently, corporations have approved the cost-based struggle, which has assisted in enticing and fascinating clients.
Threat of New Entrants
The American automobile industry has low new entrants’ threat for various reasons, including hindrances and obstacles that make it complex to restrict competition and enter the market. Different entry barriers exist, making it hard for new automobile manufacturers to successfully enter the Americana automotive industry. High capital amounts required to purchase raw materials, manufacturing plants, train, and hire employees are among the entry barriers in the American automotive industry. It takes extra capital during manufacturing processes and keeping current advancements to compete with industry frontrunners (Bruijl, 2018). Research and growth are an indispensable part of the American automotive manufacturing industry. New advancements are continually being revealed that enhance automobiles quality on markets and decrease costs during the manufacturing processes.
The automotive industry’s nature requires manufacturers to attain economies of scale. Thus, manufacturing firms also have to successfully produce in large numbers to facilitate the affordability of vehicles among customers. Achieving scale economies can be an important barrier for prospective automobile manufacturers and is frequently a main restrictive. Access distribution channels are another entry barrier that causes new companies to obtain adequate distribution since dealership space is not restricted (Bruijl, 2018). While average individuals lack the means of starting an auto manufacturing corporation, external competitors, including Toyota, have entered. Various overseas auto developers have the obligatory technologies, decision-making skills, and capital to be the US market’s strong competitors.
According to porter’s five forces model, new entrants cause low returns due to the competition costs they cause. Hence, it could be better if domestic manufacturers are updated concerning the low-cost techniques foreign companies adapt. The creation of mergers frequently occurs in the American automotive industry than new entrants because of the high prices needed to enter the business. Nevertheless, emerging developing American production plants have encouraged foreign businesses to establish and move their manufacturing plants in America over the decade (Bruijl, 2018). For example, Honda Motor Firm developed its initial business in Ohio while Toyota was established in America. Presently, Toyota Motor Auctions in America have increased globally compared to the previous year. Competitors such as Honda have acquired technologies, capital, and skills, leading to new entrants to America’s automotive industry.
Threat of Substitutes
Threat substitutes negatively impact the profits that a firm makes. When the competition is less in an industry, it implies minimal risks of substitutes, thus increasing profitability. The profitability and market share are threatened when substitute commodities are sold at a low price and the consumer’s low switching cost. In the American Automotive business, the threat of substitutes has not grown because three major firms dominate the industry. Despite the entry of foreign companies into the American automotive industry, the hazard of alternatives is not a key concern.
Together with Motors, Ford, and General Chrysler, the major car powerhouses have intensively capitalized on marketing and advertising, which has boosted them to entice more customs, establish customer trust, and evade the peril of new alternates. The high cost needed to thrive in the automotive industry has decreased the emergence of new substitutes (Bruijl, 2018). Nevertheless, with the constant increase of contestants, the business is bound to face the menace of innovative replacements. The increased rivalry will result in novel substitutes, impacting the industry’s profits and market shares.
Conclusion
The automobile business in the US has played an integral role in the growth of the US economy. The industry has enhanced economic growth through exports, production, and job creation. The entry of other foreign competitors in the automobile business has stiffened the industry in the United States. Competition in the industry has resulted in developing new strategies and the adoption of new automobile designs. The domination of the Ford, Motors, and General Chrysler in the industry has reduced the trading power of sellers and purchasers. With the increased competition, however, the haggling power of dealers and clients is gradually increasing. Thus, the business’s market share and profitability have been undermined by new entrants and competitive opposition. Competition has increased the industry’s expense costs while reducing its profits. The production of new designs and novel versions by foreign businesses has made consumers shift to other brands, thus, the business’s low, competitive advantage.
References
Abolhassani, A., Harner, J., Jaridi, M., & Gopalakrishnan, B. (2018). Productivity enhancement strategies in the North American automotive industry. International Journal of Production Research, 56(4), 1414-1431.
Bruijl, G. H. T. (2018). The relevance of Porter’s five forces in today’s innovative and changing business environment. Available at SSRN 3192207.
Dirani, K. M., Abadi, M., Alizadeh, A., Barhate, B., Garza, R. C., Gunasekara, N.,… & Majzun, Z. (2020). Leadership competencies and the essential role of human resource development in times of crisis: a response to Covid-19 pandemic. Human Resource Development International, 23(4), 380-394.