The Automobile Industry Porter’s Five Competitive Forces Analysis

Executive Summary

This research paper analyzes the automobile industry using Porter’s five competitive forces. According to the results of the study, certain conclusions have been concluded regarding the overall state of the industry and the level of competition. According to the analysis, the automotive market today is not threatened by the emergence of substitute products and the loss of the leading position among the global industries. However, the market is highly competitive, including due to the active emergence of new players. For example, China and India have recently been actively moving to the forefront of the market. The market power of suppliers also has little impact on the industry, especially suppliers involved in the narrow production of car accessories. Overall, the automotive industry is a reasonably stable industry with good prospects for continuous development.

Introduction

The automotive industry, which originated at the end of the XIX century, is considered to be a new industry. However, it continues to play an extraordinary role in this group of industries. In terms of its influence on the world economy throughout the XX century, the automotive industry is perhaps second only to the oil industry. That is why it is often referred to as a “backbone,” “locomotive,” and “economic barometer” (Böckin & Tillman, 2019). The automobile industry is the main component of the transport machine-building industry. Moreover, in many developed countries, it provides from 5 to 10% of GNP production (Böckin & Tillman, 2019).

Nevertheless, its importance goes far beyond the transport sub-sector. Firstly, this is explained by the automotive industry’s primary consumers of numerous products from other industries (steel, aluminum, plastics, lead, rubber, and electronic products). Secondly, it is directly related to the automotive business in the world’s broad sense, including cars’ sales and service, construction, and repair of roads. Thus, it marked a new technical revolution in the development of production.

For a scan of the environment in the industry, I will turn to Porter’s analysis of the five competitive forces. The first force to talk about is incumbent competitors. The most important feature of the global automotive market is the highly competitive prices and quality of the cars produced. In the conditions of tough competition, most auto corporations have become practically impossible to act independently.

The manufacturers created a developed network of financial, technical, and trade unions despite the setbacks encountered. A characteristic trend was the consolidation of the global automotive industry enterprises, leading to a decrease in the number of independent participants in the market in question. Thus, if in the 1980s it was possible to identify up to 30 large independent companies, at present, their number has significantly decreased, and further reduction is forecasted. The strategy of mergers and acquisitions in the global automotive industry is not new for manufacturing companies. It emerged along with the advent of automobiles and was constantly being improved.

Automotive Industry Analysis

Automobile corporations were looking for strategic partners to gain access to new markets, expand their sales network, obtain new technologies and more rational production management methods. It should be noted that the behavior of competitors in the market under consideration has changed quite noticeably. On the one hand, intensification of competition leads to the growth of companies’ aggressiveness towards their competitors. For example, Volkswagen is in a state of constant competition with Ford’s concern for a share in the market of compact class cars. On the other hand, these same companies are allies in other market sectors, such as the development of large-capacity cars.

The second Porter’s force is the threat of new competitors. Many factors in the automobile industry make the market difficult for new entrants. Among them are such points as the highest competition of prices and quality of products, the need for significant capital investments, the existence of customs and other barriers, relatively low-profit margins, rising prices for materials. Despite this, young Asian automakers are actively seeking to conquer traditional markets, particularly in Europe.

Chinese and Indian automobile manufacturers, which have received modern technology and are not yet subject to globalization trends, are now relatively strong. Assessing the consequences of the global financial crisis for the global automotive market, experts compare the current situation with the times of the oil crisis in the U.S. in the 70s (Carmo et al., 2021). After that crisis came the era of the global expansion of Japanese automotive manufacturers.

The latter offered low-capacity cars with low fuel consumption as opposed to bulky cars with gasoline V8 engines. Chinese and Indian companies, by offering appropriate, efficient solutions in today’s realities, can begin global expansion, just as Japanese automakers did in their time (Wong, 2018). Turning to Porter’s third force, the market power of suppliers, there are several interesting points to note. Suppliers can exercise market power over market participants by threatening to raise prices or lower the quality of goods and services supplied.

Automotive manufacturers are closely related to industries such as metallurgical, petrochemical, electrical, textile products, and automotive components. All of these industries should be considered as suppliers to automotive manufacturers, and the degree of their market power varies. For example, it is comparatively higher for suppliers of metallurgical products, which are an essential input in the automotive industry. It is worth considering the tendency to redistribute the world automotive market, which manifests itself in the relocation of production facilities to developing countries and the focus on the growth of sales in these countries.

Due to this trend, automotive equipment manufacturers are very limited in their ability to raise their prices in response to higher prices for metallurgical products consumed in the process of production of cars. In addition, the automotive industry is an important but by no means the only consumer of metallurgical products whose suppliers serve several other industries. The degree of market power of automotive component suppliers is insignificant. First of all, concentration levels in automotive components are much lower than in auto parts manufacturing. Secondly, automobile manufacturers are the critical consumers of automotive components.

It should be noted that the majority of large car manufacturers have close cooperative ties with suppliers of components, among which several major corporations specialize in the production of specific car parts and units. Breaking these ties would have a much more significant negative impact on supplier performance than it would on the performance of a major automobile manufacturer. Porter’s fourth competitive force is the market power of buyers. It manifests itself in their ability to force prices down, demand higher quality products or more services in the market, and pit competitors against each other.

Rarely do all buyer groups have the same power for a selling company. In the automotive industry, the differentiation of buyers in terms of the degree of their market power is evident in the markets of developed and developing countries (Natsuda & Thoburn, 2020). Generally, as the level of market saturation increases, the degree of market power of buyers increases. In this regard, buyers’ degree of market power in the automotive markets of developed countries is much higher than in the markets of developing countries.

Given that the markets of developed countries still account for the largest share of global sales of automotive equipment, the degree of buyers’ market power in the global automotive market is currently relatively high. It is also worth noting that as automotive markets in developing countries become more saturated, so does the degree of buyer market power in those markets. Porter’s final force is the threat of substitute products entering the market.

Defining substitutes means finding products that can perform the same function as the products of given market players. An alternative to automobile transport is rail, air, and water transport, each of which has advantages and disadvantages (Stoycheva et al., 2018). Currently, cars are the most common mode of transport. It is younger than railroads and boats, and its advantages are maneuverability, flexibility, and speed. Trucks carry almost all types of cargo and successfully compete with railroads in the transportation of valuable goods, for which speed of delivery is critical. However, despite the apparent advantages, automobile transport has many disadvantages. Passenger cars are one of the most wasteful modes of transport regarding the costs required to move one passenger.

Conclusion

Nevertheless, the level of motorization in the world is increasing rapidly, which means that more and more people own cars. However, the answer to how high the threat of substitutes is to automobile manufacturers is relatively straightforward.

At this point, with the advent of advanced developments in the industry, such as electric vehicles, the industry is not threatened by the emergence of substitute products. In conclusion, the cumulative impact of these five forces on the participants of the global automotive market can be assessed as very intensive. The current state of the automotive industry is volatile. This is primarily due to global crises and the reformatting of the market – the entry of new players. However, the automotive industry still holds a leading position among the world’s industries and has excellent potential for stable development.

References

Böckin D., & Tillman, A. (2019). Environmental assessment of additive manufacturing in the automotive industry. Journal of cleaner production, 226(1), 977-987. Web.

Carmo, M. J. D., Neto, M. S., & Donadone, J. C. (2021). Financialization in the automotive industry: Capital and labor in contemporary society. Routledge. Web.

Natsuda, K., & Thoburn, J. (2020). Automotive industrialization: Industrial policy and development in Southeast Asia. Routledge. Web.

Stoycheva, S., Marchese, D., Paul, C., Padoan, S., Juhmani, A., & Linkov, I. (2018). Multi-criteria decision analysis framework for sustainable manufacturing in the automotive industry. Journal of cleaner production, 187(1), 257-272. Web.

Wong, W. K. O. (2017). Automotive global value chain: The rise of mega suppliers. Routledge. Web.