The Automotive industry is defined by IBS World as automakers – companies that manufacture automobile chassis, and light-duty motor vehicles and assemble final automobiles and light-duty motor vehicles. The range vehicles of vehicles include: passenger cars, pickup trucks, sports utility vehicles (SUVs), crossover utility vehicles and vans.
Intensity of Competitive Rivalry in the Industry
The auto industry has low level of concentration, with the top four global automakers are estimated to account for 33.7% of industry revenue in 2012. The European passenger car segment consists of nine auto companies: BMW, Daimler, Fiat, Ford, GM, Porsche, PSA Peugeot Citroën, Renault and Volkswagen. The European truck segment consists of six auto companies: Daimler, Daf, Iveco, MAN, Scania and Volvo. As the industry get more global and firms in emerging markets (China, India and Brazil) ramp up production several major automotive companies across the globe are each grabbing a significant share of the market, and concentration has been declining over the past five years. The globalization of the economy has encouraged many European, American, Asian automakers to seek market opportunities beyond their traditional markets. Major players such as the US big four, General Motors, Ford and Chrysler have lost a portion of their market share they had in their yesteryears. For example, Ford sold Jaguar and Land Rover to Tata (India) and Volvo passenger vehicle business to Geely (China) and spun off its car component subsidiary, Visteon and also DaimlerChrysler split into separate entities after the sale of Chrysler to private equity firm Cerberus in 2007. All the examples above show that, how major players are cutting down their product lines thereby losing some market share. A study by IBS World confirms that the downward trend in market share concentration is expected to continue over the next five years as automotive companies in emerging nations continue their growth spurts and large automakers in mature economies split, dissolve or grow at a slow pace. However, the competition between the automaker players is high and increasing as an exponential rate as the markets are becoming more global. The competitive nature of the industry is based on price, quality and product innovation (hybrid electric vehicles).
This is evident from the large investments by automakers into research and development projects. Organizations such as Toyota are accelerating their research and development of environmental systems designed to improve fuel efficiency as well as safe driving support systems that seek to prevent accidents involving pedestrians and other vehicles in urban areas and at intersections. On the same note, Nissan has also developed and refined technology that helps avoid collision, such as the around view monitor and moving object detection functions. However, it is not only the renowned big players such as Toyota, Nissan, GM, and Chrysler that are working hard on bringing state of the art innovative cars onto the global market. China’s private automaker Hawtai Motor are working with Malaysian automaker Proton to jointly establish an auto technology industrial park in Erdos, Inner Mongolia so as to build new energy vehicles and get ahead of the competition. Automakers are finding ways to differentiate their product from the market so as to win the customers. A number of players are planning to manufacture low-cost vehicles to increase affordability. For example, Tata Motors of India is manufacturing a vehicle (the Nano) that is priced nearly 30.0% less than existing entry vehicles in India. Other automakers are forming strategic alliances with local automakers in emerging countries so as to gain competitive advantage in the global market. Companies such as Germany’s VW invested over â‚¬14 billion (US$18.18 billion) from 2012 to 2016 into its investment plan with its Chinese partner SAIC. Beijing Automotive Industry Holding Co Ltd (BAIC) and Daimler AG signed a six year cooperation agreement in 20111 to cooperate in the operation of a new production base, GLK compact SUV as well as three models of the new generation of Mercedes-Benz premium compact cars. Maruti Suzuki (Indian) and Tata Motors (India) are investing last sums of capital to build extra plants so as to improve their passenger car business and so that that they can benefit from economies of scope and scale.
The car market declined during the global recession and European crisis. The global recession and European crises left a financial dent on most auto companies such GM, Ford and Chrysler that invest heavily in light trucks and big vehicles. This is because the demand for light trucks and big vehicles has been on the decline (mostly in the US) because of their large gas consumption. On the other hand, the global recession and European crisis raised the demand for light fuel efficient sedans produced mainly by the Japanese automakers such as Toyota, Honda and Nissan. Furthermore, this all shows that in the face of high gas prices, consumers are in preference for gas saving and efficient vehicles. The same premise seems to apply to emerging markets such as: China, Brazil, Russia and India. Movements in fuel prices also generally influence the demand for vehicles by type. During periods of high fuel prices, more fuel-efficient vehicles are in demand. For example, Japanese carmakers offering more fuel-efficient vehicles took market share from manufacturers of large vehicles throughout 2006 and 2007.
Even though Europe is still weathering the financial crises, competition is so intense to the extent that automakers are still investing a lot into the European automaker so as a gain extra piece of the European market share. For example, international players such as PSA Peugeot Citroën (France) is investing over â‚¬750 million (US$1.02 billion)to its Valenciennes-Hordain plant in France so as to produce its future light commercial vehicle designed for the K1 segment in Europe.
The competitive nature of the auto industry is based on brand loyalty among the sellers. The rivalry been automaker is very intense since they want to attract the first time buyers and generation Y who are bound to have a longer buying life span and are more likely to develop brand loyalty if they liked their previous experience. Due to the competitive and fickle auto market, customers can have very little brand loyalty. A moderate price cut can easily swing customers away from competing brands. However study by Mergent has shown that most Gen Y consumers and first time buyers consider the small car market as their preferred auto type. Therefore most automakers that provide these types of vehicles with the desired specification will develop brand loyalty. This is evident from the success of Hyundai’s Elantra model in Latin America.
The auto industry rivalry is bound increase as more firms enter new different emerging marker, and as firms form new strategic alliances so as to get ahead of the competition. Toyota the number 1 automaker in the world is going to continue a lot of pressure from other automakers to retain its status because for example Volkswagen recently announcement to invest â‚¬50.2 billion (US$68.2 billion) in its automotive division between 2013 and 2015 as part of its bid to surpass Toyota (TSE: 7203) as the world’s largest carmaker. The level of incentives offered by manufacturers to consumers, such as zero financing, rebates or the cash for clunkers government incentive and marketing incentive programs such as rebate programs, low-rate financing offers, and special lease offers, can also affect the demand for cars. For example Ford offers a special retail and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit.
The Power of Buyers
The major customers for the automakers are household market customers and business market customers Business market customer consists of businesses that purchase vehicles for use as transport to and from job sites or as travel vehicles for business trips. They respond negatively to reduce economic activity in an economy downturn or recession. Household market customers are price sensitive and they respond positively to overall price reduction (rebates or marketing incentives) and negatively to fuel price, high unemployment, falling home prices and lack of access to credit. Since there are many automakers to choose from, consumers have the highest bargaining power in their relationship with auto makers. However Household market customers have more credible bargaining power compared their business market customer’s counterparts. This is because household market customers buy the most of the output from the auto makers. In other words, it is the auto maker’s job to keep the buyers happy or else they can easily switch to another band the next time they want to buy a vehicle. In the age of internet and social media, customers are armed with a lot of information that has led to the increase in bargaining power than they had in the past. Due to the availability of information, customers are increasingly better informed about a vehicle’s actual cost and are less likely to accept large annual price increases. Secondly, customers are familiar with dealer cost information from consumer publications and the internet thereby enabling them to become more astute when negotiating the purchase of a vehicle. Thirdly, In an era of low inflation, customers familiar with dealer cost information from consumer publications and the internet have become more astute when negotiating the purchase of a vehicle. For example business market customers can buy cars on the cheap with guarantees to repurchase from the automaker at contractually agreed upon values. The power of buyers is strong in the automotive industry, customers have diversified preferences and automakers are increasingly expected to offer products that address individualization. This implies that automakers have to make vehicles that address consumer needs in terms of safety, environmental impact and perceived value and services around the vehicle that cater to the individual situation of the customer. This has therefore led to an increase in investment by companies in research and development. In order to woo customers are differentiating their products such as developing hybrids, hydrogen fuels, sporty and gas-electric cars. For example, Ford is planning to triple production capacity of electrified vehicles in North America by 2013 and Mercedes-Benz is developing Mercedes-Benz -Cell, an electric car powered by hydrogen fuel cell technology and Honda is rolling out anew, sporty, two-seat, gas-electric hybrid, Porsche and Volkswagen are selling their first hybrids. All these actions above determine the automaker that a customer is more likelyto buy from because buyers are not just looking for vehicles that are smaller in size but also cars that run more miles per gallon and fit their personal taste. The availability to get easy credit, financing and tax incentives influences the demand for vehicles. For example in Canada, car buyers who borrow to finance their vehicle purchases can take out loans longer than six years, than the previous shorter period. Such credit and financing actions boost car sale numbers. The same logic applies to the emerging markets: China, Brazil, Russia and India where significant increase in the number of automobile financing companies has resulted in the number and range of automobile loans increasing, which has contributed to stronger demand from buyers. As a way to capture the customers, automakers are providing extras such as providing their customers with parts and accessories. For example, Chrysler through its Mopar brand offers parts and accessories. Tax reductions, exemptions and bonus payments for buyers of electric vehicles by the EU increases the demand of electric vehicles
Threat of Substitute
Products Substitutes in the automotive industry come from other modes of transport such as public transport and bicycles, walking, planes. However, the main advantage a car has over these other modes of transportation, is that it offers flexible (convenience), independence and utility. Since the threat of substitutes to the automotive industry depends on the geographical location (metropolitan or non-metropolitan) and efficiency of the public transportation. For example, cities like New York, Chicago, Boston, São Paulo, Tokyo and Seoul are highly congested cities that have a highly efficient public transportation system the benefits of having a car such as flexible (convenience), independence and utility will not be realized. Therefore, congestion in major metropolitan areas is a major threat to the automotive industry. For example, the Chinese local government imposed traffic gridlocks, such quotas on new car registrations. Such actions discourage consumers from buying new vehicles and to revert of other modes of transports. Volatile fuel prices are another dampening factor for the auto market that can influence consumers to use other modes of transportation. For example: China raised fuel prices four times and cut prices four times in 2012 and thereby reducing the demand for automobile. Considering the impact of congestion, traffic gridlocks and price sensitive of consumer to fuel prices, the threat of substitute products to the automotive industry is fairly mild. Taking into consideration the price of operating a vehicle, and the convenience, independence and utility associated with owning a vehicle, the threat of substitute products is small.
Threat of New Entrants
The threat of new entrants is minimal due to the existence of strong barriers to entry such as large capital investments, brand recognition/loyalty, economies of scale and access to technology. The auto industry requires large substantial capital investment for the success running of operations. Since car manufacturers operate on a global scale, large investments are required to develop economies of scale and large volume of vehicles and develop supply chain efficiencies. It would be highly difficult for a new company to achieve the above and achieve the capacity to function on a global scale and negotiate the various bureaucratic hurdles involved in international trade and benefit from economies of scale. Since exclusive dealerships are the distribution channels for auto companies, new entrants would have to invest in getting dealerships to sell their vehicles. Even if a new entrant can develop economies of scale, competition in the auto industry is already intense. Some companies have heavily invested in securing brand loyalty for decades. Therefore, new entrants will find it difficult to develop and establish a new brand and develop brand loyalty. In other words, new entrants will find it difficult in establishing a customer base. Companies are joining forces and forming strategic alliances, and this will present a competitive barrier for a new entrant. For example in February 2011, PSA Peugeot Citroën and the BMW Group formed a joint venture named “BMW Peugeot Citroën Electrification” so as to expand their existing cooperation to hybrid systems. Renault-Nissan Alliance has invested â‚¬4 billion (US$5.4 billion) in electric vehicles. Such alliance increases the capital, technology and competences available to the alliance partners thereby providing another entry barrier for a new entrant. The need to comply with stringent environmental regulations in the future would require significant research and development investment for an entrant. For example, for a new entrant to operate in Japanese, a country that has one the stringent emission standards in the world, it would have to create a highly environmentally friendly car. Even auto companies in emerging countries find it hard to break into developed world markets because of the many regulations that a car should fulfill before it can be put on the market. For example, competition from Chinese-made automobiles and light-duty vehicles fail to threaten the major players in their own markets because these vehicles fail to meet safety standards required for entry into US, Japanese and West European markets. Therefore a new entrant is bound to have difficulty meeting environmental regulations. New entrant will face the barrier of accessing state of the art technology. This is because major global operators have patents and claims to new technology. Since customers are becoming more green, new entrants will have to develop technology for hybrid propulsion systems and flexible-fuel technologies However, the major obstacle a new entrant will face in developing these technologies is require skilled talent and significant investment in research and development. Furthermore, with country emission standard improving globally, new entrants would have to work extra hard to develop the next-generation technologies needed to comply with them Because there is there a high capital requirement to enter this industry, is it difficult to obtain the resources to build an efficient supply chain, economies of scale and cutting edge technology, therefore the barriers of entry in this industry are high.
The Power of Suppliers
Suppliers can be classified into six categories: body suppliers, interior suppliers, powertrain suppliers, chassis suppliers and electrical component suppliers. Although the industry has large diversified suppliers such as BASF and Dow chemical that supply plastics, foams, paint and other material to the auto industries and many other industries, these supplier do not have much bargaining power. This is because the auto industry is their major customer and the major revenue generator on their balance sheet, therefore have less bargaining power. Completion between suppliers is very intense to the extent that strong and innovative suppliers are acquiring their competitors who can’t support global programs and who cannot offer cutting edge technology. For example, competition between leading tires maker such as Bridgestone and Goodyear has got so intense that both companies are testing their tires and in real-life conditions, variety of test tracks and driving environments, so as to find was to come up with superior tires. There seems to be no credible threat from the supplier of the auto product s to automakers. This is because there are many suppliers out there and they can be interchangeable. This is also because most suppliers are over dependent on the automaker for survival to the extent that some suppliers went out of business during the global recession because auto sales had dipped. Many suppliers such as the renowned inventors of the in dash car radio, cruise control, Delphi Electronics and safety had to file for bankruptcy. The relationship between the supplier and the auto makers are pivotal to the success of the automaker. The reasons are four fold. Firstly, a close relationship with suppliers and good distribution channels assist controlling costs. Secondly, a close relationship with the supplier enables the auto maker to gain access to their best technologies and receive priority fulfillment in the case of material or product shortages. Thirdly, a close relationship will ensure an establishment of an efficient supply chain and ensure collaboration with suppliers by providing flexible processes that car makers can utilize to adjust production volumes to suit changing demand situations. Fourthly, a close collaborative relationship with suppliers and good distribution channels assist in controlling costs. Steel is the most import material and backbone for the automotive industry. The total steel in the average vehicle is approximately 63 percent. The prices of steel and other metals are important to automakers. According to the WSJ the prices of steel in the U.S. have fallen by over 35% to $636 a ton from over $1,000 a ton before the 2008 financial crisis. Steel suppliers are competing to create new steels that provide a superior combination of high strength, crash energy management, excellent formability and dent resistance, making automobiles safer and more fuel-efï¬cient. However, the steel industry’s biggest customers are automakers and with the steel industries not doing well, automakers have a strong bargaining power.
In conclusion the force of internal rivalry is high and will more likely bite into the profits of Ford. However, the force of new entrants is very weak and new entrants cause little threat to Ford profits. The threat of substitutes is medium and has a medium – high threat to Fords profits. The threat of suppliers is very low and cause little threat to Fords profits. The threat of buyers is significantly large and has a substantial threat on Ford’s profits. To sum up, the automotive industry remains a profitable industry considering that the markets are becoming more global and there is a large customer to auto producer ratio. With the forces above at play, and with history as a guide, it is safe to say that the automotive industry will continue to change, evolve and present opportunities for Ford or any other player.
Identification of Environmental Opportunities and Threats and Firm Strengths and Weaknesses (SWOT Analysis)
Brand recognition – Restructure brand
Mulally CEO (Named the best leaders) – strategic leader
International Expansion- Research other markets besides India and China – (Malayisa Thailand, Brazil- large emerging middle class)
Research in Greener alternative fuels
Uncertainties associated with the European debt crisis (Cyprus, Greece recent crises)
Congestion – (might lead to regulation limiting number of cars)
GM and Ford Truck War (http://blogs.wsj.com/corporate-intelligence/2013/04/02/gm-and-ford-escalate-the-truck-wars/?mod=google_news_blog)
Attract millennial (18 -29 yrs) – racing education for motorsports
Advertising: Traditional venues (newspaper, radio, TV) and Social Media venues (Facebook, Twitter, Youtube etc)
Sponsorship: American Idol
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