Porter's Five Forces - Automobile Industry

Five Forces Analysis was developed by Michael Porter to better identify competitive opportunities and attractiveness within an industry or market. Other than a SWOT analysis, this is another analysis tool to identify opportunities and risks before entering an industry. Porters model supports analysis of driving forces in an industry. The management can make better decision by using the information that evaluated from detailed Five Forces Analysis. The five forces that Michael Porter has identified are widely used to assess the structure of any industry. They are:

Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Customers Threat of Substitutes Competitive Rivalry between Existing Players

Automobile is one of the most convenient transportation tools in our modern society today. Globalization enables foreign auto dealers to enter Indian market easily and also creates competition. In India, there are three major automobile manufacturers. They are Maruti Suzuki, Tata, and Mahindra. However, the biggest competitions are the foreign auto manufacturers, Toyota, Hyundai and Honda. Threat of New Entrants: MEDIUM It is not that easy for an entrant to enter into a car industry because of the brand loyalty of customers. However, some of the well known foreign companies entered into Indian car industry easily, for instance, when Honda Motor, Co. opened its first office in Ohio, the major competitions began. The expansion of the foreign entrants decreases the market of Indian companies.

Bargaining Power of Suppliers: LOW Suppliers have a little power in an automobile industry. Thats because numerous suppliers rely on some particular auto manufacturers to buy their products. Each manufacturer has many suppliers. For example, Toyota has more than 10 different suppliers in US. The main qualifications of the suppliers are the quality, cost, and delivery of the products. If suppliers cant meet those basic considerations, it is hard for them to survive. Bargaining Power of Customers: HIGH There are various brands and models of the cars to choose from nowadays. The factors that affect consumer to make a buying decision are: the appearance, quality, price, and environmental effect. People always want a new and nice looking car. For those rich people who love cars, they always purchase the new released and attractive model. Besides that, the quality of the car is an important issue. The car has to efficient, which means saving gas, protecting our safety, and running fast. In addition, since there are many competitors, consumer have more choices to select a cheaper, but good quality car. Moreover, because of the global warming and other environmental effects, a lot of the manufacturers make their cars unique in order to protect the environment. Based on a variety of the lifestyles, people choose to purchase a car in a different way. Threats of Substitutes: LOW It is true that there are many of transportations substituting automobiles. They are bicycles, subways, buses, and trains. These substitutions really make our life easier if we live in the cities. On the other hand, for those people who live in Utah, upstate NY or suburb area, car is the only transportation tool other than walking. Competitive Rivalry between Existing Players: LOW

Competition between existing automobile companies is high because there are too many choices for the customers. That may cause the industry earning lower profits when the cost of the competition is high.

Top 20 motor vehicle manufacturing companies by volume 2006 Total motor vehicle production (1000 units) Group 1000 2000 3000 4000 5000 600070008000900010000

Toyota* 9120 General Motors Ford Volkswagen Group Honda PSA Nissan Chrysler Renault Hyundai Fiat Suzuki Daimler Mazda Kia BMW Mitsubishi 1396 1382 1366 1313 2545 2492 2463 2318 2297 2045 3357 3223 3670 8926 6268 5685

Motors AvtoVAZ Subaru Tata Motors 765 587 561

Porter's 5 Forces in the Automobile Industry

Porter's Five Forces, also known as P5F, is a way of examining the attractiveness of an industry. It does so by looking at five forces which act on that industry. These forces are determinants of that industry's profitability. The five forces are: 1. The threat of new entrants In the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threat include all barriers to entry such as upfront capital requirements (it costs a lot to set up a car manufacturing facility!), brand equity (a new firm may have none), legislation and government policy (think safety, EPA and emissions), ability to distribute the product (Alfa Romeo has been out of the US since the early 90s largely due to the inability to re-establish a dealer network. But if you are looking at Singapore, for example, only one Alfa Romeo dealer is needed!). 2. The bargaining power of buyers/customers Who in the US has ever bought a car without bargaining? Anybody? In 2009 especially, US dealers were giving great deals to buyers to get the industry moving. While quantity a buyer purchases is usually a good factor in determining this force, even in the automotive industry when buyers only usually purchase one car at a time, they still wield considerable power.

However, this may be different in other markets. In Singapore it sure is lower than in the US, creating a more favorable situation for the industry but not the buyers.

Generally, however, it's safe to say the customers have some buying power, but it depends on the market. 3. The threat of substitute products If buyers can look to the competition or other comparable products, and switch easily (they have low switching costs) there may be a high threat of this force. With new cars, the switching cost is high because you can't sell a brand new car for the same price you paid for it. A P5F analysis of the car industry covers the new market, not used or second-hand.

But what about the threat of substitute products before the buyer makes the purchase? You need to know whether the market you are analyzing has many good alternatives to new cars. A vibrant used car market perhaps? Used cars threaten the new market. How about a very good mass-transportation system? Product differentiation is important too. In the car industry, typically there are many cars that are similar - just look at any mid-range Toyota and you can easily find a very similar Nissan, Honda, or Mazda. However, if you are looking at amphibious cars, there may be little threat of substitute products (this is an extreme example!). 4. The amount of bargaining power suppliers have In the car industry this refers to all the suppliers of parts, tires, components, electronics, and even the assembly line workers (auto unions!). We know in the US the auto unions are tremendously powerful. But we also know that some suppliers are small firms who rely on the carmakers, and may only have one carmaker as a client. So this force can be tricky to evaluate.

5. The intensity of the competitive rivalry (which is in part determined by 1-4) We know that in most countries all carmakers are engaged in fierce competition. Tit-fortat price slashes, ad campaigns, and product developments keep them on the edge of innovation and profitability. Margins are low and pressure between rivals is high.

All major car-producing nations experience this intense rivalry. This obviously includes the US, Japan, Italy, France, the UK, Germany, China, India, and more. State-owned car manufacturers like Proton in Malaysia experience less rivalry but are still under pressure from imports. While a P5F analysis applies to all companies competing in one industry (and market) the same, what differs is that those firms' profitability will vary between them. This is because of their own competitive advantages and varying business models. So just because all firms in one industry and market are subject to the same forces doesn't mean they perform equally. A P5F analysis should always be done in conjunction with other assessments, and should not be regarded as being absolute. It should only serve as an indicator, not absolute fact or even necessarily accurate. There are many critical assumptions that should be made and explained in one's P5F analysis. The market must be described, the competition must be explained, and the products must be defined. For example, a P5F analysis of the car industry in the US would not necessarily apply in China. The markets are totally different, and the product life cycle is not even close to being the same. Another example is the type of automotive industry. A P5F analysis of the electric car industry would be entirely different than one of the conventional car industry.

Porter's Five Forces in the Auto Industry Around the World

For a P5F analysis of the auto industry in the US, click here. To see a P5F analysis of the auto industry in China, click here. A P4F analysis of the Indian auto industry is here. The Porters Five Forces analysis is designed to evaluate the competitive forces in the industry the firm operates. If it determines that the combination of forces in the industry act to reduce profitability, it is saying the industry is unattractive. Even worse is an industry close to total competition. Keep in mind that this exercise evaluates the industry, not the firm (General Motors). As such, this assessment would apply to Ford, Chrysler, Toyota, Honda, or any other automotive firm manufacturing and selling cars and trucks in the US. "...manufacturing and selling cars and trucks in the US" is key. You must think about and clearly define your business unit before starting a P5F analysis. Is it in the US? China? India? Japan? Obviously the threats and forces in these countries will be far different than in the US. The Porter analysis examines three horizontal forces, or competition in the same industry: Threat of new entrants, threat of substitute products and threat of established rivals. Two forces are from vertical competition, or those from the supply-chain: Bargaining power of customers and bargaining power of suppliers. This exercise would be relatively easy to perform if the industry were stable and uniform. None of the answers to the degree of threat Porters Five Forces pose are black and white or clear-cut. In one case, the bargaining power of suppliers, either extreme could be argued. Moreover, the table in the appendix which tallies up the criteria for each of the five forces fails to identify many of the current economic conditions and dynamics in the automotive industry today. As a result, the findings may not be completely congruent with reality.

Keep in mind this analysis was written in the Spring of 2009, in the worst of both the automotive shake-up and the global economic crisis. Things have since changed. A summary of the findings is below: <6x4 blue table goes here> 1. There is low threat of new entrants 2. The bargaining power of buyers/customers is low 3. There is a huge threat of substitute products 4. Suppliers do not have much bargaining power 5. There is a significant amount of rivalry among competitors <green table 1 goes here> The analysis above indicates that the industry is moderately favorable to profitability.

However, in another analysis of the industry, based upon industry-specific news and facts surrounding the suppliers, buyers, competitors, and more, the results are very different. This is not based on the tallied results in the appendix: <green table 2 goes here> Footnote 10: Source, AFP: ttp://www.google.com/hostednews/afp/article/ALeqM5iXk3cCzM02V62eC50Iizk8S3tJFw According to this second analysis, the threats of substitute products, bargaining power of customers, and rivalry among competing firms are high, and are unfavorable to industry profitability.

The bargaining power of suppliers and threat of new entrants are moderate, which is not very favorable to industry profitability. It should be noted, however, that the bargaining power of suppliers may be induced upon them by force, as if they stop supplying it is not because they have money and are threatening the automakers, but because they cannot afford to keep assembly lines open. This creates a negative-sum game, hurting both parties. It could force the automakers to rescue the suppliers.