Introduction To The Auto Industry
The U.S Auto industry is believed to have been in inception since the 1890’s where it rose to become the largest auto industry in the world. Currently, it contributes close to 5 % of the Gross Domestic profit in the US. The development of engines and various innovations of forms of energy and tools for carrying energy lead to the success of the first motor vehicle earlier before the 1890’s. This subsequently lead to the domestic production of domestic cars for sale. Since it became a booming and lucrative market, its growth has since then encountered market constraints, environmental problems, safety, competition, and fuel economy regulations. These have significantly caused the industry to change the strategies of auto produce resulting in the growth of imports, decline in the auto employment and fluctuating profit crises. The plans are however aimed at getting an advantage over competitors and enjoying a significant market share
3.1 Industry Definition
A formal definition of the American Automotive Industry would be taken to refer to a set or combination of industries which are involved in the assembling of necessary resources of production, designing, and manufacturing motor vehicles. The industry completes the process by selling(wholesale and retail) and maintaining the motor vehicles (Scott, 2017).
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3.2 Industry Profile
The American Automotive industry is large and dynamic primarily dominated by the ‘big three.’ The big three include General Motors, Ford and Chrysler. They have been consolidating other small companies thus expanding the size and structure of the automotive industry across borders. They continue to lead major inventions including developing trucks and models of lighter motor vehicles. The industry’s profile also explains the spread of employment in the industry as well as regulations involved. The big three face competition in countries like Japan and China which continue to penetrate the auto market.
3.3 Industry Market Structure
The American Automotive industry as seen in the growth and expansion of General Motors, Chrysler and Forde depict an oligopoly market. This is because the industry is primarily dominated by the three big auto companies who are vast automakers. Their form of consolidating small or upcoming companies in the same line reveals barriers set into the entry of the market. Their actions control the overall operation of the market. This feature only points out to an oligopoly type of market. According to Scott (2017), the three firms have registered significant growth to overall claiming 70% of the auto industry.
3.4 Future Outlook
Far from being one of the largest industry contributing about 4 % of the American GDP, the American Automotive industry is struggling. Fluctuating pricing patterns, environmental pollution, state regulations on the use of energy, foreign competition, high import rates, and safety are among the numerous factors costing the auto market. Despite these, the American Automotive industry remains strong by embracing technology and new inventions that propel them ahead. It is also worth noting that the 2009 economic crisis on the auto industry is believed to have pushed the industry participants into developing a better strategy that helps them recover from the terrible condition.
An extensive network of distribution services has created a reputation for the American auto industry. They believe that this reputation will help them broaden their activities and prevent entry of any newcomers posing as competitors. They continue to focus on the production of large cars as they are famous for, designing and using modern models that are matchless. Besides, The U.S plans to use its profits and financial might to establish better market strategies that counter competition. This also explains the prospects of domestic employment and training. Such a plan together with widening markets across will also benefit third world countries, improving their economic status.
Analysis of Porters Five Forces Strategy As It Applies to The Auto Industry
4.1 Bargaining Power of Buyers
Bargaining powers of buyers can be allowed on the market but should not be exaggerated. When buyers bargain for the prices of commodities to be low, the revenue received from such products will also be low. On the hand when a reasonable margin of bargaining power is given to buyers, it could be a form of attracting more customers to buy. The presence of ‘the three big companies’ in America limits the bargaining power of buyers. Being the most massive and popular automotive makes in the country, they continue to meet the demand of the consumers whose needs cannot be postponed for instance automobiles. The rise of competitors conversely who offer cheaper options gives the need for bargaining power of buyers in America to prevent such transactions with competitors
4.2 Bargaining Power of Suppliers
Suppliers play an important role in the market in influencing prices. When suppliers offer high prices on goods or raw materials to producers, it can cause the prices to go higher while reducing demand since the commodities will be unaffordable. In the long run, the producers will incur a loss since the revenue on output did not translate to the costs incurred on the input. The American automotive industry equally relies on suppliers of spare parts or other components of automobiles to complete their work. Conversely, when a supplier does not meet the standards of the automotive industry, it is definite that the auto company may consider other options. Supplier bargaining power was low. When they give bargaining power to the suppliers, they may most likely gain or lose in the process depending on how the prices affected the demand for the automobiles. Recently, Ford's cost cutting strategy has been due to the high bargaining power of suppliers which costed them. This points out that there is a declining number of suppliers in the market which increases the bargaining power of suppliers. This continually has a considerable burden on the motor industries as well as reducing their profits as cited by Ford. Good relations with suppliers can help the supplier's bargaining power to favor both sides.
4.3 Competitive Rivalry in the Industry
The most significant force behind the competition in the market is gaining a larger share of the market and profits (Porter, 1979). This is what most industries strive to achieve. Eventually, competing companies will cause a decrease in the prices lowering benefits. Although General Motors, Ford and Chrysler exhibit features of an oligopoly, thus showing minimal competition, the growth of smaller companies and foreign entrants from Japan and China establishing grounds in the US, causes rivalry. Toyota and Honda, for instance, have entered the US auto market and have in many cases created customer loyalty to other companies.Their primary objective is to gain a larger market share which has been held by the big three for years. When they fail to achieve this, Honda and other small companies will relatively lose profits while consumers may shift preference to substitutes (Porter, 1985).
4.4 Threat of New Entrants
New entrants dealing with similar products in the market are believed to be a threat in the distribution of market share. When barriers are set to deter entrance of new firms, the existing firms will continue to enjoy steady profits. Conversely, new firms, especially in the current period, have strategic development plans that could help. Toyota’s entrance in the market had Chryslers annual sales fall in the 1990’s and the late 1980s because the automotive company could not adopt new manufacturing techniques which Toyota used. This had an advantage for Toyota as it made profits in that period. In the automotive industry, collusions or mergers would be recommended to allow participation of new entrants and the gaining of a larger market share (Porter, 1980). It also increases the learning curve of companies in the market which increase company sales. The market will still have a few large firms as participants.
4.5 Threat of Substitutes
Substitutes to the American Auto industry include road transport, rail or walking. They can be preferred since they are cheap. The implication that alternatives have on other firms is reducing their profits (Porter, 1979). Cultural beliefs and personal preference also contribute to the growth of substitutes. In other cities like Chicago and New York, using cars is not a necessity, and most people choose to forego. The phenomenon lessens demand for automobiles thus decreasing market share and demand for the big markets.
Conclusion
The definition and structure of the American Automotive industry show similarity in the features of an oligopoly. Even with the dominance, the industry is faced with major challenges which need to be adequately addressed. Michael Porter’s analysis gives insights into how some of the problems can be resolved. Advancements in technology and growth of modern manufacturing companies give suppliers more bargaining power. The American Automotive industry must continue to keep a balance with the suppliers to ensure that they incur low costs in the inputs and relatively balance the price of outputs to attract customers more than their competitors.
References
Porter, M. (1885). Competitive Advantage. New York: Free Press.
Porter, M. (1979). How Competitive Forces Shape. Harvard: Harvard Business School Reprint,.
Porter, M. (1980). Competitive Strategy. New York: The Free Press.
Scott, R. E. (2017). Short Sighted Solutions: Trade and Energy Policies for the US Auto Industry (Repring ed.). New York: Taylor and Francis. Retrieved July 6, 2017
