Abstract
In this article, the author presents an analysis of the American Automobile industry using the Porter’s Five Forces model. The essay starts by providing a background to the industry—industrial profile, structure, and outlook—with special focus on three major companies in the sector, Chrysler, Ford Motor Corporation, and General Motors. The author further examines the industry in the perspective of the Porter’s model, noting that overall; the motor industry is properly regulated from the external forces excluding the threat of substitute products and competitive forces that the companies continue facing. Importantly, most of the competition that the companies in the industry face comes from the foreign markets since foreign cars have established themselves in the American market and continue playing a role in meeting consumer demands. While the threat of substitute products is real, this analysis notes that the love for automobiles among Americans has propel the use of motor vehicles a norm in the travelling processes Americans, which makes it a weak force. Suppliers in the industry do not have a strong force, especially because they are not concentrated—the sources of raw materials for auto manufacturing are diffused around the country.
Keywords: Porter’s Five Forces, automobile industry,
Introduction to the Auto Industry
Industry Definition
There exists and incredible automobile culture the world over, and the now multi-billion dollar industry meets the needs of the culture in a remarkably brilliant fashion. Importantly, one should note that the automobile industry does not only concern the selling of cars and related motor vehicles, but it also engages in the designing, development, assembly, and repair of the products as well (Willums, Midttun, & Staurem, 2018). The cited literature elaborates that the umbrella of the auto industry also entails other ancillary services, including the sale of different auto parts and accessories, which are important in the maintenance of proper functioning of the automobile systems. Consequently, from the description of the industry given, this paper defines the automotive sector as encompassing all the activities and firms that deal in automobiles in the categories described above.
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Industry Profile
Presently, the auto industry is not confined to a specific geography, and in fact, the sector spans the whole world. Nonetheless, in aspects of manufacturing prowess, the United States ranks at the top of the industry, which is why it has the largest auto industry across the globe (Willums, Midttun, & Staurem, 2018). Despite the rise in the prominence of alternative modes of travelling, such as cruise ships, planes, coaches, bicycles, and others, the automobile industry of the United States is still the most popular. Owing to the dominance of cars, the auto industry has made a remarkable recovery since the 2008 financial depression. According to a review of the extant studies, close to a hundred million passenger vehicles cruised American streets by 2017 out of which 14.8 million were registered in the nation’s most vehicle populous state, California (Wagner, 2020a).
One may ask about the number of vehicle sales that happen in America, and the statistic that they will get may be a little surprising. Precisely, according to literature, the volume of car sales in the country reduced significantly between 1973 and 2019 (from 11.4 million to 4.7 million respectively) (Wagner, 2020a). The cited literature suggests that the change in the statistics owes to the shift in consumer demand patterns towards vehicles with larger occupancy capacities through the years, which is reflected in the fact that the volume of light truck sales rose by approximately ten million units between 1981 and 2019 (2 million—12 million respectively).
Chrysler LLC, General Motors, Ford Motors, and The Detroit Three are among the largest American-based auto manufacturers, although Chrysler is a subsidiary of the Fiat Chrysler Automobiles Holding, which is European-based (Wagner, 2020a). Apart from the identified companies, Tesla has been enjoying a rise in the market share because of the growing levels of acceptance for electric vehicles. The latter cited literature reports that General Motors was the most important company in matters light vehicles sales in 2018 followed by Ford Motors and Toyota. Overall, close to 2.8 million passenger vehicles were manufactured in America in 2018, the same study avers in addition to pinpointing Toyota and Volkswagen as the biggest producers at the global level.
Industry Market Structure
The automobile industry is an oligopoly, literature asserts. According to Irandoust (2015), an oligopoly is a market structure, which is characterized by a small number of large companies. The companies in the market, the same study reports, create several barriers to the entry of others, including the huge capital investments that are required, high standards of quality that each of the new companies must meet, and others. Usually, the objective of the companies already in the market is to make supernormal profits. Each of the companies in the market competes with the other using differentiation strategies (Irandoust, 2015). The automobile industry depicts each of the characteristics of an oligopoly as described, especially because the few companies that serve the United States and the world have made it difficult for new automobile companies to emerge.
Companies in the auto industry are largely interdependent, which is another important feature of an oligopoly. The interdependence mostly relatives to the pricing strategies that each of them employs. In this case, when a company lowers its average prices, the rest of the firms are also likely to react by doing the same because of the potential for increasing profits. Therefore, the companies in the auto industry always engage in the keen study of their opponents’ strategies before they pull strings with their own methods.
Outlook
Data retrieved from Wagner (2020b) reports that after peaking to 76.6 million sales in 2017, the global passenger sales are projected to fall to only 74 million by the end of 2020. The cited literature reports further that China is among the biggest markets and producers in the industry, and it is anticipated to continue its dominance in the future owing to its significantly large population and production technologies. Regionally, the reviewed literature reports that European companies, including Bosch, Denso, and Continental, will continue leading the pack in the production of automobiles despite the growing rise of American companies, such as Ford Motors, and Chinese producers.
Global events, especially those that focus on environmental sustainability will have significant levels of influence on the performance of the automobile industry around the world. For example, it must be noted that the Paris Agreement on Climate change is a force to reckon with now and in the future. According to Wagner (2020b), the Agreement pressures companies to consider the production of environmentally friendly vehicles, which explains why it is projected that the production of hybrid and solar-powered vehicles will increase beginning from 2020. Precisely, it is predicted that one in every three cars that will be sold by 2030 will be electric powered, which is part of an initiative to curb the scares of climate change resulting from carbon emissions, the same literature reports.
Porter’s Five Forces Strategy Analysis
Michael Porter proposed the Porter’s Five Forces in 1979 as a strategy to be used in the analysis of the competitive positions of companies. The theory is founded on the idea that the five forces shape the levels of competition and attractiveness of markets. Accordingly, Porter’s strategy is useful in determining the position of power in the competitive continuum of different industries. The five forces are useful in the determination of the strengths of specific companies through establishing their competitive positions and in informing the trajectories in which they should move to in the future. The essay discusses the five forces in respect to the automobile industry of the United States.
Bargaining Power of the Buyers
Corporate organizations, the government, and individuals drive the American Automobile industry. Most persons purchase one or several vehicles, but companies and the government may purchase several fleets of vehicles. One should note that the bargaining power of the customers is very strong because the oligopolistic structure of the automobile industry always implies that they have the freedom of choice (Candelo, 2019). The fact that the consumers could easily chose one company over its competitors implies the power that they have in influencing the decisions of the manufacturers in the industry. According to Steidle (2018), the power of consumers solidifies further when it is understood that the cost of switching to alternative means of transportation and competitors is not high, and that the customers may often do so almost freely. The consumers have the freedom of choosing their car brands, and notably, some of them often opt for foreign models as opposed to the American-made vehicles.
As much as the consumers are influential in the car industry, it is notable that the power increases, especially when the analysis considers the corporate and government buyers who purchase automobiles on large scale. The statement does not imply that individual consumers do not have any influence on the companies in the industry. A review of the extant literature reveals that the firms operating in the industry understand the implications of pricing on the levels of their sales. The fact that the corporations operate in an oligopoly, as it has already been articulated, indicates the need for them to the sensitive to the price levels that they set because they determine consumer behavior at the individual level.
Bargaining Power of the Suppliers
A review of the extant studies reports that suppliers of the auto industry in the United States are weak force on the companies because of the relatively high saturation levels. The country has many scattered suppliers, small and large scale alike, which makes all the raw material and parts required in the manufacture of the automobiles readily available and accessible (Candelo, 2019). Furthermore, as the cited literature informs, America has many auto suppliers who are evenly distributed around the nation. A survey done in 2012 reports that auto suppliers accounted for close to four percent of the total national manufacturing and created over 3.6 million jobs that year, which show the levels of saturation of the industry. All the available suppliers deal in specific products because the auto industry has different types of material and parts, which are useful in the manufacture of automobiles and one company cannot stock all of them to meet the demand in different aspects. The number of suppliers in the industry means that the companies dealing in automobiles have a chance of accessing their supplies with ease, which reduces the bargaining power of the suppliers. In any case, the suppliers are accustomed to complying with the needs of the individual automakers and not the other way round, which further reveals their weakened bargaining power.
Competitive Rivalry
Oligopolies are competitive market structures, especially because of the interdependences of the individual companies. The American auto industry is very competitive, and the companies strive to outdo each other through significant levels of product differentiation. The largest players, including Ford, Chrysler, and General Motors, are the most competitive because each one of them strives to be the most preferred. Customers look for different aspects when they select automobiles, including sizes, price, comfort, safety, performance, durability, and other factors, which explains why the three companies strive to differentiate their products on such criteria.
Furthermore, the American auto industry faces stiff competition from foreign companies, including Toyota, Volkswagen, Mazda, Mitsubishi, Hyundai, Subaru, and others (Steidle, 2018). Each of the competitors has a special way in which it differentiates its products from the rest of the players in the industry, which explains the freedom of choice that the consumers have, as explained previously. The stiffness of competition also stems from the fact that each company, foreign and domestic alike, engages in rapid product promotion, especially through advertisement, which increases the levels of customer awareness of different elements of the industry, which influences their decision-making.
The pricing strategies of the companies in the industry are worth mentioning in this section of the analysis. While it has been described that the companies are interdependent in terms of their pricing mechanisms, it must also be known that the companies do not engage in price wars per se. the high costs of production limits the levels of price wars that the firms engage in because tougher wars are likely to attract losses to all of them. Therefore, instead of taking the competition to all products, the carmakers manufacture different types of products for specific customer segments—each of the firms has expensive and cheaper vehicles to address the needs of the customers according to their purchasing abilities.
Threat of New Entrants
The American auto industry faces a low threat of new entrants. The reasons given for this observation are those akin to the nature of the oligopolistic market competitions. First, new companies cannot easily enter the American auto industry because of the high start-ups costs that they will likely incur (Steidle, 2018). The firms are needed to comply with different standards of safety, which means that they incur extra costs in doing checks and tests, which is an additional factor that makes the industry not easy for smaller companies to enter. As the cited literature still reports, economies of large scale operations is another factors that makes the threat of entry of new companies into the industry insignificant for those that already operate. It has been mentioned that oligopolies have a characteristic low number of large firms, which means that each one of them enjoys the economies of large-scale operations in activities, such as dealing with suppliers and in setting the prices for manufactured products. The fact that the largest companies in the industry are established brands means that new entrants will always shy from the thought of competing the extant brands. As much as the barriers to entry can surmounted eventually, the companies in the American auto industry face low threat of new entrants.
Threat of Substitutes
The automobile industry faces the threat of substitute products and services. Precisely, people may opt not to drive, which means that they will lower their demand for automobiles and related products and services. For instance, some groups of people may choose to travel by public means on trams, trains, and busses, which lower the aggregate demand for personal vehicles. Over short distances, others may choose to cycle or walk, which implies that they will lower their reliance on vehicles. In the recent years, it should be note that the focus of policy has been to contribute to environmental conservancy. In the wake of this policy, most countries have been asked to lower the incentive for having many vehicles on the roads, which is why people have been option for substitute means of travelling and moving around. Others, especially who cannot afford the cost of vehicles, also find the alternative products and services more viable than automobiles. Over long distances, planes have continued their domineering presence, which strengthens the threat of substitute products.
The threat of substitute products is real in the automobile industry of the United States, yet it is a weak force. According to Candelo(2019), Americans have an automobile culture that has made motor vehicles continuously relevant as a means of transport in the country even in the wake of stiffening competition from alternative means. The latter literature reports that most people in the country would rather buy a vehicle than go by public means, which explains why the number of new manufactures hitting the market has been rising, but for the recent trend. Therefore, the automobile culture of Americans effectively counters the threat of substitute products, which makes it a weak force.
Conclusion
The Porter’s Five Forces is one of the most widely described tools for analyzing the external environments of organizations. Importantly, the tool may be used at both organizational and industrial levels, as it has been the case with this essay in which it has been used to appraise the attractiveness of the American Automobile industry. This analysis has found that despite recent trends indicating a slight dip in the automobile productions owing to a shift in environmental policies, the industry is still large. It is anticipated that most of the new manufactures will happen in China and the United States in the coming years, which puts America in the context for an analysis of this type.
As analyzed, the bargaining power of customers in the motor industry of the country is low. In fact, individual buyers do not have a voice except where each of the companies in the industry engages in target marketing on them. The weak bargaining power of consumers, therefore, means that they are not a threat. Suppliers, as do eh customers, have a weak force because the auto industry has a wide range of sources of raw materials used in making auto parts and in manufacturing. Competitive forces are the most significant. The largest companies in the country always compete to maintain their dominion over others, which is why each one of them strives to differentiate its products as much as possible. Lastly, the threat of substitute products is not significant considering the importance of the automobile culture of Americans.
References
Irandoust, M. (2015).Market structure and market shares in the car industry. Japan and the World Economy , 11 (4), 531-544.
Steidle, F. (2018). Analysis of the Automobile Industry in Times of Transition Using Porter’s Five Forces Model . GRIN Verlag.
Candelo, E. (2019). Marketing Innovations in the Automotive Industry: Meeting the Challenges of the Digital Age . Springer.
Wagner, I. (2020a). U.S. Automotive Industry . Retrieved 17 March 2020, from https://www.statista.com/topics/1721/us-automotive-industry/
Wagner, I. (2020b). Automotive Industry . Retrieved 17 March 2020, from https://www.statista.com/topics/1487/automotive-industry/#dossierSummary__chapter6
