External industry analysis
a. competitive rivalry a. profitability of the industry Ford profit margins by quarter
GM Profit margins by quarter (declared bankruptcy in 2009)
Tesla Profit margins by quarter
b. how relevant is price competition in the market Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales.
Read more: http://www.investopedia.com/features/industryhandbook/automobile.asp#ixzz2BNSDQ2RQ
c. how aware are firms of each other b. The top-level personnel moves highlight the growing confrontation between Ford and GM, as automakers claw their way back from the lows of the financial crisis. More than ever, America's two top domestic automakers find themselves fighting each other in vital markets around the globe, from California to Calcutta. GM ranks number one in U.S. sales, with Ford behind it. Globally, GM competes with Toyota and Volkswagen for the top spot. Ford is in the top six. - http://management.fortune.cnn.com/2012/07/31/ford-gm/
d. how interdependent are firms in this industry
c. Mutual interdependence means that firms realize the effects of their actions on rivals and the reactions such actions are likely to elicit. For instance, a mutually interdependent firm realizes that its price drops are more likely to be matched by rivals than its price increases. This implies that an oligopolist, especially in the case of a homogeneous oligopoly, will try to maintain current prices, since price changes in either direction can be harmful, or at least nonbeneficial.
Consequently, there is a kink in the demand curve because there are asymmetric responses to a firm's price increases and to its price decreases; that is, rivals match price falls but not price increases. This leads to "sticky prices," such that prices in an oligopoly turn out to be more stable than those in monopoly or in competition; that is, they do not change every time costs change. - http://www.bookrags.com/research/oligopoly-ebf-02/
e. is there evidence of partnership/ alliances? d. The United States Council for Automotive Research LLC (USCAR) was founded in 1992. It is made up of Ford, GM, and Chrysler. Its goal is to further strengthen the technology base of the U.S. auto industry through cooperative research and development. Its main focus is to: e. Create, support and direct U.S. cooperative research and development to advance automotive technologies. f. Be responsive to the needs of our environment and society and include the appropriate public and private stakeholders.
Ford will partner with General Motors to work on a new transmission technology. The new 9- and 10-speed gearbox will try to provide better fuel economy and a smoother driving experience. Many analysts were taken aback by the partnership between the long-time rivals. It is really more just a sign of the times. Many automakers have been teaming up lately in hopes of slashing research and development costs while creating new manufacturing efficiencies. - http://blog.bluespringsfordparts.com/63/ford-gm-transmission-partnership/ f. How global is the competition?
They're cutting costs by focusing on innovation, global platforms 82% of
automotive CEOs say they’ve implemented a cost-reduction initiative over the past 12 months, and 69% plan to cut costs further in the next 12 months. That doesn’t always mean cutting heads: 72% intend to focus more on innovating to improve existing processes. We think that includes increasing their reliance on global platforms. - http://www.pwc.com/gx/en/ceo-survey/industry/automotive.jhtml
g. bargaining power of buyers | 1960| 1965| 1970| 1975| 1980| 1985| 1990| 1991| 1992| 1993| 1994| 1995| 1996| 1997| 1998| 1999| 2000| 2001| 2002| 2003| 2004| 2005| 2006| 2007| 2008| 2009| 2010| Passenger car (new retail sales)| 6,641,000| 9,332,000| 8,399,000| 8,624,000| 8,979,000| 11,043,000| 9,300,000| 8,175,000| 8,214,000| 8,518,000| 8,990,000| 8,635,000| 8,526,000| 8,272,000| 8,141,721| 8,698,284| 8,846,625| 8,422,625| 8,103,229| 7,610,481| 7,545,149| 7,719,553| (R) 7,761,592| (R) 7,562,334| (R) 6,769,107| (R) 5,400,890| 5,635,433| g. number of buyers- There are many buyers in the auto industry. - http://www.bts.gov/publications/national_transportation_statistics/html/table_01_12.html Most are sold through franchised dealerships, although up to 5% of deliveries go to institutional buyers (mostly rental companies) h. differentiation across buyers
i. switching costs of buyers (installed base)? h. Experian Automotive defines corporate loyalty as measuring whether a new vehicle purchase matches a prior vehicle owned at the corporate level. This includes all brands under the corporate umbrella. For Q2 2012, GM had a loyalty score of General Motors (46.2 percent), Ford Motor Co. (46.0 percent). Tesla is too new to be counted in the survey. PR Newswire (http://s.tt/1pGnY)
The reasons for the falling loyalty according to analysts include that consumers buy cars less frequently, the internet has increased infromation available to consumers, and fuel economy is an increasingly important metric.- http://business.time.com/2012/10/30/why-brand-loyalty-is-fading-among-car-buy
ers/ j. Relative importance of the supplier to the buyer
k. Vert integration potential of buyer (low/ high) i. bargaining power of suppliers l. number of suppliers- GM has 544 suppliers, Ford has 318 suppliers, and Tesla has 35 suppliers. m. differentiation across suppliers- there is little differentiation; the Big 3 share are supplied by many of the same suppliers (e.g Magna, Johnson Controls, Faurecia, etc.) n. switching costs between suppliers-
o. vert integration potential of supplier (high/ low)- Low p. relative importance of the buyer to the seller j. threat of substitutes
Transactions cost considerations surrounding the development and deepening of human skills appear to have important ramifications for vertical integration in the automobile industry, thereby supporting the transactions cost paradigm advanced by Williamson. G M and Ford are more likely to bring component design and manufacturing in-house if relying on suppliers for preproduction development service will provide suppliers with an exploitable first-mover advantage. We posit that this is a result of the high switching costs entailed if the supplier acquires transaction specific know-how at the assembler's expense.
Since know-how cannot simply be transferred from supplier to supplier like a book of blueprints (Winter, 1980), backward integration is the more prudent course of action. General Motors and Ford also have a preference for backward vertical integration when the components are firm-specific and their design must be highly coordinated with other parts of the automobile system.
Hence, the vertical structure of GM and Ford appears to be based at least in part on efficiency considerations. Specifically, the structure appears to be designed to take advantage of the coordinating properties of hierarchies as well as the ability of internal organization to reduce the exposure of the automakers to opportunism from suppliers a hazard which is apparently absent in the less integrated Japanese industry where "the relationship between
the major auto firm and its satellite suppliers is one of total cooperation" - http://business.illinois.edu/josephm/BA545_Fall%202011/S5/Monteverde%20and%20Teece%20(1982).pdf
Degree of Rivalry * Historically the big three Detroit automakers General Motors, Ford and Chrysler) controlled most of the car market. Over the past decades there has been an increased presence of foreign automakers such as Toyota, Volkswagen, Hyundai and Honda. Threat of Substitutes
* The threat of substitutes is quite low for the automotive industry, with no other method offering the same level of freedom, ease and speed as cars. Barriers to Entry * Barriers to entry in the car industry are huge. The amount of capital required to enter the industry makes it nearly impossible for incumbents to enter. Buyer Power * Buyers have considerable power due to the low switching costs and the relative standardization of cars. Supplier Power * Suppliers have little power as many are entirely dependent on large automotive manufacturers for their entire sales, this gives considerable power to the manufacturers to dictate prices and conditions.
| 1960| 1965| 1970| 1975| 1980| 1985| 1990| 1991| 1992| 1993| 1994| 1995| 1996| 1997| 1998| 1999| 2000| 2001| 2002| 2003| 2004| 2005| 2006| 2007| 2008| 2009| 2010| Passenger car (new retail sales)| 6,641,000| 9,332,000| 8,399,000| 8,624,000| 8,979,000| 11,043,000| 9,300,000| 8,175,000| 8,214,000| 8,518,000| 8,990,000| 8,635,000| 8,526,000| 8,272,000| 8,141,721| 8,698,284| 8,846,625| 8,422,625| 8,103,229| 7,610,481| 7,545,149| 7,719,553| (R) 7,761,592| (R) 7,562,334| (R) 6,769,107| (R) 5,400,890| 5,635,433| http://www.bts.gov/publications/national_transportation_statistics/html/table_01_12.html
Threat of New Entrants. It's true that the average person can't come along
and start manufacturing automobiles. Historically, it was thought that the American automobile industry and the Big Three were safe. But this did not hold true when Honda Motor Co. opened its first plant in Ohio. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of North American companies.
Power of Suppliers. The automobile supply business is quite fragmented (there are many firms). Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power.
Power of Buyers. Historically, the bargaining power of automakers went unchallenged. The American consumer, however, became disenchanted with many of the products being offered by certain automakers and began looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars.
Availability of Substitutes. Be careful and thorough when analyzing this factor: we are not just talking about the threat of someone buying a different car. You need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles.
Trucks and sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller sedans and light trucks. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute.