Michael Porter identified five forces that influence an industry. These forces are: (1) degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5) supplier power. For more on this framework proposed by Porter, please see Appendix C. Like other industries operating under free market, capitalistic systems, viewing the automotive industry through the lens of Porter’s Five Forces can be helpful in understanding the forces at play. Degree of Rivalry
Despite the high concentration ratios seen in the U.S. market, which typically signify that a lesser degree of competition is seen in the industry, rivalry in the U.S. and the global automotive industry is intense. Clearly, the concentration ratios do not tell the whole story. The automotive industry in the U.S. is no longer the playground of the Big 3 (GM, Ford, and Daimler Chrysler); global companies compete in the U.S. market, while U.S. companies have globalized themselves.
In the 1980s, the Japanese car makers Honda and Toyota entered a fairly disciplined U.S. market and have been very focused in growing their shares of the market. The great diversity of rivals in terms of cultures and associated philosophies has intensified rivalry in the industry. Market growth is slow in the established markets of the U.S. and Western Europe, and companies must fight fiercely to eke out gains or prevent losses in market share.
However, growth is potentially huge in the rapidly industrializing nations of China and India; in these booming markets, companies could take advantage of the opportunities to reap handsome rewards. The degree of rivalry in the automotive industry is further heightened by high fixed costs associated with manufacturing cars and trucks and the low switching costs for consumers when buying different makes and models. Threat of Substitutes
The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence, and value afforded by automobiles. The switching costs associated with using a different mode of transportation, such as train, may be high in terms of personal time (i.e., independence), convenience, and utility (e.g., luggage capacity), but not necessarily monetarily (e.g., round trip train fare on MARTA would most likely be less expensive than the cost of fuel consumed on a similar round trip, daily parking, car insurance, and maintenance).
The exception to this statement occurs in the global urban areas with high population densities. In these areas, the substitutes available (e.g., walking, mass transit, bicycles, etc.) can be less costly than automobiles and thus alternative modes of transportation are often preferred. Also, there are inherent underlying social and cultural attitudes that keep people from owning automobiles in some parts of the world.
Many nations are not as spread out or as mobile as the U.S.; they are constrained either by geography, race, class, or religion and the need for personal transportation is not as great, yet. The American dream of “a car [or two] in every garage” is not what the rest of the world currently wants or needs.
However, the marketing arms of the global automotive manufacturers are certainly working very hard to change this paradigm, and with unprecedented production volumes world wide, all signs indicate that they are succeeding. Most with the ability and means to own a vehicle, who live in a society with the necessary infrastructure (e.g., roads and fueling stations), will do so. Barriers to Entry
The barriers to enter the automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily re- tooled. Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies.
In fact, the barriers to entry for new (or different) markets may be quite low; in the 1980s, U.S. companies Team A3practically invited Japanese makers into the U.S. by failing to offer quality vehicles in the lower price markets. All of the large automotive companies have globalized and entered foreign markets with varying degrees of success. In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist.
However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold. Buyer and Supplier Power
In the relationship between the automotive industry and its suppliers, the power axis is substantially tipped in the industry’s favor. The automotive industry is comprised of powerful buyers who are generally able to dictate their terms to their suppliers. There are specific characteristics that make members of the automotive industry powerful buyers: (1) there is not a grand proliferation of companies manufacturing automotives, and the four largest automotive companies in the U.S. have roughly 90% of the value of shipments and value added in the U.S. ; (2) automotive parts (e.g., oil filters, mufflers, belts, etc.)
are standardized commodities and these parts are only used on automobiles; and (3) backward integration can and does occur, as seen in summer 2005 when Ford purchased struggling parts maker Visteon. In the relationship between the automotive industry and its ultimate consumers, purchasers of finished vehicles, the power axis is tipped in the consumers’ favor.
Consumers wield the greatest power in this relationship due to the fairly standardized nature of the automotive commodity (a vehicle) and the low switching costs associated with selecting from among competing brands. However, the automotive industry remains marginally powerful due to the large customer to producer ratio. The automotive industry is a dynamic place. 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 adapt.