Us Auto Industry. Porter’s Analysis

The US Automobile Industry is an ever changing industry since the early days of Ford’s revolutionary assembly line technique to current green technology and everything in between. Following are the 6 Porter’s Industry Analysis I have collected and analyzed. The Threat of New Entrants 5. 33 (high) Economies of Scale; According to my research, the threat of new entrants is very low in the automobile industry. The industry has been established for a long time.

If you need to be competitive, the company must be able to mass produce to reach a certain level of economies of scale to keep the production cost low, so that the automobiles can be affordable to the consumer. Capital requirements; It takes an extreme amount of capital and a large sum of investment to manufacture the automobiles. For Example GM makes no profit on a $ 20000 vehicle, most of the income actually comes through the financing portion [1]. Access to distribution channels;. In order to sale their products, manufacturers must locate dealerships across different markets.

Space is limited and unless they have their own dealership, it makes it very difficult for the manufacturer to show a large variety of their products to potential clients. The Rivalry Among Existing Firms 5(high) The biggest competitors are fairly equal in size which increases the rivalry. The only way to gain market share is by taking away customer from other competitors. The main reason for this rivalry is because they all provide the same product service with little differentiation. The industry is mature and saturated.

When the different manufacturers advertise they even compare their products to their competitors. For example, the commercials will focus on areas where the company outperforms its competitors. One of the most commonly used differentiations is examples such as; who had the Motor Trend Car of the Year [5], best mileage in its category or best safety rating by the government. The Threat of Substitute Products or Service 2 (fairly low) Different substitute can be found but nothing that can be considered threatening. Some example can be walking, biking, train or public transportation.

In big cities where Public transportation is well developed, an automobile isn’t a necessity since consumer can go from one area to another. “New York is the only city in the United States where over half of all households do not own a car (Manhattan’s non-ownership is even higher – around 75%; nationally, the rate is 8%)”[2] The Bargaining Power of Buyers 4 (moderately high) Most of their buyers about 57% of the market are consumers for privately owned light 4 door sedan vehicles [3]. Manufacturers depend on them to stay in business.

The buyers also are a significant percentage of the industries revenue. If they cannot keep their buyers happy then they risk losing them to their competitors. The buyers have low switching cost if they are not happy with the quality or reliability of the product. Buyers can sell the car they own and purchase a new one from another competitor. Although the buyers (the population) are large they purchase a large portion but they are few in incremental numbers (they are buying 1 car at a time). The buyers do not have the ability to integrate backwards into the industry.

If they want a car then they have to purchase it from a dealership. These are the main reasons why the power is not completely high. The Bargaining Power of Suppliers 2 (fairly low) A vehicle requires lots of parts , therefore the amount of available supplier is very large. Because of this supplier have a fairly low bargaining power. Switching cost is low if one supplier isn’t performing up to par. Another side note, according to NCSE, for each car making job created a ripple 17 other jobs are created within the same or adjacent / side industry.

This show proof of the very close interdependency relationship between the auto maker and its suppliers. [4] Relative Power of Other Stakeholders: 3 (medium) In 2008 the bailout of the government was one of the largest injections of stimulus in US history. This rescued the industry from collapsing on itself and prevented the spiral downfall by purchasing shares of stocks from GM and Chrysler. Although this seems like an extraordinary case, the fact that the government can influence and interact with this industry is the reason why I am giving a force level of 3.

In conclusion, once we add all of the forces we gather an average of 3 which stands in the middle of our 1 to 6 scale. It is an industry that has been established for a long time and difficult to get into and stay afloat with fierce competition (rivalry) while maintaining profit can be quite challenging. Anyone that is currently selling in the USA has felt the downturn during the 2008 economic downfall. All indicators show an upswing for better future, and the green initiative is the next chapter in this industry.

The Chevy Volt has been chosen as the vehicle of the year (2011), the first electric vehicle ever winning this prestigious award. [5] Table that lists and rates each determinant The Threat of New Entrants| 5. 33| Economies of Scale| 6| Capital requirements;| 6| Access to distribution channels;. | 4| | | The Rivalry Among Existing Firms| 5| Number of Competitor| 6| Product or service characteristics| 4| | | The Threat of Substitute Products or Service| 2| | | The Bargaining Power of Buyers| 3. 5| Purchase a large portion| 5| Integrate backwards| 2| The Bargaining Power of Supplier| 2|

Relative Power of Other Stakeholders:| 3| | | Average of all forces| 20. 83/6 = 3. 47| REFERENCES / Sources [1] How much does it really cost to make a $20,000 automobile? – Yahoo! Answers. 3/20/2011 [2] BTS | Executive Summary. 3/20/2011 [3] OICA; Production Statistics. 3/20/2011 < http://oica. net/category/production-statistics/> [4] CRS Report for Congress – U. S. Automotive Industry: Policy Overview and Recent History. 3/20/2011 [5] 2011 Automobiles of the Year – Best New Cars of 2011 – Motor Trend Magazine . 3/20/2011 < http://www. motortrend. com/oftheyear/04/2011/index. html >