American Automotive Industry and Porter\'s Five Forces Model

United States Automotive Industry and Porter's Five Forces Model

American Automotive Industry

United States Automotive Industry and Porter's Five Forces Model

United States Automotive Industry and Porter's Five Forces Model

The purpose of this report is to analyze and discuss the automotive industry of the United States in the light of Five Forces of Competition presented by Michael Porter. The report starts with an in-depth introduction to the U.S. automotive industry; including its profile, present structure, major participants, evolution, and future outlook. The main body of the report discusses the competition present in the U.S. automobile industry from five different perspectives. The manufacturers in the U.S. automobile industry face a dual competition from the local and international competitors and from the substitute transportation mediums. The entry of new competitors in the industry is also a big threat for these manufacturers.

In the U.S. automobile industry, the customers make their purchase decisions according to certain preferences; including price, quality, performance, brand, and design of the automobiles (Morton, Silva-Risso, & Zettelmeyer, 2011). These preferences define the strength of their bargaining power in the industry. The suppliers, on the other hand, have to keep their prices at lower levels in order to compete with the local and international suppliers. The analysis of these five forces gives a true snapshot of the U.S. automotive industry to the investors and key stakeholders (Porter, 1998).

Introduction to the Auto Industry

a) Industry Definition:

Automobile industry consists of companies that design, manufacture, promote, and sell motor vehicles. The major products of automobile industry include cars, light commercial vehicles, and heavy commercial vehicles. It is among the world's largest industries by revenues and size of the markets. Due to a large number of manufacturers, high level of competition and an intractable race towards competitiveness, this industry has never seen a monopolistic influence by a single manufacturer (Morton, Silva-Risso, & Zettelmeyer, 2011). China, United States, Japan, Germany, South Korea, and India are the largest automobile manufacturing countries while Toyota, General Motors, Volkswagen, Hyundai, Ford, Nissan, Honda, Daimler AG, and Suzuki are the market leaders of the industry. These manufacturers have dominated the entire world market with their mechanically advanced and ingeniously designed motor vehicles. Automobile industry is highly labor and capital intensive which essentially require its participants to invest huge amounts and human capital to operate and grow in a profitable fashion.

b) Industry Profile:

The automobile industry of the United States evolved at the end of 19th Century and became the world's second largest industry after China in a few decades. The industry has experienced many changes during this period; began production with internal combustion engines and battery-powered electric engines and followed by steam engines and electric power engines, the U.S. automobile industry has always brought revolutionary changes in the automobile manufacturing sector of the World. The first gasoline-powered car, Buckeye Gasoline Buggy manufactured by John William Lambert in 1891 was the evolution of automobile manufacturing in the United States. It was followed by a series of automobile manufacturing by Elwood Haynes, Alexander Winton, Ransom E. Olds, and Oldsmobile Curved Dash. Keeping in view the rapidly growing automobile industry in the country, the Federal Aid Road Act of 1916 allocated a huge amount for building roads and improving transportation infrastructure (Bigelow & Argyres, 2008).

c) Industry Structure:

At present, the U.S. automobile industry is recognized by its massive production and size of the domestic market. There are hundreds of manufacturers in the country that are producing highly modernized automobiles and meeting the demands of the domestic and international customers. The big three U.S. automobile manufacturers are General Motors, Chrysler, and Ford. These three manufacturers are sharing the major automobile production in the United States with some renowned multinational brands including Honda, Toyota, Nissan, BMW, Mazda, Mitsubishi, Hyundai-Kia, Subaru, and Daimler (Vlasic, 2011). In addition to the motor vehicle manufacturers, the U.S. automobile industry consists of a large number of auto parts suppliers that supply these parts to the local manufacturers and consumers as well as make heavy exports to all the corners of the world.

d) Future Outlook:

Keeping in view the rapid technological and mechanical advancements in the automobile manufacturing processes, it can be projected that the U.S. auto industry will always show a growing trend in the future. The market leaders will keep on introducing astonishing features in the new models of their cars in order to compete with their top rivals as well as throw out the new entrants from the industry. On the other hand, the new entrants will keep struggling hard to penetrate in the United States market and snatch the customers from the existing competitors. The environmental forces which have always been impacting the business operations and profitability of automobile manufacturers will become more severe with the passage of time. The fuel and raw material prices, governmental laws and regulations, inflationary pressures, consumer preferences, and other important environmental forces will always pose critical issues and challenges to this industry (Stonehouse & Snowdon, 2007).

Michael Porter's Five Forces Model for the U.S. Automobile Industry

Michael Porter presented a framework of five forces which can be used to analyze the current level of competition and future outlook of an industry from five different angles. These five forces are; threat from the new entrants, rivalry among the existing competitors, threat from the substitute products, bargaining power of buyers, and bargaining power of suppliers (Porter, 1998). The following section is dedicated to discuss these five forces for the automobile industry of the United States.

1. Threat from the new entrants:

The entry of new businesses in an industry is always a big threat for existing competitors. These new entrants try to penetrate in the industry when they find its markets attractive for their business and anticipate a sustainable future in this industry. These entrants pose big challenges for the existing businesses in maintaining their profit margins, market share, and customer base (Phadtare, 2011). The threat from new entrants is even more critical when these entrants have an established brand image in the same industry of some other countries. However, barriers to entry in a particular industry are the major forces which can restrict new entrants from targeting its markets.

The automobile industry of the United States is quite mature where there is a very low potential for new entrants to emerge and grow in the presence of a large number of existing competitors. The biggest reason for this low threat of new entrants is the high business expansion, manufacturing, and operational costs in the international markets. History is evident that a large number of automobile manufacturers failed in United States industry because they were unable to achieve the economies of scale or even failed to get back their initial investments. It is quite hard for new businesses to emerge their new car brands in a mature industry where a large number of well-established brands have been operating for a long period of time (Porter, 1998).

A new brand is difficult to be established in the U.S. automobile industry due to the perceived brand image of car brands by the customers. United States is the industry of some renowned world market leaders, e.g. Chrysler, Ford, Toyota, General Motors, Honda, Dodge, Jeep, GMC, etc. These automobile giants give a strong competition to new car brands. The access to distribution channels in the U.S. automobile industry is also difficult for the new entrants. It is due to strategic alliances and long-term contracts of the well-established brands with all the major distributors in the country which restrict them from making business relationships with new brands.

Another barrier to entry for new businesses in the U.S. automobile industry is high fuel prices and post-purchase maintenance costs which are borne by customers. These two costs also impact the purchase decision of customers when they have to make choice between a well-recognized brand and a new brand. It is a common perception that good brands make more fuel efficient and reliable automobiles which save high costs of repairing and maintenance in the future. Due to these factors, customers generally hesitate to purchase automobiles which are manufactured by new brands. Moreover, legislation and regulatory policies of the U.S. government are very strict for automobile industry. The safety and environmental laws, emission, EPA, labor laws, and other policies and regulations are mandatory to be followed by all the participants of this industry in order to operate without legal consequences. For the top industry rivals, technology and innovative processes are the strongest tools by which they can compete with the new entrants and restrict them from snatching their potential customers. On the other hand, the new entrants have a strong tool of low pricing strategies which can help them attract customers towards their new brands.

2. Rivalry among the existing competitors:

The competition among existing businesses shows the actual snapshot of any industry. The prices levels, quality and features of the products, customer perception, market share and future outlook of the industry; all types of analysis are made by keeping in view the level of competition among existing competitors. The automobile industry of the United States is saturated by a large number of well-established local and international brands. General Motors, Ford, and Chrysler are the local automobile giants whereas Toyota, Honda, Nissan, Suzuki, and Hyundai; the big five international brands have more than 80% share in this industry. All these local and international brands are competing with each other on the basis of technology, exterior design, performance, prestige, price, fuel efficiency, and environmental impacts of their automobiles.

In order to attract customers from the potential markets, these competitors are expending a huge amount from their budget on their marketing and promotional activities. Advertisements are done on all the electronic, print, and social media in which target customers are directly addressed and persuaded using different marketing strategies and tactics. Due to this high level of competition among the top rivals, the small scale auto manufacturers find it harder to compete just on the basis of price and quality of their automobiles. Therefore, they are entering into joint ventures with other local and international automobile manufacturers and supply chain members in order to grow in the U.S. auto industry and compete with the top rivals in a more competitive and profitable fashion.

3. Threat from the Substitute Products:

The manufacturing participants of the U.S. automobile industry have always been facing a dual competition. On one side, they have to compete with the new automobile manufacturers that come from other regions of the world to target the U.S. auto industry, and at the same time, they have to maintain their position in the automobile industry in the presence of a large number of alternative transportation mediums available in the country. From this dual competition, the alternative transportation mediums are a bigger threat for the automobile manufacturers. The transportation infrastructure of the United States has significantly improved during the last few decades. This improvement has largely facilitated the expansion of local train, subways, and buses network in the country. The easy availability of public transportation mediums has negatively affected the demand for personal automobiles by the U.S. citizens. The impact of these substitute transportation mediums is comparatively lower in the rural areas of the country due to smaller buses and railways network. The overall negative impact of these public transportation mediums equally prevails on the local and international manufacturers; either they are well-established business or new entrants in the U.S. automobile industry.

Another substitute for the fuel based automobiles is electric cars which have recently been introduced by Electric Car Corporation in the United Kingdom and many other manufacturers in China, Germany, and Japan. If these low priced cars arrive in the United States market, they will pose a big threat to the automobile manufacturers that have been charging a high price for their cars. The arrival of these substitute automobiles may totally exclude the middle income group from the potential target market of the existing automobile manufacturers (McCarthy, 2007).

4. The Bargaining power of Customers:

Due to a high level of competition among the top industry rivals and new entrants, the bargaining power of customers is very strong for the U.S. automobile industry. The customers in the U.S. market have now become more knowledgeable and price conscious than before. They make complete analysis of different brands according to their requirements and preferences before making their purchase decision in favor of a single brand. The market leaders like Toyota, General Motors, Ford, Chrysler, Honda, etc. have an established brand image which impulsively attracts customers to buy their cars. On the contrary, U.S. customers hesitate to buy cars and other automobiles from new brands due to the lack of reliability and brand loyalty with new manufacturers (Clarke, 2007).