Porters Five Forces and Complementors: The Automobile Industry

Threat of New Entrants: LOW

The automobile industry has been one of the most dynamic industries that greatly depend on the
external preferences of the masses that direct the profits of the investors in this market. Market
segmentation as well as market positioning are valuable inputs that a possible entrant could
traverse in relation to the number of possible competitors that are ready to receive them in
whatever segment they choose. It should also be considered that these established companies
have already marked themselves with the mass of customers that are most likely to continue their
buys on the brand.
Achieving economies of scale is a major challenge for any potential new entrant in the
automobile industry. Huge capital outlays to establish manufacturing units result in very high
fixed costs. Owing to the cyclicality and hence the volatility of demand in segments (strong
correlation with industrial productivity), even the incumbents with all their experience are
finding it difficult to achieve economies of scale, which makes it extremely difficult for a
company to enter the industry. Barriers to exit for the existing players are also high owing to
their existing investments in fixed assets and technology. The next consideration is the
investment that is needed to be invested in the manufacturing processes of this kind in order to
compete with the prices of other established companies because of the big economies of scale.
The investment is a big hindrance to any investor, in that if it turns out to be a bad one it will
generate much losses to the investor. So, the overall threat is low.
Moreover, strong brand identification of the incumbents brands and their diversified product
portfolios which already have differentiated positioning catering customer needs of safety,
comfort, total cost of ownership etc. make it difficult for the new entrants to establish brands as
well as to differentiate their offerings from the existing players vehicles.
The existing players have either developed extensive R&D capabilities or have entered into
joint-ventures with global OEMs providing them with cutting edge technology. A new entrant
will find it extremely challenging to avail either of the two advantages.
Stringent emission norms and uncertainty in government stance over them exposes new entrants
to business risk which the existing players are largely able to overcome through their existing
reputation and experience in dealing with the policy decisions.
The wide-spread service networks which the existing players have across India, enables them to
offer a product-service bundle which a new entrant cannot offer immediately at the time of
market entry.
Entry of Foreign OEMs: The foreign OEMs having a globally reputed brands, cutting edge
technology, ability to invest, and compliance to strict norms are in a position to overcome the
above mentioned points A, B, C, D. They can overcome the threat due to point E (distribution
network) by initially entering into JV/alliance with existing players till they gain sufficient
market knowledge and experience.

Intensity of Rivalry Among Established Companies: Medium to High

In the global automobile industry, rivalries are broken down into the sectors of each brand.
Ferrari does not compete with BMW and the latters market is not the same with Toyota. The
segmentation of market, however, does not diminish the number of firms in a certain market
sector. A lot of firms compete with each other in a certain market segment which contributes to
increase competition as the industry is noted for having firms of equal strength. This could lead
to firms engaging in competitive battles and attack and retaliate as they strive for market
leadership. Further, the growth in the industry is slow and the only way for firm to grow is by
capturing market share from each other, which leads to increased competition. The industry is
also described as having high fixed costs, having undifferentiated products, having diverse
competitors, and having high exit barriers. All these factors contribute to an increased
competition in the industry.
Bargaining Power of Buyers: MEDIUM to HIGH
The customer preferences have been evolving from being extremely price sensitive, willing to
trade-off performance to willing to pay premium for performance owing to rising disposable
incomes. The existing players with access to technology from global Original Equipment
Manufacturers (through Joint Ventures or otherwise) are adapting international products to serve
customers. These products score highly on the performance, safety and comfort parameters,
increasing the bargaining power of the customers. With rising fuel and service costs, customer is
more focused on the total cost of ownership instead of just the acquisition cost. Thus the
customer is increasingly basing the buying decision on the quality of service bundle (after sales).
Customers have shown an increased adoption of newer modes of transport such as metro-rail,
negatively influencing the demand for buses, in turn affecting the buying decisions of State
Transport Units. Further, in recent years, this seems to have weighed heavily towards buyers with industry players needing to be more vigilant regarding consumer preferences. Because of
the current global economic conditions, there is a smaller number of buyers at global levels. This
is most evident in Europe currently with Ford having to close plants, cutting 6,200 employees, or
13% of the European workforce to stem losses exceeding US$1.5 billion (Barr, October 25,
2012). Consumers are also keeping their automobiles for longer periods of time and are being
more prudent and judicious when buying new ones. This may effectively signal lower demand
and higher-than-expected bargaining power of buyers.
Bargaining Power of Suppliers: LOW
The Industry Analysis Handbook 2012 describes the automobile supply business as fragmented.
Many suppliers rely on one or two automakers for the purchase of the majority of their products.
Moreover, switching costs of suppliers of component parts are high. Because of this, suppliers
hold little power and are susceptible to demand and requirement of automobile manufacturers.
The exception within this is the world price of steel where automobile manufacturers holds no or
little influence to them.

Threat of Substitutes: LOW to MEDUUM

Railway network is a substitute for Medium & Heavy Commercial Vehicle and Light &
Intermediate Commercial Vehicles (trucks, trailers, etc.). Railway networks has become a
compelling alternative to mass transit especially for a border to border or state to state travel.
Aside that it cost you less, its also faster. Despite the trend in railways as mentioned, it does not
suffice to consider it as a strong threat to the automobile industry. The betterment of roads and
highways have mitigated this threat as consumers are happier to drive in smoother paths. Another
threat is from the Metro-rail networks which offer a substitute for passenger vehicles and buses.
But in terms of penetration in the market, they still have a long way to go to compete with buses
as the latter is still more mobile and convenient. Thus, this threat is presently low but may
become medium in the near future. Lastly, the Used Car Market may also be a threat. Cars sold
in the used car market are relatively cheaper than newly manufactured and furnished ones.
However, the higher costs of ownership (i.e. repairs and maintenance) associated with
purchasing cars and the lower confidence in durability and reliability of product quality almost
counterweight the lure brought about by lower prices of used cars and thus making this substitute
not so threatening.
Complementors
The Road Infrastructure Industry can be a complementor for the automobile industry.
Proper infrastructure on roads contributes to the value of cars. People would consider buying
more cars if roads are better. The government should be the main initiator of this complementor
but they should be able to create meaningful partnerships with the private sector to be able to
maximize the creation of better roads. Further, urbanization on a certain area can also
complement the growth of the automobile industry. As cities become more urbanized more
activity is going on within and cars becomes more of a necessity. People tend to buy cars in a
more urbanized area to meet immediate demands from their different activities. Automobiles
gives convenience to people in a highly urbanized area. Lastly, the government is a key
complementor the automobile industry. The role of government as a complementor to the car
industry is broken down into two parts: 1) Policies on emission norms, and 2) Ability to control
interest rates.
With Global Warming being an issue which is debated fiercely at the global level, international
treaties and resolutions may bring about sudden and sweeping revision in the present norms of
emission, requiring steep technology up gradation (and investments). This may provide edge to
foreign new entrants who already possess technology for this. Further, the government can
influence the availability of financing options and the easing of interest rates. Governments
economic policies also influence the index of industrial productivity to which M&HCV (heavy
trucks, trailers) demand is strongly correlated.