American Automotive Industry
The economy of the United States suffered a major downturn in 2008. The stock market crashed and the housing market was quickly collapsing, so was the banking industry. The automotive industry was not left unscathed with the ‘Big Three’ auto companies suffering major sales drops in 2009. The significant increase in the prices of fuel discouraged the purchase of SUVs and pickups in America causing General Motors, Chrysler, and Ford to experience dramatic drops in sales. The three companies had put their main focus on manufacturing the low-fuel economy cars. The situation became dire when the credit crunch began to put immense upward pressure on the prices of raw materials. The companies were in the brink of collapse and the Obama government had to do something fast in order to save them.
In 2009, the American economy was on the brink of collapse and it seemed that the automotive industry would collapse alongside it. The three major US auto companies, Chrysler, General Motors, and Ford, had experienced dwindling car sales owing to the economic downturn. Chrysler was in the 11th chapter of reorganization, while GM and Ford were in the brink of bankruptcy. GM had lost $30.9 billion by the end of 2008 and had only $14 billion in cash, which is the minimum amount for the company to run its operations.
GM and Chrysler were unable to get credit from private markets. There was no doubt in anyone’s mind that the demise of the American auto industry would render a devastating blow to the struggling economy, more so the economies of Ohio and Michigan. The only thing left to do was to borrow money from the government. GM and Chrysler received loans from the Canadian and U.S governments while Ford managed to access a line of credit by mortgaging some of its most valuable assets. The loans that Chrysler and GM received were given with conditions such as submitting restructuring plans on how they would streamline their operations, cut down on expenditure as well as changing the products they were offering to the public. In total, both companies received $17.4 billion from the U.S government and $3 billion from the Canadian and Ontario governments.
An automotive industry is the set of operations conducted by carmakers to manufacture cars on a large scale for a profit. It may also be defined as the range of organizations and companies that are involved in the designing, development, testing, and manufacturing, marketing and selling of automobiles. This industry is one of the world’s leading industries by virtue of revenue and profits. The American auto industry began around 1890 and has been growing tremendously since then. This tremendous growth is attributed to the constant innovations and competition to make the most fuel-efficient and fastest cars in both the American and global markets (Alstrom & Burton, 2010).
Before the 1980s, most automobile manufacturing was conducted by the Big Three i.e. Ford, GM and Chrysler. The three companies were in existence since the time of the Great Depression. However, their market share has continued to drop due to other entrants into the markets. For instance, Toyota, a Japanese firm, continues to enjoy a considerable market share in the nation. The government has always wanted to protect its auto industry from external competition. In 1981, the Japanese government and the U.S. signed the Voluntary Restraint Agreement. This agreement limited the number of automobiles that Japan could import to the United States to an average figure of 1.68 million every year. This, however, was counterintuitive as it led to Japanese firms focusing on the creation of luxury cars such as Lexus and Infiniti, which enjoyed amazing success in the American market. Another consequence of the agreement was the Japanese carmakers beginning to open production plants across the United States by 1985. Therefore, the agreement only fanned more intense competition for the domestic market by external forces.
Many experts in the field of automotive industry see the American auto industry as being an impure oligopoly. An oligopoly has a large number of buyers but only a few sellers. The cars sold to the market are slightly differentiated. There are barriers to entry in the industry and the buyers are small while the sellers are huge corporations. The industry is described as an impure oligopoly because it only has a few producers who manufacture a differentiated product.
Today, the automotive industry in America consists of 15 companies in production. Five are automotive producers and include the likes of GM, Chrysler, Ford, Toyota, Honda, and Nissan. These companies as well as others are also known for the production of commercial vehicles. These companies have also ventured into the manufacturing, and distribution of gas-electric hybrid cars.
The American automotive industry has largely bounced back after almost collapsing under the global financial crisis of 2008-2009. Sales have increased for each of the dominant manufacturers and this is backed up largely by an increase in demand in the local market. For instance, the demand for high powered sport utility vehicles continue to rise despite them being criticized for being cash guzzlers for the Big Three. The domestic car sales rose to a decade high of 9% in 2014 compared to 6% the previous year (Bennett, White & Rogers, 2014).
There are several opportunities for the American car manufacturers and the future looks relatively bright for the industry. For starters, the carmakers are coming up with technologically advanced vehicles that are also economically viable. These cars cater to the needs of consumers in both emerging and developed markets (McAlinden and Chen, 2013).
Secondly, the automakers are also shifting their production plants from high cost regions including the European Union and North America. The companies are now establishing their production plants in low cost areas such as South America, China and India.
Porter’s five forces strategy has been very instrumental in bringing back the American auto industry from the brink of collapse. Market information has been crucial in trying to identify the weak spots of the industry as well as how to improve on these weaknesses and take advantage of the industry’s strength.
Porter’s Five Forces Strategy Analysis as it applies to the Auto Industry
Porter’s five forces model is a strategic tool for the analysis of the profitability of an industry or a company. The model is also very useful in shaping a company’s or industry’s competitive strategy. It can also be described as an analytical framework that organizes and analyses the crucial forces that affect the intensity and level of competition in an industry as well as the profitability level of such competition. The stronger the competitive forces, the less profitable the industry becomes.
An attractive industry will have low levels of competition by having high barriers to entry, weak buyers’ bargaining power, weak suppliers’ bargaining power, few substitute products, and low competition. Such a scenario will guarantee high profits for the major players involved. On the other hand, a less attractive industry will have low barriers to enter, strong buyers and suppliers’ bargaining power, several substitute products and intense rivalry and competition among the players. Profits are often marginal at best under such circumstances.
1. Bargaining Power of Buyers
The bargaining power of consumers in the automotive industry is considerably high. There are various models and brands to choose from in the market and they all come with different prices. Consumers can select cars based on the appearance, environmental impact, price, and quality of a vehicle. Consumers can also select cheap but quality cars from various sources including purchasing the car from abroad. The high bargaining power of the buyers also stems from the fact the switching costs from one manufacturer to another are relatively low. The bargaining power of the buyers also increases because there are relatively few buyers in the market and the buyers are highly price sensitive.
2. Bargaining Power of Suppliers
If the suppliers in an industry have high bargaining power, this will have a definite influence on the cost of the final product. The suppliers will sell the raw materials at a high price which means that the manufacturers will have to increase the prices of their final products in order to cover the costs. The bargaining power of suppliers in the automotive industry is low i.e. they have little power in the industry. This is because many of the suppliers rely on a particular car manufacturer to purchase their products. In addition, each manufacturer has several suppliers. It takes so many parts to make a car meaning that each car manufacturer will have a team of different suppliers. For instance, Toyota is known to have more than 10 car part suppliers. The suppliers are chosen based on the quality of the products they sell as well as the associated costs. Timely delivery of the car parts is also mandatory. If a supplier cannot meet these requirements then he will be ousted from the industry (Sun, 2008).
3. Competitive Rivalry in the Industry
The upsurge of foreign competition that was witnessed in the late 70s and early 80s has led to increased rivalry in the automotive industry. Firms are competing on both non-price and price dimensions (Adams & Brock, 2005). The companies are using diverse methods of attracting and retaining new customers. Ford and General Motors have always had an intense rivalry with both battling to own the largest market share. Ford was close to overthrowing GM as the biggest automaker in the country, but the tire scandal coupled with poor marketing techniques confined Ford to the number 2 position for all this time.
The fact that the automotive industry is a mature one means that the rivalry between the key players is only set to intensify with advances in technology and product differentiation. The Japanese competitors have great cost advantages over their American counterparts. Increased competition may lead to a loss of profits for the major players.
4. Threat of New Entrants
This force determines how difficult it is for a new competitor to enter the market. If an industry is highly profitable, with few barriers to entry then rivalry intensifies. With more companies in the market, market share begins to dwindle for each resulting in fewer profits.
In the auto industry, there is generally low threat from new entrants into the market. The industry is capital and labor intensive making it very difficult for new companies to enter the industry. Government regulations and policies also make the industry less attractive to new players. The threat is also relatively low due to the competitive advantage enjoyed by the already established companies. It is difficult to establish a distribution network in the already established auto industry. Brand recognition will also deter many companies from joining the industry because the established companies are known worldwide.
5. Threat of Substitutes
The threat of substitutes in the automotive industry is relatively low but it seems to be on the increase. The increase is mainly due to the increasing fuel prices, which forces many people to seek alternative methods of transportation. There are various transportation means that can be used as substitutes for cars. These include trains, bicycles, air travel, and buses. However, many people seem to agree that the convenience of having a personal car offsets any rise in fuel costs. The threat is likely going to increase if car manufacturers do not find a sustainable and economically viable solution to the problem.
There is, however, no real substitute to a motor vehicle except maybe perhaps large-scale railway transport. People have become more and more dependent on motor vehicles ever since the start of mass production of cars in 1910 by Ford. Automobile transportation has surpassed any other form of transportation of both human beings and personal goods. For the reason of over-dependence on motor vehicles, the threat of substitutes can best be described as relatively low or moderate (Grant, 2008).
The American automotive industry had been growing rapidly in terms of sheer volume and profitability. It was the one of the most lucrative industries in the entire world. All this success came to a grinding halt when the 2008-2009 financial crisis hit the country. The biggest automakers in the country were in the brink of collapsing. The government had to bail out GM and Chrysler in order for it to save the millions of jobs that would be lost if the companies were allowed to go under. The economies of Ohio and Michigan would have been significantly compromised as they are the main employment providers for the Big Three. The bailouts came with strict conditions which meant that each company had to restructure itself and offer better, more lucrative products to the public.
The companies were able to bounce back after the restructuring processes. They saw increased market share from 2011 and the industry outlook is very promising. The positivity surrounding the America automotive industry lies in the constant demand for better cars in the local/ domestic market. The Porter’s five forces model has been very instrumental in reviving the motor industry and shaping its competitive structure. Market information derived from utilizing the model has been crucial in reviving the industry from the brinks of collapse.
Adams, W., & Brock, J. (2005). The Structure of the American Auto Industry, 11th Edition.
Bennett, J, White, J., & Rogers, C. (2014, 1 October). U.S. Car Buyers Offset Troubles Abroad. Wall Street Journal. Retrieved on 16/10/2015 from http://www.wsj.com/articles/gm-outlines-financial-plans-1412173772
Grant, R.M. (2008). Cases to Accompany: Contemporary Strategic Analysis (6th Ed). Malden: Blackwell.
McAlinden, S., & Chen, Y. (2013). After the bailout: Future prospects for the U.S. Auto Industry. Retrieved on 16/10/2015 from http://www.cargroup.org/?module=Publications&event=View&pubID=98