Abstract
Porter’s Five Factors model is a framework for identifying and evaluating the five possible forces that shape each industry and can influence an industry’s strengths and weaknesses. For many years, the US automotive industry controlled worldwide markets and was also the country’s largest income generator; this, however, has transformed over time as a result of growing pressures threatening the existence of strong firms in the domestic markets. The entrance of Japanese automakers such as Honda and Toyota significantly boosted competitiveness, necessitating a market analysis. The economic recession of 2006–2008 had a significant impact on the sector. Although most domestic enterprises have recovered and demonstrated performance improvements, it is essential to comprehend the automobile industry’s environment to plan strategically and realign for optimal efficiency. Given the automotive sector’s pivotal role worldwide, examining competitive factors will benefit both new and established enterprises in determining the optimal way to structure themselves inside the globalized economy.
Introduction to the Auto Industry
Industry Definition
The automotive sector is formed by various organizations and businesses involved in planning, developing, producing, and selling automobiles. However, the automobile sector in the United States of America excludes services such as vehicle repair or other services concerning its upkeep (Plock, 2021). currently, the American automotive sector is the world’s second-largest, producing and distributing around twelve million automobiles and other vehicles each year. The industry has created thousands of job opportunities for United States residents.
Industry profile
The automobile industry is one of the global economy’s primary driving forces. It accounts for a sizable portion of the US GDP. The US automobile industry has historically been a worldwide leader. Hundreds of firms spearheaded the horseless carriage in the 18th century, establishing the automobile industry (Bruijl, 2018). The United States topped the overall global automotive manufacturers for several years. In 1929, prior to the Great Depression, there were 32,028,500 automobiles worldwide in use, 90 percent manufactured in the United States. In 1945, the United States produced over 75% of all autos on the planet. The United States was ousted as the highest manufacturer by japan in 1980 but reclaimed the top spot in 1994. In 2005, manufacturing and sales reached their all-time highs in the history of the US, reaching fifteen million vehicles and later succeeded by the economic recession of 2009, during which automotive production fell to eight million units annually (Plock, 2021). Japan narrowly overtook the United States in 2006 and maintained that position until 2009, when China surpassed Japan with 13.8 million units. China produced nearly double the 10.3 million units made in the United States in 2012, while Japan came in third with 9.9 million units.
Industry Market Structure
Market structure is a word that refers to a collection of elements that influence how buyers and sellers interact in a specific market setting. The elements include prices, production rates, and sales, all of which result from the intensity of competition (Bruijl, 2018). The automotive industry in the United States is regarded as an oligopoly, as three prominent companies, namely General Motors (GM), Chrysler, and Ford, dominate (Plock, 2021). The three dominating automotive companies dictate the pricing approach. They have manipulated the competition and devised a strategy for joint profit maximization. It has grown more difficult for other enterprises to establish a footing or acquire a share in the market. The buyers in this market are homogeneous, which means they have distinct tastes and expectations regarding automobiles. The automotive business is highly competitive, making innovation critical for most companies.
Future Industry Outlook
The automobile sector has been under intense pressure to transform for some time now due to emerging trends. The emerging trends include the emergence of electric cars, ride-sharing options, and automated vehicles. The COVID-19 pandemic has advanced these trends even more. When the epidemic struck, there was a disruption of the supply channels, halting manufacturing, and reduced demand for automobiles globally. As a result, the whole automotive sector accumulated considerably massive debt; therefore, most automotive industries in the US will either collapse or merge soon if they cannot pay the debts.
Over the previous decade, new technology, sustainability, and changing customer behaviors have contributed to the automobile industry’s transformation; therefore, there will be high technology-dependent cars such as self-driven and electric vehicles in recent years. Approaching 2030, growing constraints on carbon emissions have accelerated the development of electric vehicles. Vehicle electrification is likely to reduce the high costs of owning a car which is associated with the high cost of gas, and therefore more people are likely to buy them (Musonera& Cagle, 2019). Most people in the US have also started embracing alternative means of transport such as bicycles, public transportation, cabs, electric steps, and scooters (Plock, 2021). If more people continue embracing alternative means of transport, the US automotive manufacturers will have reduced sales
Porter’s Five Forces Strategy Analysis as it applies to the Auto Industry
New and existing enterprises proactively use Porter’s model technique to determine the structure and attractiveness of the industry to. Economic conditions are pretty unstable at the moment, demanding that enterprises make smart investment decisions. Applying this concept to the automobile industry in the United States is noteworthy, especially given the industry’s importance to the country’s economic success. While the US automotive industry has accomplished consistent growth since the great recession, it is critical to continuously evaluate it to avoid repeating past mistakes. Below is an analysis of porter’s five forces focusing on the US automotive industry.
Bargaining Power of Buyers
Customers can influence the prices of a product or reduce organizations’ profit margins. Consumers’ bargaining power is contingent upon the following factors: their numbers and concentrations, their availability of information, their loyalty to particular brands, their responsiveness to price, the degree of product differentiation in the marketplace, and the availability of replacements (Bruijl, 2018). Although buyers’ bargaining power in the American automotive sector is low, the entry of other manufacturers into the global market, such as Toyota and Honda, has stimulated competitiveness, which has impacted the level of buyers’ bargaining power in the industry (Bruijl, 2018). Initially, the US automobile industry domination was by a few corporations, which resulted in buyers having relatively little negotiating power. The entry of new enterprises into the domestic and foreign markets has impacted buyers’ negotiating power, yet this bargaining power has little effect on market prices (Riley, 2021). Additionally, most US citizens own a personal vehicle; most people buy their vehicles via dealerships. As a result, purchasers’ bargaining powers are limited, as automotive makers exclusively interact with dealers.
Bargaining Power of Suppliers
The pressures that suppliers may exert on businesses by increasing their prices, deteriorating their quality, or lowering their product availability is known as the bargaining power of suppliers. Several factors to be considered in determining the strength of suppliers are the strength of suppliers’ positions, the industry’s supplier base, ability to source inputs from single or several suppliers, ability to switch between suppliers, and the existence of replacement inputs in the industry. The fewer suppliers, the more bargaining strength they have, and the more the suppliers, the less bargaining strength (Bruijl, 2018). When suppliers have greater bargaining power, they impose higher pricing on industry products. Suppliers in the US automobile sector have limited bargaining power. The lack of bargaining power is due to the automotive industry’s large suppliers and industrial nature. Manufacturing requires the use of numerous components. Various suppliers in the US automotive industry include producers of various components used in manufacturing, such as seats, tires, windscreens, engine parts, and equipment (Plock, 2021). There are many suppliers in the US automotive industry, and therefore manufacturers have several options to choose from. In addition, many suppliers rely on a few automobile manufacturers to buy their products. As a result, suppliers have little bargaining power and are subject to the demands and specifications of automotive manufacturers.
Competitive Rivalry in the Industry
The emergence of numerous industry players has aggravated already-existing competition. New manufacturers have established operations in America, reducing the market share of domestic partners. Industrial actions between competitors result in competition in non-monetary dimensions, resulting in product differentiation. Additionally, with the development of new techniques, such as hybrid, the low fuel consumption means that manufacturing models in the United States have a short comparison period, which causes buyers to switch to other models as the price differential is small (Riley, 2021). The level of competition in the US market, particularly among vehicle manufacturers, is strong. Previously, the industry’s control was by three main automobile manufacturers: Chrysler, General Motors, and Ford; however, the entry of foreign automotive manufacturers into the US market altered the type of competition, threatening the pioneering firms’ survival (Plock, 2021). For example, Honda, Toyota, and Japanese manufacturers entered the US market offered high-quality automobiles at significantly lower prices, increasing competition for domestically built vehicles. Since then, manufacturers located in Japan have sought to expand their market share globally and within the US market, which accounts for the most significant market share of automobiles’ global consumer market.
The threat of New Entrants
Several factors affect the availability of new entrants in an industry. The factors influencing new entrants are funding and supplies for manufacturing, government constraints, production cycle, capital needs, and access to distribution channels (Bruijl, 2018). Due to the increased costs of entering the automobile industry, the automotive industry usually develops a foundation of mergers than new entrants. Notably, over the last decade, the growing manufacturing trend in America has prompted foreign industries to continue and expand their manufacturing operations in the US. For example, Honda established its first manufacturing facility in Ohio, just like Toyota (Riley, 2021). Toyota Motor Corporation currently holds over 20% of the automobile industry’s sales in the United States and is the fourth largest automotive business internationally.
However, circumstances warrant market players lowering entrance barriers, particularly in a domestic setting. The United States welcomed the infiltration of Japanese automakers following domestic firms’ failure to develop high-quality vehicles that satisfied relevant manufacture specifications and fuel-related requirements.
Threat of Substitutes
The automobile’s development and manufacturing characterized the twentieth century. One aspect affecting the change is the cost and availability of oil and gasoline, affecting consumers’ propensity to purchase a new or second car. These increased prices will almost certainly result in a reduced market segment of customers unless there are improved levels of fuel efficiency and lower ownership costs. Subtle structural risks include the broader shift away from an industrial basis and its urban commuters culture toward a knowledge economy (Riley, 2021). The transition to a knowledge economy and the growth of online modalities eliminate the requirement for a household with two or more vehicles. Other modes of mobility, particularly in densely populated metropolitan areas, include bicycles, walking, and public transportation, far less expensive than motor cars.
Conclusion
The automotive industry is the engine of the US economy, accounting for more than half of the countries GDP. Economic conditions are continually changing due to technological breakthroughs and more regulation. Investors in the automotive industry should prioritize innovation over sufficient marketing to address the majority of the automotive industry’s identified sources of competition. Given the industry’s unpredictable outlook, increased coordination between local and foreign partners is essential to manage most economic factors and ensure economic sustainability.
References
Bruijl, G. H. T. (2018). The relevance of Porter’s five forces in today’s innovative and changing business environment. Available at SSRN 3192207.
Plock, J. (2021). Corporate Responses in the Automotive Industry to the Climate Change Challenge in the United States (Doctoral dissertation, Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU)).
Riley, A. K. (2021). US Automotive Industry: Threats and Opportunities in a New Age of Uncertainty (Doctoral dissertation, Dartmouth College).
Musonera, E., & Cagle, C. (2019). Electric Car Brand Positioning in the Automotive Industry: Recommendations for Sustainable and Innovative Marketing Strategies. Journal of Strategic Innovation & Sustainability, 14(1).
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