Porter's 5 Forces in the Automobile Industry

Porter's Five Forces, also known as P5F, is a way of examining the attractiveness of an industry.
It does so by looking at five forces which act on that industry. These forces are determinants of
that industry's rofitability.
The five forces are!
1. The threat of new entrants
In the auto manufacturing industry, this is generally a very low threat. Factors to examine for
this threat include all barriers to entry such as ufront caital re"uirements #it costs a lot to set u
a car manufacturing facility$%, brand e"uity #a new firm may have none%, legislation and
government olicy #think safety, &P' and emissions%, ability to distribute the roduct #'lfa
(omeo has been out of the )* since the early +,s largely due to the inability to re-establish a
dealer network. .ut if you are looking at *ingaore, for examle, only one 'lfa (omeo dealer is
needed$%.
2. The bargaining power of buyerscustomers
/ho in the )* has ever bought a car without bargaining0 'nybody0 In 1,,+ esecially, )*
dealers were giving great deals to buyers to get the industry moving. /hile "uantity a buyer
urchases is usually a good factor in determining this force, even in the automotive industry
when buyers only usually urchase one car at a time, they still wield considerable ower.
2owever, this may be different in other markets. In *ingaore it sure is lower than in the )*,
creating a more favorable situation for the industry but not the buyers.
3enerally, however, it's safe to say the customers have some buying ower, but it deends on the
market.
!. The threat of substitute products
If buyers can look to the cometition or other comarable roducts, and switch easily #they have
low switching costs% there may be a high threat of this force. /ith new cars, the switching cost is
high because you can't sell a brand new car for the same rice you aid for it. ' P5F analysis of
the car industry covers the new market, not used or second-hand.
.ut what about the threat of substitute roducts before the buyer makes the urchase0 4ou need
to know whether the market you are analy5ing has many good alternatives to new cars. '
vibrant used car mar"et erhas0 )sed cars threaten the new market. 2ow about a very good
mass-transortation system0
Product differentiation is imortant too. In the car industry, tyically there are many cars that are
similar - 6ust look at any mid-range Toyota and you can easily find a very similar 7issan, 2onda,
or 8a5da. 2owever, if you are looking at amhibious cars, there may be little threat of substitute
roducts #this is an extreme examle$%.
#. The amount of bargaining power suppliers ha$e
In the car industry this refers to all the suliers of arts, tires, comonents, electronics, and even
the assembly line workers #auto unions$%. /e know in the )* the auto unions are tremendously
owerful. .ut we also know that some suliers are small firms who rely on the carmakers, and
may only have one carmaker as a client. *o this force can be tricky to evaluate.
5. The intensity of the competiti$e ri$alry %which is in part determined by 1&#'
/e know that in most countries all carmakers are engaged in fierce cometition. Tit-for-tat rice
slashes, ad camaigns, and roduct develoments kee them on the edge of innovation and
rofitability. 8argins are low and ressure between rivals is high.
'll ma6or car-roducing nations exerience this intense rivalry. This obviously includes the )*,
9aan, Italy, France, the ):, 3ermany, ;hina, India, and more.
*tate-owned car manufacturers like Proton in 8alaysia exerience less rivalry but are still under
ressure from imorts.
/hile a P5F analysis alies to all comanies cometing in one industry #and market% the same,
what differs is that those firms' rofitability will vary between them. This is because of their own
cometitive advantages and varying business models. *o 6ust because all firms in one industry
and market are sub6ect to the same forces doesn't mean they erform e"ually.
' P5F analysis should always be done in con6unction with other assessments, and should not be
regarded as being absolute. It should only serve as an indicator, not absolute fact or even
necessarily accurate.
There are many critical assumtions that should be made and exlained in one's P5F analysis.
The market must be described, the cometition must be exlained, and the roducts must be
defined.
For examle, a P5F analysis of the car industry in the )* would not necessarily aly in ;hina.
The markets are totally different, and the product life cycle is not even close to being the same.
'nother examle is the tye of automotive industry. ' P5F analysis of the electric carindustry
would be entirely different than one of the conventional car industry.
Porter's Fi$e Forces in the Auto Industry Around the (orld
For a P5F analysis of the auto industry in the )*, click here.
To see a P5F analysis of the auto industry in )hina, click here.
' P<F analysis of the Indian auto industry is here.
The Porter=s Five Forces analysis is designed to evaluate the competiti$e forces in the industry
the firm oerates. If it determines that the combination of forces in the industry act to reduce
rofitability, it is saying the industry is unattractive. &ven worse is an industry close to total
cometition.
:ee in mind that this exercise evaluates the industry, not the firm #3eneral 8otors%. 's such,
this assessment would aly to Ford, ;hrysler, Toyota, 2onda, or any other automotive firm
manufacturing and selling cars and trucks in the )*.
>...manufacturing and selling cars and truc"s in the )*> is key. 4ou must think about and
clearly define your business unit before starting a P5F analysis. Is it in the )*0 ;hina0 India0
9aan0 ?bviously the threats and forces in these countries will be far different than in the )*.
The Porter analysis examines three hori5ontal forces, or cometition in the same industry! Threat
of new entrants, threat of substitute roducts and threat of established rivals. Two forces are from
vertical cometition, or those from the suly-chain! .argaining ower of customers and
bargaining ower of suliers.
This exercise would be relatively easy to erform if the industry were stable and uniform. 7one
of the answers to the degree of threat Porter=s Five Forces ose are black and white or clear-cut.
In one case, the bargaining ower of suliers, either extreme could be argued.
8oreover, the table in the aendix which tallies u the criteria for each of the five forces fails to
identify many of the current economic conditions and dynamics in the automotive industry today.
's a result, the findings may not be comletely congruent with reality.
:ee in mind this analysis was written in the *ring of 1,,+, in the worst of both the automotive
shake-u and the global economic crisis. Things have since changed.
' summary of the findings is below!
@Ax< blue table goes hereB
C. There is low threat of new entrants
1. The bargaining ower of buyersDcustomers is low
E. There is a huge threat of substitute roducts
<. *uliers do not have much bargaining ower
5. There is a significant amount of rivalry among cometitors
@green table C goes hereB
The analysis above indicates that the industry is moderately favorable to rofitability.
2owever, in another analysis of the industry, based uon industry-secific news and facts
surrounding the suliers, buyers, cometitors, and more, the results are very different. This is
not based on the tallied results in the aendix!
@green table 1 goes hereB
Footnote C,! *ource, 'FP!
htt!DDwww.google.comDhostednewsDafDarticleD'Fe"85iGkEc;58,1HA1e;5,Ii5kI*Et9Fw
'ccording to this second analysis, the threats of substitute roducts, bargaining ower of
customers, and rivalry among cometing firms are high, and are unfavorable to industry
rofitability.
The bargaining ower of suliers and threat of new entrants are moderate, which is not very
favorable to industry rofitability. It should be noted, however, that the bargaining ower of
suliers may be induced uon them by force, as if they sto sulying it is not because they
have money and are threatening the automakers, but because they cannot afford to kee assembly
lines oen. This creates a negative-sum game, hurting both arties. It could force the automakers
to rescue the suliers.
In summary, the industry is unfavorable to rofitability.
Porter's Five Forces 'nalysis - Indian 'utomobile Industry
Porter's Five Forces 'nalysis - Indian 'utomobile Industry
' Porter's Five Forces 'nalysis exlores five rincial industry factors to determine the
attractive of a given industry in a given market. In this P5F exercise, we look at the automobile
industry in India. This is indeendent of any manufacturer. 's such, it alies to every Indian car
manufacturer.
In any P5F analysis, one must examine the following!
C. The threat of new entrants
1. The bargaining ower of buyersDcustomers
E. The threat of substitute roducts
<. The amount of bargaining ower suliers have
5. The amount of rivalry among cometitors
C. The threat of new entrants
In most markets, the caital and exertise needed to setu an auto or arts manufacturing facility,
would be a great enough barrier to entry to revent many new entrants from setting u.
2owever, given India's incredible growth forecasts, infrastructure rogress #esecially new and
better roads%, and ever-exanding financing otions to rural residents, the market is attractive. 's
such, we exect the threat of new entrants to be high.
(esult! )nfavorable
1. The bargaining ower of buyersDcustomers
.uyers in India have a wide variety of choice. There are more than 1, foreign manufacturers
selling in India #including ultra-high-end such as (olls-(oyce and Famborghini%. ?f course there
are also a lethora of incredibly chea choices, like the famous Tata 7ano.
(esult! )nfavorable
E. The threat of substitute roducts
India is famous for its two-wheelers #bikes and moeds% and three-wheelers. These are very real
and obvious threats to auto manufacturers.
(esult! )nfavorable
<. The amount of bargaining ower suliers have
It is likely that the suliers to the manufacturers have considerable bargaining ower. They are
not held ransom by one single manufacturer as they can market their roducts to any of the
others in India.
(esult! )nfavorable
5. The amount of rivalry among cometitors
2igh. The industry is not yet in its shake-out hase and is still struggling to find the u-and-
coming stars and ossibly tole the leaders.
(esult! )nfavorable
India's auto industry is much like ;hina's, as far as Porter's Five Forces is concerned. Fike
;hina's, the P5F analysis ignores the massive future rosects which could indeed render this
analysis irrelevant.