Auto Industry/Hybrid Cars & Yuppies

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Porter's Five Forces for the Automotive Industry

New Entrants

The possibility of new entrants into the automotive markets is slim because of the large amounts of capital, large distribution networks and brand image. However, global companies can enter into new markets and steal market share from existing companies in that market. One such example is the Big Three in North America. The Japanese car maker Honda built a manufacturing plant in Ohio to start production on some of its popular models for distribution in the North American market. Since then, other foreign companies have also established manufacturing plants in North America to feed to demand for their vehicles. Foreign companies had many competitive advantages when moving in such as high quality standards, lots of capital and superior management skills.

Power of Suppliers

There are so many suppliers in the automotive industry that their power is quite low. The cheer size of the industry and each of its players is so big that any one of them can be a huge part of a supplier?s business. The effect is somewhat like Wal-Mart?s effect on it?s suppliers. Many suppliers will tailor their products and aggressively negotiate prices to gain contracts with large automobile manufacturers.

Power of Buyers

Automobile buyers themselves do not hold much power as they may buy only 1 car every 5-10 years. Historically, the car manufacturers themselves had much of the power until foreign companies moved in and offered alternatives to domestic vehicles. More recently, the automobile manufacturers are competing against each other on value, features, quality, style and customization to appeal to their customers. There are exceptions however such as police and other specialized vehicles which are tailored by the manufacturer to their specifications. In this case, the buyer has a lot of input into design to fit its individual needs because of the volume of vehicles it will purchase from the manufacturer.

Availability of Substitutes

There are several factors that affect substitutability. These factors are the price of gas, time, money, personal preference, convenience as well as alternative transit systems (bus, train, airplane, etc.) As the price of gasoline rises, people will seek substitutes such as the transit system, fuel efficient vehicles and hybrid or electric vehicles. Car manufacturers must adapt to these changes to retain market share and keep up with the needs of its consumers. In the last couple decades, import vehicles with fuel efficient engines are becoming more popular in North America where traditionally vehicles had large gas consuming engines. Also, the popularity of large trucks and SUVs are on the decline and car manufacturers are hard at work developing fuel efficient alternatives.

Competitive Rivalry

The competition among players in the automotive industry is quite high. This is because the industry players are well established and have large marketing budgets. The barriers to entry to this market make the industry an oligopoly which somewhat reduces the risk to the existing car manufacturers. Price based competition, including attractive financing options is one method of attracting new customers, however the margins are becoming smaller and car manufacturers are relying on brand, quality and warranties to differentiate themselves from the competition. Competition is more difficult in the automotive industry since most automotive companies already have a global presence.

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