The world automobile industry had experienced near constant growth through to the mid-1980’s. The transition from horse carriages to automobiles brought about uncertainty over the development of the product during the industry’s infant years. As the automobile evolved, demand for automobiles soared at different points in time throughout the world. However, depressed demand eventuated two decades ago after the saturated markets of North America, Europe and Japan. This consequently left industry profitability at a recession. The reasons to why such an occurrence was brought about are explained below.
Porter’s Five Forces
Threat of Substitutes
The competition of substitutes has remained calm within the industry (Grant, 1998). In the absence of close substitutes for a product, consumers usually will not react to price increases and switch to substitutes (Grant, 2002). Consumers’ reasons for demand for an automobile can differ. Fundamentally, motor vehicles serve the purpose to deliver passengers from the departing location to a particular destination. Grant (2002) says, “the more complex the needs being fulfilled by the product… the lower the extent of substitution by customers on the basis of price differences”. If the intent is solely transportation needs, such a need can be simply satisfied by the substitutes of public transport. On the other hand, more complex needs, such as consumers desiring a more flexible, comfortable, and personal means of transportation, decrease consumers’ propensity to switch to substitutes.
Threat of Entry
New entrants in an industry intensify competition in their respective markets. However, they are usually disadvantaged in respect to competing at the competitive level (Grant, 2000). Established manufacturers can hold several abilities gained from survival in the industry that entrants cannot instantly acquire, and these further create barriers to entry into the industry.
We can write a custom dissertation on Automobile Industry for you!
It is estimated that over four million vehicles should be produced per year to qualify as a low-cost producer in the automobile industry (Grant, 2002). “Economies of scale remains an essential determinant for cost-efficient production, and that without it, high levels of flexibility alone cannot translate into world competitive production” (Husan, 1997). The inability refrained most potential new entrants from entering the industry with the exception of Proton (Malaysia) and Maruti (India). Settled in protected markets with acquisition to licenses and support from its government, permits access to required technology and designs of automobiles. This enhanced their ability to produce at low-cost and reduced the distance from established manufacturers.
As a result of increased competition, established manufacturers’ absolute cost advantages are important and valuable. From experience and early existence in the industry, manufacturers have acquired cost-specific knowledge to drive low-cost production. Though producing at low-cost, product differentiation throughout the market is also important.
Rivalry Between Established Firms
Competing on innovation and cost reduction, established manufacturers created a strong wave of increased competition. As a result of merges, acquisitions, and alike strategic relationships between manufacturers, of small- and medium-sized producers, the industry became more concentrated. Many manufacturers internationally expanding caused greater import activity and construction of foreign plants to accommodate for the foreign market’s demand and drive for low-cost (Grant, 1998) and to exploit factors that aid research and development (Kuemmerle, 1999).
Competing in a sole market may not earn profitable returns; therefore manufacturers decide to participate in other markets. Manufacturers diversifying into numerous segments of the industry caused the number of competitors...