In this Section take a closer look at the main structural features of China’s automobile industry for luxury and premium cars. We use Michael Porter’s (1980) Five-Force model to analyze the industry. These five forces jointly determine the intensity of competition within the industry and in turn help firms to set their strategies.
1. THREAT OF NEW ENTRANTS
New entrants to an industry will bring new supplies, new ideas and new competition. Therefore, the threat of new entrants is crucial to existing firms’ profitability. We analyze domestic entry, foreign entry through imports and foreign entry through foreign direct investment (FDI). The automobile industry in general requires large fixed investments and is therefore characterized by very large Economies of Scale and Economies of Scope. A other characteristic is the fact that even long existing firms still need to provide a huge amount of resources to research and development (R&D) and marketing to introduce new models, obtain technological breakthroughs, and maintain and raise consumers’ loyalty as well as the firm’s market share and profits. Both, Economies of Scale and Scope and huge R&D investments and marketing cost put potential entrants in very disadvantageous positions because first they need to raise sufficient capital and second they must prepare to bear the debt for a long period of time, since these long-term investments cannot be recovered within several years. Pure local entry is very unlikely expected since there are already a lot of firms in the luxury-car market and because it is improbable that local governments will again heavily subsidize new entrants because the central government has been discouraging this type of investment.
On the other hand makes the continuing growing demand of luxury cars the Chinese market very attractive for local and global luxury-automobile manufacturers. The rapid growth of the high/upper class, caused by the rapid economic growth and the unequal income distribution, increases the demand of luxury cars.
Chinas entering into the WTO leads to a gradual trade liberalization and to relaxed restrictions on introductions of foreign investments. This did not only increases automobile imports but also Foreign Direct investments (FDI).
Since existing luxury car brands already have brand equity, brand identification and customer loyalty in the Chinese market it is hard for new entrants to survive in this market.
No protection of intellectual property rights in China is a big problem. Weak intellectual property laws allow for massive copying, which is faster, easier, and cheaper than research and development and genuine innovation The threat of new entrants is considered to be very low (and therefore favorable) if there is already a Chinese luxury car brand existing. No threat cause all other brands already launched into the market
The passenger car industry was delicensed in 1993. So no industrial licence is required for setting up of any unit for manufacture of automobiles.
2. THREAT OF SUBSTITUTES
Substitutes restrict the potential growth, and therefore also the returns, of the automobile industry. Growth of these substitutes can reduce demand for cars and consequently impose price pressures and limit profit margins for automobiles. Substitutes for cars in general are bicycles, motor cycles, taxis and Public Transports, like trains, busses and airplanes. Given that luxury and premium cars are not only means of transportation but also a symbol of economic and social status all the above mentioned substitutes should not be a threat to the demand for the luxury car industry in China. The only realistic substitute is therefore a second hand luxury car. Also renting and leasing!!!
The threat of substitutes is considered to be very low and therefore favorable.
3. BARGAINING POWER OF BUYERS / CUSTOMERS
The customers of luxury cars are mainly upper...