Introduction to the Auto Industry
Industry Definition
The automotive industry, also known as the automobile industry or simply as the auto industry, is one of the largest sectors of the United States’ economy. Kachelmaier (2018) defines the auto industry as one that specializes in the design, production, and sale of cars, trucks, buses, farm machines, and other commercial vehicles. Different automotive companies specialize in different market segments depending on the segment that they believe they can serve in the best way possible. Some specialize in cars, others in large trucks or heavy farm equipment.
Industry Profile
The United States automotive industry traces its history back to 1893 when the Duryea brothers built and road-tested the first gasoline-powered car in Springfield, Massachusetts. Its engine design closely resembled that which had been developed and patented in Germany by Karl Benz (Oqubay et al. 2020). Ford Motor Company developed the first car accessible to the masses in 1908 when it designed and produced Model T. The industry gained massive growth in the 1920s as the self-driven vehicles rapidly replaced the animal-drawn carriages (Murray & Schwartz, 2019). The industry grew rapidly as government agencies, corporations, and individuals embraced the use of vehicles as a better alternative to trains and other traditional modes of travel.
The United States became the largest manufacturer and exporter of automobiles in the world. It became one of the largest sectors of the country’s economy in terms of revenues generated and the number of people it employed (Golensky & Hager, 2020). However, the sector has been facing stiff competition from other countries. Germany and Japan have since surpassed the United States as the largest and second-largest manufacturer and export of cars respectively. Although the future of the industry is still bright because of the massive demand for automotive products, stiff global competition and emerging concerns such as pollution are concerns that the industry cannot ignore. General Motors is currently the market leader in this industry, followed by Ford Motor Company, and Stellantis North America (Kachelmaier, 2018). The industry has more than 20 other small players such as Tesla, AM General, Elio Motors, Falcon Motorsports, VIA Motors, and Trion Supercars among others. Competition, customers’ changing tastes and preferences, and government policies are the main forces that affect operations in this industry.
Industry Market Structure
When assessing the United States auto industry, it is necessary to analyze its market structure. The country’s auto industry can be classified into monopolistic competition. In this market, Trigeorgis and Reuer, (2017) explain that many companies offer similar products, which are not perfect substitutes. General Motor’s Chevrolet is not a perfect match to Stellantis North America’s Chrysler. Each of them has unique attributes, making them attractive to a specific segment of the market. There is the ease of entry and exit into this market. The competition is relatively stiff, but manufacturers are often keen on differentiating their products to meet the needs of a specific segment of the market. For instance, Tesla is differentiating its products from the rest in the market by focusing on purely electric cars. The strategy is meant to appeal to customers who are sensitive to the problem of climate change and global warming.
The industry market structure is also considered a monopolistic competition because of the perfect information available for all the players. Any automotive company can easily collect information about the needs and expectations of customers in the market. However, they use the information they collect differently depending on their interpretation and mission in the market. Some have developed unique designs that make their products significantly different from that of their rival players. The government of the United States has also eliminated most of the barriers to market entry and exit. It means that foreign companies can easily have access to the local market. Some of the leading foreign firms with a significant presence in the local market include Mercedes Benz and Toyota.
Future Outlook
Competition in the global automotive industry is getting increasingly stiff as new firms emerge in the market. In the United States, firms have come to realize that stiff competition requires creativity and innovativeness to overcome. As such, some of the dominant players and new entrants are focusing on innovation as the only way of achieving a competitive edge in the market. They understand that their sustainability depends on how well they can understand the changing tastes and preferences of customers in the market. Kachelmaier (2018) observes that the United States is one of the leading manufacturers of electric cars in the world. It means that the future of the country’s automobile industry is secure. Players in this sector can understand the changing market forces and are responding accordingly. The use of hybrid cars in the country and around the world is becoming common. Companies able to respond to these forces and easily achieve sustainable operations, especially at a time when the global community is keen on reducing the emission of greenhouse gases as a way of protecting the environment.
Porter’s Five Forces Strategy Analysis as it applies to the Auto Industry
When assessing an industry, it is always necessary to use various models and tools to understand specific forces that may directly or indirectly affect the operations of individual companies. Porters’ five forces model is one of the tools that effectively assesses these forces in the market. As shown in figure 1 below, this model assesses the bargaining power of buyers, bargaining power of suppliers, competitive rivalry in the market, the threat of new entrants, and the threat of substitute products.
Bargaining Power of Buyers
When using this model, one of the factors that one has to consider when analyzing the market is the bargaining power of customers. Riivari and Lämsä (2019) note that the ability of buyers to put a company under pressure due to availability of existing substitute products, buyer price sensitivity, uniqueness of the products should be assessed. When the buyers have great bargaining power, they can easily negotiate favorable prices for them, which may affect the profitability of a firm. The automotive industry in the United States has buyers with a strong power to bargain (Brusoni & Vaccaro, 2017). Locally, there are numerous car brands offering similar products. Foreign companies, especially from Europe, also offer products of high quality. A customer can choose to buy a Chrysler, Benz, Ford, or any other brand of cars whenever they intend to own a car.
The wide variety of brands to choose from means that they can negotiate for lower prices. Whenever they feel that the options will offer them similar experiences, they will opt to purchase from a retailer that offers the best price. Organizational buyers such as government entities, large corporations, and non-governmental agencies also have huge bargaining power because they purchase these products in bulk. The effect of the strong bargaining power in this industry is that players have to find unique ways of meeting customers’ expectations. Using pricing as a strategy of attracting customers is not enough. Buyers need to be sure that the company is offering them something unique that meets their needs in the best way possible.
Bargaining Power of Suppliers
The second factor in this model, as shown in the figure above, is the bargaining power of suppliers. The cost of factors of production such as labor, raw materials, components, and services such as expertise offered by suppliers often have a significant impact on a firm’s profitability (Porter, 1985). When they are powerful, some suppliers may refuse to work with a given company or charge excessively high prices for unique resources (Murray & Schwartz, 2019). They know that it is not easy for these firms to have access to their services or products that they offer in the market. Steel, copper, aluminum, rubber, special fiber, and glass are the main raw materials needed in the manufacturing of vehicles. Although these materials are easily accessible, their prices have been going up consistently. For example, most of these car manufacturers are reducing the amount of steel that they use because of the issue of cost (Golensky & Hager, 2020). However, the number of companies supplying these products is significantly high, which means that their power is relatively low.
The new challenge that these firms currently face is the cost of hiring and maintaining highly skilled workers. The stiff market competition requires firms to remain innovative in their operations. As such, there is competition among the top players to hire and retain top talents. Doing so comes at a cost to these players. They have to offer them attractive remunerations to ensure that they do not consider moving to other firms. The workplace environment must also be sustainable to ensure that they are satisfied at work.
Competitive Rivalry in the Industry
The success of a firm can also be affected significantly by the intensity of competitive rivalry. Kachelmaier (2018) observes that competitive rivalry is defined by the market structure. In a monopoly, a single firm enjoys massive control of the market and does not have to worry about competition. In an oligopolistic market two or three firms have to compete for customers, and they can easily agree to work as a unit for their own benefits. However, in the case of monopolistic competition and perfect competition, rivals may choose to use aggressive, non-aggressive in non-price approaches to competition. In most cases, aggressive strategies are used to attract and retain customers.
The competitive rivalry in the automotive industry is significantly high. The market has numerous players targeting the same customers. As such, they use various strategies to attract customers. Toyota has been using pricing as a way of creating a large pool of customers. It produces good quality cars at the most competitive prices. Mercedes Benz uses quality as its unique positioning strategy in the market. Tesla positions its products as being friendly to the environment because they use renewable energy. Ford prides itself as a manufacturer of powerful trucks that can be used off-road. As competition continues to be stiff, firms are struggling to find ways of ensuring that their products remain appealing to customers in the market (Murray & Schwartz, 2019). Competition in the local market has made the local automotive industry highly attractive internationally. As firms struggle to meet customers’ needs locally, they have embraced innovation, making their products more appealing to customers in the global market.
Threat of New Entrants
The model also identifies the threat of the entry of new competitors as a major factor that firms in a given industry have to consider. Unless there are significant barriers to entry, profitable markets that yield high returns will attract firms, creating a perfect competition market structure, effectively eroding the profitability of existing players (Kachelmaier, 2018). In the United States and other parts of the world, a car has become a basic need. Once an individual attains the age of majority, one of the things they consider purchasing is a car. The trend has led to a consistent increase in the demand for cars not only in the United States but also in other countries around the world. It has made the industry one of the most attractive for investors globally.
The United States is one of the most attractive markets for car manufacturers around the world. The attractiveness of the market is caused by high purchasing power of customers in the country and its large population (Murray & Schwartz, 2019). Most of the leading car manufacturers around the world often target this market in their expansion strategies. The United States government has created an environment that allows local and international firms to start operations in the country as long as they meet various legal requirements. The country has been keen on supporting the local business entities to achieve growth. It means that there is the ease in the entry and exit out of the market. Various global car manufacturers can easily start their operations in the country as long as they believe that they can overcome various challenges that existing players face. It means that the current level of competition in the market can become worse as new firms make an entry into the market. Numerous Chinese firms that have emerged in the recent past may make an effort to enter this market.
Threat of Substitutes
The fifth factor when using Porter’s five forces model to assess an industry is the threat of substitute products. The existence of close substitutes increases the propensity of clients to switch to alternatives in case there is a price increase in the products they often prefer (Golensky & Hager, 2020). The substitute must meet the need of customers in as effective a way as the product that is forgone. It is also necessary for customers to ensure that they can use the product consistently for a period without having the need to use the substituted product. Besides price, factors such as convenience and availability have to be considered when selecting the substitute product.
It is important to note that the threat of substitute products in the United States automotive industry is significantly low. Services that a car owner gets from their vehicle cannot be substituted easily. There is the alternative of using an airplane or a ship or boat to move from one location to another. However, these other means of transport are not perfect substitutes for road transport. When one uses air or sea transport, there are some locations that they can only reach using a car. There is the issue of convenience that has to be considered. The cost factor also makes these alternatives highly unlikely to replace cars. Traveling by air is significantly expensive compared with traveling by road. It is unlikely for an individual who was planning to purchase a car to consider other alternative means of transport because of cost, convenience, and geographical constraints of the other means of transport. As such, firms in this industry can easily operate without worrying about the possibility of substitute products eroding their profitability.
Conclusion
The United States auto industry has experienced massive growth over the past century that it has been in existence. In 2009, the industry, just like many others in the United States, was negatively impacted by the global economic recession. Many families were losing their homes and purchasing a new car was not a priority to the majority of Americans. The problem affected the global market as the purchasing power of many people was significantly reduced. The United States’ government, which is always one of the largest customers for these companies, focused on the recovery of the economy instead of increasing the fleet of its cars. Large corporations also opted to reduce their purchase of cars because of the need to address other more pressing concerns. Despite the challenge, the automotive industry in the country has recovered.
The analysis of the market using Porter’s model has identified factors such as intense market competition, power of buyers, power of sellers, and ease of entry into the market as some of the challenges that these firms have to address. Despite the existence of these challenges, the analysis shows that local firms have developed ways of coping. They have embraced innovation as a way of making their products unique in the market. They are also using emerging technologies to ensure that they enhance the quality of products as they cut costs of operation. Although the country has been overtaken by Germany and Japan as the two largest manufacturers and exporters of vehicles, the future of the local industry is bright. The innovativeness of the local players in the industry means that they are in the best position to manage emerging threats, especially in relation to global warming and climate change.
References
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