Introduction
The year 2009 was unprecedented in the American Automotive industry. While early 2008 vehicle sales seemed to be doing well, sales volume deteriorated toward the end of the year, and the situation worsened with the recession’s onset. This had the effect of choking credit to consumers, automakers, and suppliers. By the start of 2009, the sustainability of the big three Detroit-based companies: Chrysler, General Motors, and Ford, was under threat, and basically, the whole of the American auto industry had their facilities operating at less than half of their utilization capacity.
This decline in production had adverse effects on original equipment vehicle manufacturers (OEM), and the pain was quickly felt by suppliers who stopped production and laid off employees. This made it hard for the Auto-industry producers to serve their clients and still make profits. It was also problematic to explore the economic impact of the recession on the industry. This paper offers a detailed analysis of the American Automotive industry in relation to the framework of Porter’s Five Forces Model.
The Auto Industry
The Automotive industry in America was incepted in 1890 and since then has evolved tremendously. By 1920, Chrysler, General Motors, and Ford dominated the country’s automobile industry (Xiao, 2022). The Vehicle industry in America contributes to a substantial share of the country’s gross domestic product. It, therefore, captures huge attention from politicians, economists, and politicians for its immense effect as an economic driver (Michael, 1979). Ford is famous for being the initial automobile maker and pioneering assembly line manufacturing. Some important dates in the American automotive industry include: in 1913, the industry started with Ford company creating its initial model T from an assembly line.
From the 1930s through to 2009, the industry had various ups and downs, the most profound effect being the Great Depression and the 2009 Financial Crises. 2019 was characterized by a surge in production, with figures indicating high commercial and passenger vehicle production (Xiao, 2022). The automotive industry’s input to the country’s economy is multifold, ranging from domestic production, employment creation, and research and development (Xiao, 2022). The Alliance of Automobile manufacturers released a report indicating that the sector produces $500 billion in revenue for Americans and supports more than 7 million private sector jobs. Additionally, the industry’s contribution to the overall American GDP is 4% (Xiao, 2022). Though the 2009 financial crisis significantly affected the industry, with the government’s intervention, there have been improvements and significant growth demonstrated with Chrysler, General Motors, and Ford on the lead globally.
Industry Definition
The Automotive industry in the U.S. comprises approximately 200 companies with operations in retailing, wholesaling, production, and maintenance of motor vehicles. The companies make car chassis, light trucks, and passenger cars. While the industry has performed optimally throughout time, the 2009 financial crisis recently caused a great setback (Xiao, 2022). High unemployment rates resulted in consumers who are price sensitive and a fall in automobile sales (Xiao, 2022). This precipitated the bankruptcy filing by manufacturers and suppliers, while others had to be innovative to ensure they endured in the market. Certain manufacturing firms have dominated the sector due to high market entry barriers.
Furthermore, the extraneous overhead cost has orchestrated dominant barriers. Thus, the vehicle industry needs to intensify efforts to retain its market share. This analysis will illustrate that the American automotive industries remain incredibly competitive. Brand and corporate standing have resulted in loyalty among buyers and also caused high barriers to entry. This is because new entrants have to possess adequate capital to overcome the challenges of accessing the proper distribution channels for survival in the market. It is a pre-requisite for any entrant to have high capital to obtain and maintain expertise in automobile manufacturing (Xiao, 2022). The country’s vehicle industry is the core pillar of the country’s economic development, with colossal interconnection across the industrial and cultural fabric of the country.
Industry Profile
At the end of the 19th century, the American automobile industry evolved to become the second biggest globally after China. During this period, many changes transpired in the industry: it started with steam engines, proceeded to internal combustion engine production, battery-powered electric engines, and steam engines (Michael, 1979). The automobile industry in the U.S. has been responsible for initiating revolutionary changes. The industry’s evolution commenced with the initial gasoline-powered car, referred to as Buckeye Gasoline Buggy, manufactured in 1891 by John William Lambert. Subsequently, a series of vehicles was made by Alexander Winton, Elwood Haynes, Oldsmobile Curved Dash, and Ransom E. Olds (Michael, 1980). With the rapid growth of the country’s economy, the 1916 Federal Aid Road Act set aside a massive amount for improving transport infrastructure and building roads.
The evolution led to the emergence of the big three American domestic market leaders: Chrysler, General Motors, and Ford. Extraneous competitors are Honda, Toyota, Nissan, and Hyundai. In October 2012, the market share in the U.S. was divided into Honda at 8.5%, Toyota at 15.6%, Hyundai at 11.4%, Ford 12.0% and General motors at 15.3%. This totals 62.8% of the market with the classification of high volatility revenue and medium concentration (Xiao, 2022). Compared with the preceding market share’s quarter, General Motors maintained the lead at 17.8%, it was accompanied by Ford’s 16.6%, Toyota at 14.5%, Chrysler-Fiat’s at 11.5%, Honda at 9.6% and Nissan at 8.1% (Xiao, 2022). The variation illustrates the rate of competition that is present in the market. Due to the global economy’s prevailing conditions, migration to green technologies, and high prices of oil, the Vehicle industry is in a transition state (Xiao, 2022). Technological innovation, fuel efficiency, and hybrid vehicle dominate the industry.
Industry Market Structure
The American automotive industry is characterized by an oligopolistic market structure. Few manufacturers control the industry, with four companies dominating 70% of the industry market and eight firms dominating 80% of the market (Xiao, 2022). The fortune of the oligopoly automotive industry organizations is mutually inter-reliant. This was retrospectively best witnessed in the 2009 financial crisis when all three leading vehicle manufacturers in the U.S. faced identical economic challenges (Michael, 1980). While there is class homogeneity in the production of vehicles among these firms, there are also diversities in process, features, and choice options. Due to this, marketing and advertising in several segments of the market becomes tremendously vital.
Future Outlook
The industry’s future strategy is overseeing expansion of its markets, which will result in an increase in demand. Through the expansion of manufacturing to other countries, the industry will reduce its transportation and logistics cost. Additionally, this will permit the industry to have low-cost skilled labor (Michael, 1979). Figures indicate that this shift will lead to a 12.8% overall increase (Michael, 1979). In addition, to ensure that the industry remains competitive, there are plans for the adoption of new strategies by the industry to aid in the manufacturing and production process (Michael, 1979). The Automotive industry is also aiming to utilize methods of automation that make it possible to reduce labor costs in vehicle production both abroad and domestically.
After the 2009 financial crisis, the main suppliers and manufacturers of vehicles had to clean their balance sheets, restructure costs and remove surplus capacity. For the big three, most forecasters are more bullish on Ford’s future, leading the pack with fuel-efficient, gas alternative, and hybrid models (Michael, 1979). There is a joint agreement among the big three that they require intelligent growth to evade financial calamities in the future and do it with caution (Michael, 1985). Vigorous potentials of the digitization of current opportunities and wireless network potentials for embedding further technologies within vehicle systems. The technologies to be embedded include navigational connectivity, safety, and entertainment in a bid to meet the need of clients.
Porter’s Five Forces Strategy Analysis as it applies to the Auto Industry
Porter’s five forces is a simple context for evaluating and assessing a business organization’s competitive position and strength. It was developed by Harvard’s Business School’s Michael E Porter in 1979 (Michael, 1979). The theory is based on the notion that there exist five forces that determine a market’s attractiveness and competitive intensity. They help in the identification of where business power lies. This helps understand an organization’s present competitive position and the strength of a situation that an organization may be searching to move into.
Often Porter’s five forces are utilized by analysts to assess whether a new service or product is possibly profitable. Through the assessment and noting where powers lie, the theory can be used to identify strength areas and avoid mistakes by improving weaknesses (Xiao, 2022). Porter’s five forces are the Bargaining Power of Buyers, the Bargaining Power of Suppliers, Competitive Rivalry in the Industry, the Threat of New Entrants, and the Threat of Substitutes. Below is a discussion of these five forces in relation to the United Stared automobile industry.
Bargaining Power of Buyers
The nature of customers helps determine the price of goods. It is thus essential that the bargaining power of purchases should not be in an overstating position. The buyer’s bargaining strength results in sellers’ failing returns: abstemiously high buyers’ bargaining power characterizes the American Automotive industry (Xiao, 2022). The limited bargaining power of buyers can be ascribed to the presence of the big three companies in the U.S., which possess the leading market share (Xiao, 2022). Most of the industry’s outputs are purchased by the buyers, who make up a substantial portion of the industry’s revenue. In addition, in case of an unsatisfactory experience, the buyers pose a low switching cost (Michael, 1979). The fact that buyers are few causes low bargaining power. Also, the buyers do not possess the power to backward intergrade into the U.S automotive industry as they buy their cars from dealerships.
Nonetheless, the emergence of various companies in the international market, including Toyota, resulted in competition. A few manufacturers are controlling the industry, and the emergence of new competition has affected buyers’ bargaining power: the effect is not large enough to affect the industry prices (Michael, 1985). In addition, the private automobile is a requirement for most U.S. citizens, and buyers deal with dealers, which limits the bargaining power of the buyer (Michael, 1985). Thus, there is little pressure from buyers in the industry, and they also lack the power to influence the industry’s product prices.
Bargaining Power of Suppliers
Typically, in Porters’ model, few suppliers, as opposed to multiple suppliers, are disposed to have high bargaining power and control high prices. The American car industry is characterized by suppliers with low bargaining power (Michael, 1980). This is because the production of vehicles needs the utilization of multiple parts, which necessitates numerous suppliers. The presence of various suppliers in an industry results in low bargaining power among suppliers. The industry suppliers comprise providers and dealers of car components, including seats, tires, and screens.
The industry’s overreliance on vehicle manufacturers results in challenges for suppliers, which entail pricing pressure and production cut. The presence of multiple suppliers in the industry makes it possible for manufacturers to switch suppliers easily(Michael, 1980). Suppliers have low bargaining power, so they sell their services and raw material at a lesser price. Furthermore, notably, they do not hike their component’s costs due to the massive base of suppliers in the industry (Michael, 1985). Thus, the price of raw materials and components that suppliers provide is determined by the industry, hence the profitability. Furthermore, suppliers have limited options because the automotive industry in the U.S. is dominated by the big three. The suppliers lack companies to supply them with components and raw materials at a higher cost.
Competitive Rivalry in the Industry
New entrants in the industry have resulted in the industry experiencing intense competition. There has been an increased establishment of facilities by foreign manufacturers in America, ensuing in decline in the markets here of domestic players. The competition in the industry is in non-price dimensions, ensuing in product discrepancy. With the emergence of new trends, including fuel-efficient versions and hybrid, U.S. manufacturers have a lesser comparative advantage (Michael, 1980). The low switching cost has made consumers switch to other brands without difficulty.
The existing competition between Chrysler, General Motors, and Ford has decreased profits among all competitors. With intense competition in the industry, this results in amplified advertisement costs which leads to lower yields (Michael, 1980). The fact that the U.S. car industry is an oligopoly has reduced the impact of price-based competition. The industry, though, has avoided price-based competition, in recent times, firms have embraced it, which has helped in marketing and attracting clients.
Threat of New Entrants
While it is a fact that high barriers to entry characterize the vehicle manufacturing industry in the United States, increasingly, the economy is globalizing, and there has been a comparative new rise of foreign competitors. These competitors possess marketing and management skills, technology, and capital which signify an actual threat to the country’s domestic industry (Michael, 1979). This emerges when the perspective is shifted to the international market in terms of sales of vehicles. The international organization of motor vehicle manufacturers indicates that new international entrants will increase their sales which means a decline in local players’ market share.
Tactically, it will be necessary for domestic players to identify opportunities further internationally and have a look at competitors’ strategies for market entrance and incursion. The Korean car manufacturer Kia is one example of a threat, which has positioned the U.S. market via high-quality, low-cost cars with excellent reliability (Michael, 1985). Such new entrance can easily leverage prevailing abilities and cash flow to shake up the market rankings more.
Low returns due to competition cost also characterize Porter’s five forces. Domestic manufacturers would be more prudent if they capitalized on low-cost foreign strategies. High-quality and low-cost players, including Tata and Kia, have the probability of taking a big chunk of the market share from domestic producers (Michael, 1985). Another significant factor to consider is that the present loyalty to the major brands has faded. Domestic manufacturers here should focus on sophisticatedly leveraging the cost or switching client through car ownership club brand loyalty and social networks.
Threat of Substitutes
The 20th century was characterized by the emergence of the automobile and its manufacturing. The 21st century is expected to experience a shift: a significant factor affecting the change is the availability and price of gasoline and oil. This affects the willingness of consumers to purchase secondhand or new vehicles (Michael, 1979). High cost will result in a decline in market segment unless accompanied by high fuel efficiency levels and lower cost of ownership. An even more intricate threat is the shift to an economy that is knowledge-based from one that is industrial-based with its urban commuting culture.
Thus, the shift to a knowledge-based economy and the rise of the internet results in a reduction in the necessity of a household with two or more vehicles (Xiao, 2022). Statistics indicate that while motor vehicles will persist as the dominant transportation mode for most homes in the U.S., prospects will migrate from domestic requirements to developing economies that are industrializing (Xiao, 2022). The domestic opportunities are in the supply of hybrid/alternative transport options and low-cost vehicles to segment these markets.
Conclusion
Porter’s five forces model analyzes and identifies five competitive forces that are essential in shaping every industry and which are vital in the determination of the strengths and weaknesses of an industry. The model is applicable in any economic segment, to enhance the long-term profitability of a company. In this paper the analysis based on Porters five forces model has the effect of initiating an essential Big three company dialogue and progressively foreign competitors that are on the rise. It will be inevitable to come up with international and domestic strategies to challenge and address emergent economic players (Xiao, 2022). The model by Porter also offers a view of the industry in the more powerful economic frameworks, particularly in relation to the international economy and desirable changes that are obligated to occur in manufacturing.
Consumers will ensure they retain the industry as a dynamic and viable market, and it is imperative not to leave behind domestic manufacturers. Potters model also permits strategic ways to ensure the American Vehicle industry can thrive not only when the economy is booming but also during economic uncertainties such as during financial crises. Understanding forces that are imperative in shaping competition offers a pivotal pattern to have a better view of profitability strategies. This will ensure that the U.S. auto industry is headed toward success.
References
Porter, M.E. (1979) “How competitive forces shape strategy,” Harvard Business Review, Web.
Porter, M.E. (1980) “Competitive Strategy”, The Free Press, New York, Web.
Porter, M.E. (1985) “Competitive Advantage”, The Free Press, New York, Web.
Xiao, y. (2022). Research on tesla’s market—based on Porter’s five forces and ratio analysis model. Atlantis-Press, 5-10. Web.