Five Forces Analysis - Automobiles Industry

FIVE FORCES ANALYSIS

The automobiles industry will be analyzed taking manufacturers of passenger cars, light trucks and motorcycles as players. The key buyers will be taken as independent dealers and distributors, and manufacturers of raw materials, assembled and semi-assembled components, and providers of energy, freight and transportation as the key suppliers.

Rivalry is fierce, with the industry dominated by several multinational companies. There is a great deal of brand loyalty in this industry, which reduces buyer power to a certain extent. Industry players are reliant upon suppliers of raw materials for their business. However both suppliers and industry players have witnessed the harsh reality of the economic downturn resulting in increased prices throughout. New entrants must compete with well-established companies by developing new technologies to meet growing environmental regulations. Many large incumbents hold a great deal of intellectual property (IP), making it hard for new entrants to progress.

Buyers in this industry tend to have a great deal of financial strength and therefore they can make large purchases, enter into long term contracts and ultimately put pressure upon market players to reduce prices. Many of the top industry players hold well-established and popular brands, thus they are well sought after. Brand strength in this industry does, however, serve to reduce buyer power as many buyers will enter into contracts with well-known manufacturers in order to meet consumer demand and boost their own sales margins. Buyers are likely to feel pressure from manufacturers who have integrated forward into selling their own automobiles. In some cases retailers are franchised dealerships that have contracts with one industry player; thus they are dependent on that industry player, reducing buyer power considerably. Overall, buyer power in this industry is moderate.

There are several inputs to the global automobiles industry, including a variety of raw materials (such as steel, aluminum, resins, copper and lead), components, freight, transportation and energy. Suppliers of raw materials are usually large companies who provide materials to a range of sectors, negating their reliance upon the automobiles industry for revenues, thus putting them in a strong position. Furthermore, industry players require raw materials for their business, strengthening supplier power further. However, players are likely to use a variety of suppliers for the majority of their inputs, meaning they are less reliant upon individual suppliers. For example, Toyota and Honda ensure that no single supplier accounts for more than 5% of purchases of major inputs. Overall, supplier power is assessed as moderate.

Entering this industry requires large capital investment,