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Automotive Industry Analysis

Team 5

Automotive Industry Analysis

Executive Summary

The following report is a strategic analysis of the Automotive Industry. This report will use several resources to analyze the industry and overall market. Additionally, including the information gathered from strategic and analytical recommendations are considered for the Automotive Industry analysis which could help achieve a greater market share in this industry.

The report analysis includes the external industry environment which includes, …. Additionally, a PESTEL analysis as well as Five Forces analysis has been conducted. These are important to understand the market environment of the industry needed by anyone trying grow or enter this market.

Introduction

The automotive industry is an industry that has been steadily growing over the several decades due to rising demand for vehicles. There is a considerable market share for the supply which occurs although the industry faces immense challenges to do with governance and political interests (Wells & Rawlinson, 2009). The consumers of the automotive sector mostly include individuals, organizations, governments, and institutions. The industry has been steadily marked by around five hundred players who have been regularly producing cars over the last few decades. The first boom that was related to the automobile industry was in the nineteen-hundred where the demand for vehicles shot up due to the change of governance and industrialization.

Background

The first dominant players in the market were France and closely followed by Germany. Eventually, Germany was the most significant car producers. The needs for mass production lead to the emergence of Japanese brands and the United States as well (Winkelhake, 2018). Many companies that first started as the most desirable brands are being phased out while others are barely making enough profit due to factors associated with the external environment of the industry. Strategic choices have to be considered to ensure survival in a highly competitive market. The industry has faced an immense shift in the external environment that has led to the market players having to be innovative to keep their competitive advantage.

Part 1: External Environmental Analysis

General Environmental Analysis

A PESTEL analysis was conducted to evaluate all relevant external factors and evaluating macro-economic influences the industry may have.

Political factors

The automobile industry has been having challenges of a political nature due to the interests that the governments have on the industry (Kaplan & Smolkin, 2009). The benefits are but of a positive and negative environment. For instance, fuel emissions from guzzlers are a significant issue of concern to the politics in a country such a United States of America. It has led to the imposition of tax on vehicles that have high emissions, and this affects the production and supply of cars. Most politicians do not like to be associated with the cars that are harmful to the environment, and therefore laws are passed that may undermine some industry players.

Also, the automobile industry is a high source of revenue to the government. This means that the government has a role to play in the production and distribution of cars by setting up guidelines that are more favorable to the industry. This also undermines the new entrants into the market because the cost of production can be extremely high and small manufacturers are unable to meet the targets that they require to break even or even make a profit (Nieuwenhuis & Wells, 2015). Such is the challenge of companies that try to provide innovative solutions like to fuel efficiency. They may not be able to meet the cap set for the production needs of the company.

Safety standards have also been a factor of production in the industry. Currently, the safety rating of care has a significant effect on how sellable the car is (Wells & Rawlinson, 2009). Besides, brands that invest heavily in ensuring that the standards are met tend to do better than those that only meet the minimum requirements. This s as a result of consumer education and awareness and has a massive impact on the preferred brands in the market especially for vans that are considered family cars. Most of the brands that have more accessories for safety are getting a much more positive response from the market, for example, the use of sensors.

Governments are also consumers and recognize certain specific brands for the fleets of cars the purchase (Meyer, 2009). They mostly factor durability and cheaper running costs for the vehicles they purchase and mostly prefer certain particular brands for the long hold. This means that these brands have the upper hand because they provide a steady supply of cars to the government institutions, a relationship that lasts over a long period unless a vast change of governance occurs. The result is that the small industry players never grow at such levels.

Economic factors

One of the biggest hit in the industry was the recession. The loss of disposable income during the recession meant that most of the middle-income earners who are the biggest consumers for cars were left with no disposable incomes (Okada, 2010). This decline in revenue led to a decrease in the demand for cars because cars were an unnecessary expenditure. As the economic environment begins to stabilize once more, the need for cars has increased. The emerging middle-class that prefer mobility and convenience are not very comfortable using buses, and each household owns at least two vehicles to ensure that they can move comfortably.

Globalization has had both positive and negative effects on the mass market supply of cars. On the one hand, the older brands which were the sole providers of vehicles at the time have been quickly overtaken by the open market (Nieuwenhuis & Wells, 2015). These brands are now declining because it is much cheaper to import cars from certain countries like Japan which have low production costs due to mass production. It has resulted in introducing cars by individuals being made much simpler even by the government because the taxes are still a source of revenue for the institutions. The consumer is much more sensitive to the prices due to the available options worldwide.

Social factors

Cars have been a source of social degradation in terms of pollution. Noise pollution especially is a major concern, especially in big cities and towns. Cars keep making engine noises and hooting that are a source of a sound (Wells & Rawlinson, 2009). Besides, luxury cars are even noisier and are a source of pollution in terms of emissions. Traffic jams are another factor of vehicles that are incredibly time-consuming. Most cities were not built to handle such an upsurge of car owners as has been recently experienced. As a result, there are always traffic jams as people travel into and out of the cities where most people earn their living.

Cars are seen by many as a source of prestige, and many people change vehicles according to their income which favors some brands more than others (Meyer, 2009). An average home spends around a thousand dollars each to acquire a, but as the family gets wealthy, the cars they purchase increase and even more prestigious brands are bought. This is mostly with the middle-income earners where their pressure to conform to society influences the types of cars they buy. This increases the market share for some brands but also undermines other brands.

Legal factors

Gas emission laws have also influenced car production over the past few decades. The major contributor to global warming has been established to be greenhouse gases such as carbon dioxide which is produced by engine combustion in cars (Okada, 2010. There has had to be a legal framework to curb the climate change which has led to laws that dictate the acceptable limits of the gases that a car can emit. The cost of production is always affected by such, and yet this increase in price is barely compensated because the issue is a matter of law, not just productivity.

Safety and standards is another factor that has changed how cars are produced. The Federal Motor Vehicle Safety Standards stipulates that specifically, some bare minimum needs of security need to be met to allow the production and distribution of cars and car parts (Kaplan & Smolkin, 2009). This s also fuelled by consumer awareness, blogs, and media that continually highlight the dangers associated with some car brands who bypass safety regulations or do not pay attention to safety needs. The effect is that production costs to adhere to safety goes up and is not compensated which decreases the profit margin o the company.

Technology factors

Technology has revolutionalized how cars function. There has been an increase in the needs of consumers in terms of technology. Innovative systems such as alternative energy, fuel cell, hydrogen, solar and hybrid have to lead to the production of cars that provide solutions to environmental degradation (Hiraoka, 2009). Today’s consumer is very interested in factors such as how the cars are made and the environmental friendly brands are becoming increasingly acceptable and appealing to a larger market share. Contemporary car producers are now looking for more innovative ways to deal with these needs of the consumer and technology is the ultimate solution.

Synthetic materials, car management systems and computer-aided design software are also forms of technology that have influenced the market preferences of individuals buying cars. Most people prefer accessories or features that are more suited to their needs and those that have a friendlier interface (Wells & Rawlinson, 2009). These include touch screens, seat warmers, seat massagers and other sensors that can make the driving experience more natural and more appealing. The use of navigation systems like satellite navigation makes it easier to locate places without a struggle. Most users prefer cars that even their children can quickly hop into and drive away easily which has led to preferences like the automatic gear systems as opposed to the manual.

Environmental

Cars are a source of environmental pollution which includes climate change. Petrol engines emit a lot of greenhouse gases that result in global warming, and therefore most regulations are meant to control car emissions. The production of fuel-efficient cars has increased and even electric vehicles that are eco-friendly. The result is that slowly the traditional petrol engines are being phased out especially in countries in Europe that have tax-exempt laws on electric cars. This has affected the market share of diesel engines and petrol engines.

Trends in the industry

Many of the car owners are individuals who prefer personal freedom and therefore make the most significant market share (Calabrese et al., 2012). There is an increase in disposable income especially for developing countries that previously did not have an effect in the automobile industry but have recently been having a significant market for personal cars. Changes in government policy have also affected car production by increasing the costs of delivery. Most government policies have to do with fuel emissions and fuel efficiency. The market size and growth rate are inconsistent due to a highly volatile business environment.

Competition between brands is extremely stiff because the brands produce very similar units that are hard to differentiate and that meet the various needs of the market (Okada, 2010). Also, many companies have come up that provide extra features to standard cars, and this affects the choice of cars and the resale value. Most of the industry innovators have provided solutions to most of the issues such that vehicles are only bought as standard accessories and then upgraded depending on the needs of the consumer market. These cars are difficult to compete with as brands within the market space.

Five force Analysis and Effectiveness

The threat of new entrants

The risks of new entrants are low because of the brand image issues associated with the market. Most of the market brands are established and easily meet production costs although lower brands also struggle with the unknown brand image(Meyer, 2009). Besides, new brands have a difficult time adjusting to the market requirements and regulatory needs of the law. This poses a challenge because even the people that are already key players in the industry sometimes have difficulties meeting their profit margin. New entrants, therefore, are not a source of competition to a large extent.

Threat of Substitutes

Substitutes to cars include buses, trains, boats, and trams. These other forms of public transportation are becoming increasingly efficient with some car owners preferring to use bikes and different ways due to traffic, especially in large cities. On the other hand, these alternatives are not used as a replacement but in addition to cars because the convenience and freedom of personal vehicles are still hard to match. These means that cars still have the upper hand in the market share. The threat of substitutes is therefore low.

Bargaining power of buyers

The bargaining power of buyers is significant because most of the suppliers have diversified their brands to suit the needs of the consumers. Many companies that manufacture cars now offer a variety that can satisfy the needs of the consumer which includes the cost that the consumer can afford. This diverse market and globalization mean that the consumer has this fact undermines a vast pool of choices to consider and some brands because a select few have the brand image already. The options favor renowned brands more than others.

Bargaining power of suppliers

Bargaining power of suppliers is also low because in most cases the suppliers are small in size. They are influenced by the existing brands that hold most of the market share already. Most of lower brands have not been long enough in the market and switching of suppliers for parts is effortless. This makes it easy for the consumer to decide their preferences. The consumer chooses to mostly based on the most recognized brands that own a larger market share and therefore those brands always remain relevant in the industry as compared to the smaller brands.

Competitive rivalry

Competitive rivalry is very high in the automobile industry. The global market has a massive pool of cars that individuals or institutions can prefer (Winkelhake, 2018). There is a lot of very similar production especially in vehicles that have to lead to a disadvantage to some brands that were the first to produce certain engine types. Nowadays, there are the same engines on different brands, and it is just a matter of choice although most customers increasingly price sensitive. Most car owners prefer the cheapest option for the specs of car they need emerging markets to show that the preferences cut across car brands and mostly depend on the price.

Other external factors

Critical success factors for the automotive industry include factors such as fuel consumption. Fuel consumption of a car is essential because most of the people prefer cars that are easy to maintain (Dima, 2015). Most individual consumers are cautious about their spending, and since they provide the mass market, they have a considerable market share. Making fuel-efficient cars has been the priority of most companies as they seek a competitive edge over other brands. Cars that are expensive to run are not a favorite of the consumer that is sensitive to unnecessary spending.

Engine capacity is another factor that influences the choice of cars. For example, a five-liter petrol engine is a car that is expensive to run because the huge engine capacity translates to higher fuel costs. Lower engine capacity means that buyers do not have to dig deeper into their pockets just for everyday use of their cars. Most of the cars that are preferred have low fuel costs and are easy to manage and service. High capacity engines also have the disadvantage of expensive spare parts.

Some of the differentiators include complicated music systems, sensors and satellite navigation. In a highly competitive market, such accessories that comes inbuilt in the car as standard without additional costs make the vehicles more pocket-friendly. Due to a rise in insecurity, the addition of tracker to cars provides a competitive edge (Kaplan & Smolkin, 2009). In the acquisition of the accessories means extra cost, most consumers shy away. Buyers who want to upgrade their current car want an upgrade of the fixtures and other functions like GPS. The want heated seats and cruise control options. They need cars better adaptable cars to harsh environments. This dictates their preference for cars.

Durability is also a crucial factor when it comes to cars. Most people own cars for years and prefer brands that stand the test of time (Hiraoka, 2009). Consumers prefer cars that do not break don’t often and are reliable even over long distances without a struggle. Majority of the brands are those that have been passed down over generations and prove that they do not need to struggle to maintain these brands. Most cars are handed down from father to son and classic cars gain their added advantage.

Conclusion

The automotive industry is full of challenges of having a competitive edge over each other especially if the brands are not recognized and are new to the market. Most of the consumers to some extent are loyal to the key industry players and rarely venture into other brands. Most of the other brands then struggle to meet the needs of a diverse market that can cater to the complex needs of consumers and consistently show a response to their needs. The external environment is different and consists of risks, and few companies are risk-averse.

It is imperative for a company to ensure competitive sustainability. This translates to carrying out research on the needs of the consumers of the mass market and understanding what the consumers are sensitive to. The companies that provide the most valuable addition and value for money are more risk averse than those that remain rigid. Innovations in the automobile industry have led to the emergence of new products that are readily available to a global market and one that meets the needs of the consumer adequately.

References

Calabrese, G., & Groupe d'études et de recherches permanent sur l'industrie et les salariés de l'automobile. (2012). The greening of the automotive industry. Basingstoke, Hampshire: Palgrave Macmillan.

Dima, I. C. (2015). Systemic approaches to strategic management: Examples from the automotive industry.

Gobetto, M. (2014). Operations management in automotive industries: From industrial strategies to production resources management, through the industrialization process and supply chain to pursue value creation.

Hiraoka, C. (2009). Technology Acceptance of Connected Services in the Automotive Industry.

Kaplan, L., & Smolkin, A. (2009). Is automotive industry dead--or just stuck?: Future innovations for new leaders in car transportation. United States: Lulu.

Meyer, G. (n.d.). Advanced microsystems for automotive applications 2009 [electronic resource]: Smart systems for safety, sustainability, and comfort. Springer.

Nieuwenhuis, P., & Wells, P. E. (2015). The global automotive industry.

Okada, A. (2010). Innovative materials for automotive industry. New York: Nova Science Publishers.

Wells, P., & Rawlinson, M. (2009). The new European automobile industry.

Winkelhake, U. (2018). The digital transformation of the automotive industry: Catalysts, roadmap, practice.