Automobile Manufacturing Industry
Table of Contents
The Industry‟s Dominant Economic
Power of Buyers…………………………………….……….…………………………….6
Power of Suppliers……………………………………….………………………………. 6
Barriers to Entry…………………………………..……………………………………… 6
Threat of Substitutes……………………………...…………...…………………………. 7
The Drivers of
Companies in the Strongest/Weakest Positions………………………...………………………..11
Industry‟s Attractiveness and Prospects for Long-Term Profitability……………...……………13
Industry Analysis: Automobile Manufacturing Industry
The auto manufacturing industry is responsible for a great percentage of the global
economy. Products in the industry consist of complete automobile and light duty motor vehicles.
The industry consists of six segments: three mature markets (North America, Japan and Western
Europe) and three emerging markets (Asia-Pacific, Eastern Europe and Latin America). The
leading competitors in the industry are the Big Three (GM, DaimenChysler and Ford) and the
Japanese Manufacturers (Toyota, Honda, and Nissan) (Business & Company).
In recent years, the industry has seen a decline in sales. There has been an upward
pressure in vehicle and manufacturing price, as a result of the rise in oil and steel prices.
Companies in the industry such as Ford and General Motors have had to restructure their strategy
in order to regain profitability. To gain market shares companies are concentrating towards
continuous improvement, innovation and cost control.
In the first part of the analysis, it will focus on the dominant economic features, the
Porter‟s Five Forces and the drivers of change in the industry. Then it will identify the three
companies who hold a significant number of market shares in the industry. Lastly, the industry‟s
attractiveness and long-term profitability will be analyzed with regard to its mature life cycle.
1. The Industry’s Dominant Economic Features
? Market Size:
o In 2005, the industry‟s revenue was estimated to be $88.805 billion (IBISworld,
o The industry is a significant employer in the U.S. In 2005, they employed 70,690
people from the 152 enterprises, which operated in 169 establishments
(IBISworld, “Market characteristics”).
o A 2.4% increase in car production in the first half of 2006 resulted from the rising
fuel. There has been a high demand for fuel-efficient vehicles (IBISworld,
o In 2005, total imports amounted to $68.0 billion and occupied 47.0% of domestic
demand. For the same period, exports amounted to $12.2 billion and accounted
for 13.7% of industry revenue. Major trading partners for exports were Canada
and Germany, while imports were mainly sourced from Japan, Canada and
Germany (IBISworld, “Industry performance”).
? Scope of Rivalry:
o “Leading players in the global automobile manufacturing sector include: General
Motors Corporation, Ford Motor Company, General Electric Company, Toyota
Motor Company and Motorola Inc” (Datamontior, p.14).
o “In order to boost sales the major US players are executing a campaign of heavy
discounting in the form of zero percent financing and huge cash back incentive
schemes. However, having previously reduced production levels, companies are
struggling to pay for these deals with increased volumes in sales” (Datamonitor,
o Adversely, Japanese and Korean companies are continually gaining market share
in the US, while offering no incentives or price cuts, this proves that US
consumers are prepared to pay more for these foreign models, with consideration
on the current climate of high and rising fuel prices (Datamonitor, p.14).
? Growth Rate and Life Cycle Stage:
o The slowing growth in industry demand, increasing competition, and refinement
of current product and service are characteristics of the mature industry stage of
the automotive industry.
o Over the past five years, industry value has grown at an average annualized rate
of rate of 3.5 percent, around the same average annualized rate of GDP growth of
3.6 percent over this time (IBISworld, “Market characteristics”).
o The industry's strong consolidation trend is best exemplified by Ford's take over
of Volvo and the merger of Daimler and Chrysler (IBISworld, “Industry
o “The average age of automobiles in the U.S has increased over the past decade.
This indicates that the frequency of vehicle replacement is declining as a result of
better quality vehicles and the higher average cost of new vehicles” (IBISworld,
? Number of Rivals and their relative size:
o Competition and rivalry is high in the automotive industry, in return there is a
constant focus on the introduction of new models and technology.
o General Motors is the leading competitor in the industry. They are the world‟s
largest automaker employing 324,000 people around the world and have
manufacturing operations in 32 countries and vehicles sold in 200 countries
o The key competitors in the industry are: General Motors Corporation, Ford Motor
Company, DaimlerChysler AG, Toyota Motor Corporation ADS, Honda Motor
Company, and Nissan Motor Ltd. Each company‟s market share range are 29%,
23%, 19.5%, 7.2%, 5.9%, 4.1%, and 11.30% respectively (IBISworld, Key
? Prevalence of Forward/Backwards Integration, Channels of Distribution, Pace of
Process and Product Technology Change:
o Forward and backward integration is prevalent in the industry. GM is known for
backward integration by using subsidiaries such as steel and glass to efficiently
produce their vehicles. o Forward integration is utilized by sending the vehicles to dealerships where they
are sold to customers.
? Whether Products are highly differentiated or very similar:
o The perceived status or image is a key factor in the differentiation of the vehicles
since the main function and structure of the basic product are very similar in the
o Advertisements are the main driving force to the product differentiation; they
create a sense of value for the vehicles whether it‟s genuine or perceived.
? To what extent are economies of scale in purchasing, distribution, advertising, etc.
o “The cost of developing high volume production facilities, in order to benefit
from economies of scale” creates a barrier to entry for new entrants (IBISworld,
o The need to comply with stringent environmental regulations in the future would
require substantial research and development investments for an entrant.
o “The ability to gain access to technology of major global operators is a barrier
since the present incumbents include some of the largest carmakers in the world
who have considerable claims to new technology” (IBISworld, “Industry
o “Large scale production requires significant capital for automated processes to be
installed. Economies of scale prevail for successful entry into the market
(IBISworld, “Industry conditions”).”
? To what extent do learning curves exist
o There is a significant learning curve in the auto manufacturing industry. For
instance, it will be difficult for an unestablished company to enter the industry
because a massive amount of capital is necessary in order to be successful and
competitive with the incumbent firms.
o Investment in the work force is substantial in the industry. By doing so they are
able to keep their cost advantage with their high skilled workers.
? Are high rates of capacity utilization important for profitability
o According to IBISworld, one of the key success factors in the industry is to have
optimal capacity utilization. In turn, efficient plant utilization results in cost
advantage and profitability in the industry (IBISworld, Key factors).
? What are the historical levels of profitability
o “In the late 1980s, manufacturers introduced sports utility vehicles (SUVs) to the
market, which in years to come would increase wholesalers' revenues
significantly (IBISworld, “Industry performance”).” o “Between 1992 and 1996, the automobile wholesaling industry experienced an
average rate of revenue growth of 7.1 percent per annum. The solid revenue
growth reflected a 4.1 percent increase in retail sales of automobiles” (IBISworld,
o “Throughout 1998 and 1999 the industry continued to experience strong revenue
growth as the United States economy experienced its greatest post WWII boom.
Over this period, new automobile sales grew at an average annualized rate of 6.3
percent, while private fixed investment in autos and light trucks grew at an
average annualized rate of 7.2 percent “(IBISworld, “Industry performance”). o “Rising interest rates will effect consumer expenditure on "big-ticket" items such
as autos will decline, as a result, slowing the growth rate of industry revenue. But
growing employment and continued economic growth in the future will bolster
consumer confidence, an important determinant of auto expenditure, ensuring that
industry revenue growth will remain positive in the absence of extraordinary
occurrences” (IBISworld, “Industry performance”).
? Are there segments within the industry
o The industry is divided amongst six segments: three mature markets (North
America, Japan and Western Europe) and three emerging markets (Asia-Pacific,
Eastern Europe and Latin America) (Business & Company).
o “The three mature markets dominate the world‟s vehicle production and sales by
85%” (Business & Company).
o The United States is the worldwide leader in the industry followed along by Japan
(second) and Germany (third) (Business & Company).
? If so, what are they, and how do their presence effects firms, strategies, competition,
and levels of profitability within each segment:
o The Big Three (GM, Ford Motor Company and DaimlerChysler) are facing fierce
competition with the foreign manufactures. In 2004, the United States and
Canada sold the majority of their vehicles in the domestic market; in contrast,
Japan exported more than 40 percent of their production (Business & Company). o In Western Europe several manufacturing companies “established joint ventures
with or acquired controlling interest in other companies to obtain broader market”
(Business & Company).
o Despite the strong growth in the Asia-Pacific market of 22.6 percent of the global
market‟s value (2005), the United States has retained “the highest proportion of
the global sector‟s value at 37 percent, with revenues of $423 billion in 2005”
2. Porter’s Five Forces
? Power of Buyers
o The treat of buyers is very strong in the industry due to the high competition and
the threat of rivalry.
o Despite the perceived value that is embedded in some products, the lack of
differentiation in the basic car structure gives the buyer the option to choose from
a variety of automotive manufacturers.
o The apparent power of the buyers is noticeable in their ability to negotiate during
the purchasing process with the dealerships. In addition, strong incentives from
manufacturers such as GM‟s zero percent finance and employee discount offers
increases buying power.
o Due to the technological advancements of the internet, consumers are more
informed about costs and less susceptible to accept significant price hikes
(IBISworld, “Industry conditions”).
? Power of Suppliers
o The lack of product differentiation allows the manufactures flexibility in
purchasing products from several different suppliers.
o “Material costs are expected to increase in the short term, as tier 2 suppliers
succeed in obtaining price increases to parts and components that have substantial
steel in them. This is due to accelerating steel prices brought about by increased
demand from China and India” (IBISworld, “Outlook”).
? Barriers to Entry
o The automobile manufacturing industry is a mature industry that will not attract
too many new entrants because of the “high and steady barriers to entry”
(IBISworld, “Industry conditions”).
o New entrants will be face the barrier to economies of scale due to the large capital
required to generate the high production volume facilities of automobile
manufactures such as GM (IBISworld, “Industry conditions”).
o The need to comply with stringent environmental regulations in the future would
require substantial research and development investments for an entrant
(IBISworld, “Industry conditions”). o “The ability to gain access to technology of major global operators will be a
barrier, as the present incumbents include some of the largest carmakers in the
world that have considerable claims to new technology” (IBISworld, “Industry
o Quality is holds a strong competitive advantage in regards to purchasing vehicles,
hence, consumers are hesitant to choose new automobile manufacturers over an
o Another barrier, new entrants must face when entering a mature industry is the
customer loyalty to certain auto manufacturers.
? Threat of Substitutes
o Public transportation is a significant threat to the automobile industry.
o Due the rising cost of fuel, population growth, and environmental issues during
the recent years more people are choosing alternate modes of transportation from
subways, taxi, monorails, and busses.
o Long distance travels are offered through air travel, busses, and trains.
o According to American Public Transportation Association, “in 2004, Americans
took 9.6 billion trips using public transportation,” (APTA) this has drastically
increase by 23 percent since 1995.
o New technological features are used to encourage public transportation such as
“onboard wireless internet on commuter busses, smart cards and electronic
signage, all designed to improve passenger convenience, safety and comfort”
o “Congestion is rising, gas prices are sky-rocketing, and people in record numbers
are choosing to use public transit instead of driving (APTA)”.
? Competitive Rivalry
o “Competition based on rebates intensified with U.S. manufacturers providing cash
rebates to shift 2004 models as inventory build-ups” (IBISworld, “Industry
o “In November 2004, GM offered those who buy 2005-model vehicles using loans
from its financing arm, the same interest rate on their next vehicle. To get the
same interest rates on a subsequent vehicle, a buyer would have to buy it before
the first loan expires” (IBISworld, “Industry performance”).
o “Facing strong competition from imports, GM led the introduction of employee
discount scheme to all consumers in June 2005. By selling all cars and trucks at 5
percent below the list price to the dealer, GM managed a 41 percent sales increase
for the moth of June, 2005, compared with June 2004” (IBISworld, “Key
o “The most significant competitive basis is price, quality and product innovation
such as the introduction of Sport Utility Vehicles (SUVs) and cross-over models”
(IBISworld, “Industry performance”).
? Summary of the analysis and what it means for the industry.
o The automobile manufacturing industry is an attractive industry because there are
opportunities for profitability. Competitive forces are very strong as a result of
the dependency for automobiles. Since this is a mature industry, a company who
will try to break through will have to face many barriers to entry such as
economies of scale in order to have the same production volume as the
established firms. According to Porter‟s Five Forces focal firms must strive for
continuous improvement, innovation, and cost leadership for the reason that
buyers have a significant power in the industry. In addition, the uncertainty of
fuel prices will plague the industry and demand for fuel-efficient vehicles will
continue to rise. Competitive rivalry will climax as companies such as Ford and
GM restructure their organization and aggressively compete against the foreign
auto manufacturers for market shares.
3. The Drivers of Change in the Industry and Impact They Will Have
? Long Term Growth Rate
o “Growth in domestic demand is expected to be 3.3 percent in 2006 period before
experiencing a cyclical decline in the next two years of the forecast period to 2010.
Industry revenue is expected to fluctuate between 3.1 percent and minus 1.8
percent per annum over the forecast period of 2010” (IBISworld, “Outlook”).
o “Industry profitability is expected to improve considerably from 2009 onwards as
General Motors and Ford restructure themselves” (IBISworld, “Outlook”).
o “Sources indicate that the U.S. market for hybrid vehicles or clean diesels engines
are forecast to exceed 11 percent of the total vehicle market by 2012. Sales of
hybrid light vehicles will rise from 83l, 000 units in 2004 to three million by 2015,
equivalent to 17.7 percent of the total U.SL light vehicle market” (IBISworld,
? Who Buys the Product and How They Use It
o “The major purchasers of automobiles and light trucks are households, corporate
and government fleet buyers” (IBISworld, “Segmentation”).
o The function of the industry is segmented as cars and commercial vehicles. Car
has the significant share in the market by 66.50 percent, while commercial vehicle
falls short at 33.50 percent (Datamonitor, p.11) o The passenger cars, light trucks, ad light commercial vehicles are used for
personal, business, and governmental functions.
? Significance of Product Innovation & Technological Change
o The industry is working towards the improvement of gas usage. As a result, “in
2001, GM unveiled what it claims is the world‟s first gasoline fuel processor for
fuel cell propulsion” (IBISworld, “Outlook”). o “General Motors has developed „Displacement on Demand‟ technology that will
help fuel consumption levels in sport utility vehicles. The DOD technology will
automatically shut off half of a V8 engines cylinders, effectively turning the
engines into a more effective four-cylinder engines” (IBISworld, “Key
o “In January 2006, Ford unveiled the Escape Hybrid E85, which is the world‟s first
hybrid vehicle capable of operating on blends of fuel containing as much as 85
percent ethanol, a renewable fuel that can be produced from American-grown
corn or sugar beets (IBISworld, “Key competitors”).”
o “The use of computer-aided design ultimately should lead to more uniform
product cycles because key design questions can be answered in days rather than
months. Similarly, a part can be modeled and prototyped in hours rather than
days. These technological innovations save time and also reduce development
costs.” (IBISworld, “Industry conditions”).”
? Marketing Innovation
o Automakers have incorporated the multi-media to gain additional revenue. For
instance, “Honda‟s Fit and Element, and Toyota‟s Yaris TV ads are drawing
inspiration from websites such as YouTube, and iFilms” (Boston Globe).
o According to the Boston Globe, the industry focuses more on the “personality” of
the customers who purchase the vehicles as opposed to “bells and whistles” of
vehicles (Boston Globe).
o Toyota‟s Scion brand, which targets the Gen Y-ers, allows the customers to
individually customize or “trick out” their vehicles on-line (Boston Globe).
o Many companies have offered incentives for employees who purchase hybrid
vehicles. In example, Bank of America will contribute $3,000 toward the
purchase of a hybrid vehicle (Boston Globe).
? Entry/Exits of Major Firms
o This section of the analysis does not need to be addressed for the reason that new
entrants will not enter the market and the incumbent firms are not planning to
leave the industry. New firms will face a high barrier to entry for the reason that
the industry requires a large capital to reach the economies of scale. Also, “there
is no untapped portion of the population that is about to enter the market”
(IBISworld, “Market characteristics”). The only strategy to for new entrants to
enter the market is to fall under the umbrella of the established firms such as
Toyota introducing Scion.
? Diffusion of Technological Know-How
o The lack of product differentiation allows for the diffusion of technological know-
how in the industry.
o Technology in the industry is easily duplicated. Hence, perceived quality is one
of the only source of differentiation in the auto manufacturing industry.
? Extent of Globalization
o The big three manufactures: General Motors, Ford and DaimlerChysler have
gradually acquired control of international car manufacturers. In example, “in
1999, Ford which effectively controls Mazda and owns the British makes Jaguar
and Aston Martin, acquired Volvo‟s car operations” (IBISworld, “Key
o Joint ventures have also emerged in the industry. For instance, “General Motors
has a joint venture $1.5 billion motor vehicle plant in Shanghai, China which
currently produces luxury Buick sedans and the family-style model, the Sail”
(IBISworld, “Key competitors”).
o General Motors have invested a significant amount of money in China to “double
production capacity in a bid to reign-in the market leader- Volkswagen”
(IBISworld, “Key competitors”). As a result, General Motors relocated their
Asia-Pacific headquarters from Singapore to Shanghai.
? Changes in Costs and Efficiencies
o “Labor costs declined over the last two years as DaimlerChysler shed 26,000
positions. In addition, General Motors shed 15,000 positions as it discontinued its
Oldsmobile division” (IBISworld, “Industry performance”) o “Material costs are expected to increase in the short term, as tier 2 suppliers
succeed in obtaining price increase to parts and components that have substantial
steel in them. This is due to accelerating steel prices brought about by increase
demand from china since 2002” (IBISworld, “Industry performance”).
o “Purchase as a percentage of revenue (70 percent) is the largest cost item of the
industry. Any gains from cost reduction has to be from purchases by streamlining
its procurement process” (IBISworld, “Industry conditions”).
? Emerging Buyer Preferences
o Due to the gas hike in the past couple of years, buyers have shifted to
economically gas efficient vehicles. As a result, automakers started to
concentrate its manufacturing to hybrid technology in 2004. (IBISworld,
o Street racing has had a significant impact on the industry. This has shifted the
automakers to manufacture vehicles that are suited to street racing such as the
Acura RSX, Nissan Sentra, and Honda Civic. o Hyundai has captured the two advantages of low-cost and product differentiation.
To achieve this strategy, they are competing as one of the lowest priced autos in
the market and they have “10 years, 100,000 mile warranty” (Hyundai).
? Regulatory Influences
o “Federal law requires that a manufacturer recall a vehicle if it finds a defect that
poses an unreasonable risk to safety. The Government complies complaints from
consumers and will prod a manufacturer to recall a vehicle if warranted”
(IBISworld, “Industry conditions”).
o “The clean air acts amendments of 1990 mandated that automakers reduce
emissions from their manufacturing plants and contain several new vehicle
regulations. Additionally, automobiles sold in the United States must be equipped
with fuel recovery canisters to prevent gasoline fumes from being released when
the tank is filled” (IBISworld, “Industry conditions”). o “American Honda Motor Co. is to engage in a new voluntary program to provide
safety information to consumers by placing US government crash test rating in the
window stickers of all 2006 model year Honda and Acura cars and light duty
trucks. All vehicle window sticks will display the star ratings under the National
and Highway Transportation Safety Administration‟s, New Car Assessment
Program for frontal, side and rollover crash safety test ratings” (IBISworld,
? Changes in Societal Concerns, Attitudes, Lifestyles
o The decline in economic conditions as well as the rising fuel prices has caused
society to decrease their spending on expensive, gas guzzling vehicles.
o Also, environmental concerns have forced the auto manufacturers to shift their
focus on hybrid and fuel cell vehicles.