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Automotive Industry Overview

Submitted by:

Zachary Diamond
Andy Fairchild
Tyler Sandlin
Zachary Koehler

Table of Contents
Automotive Industry Overview...............................................3

Introduction...............................................................................3
Segments...................................................................................3

Socio-Economic..................................................................... 4

Governmental and Environmental Factors Relevant To Industry.....4


Technological Factors..................................................................5

Porters Five Forces..............................................................6

Threat of New Entrants...............................................................6


Economy of Scale........................................................................6
Working Capital Requirements....................................................7
Absolute Cost Advantage............................................................8
Brand Identity............................................................................8
Access To Distribution.................................................................9

SUPPLIERS..........................................................................12

ANALYSIS..................................................................................12
SUPPLIER CONCENTRATION.......................................................12
PRESENCE OF SUBSTITUTES.......................................................12
DIFFERENTIATION OF INPUTS.....................................................13
IMPORTANCE OF VOLUME TO SUPPLIER......................................13
IMPACT OF INPUTS ON OUR COST OR ABILITY TO DIFFERENTIATE. 13
ACCESS TO CAPITAL..................................................................14
ACCESS TO LABOR.....................................................................15

BUYERS..............................................................................16
SUBSTITUTE PRODUCTS.......................................................17
RIVALRY.............................................................................18

DEGREE OF CONCENTRATION AND BALANCE AMONG COMPETITORS


................................................................................................18
DIVERSITY AMONG COMPETITORS..............................................19
INDUSTRY GROWTH RATE (PAST AND PROJECTED).......................19
FIXED COST TO VALUE ADDED....................................................20
INTERMITTENT OVERCAPACITY...................................................20
PRODUCT DIFFERENTATION........................................................20
GROWTH OF FOREIGN COMPETITION..........................................20
CORPORATE STAKES..................................................................21
EXIT BARRIERS..........................................................................21

Bibliography.......................................................................23

Automotive Industry Overview


Introduction
The automotive industry is made up of major automotive companies such as Ford,
Honda, Toyota, and General Motors. These companies own the majority of the worlds
market in automotive sales. These car companies are global brands that sell their cars
internationally on every continent. The automotive industry is enjoying recent sales as the
growth rate of the industry is up 5.9% in 2015.
The automotive industry is in a much better place than I previous times. Between
2000-2008 the automotive industry was in complete turmoil. Renewed consumer
confidence in the economy and higher spending have led to the improvement in sales in
the industry of recent years.
Segments
The automotive industry has multiple segments that consist of: Engineering, Parts
Manufacturing, and Assembly. These segments of the automotive industry are very
interdependent upon one another. All segments share in the production, marketing and
distribution of the vehicles.
The purpose of this paper is to determine whether or not the automotive industry
is attractive by studying both Ford and Toyota Motor Companies and the opportunities
and threats that exist within the environment. The paper will examine Porters Five
Forces of the Industry, Socio-Economic Factors, Economic and Technological factors,
Rivalry and the Buyers and Suppliers of the Industry. All of these sections will help
determine the future competiveness and profitability for entering into the automotive
industry.

Socio-Economic
Governmental and Environmental Factors Relevant To Industry
The automobile industry sales continue to grow. As a whole, the automobile
industry growth rate is up 5.9% for sales. In 2015, Ford has been experiencing a 2.9%
increase in total sales across all lines, while Toyota has experienced a 4.0% growth in
total sales of its vehicles to date. The growth does not come as much of a surprise, but the
future is not so certain. (Hirsch Turbulence and Technology)
New regulatory standards are projected to add as much to US$1,000 to the
production cost of a vehicle in 2016 (Hirsch Turbulence & Technology). Original
Equipment Manufactures (OEM) are going to see majority of this cost fall onto them, as a
large number of consumers are much less likely to pay for environmental improving
choices in cars such as electric cars. One reason for such a high raise in production cost
of a car is the new Corporate Average Fuel Economy (CAFE) standards, which mandate a
companys fleet of cars must average 34.1 miles per gallon. Ford has already begun to
experience first hand the difference in production cost with their F-series truck line. Ford
has replaced a large amount of steel used in manufacturing the trucks body, with
aluminum. This alone has added US$500 dollars in production cost to each truck, and
Ford has only increased the MSRP to US$395 dollars per truck. (Hirsch Turbulence and
Technology)
Consumer demand is also changing the face of the automobile industry. The
industry is seeing that consumers are viewing their vehicles simply as a just a means to
get around and not forming a long love affair with the cars. Sales number are not
expected to be effected by this fact, but the amount that people will be willing to pay for
their cars will see a decrease. With all the advances made in the industry, nearly every
vehicle is seen as reliable. Foreign models such as Toyota and Honda use to be seen as
the sole companies to buy from if you wanted a car that would last you 15 years. US car
companies have now caught up to Japanese companies and the product differentiation has
diminished. This has created the illusion to consumers that all cars are the same, therefore
they will buy the cheapest and has the most technological features.
The automotive industry has always faced its challenges with making sure to
comply with environmental standards that have been set. Companies must comply with
emissions standards, fuel quality, vehicle recycling and more. The automobile industry
had actually impressed in recent years with the compliance and improvement across all
manufacturers with how new innovations has increased the healthiness of cars to the
environment. Volkswagen has recently been discovered as to be lying about its emission
test and brought into question the entire industry. The automobile industry may see a
large drop in sales in the future depending on the outcome of this event. (Hotten
Volkswagen: the scandal explained)

Technological Factors
The cost of electronics and software put into cars today is down nearly 35 percent
according to studies by Manfred Broy. 90 percent of automobiles newest features come
from the technology put into the cars. These two criteria have placed technology as the
highest emphasis for the automobile industry. The increasing importance of infotainment
and telematics systems is disruptive for OEM and traditional suppliers, putting a
premium on innovation and changing the ways that industry players design and develop
new products and services (Singh Turbulence and Technology). Automobile Companies
must rely on new innovation of technology and software to put into their cars every year
as consumers want the most up to date technology they can have as quickly as they can.
While emphasis put on new vehicle launches is not quite as high. Consumers are not as
concerned with a body style change every year.

Porters Five Forces

Threat of New Entrants


The automotive industry is a very hard industry to break into. The big firms in the
industry, such as Ford and Toyota, take up such a large portion of the industry since they
have been in the industry for such a long time.
Economy of Scale
Economies of scale exist in the automotive industry. Ford and Toyota are both in
the top of the industry. Ford is a global automotive industry leader. They manufacture
and distribute automobiles across six continents. Ford has 61% of sales in the US. They
also have 22% of sales in Europe. (Morningstar)
Ford is able to cut costs per unit with greater output shown in the image below. It
is cheaper for Ford to produce one hundred thousand F-150 than produce ten thousand F150s. This is one piece of evidence to show that Ford has an economy of scale. The
image below illustrates Fords economies of scale.
(http://www.manufacturingchemist.com/technical/article_page/Reaping_the_benefits_of_
economies_of_scale/104670)

Building more Ford models on common platforms, which will improve


economies of scale. By 2016, Ford expects 99% of its global production to come from
nine core platforms: five global and four regional. This move to nine platforms from 12
this year and 27 in 2007 will also allow Ford to switch production faster to meet changing
demand while drastically cutting costs via better economies of scale than in recent
decades. This change should save Ford billions of dollars in development costs.
Management targets eight platforms as a long-term objective. The global subcompact and
compact platforms (B and C segments) now each get more than 2 million units of annual
volume. Before former CEO Alan Mulally's arrival, Ford had a different platform in each
segment for each part of the world. The old way wasted billions and had volume too low
to achieve the economies of scale Ford can achieve going forward. (Morningstar)

A second indicator shows that Ford does have economies of scale is their total
assets. Fords total assets have gone up from 2010 to 2014. After the recession Fords
total assets have been increasing every year. This is a second indicator that Ford does
have economies of scale.

Through the two indicators, an economy of scale is proven through total assests
increasing the past 4 years and the lower costs of manufacturing automobiles. The threat
of entrants is low, the barriers are high and attractiveness is high.
Total Assets
2014

2013

2012

2011

2010

208,527

202,026

190,554

178,348

164,687

(Morningstar)
Working Capital Requirements
In the table below, the working capital Ford has is illustrated from 2009 to 2014.
The automotive industry usually has a large working capital for various reasons. Working
capital management is analyzed by segment and region for accounts payable and
receivable, inventory, and cash as a percentage of total assets. (M2 Presswire) The table
shows how much money the automotive industry has tied up and money that they can not
use (otherwise they shall not be able to pay for the segments you mentioned above).
Working capital fluctuates often and is on the rise right now in the industry, which is due
to an increase in sales. With working capital being so high it makes the threat of entrants
low. It would be very difficult for a firm to come up with 7.7 billion just to start out. It
also makes the barriers high and the attractiveness high.

Ford Working Capital


2014
77,911

2013
77,438

2012
68,666
USD Mil

2011
60,008

2010
81,737

2009
99,358

(table data from Morningstar)

Absolute Cost Advantage


The automotive industry has many patents and copyrights. For example Tesla
Motors will not enforce their patent rights on innovations made using their lithium-ion
battery technologies. Ford recently announced that they will facilitate licensing of more
than 650 patents and about 1000 patent applications in the field of electric vehicles. Ford

is not giving these patents away for free like Tesla Motors did but are listing them online
IP marketplace maintained by the AutoHarvest Foundation. Fords commitment to
electric vehicles shows that they see a long term value in the industry. Ford recently just
announced that Ford Motor Company and Alcoa Inc. are collaborating to produce nextgeneration automotive aluminum alloys that are more formable and design-friendly.
"Alcoa's breakthrough Micromill technology offers highly
differentiated automotive material with strength, weight, formability and
surface quality combinations previously impossible," said Klaus Kleinfeld, Alcoa
chairman and chief executive officer.
(http://www.businesswire.com/news/home/20150914006257/en/)

This trend seems to be happening with other car firms also such as Toyota.
Toyota showed that hybrids could be successful in the mass market over fifteen years
ago. These types of patents and copyrights make it difficult for a new firm to come into
the industry because of all the history these big firms already have. Most firms have years
and years of research with patents from twenty years ago that they are just now
implementing. One example is Toyota and the hybrid car. Toyota had patents in the early
90s for hybrid cars but did not use them until they knew that hybrids would be successful
in the market. This type of business makes it extremely difficult for a new company to hit
the market because they would probably not have the engineers or researchers with the
capability that the big firms have. Also, you get sued for patent infringement if you use
someones patent without their permission.
The threat of entrants is high, the barriers are high, and attractiveness is high.

Brand Identity
Brand identity is very evident in the automotive industry. For example Fords
most profitable vehicle, the F-Series pick-ups, F-Series sales have increased year over
year by nearly 5% for its best August since 2006 with over 71,000 units delivered.
(Morningstar) Also the new generation of Fords Edge and Explorer appear to be well
received, with increases of 36% and 22% respectively, which helped Ford post its best
SUV sales for any month in the past 12 years. (Morningstar) My father has been buying
Toyotas since I was a young child. I asked him why he was so loyal brand loyal to
Toyota. He told me it was because Toyota was more dependable than the competition
through his experience.
I think that the key to brand loyalty is the customers experience. Brand loyalty is
a huge factor for the threat of new entrants. It makes it nearly impossible for new
companies to come into the market. If you drive down your street in your neighborhood

you can usually tell if a family is brand loyal by just looking at what is sitting in their
driveway. In most cases it will be the same brand of cars in the driveway.
In an article written by the Wall Street Journal titled, How Auto Makers Keep
You Coming Back. It discusses how automakers are paying close attention to consumer
attitudes about sticking with a brand. They pay so close attention to this because it is
money in the bank for them when they have brand loyal customers. The latest R.L. Polk
study of brand and vehicle loyalty in the auto industry found that 48% of people who
bought a car in 2012 bought from the same brand they were already driving. Polk says
the three brands with the most loyal customers were Ford, with 61.2% repeat buyers,
Mercedes-Benz (57.7%) and Toyota (54.4%). In the article it goes on to say reasons for
staying loyal. For buyers across the vehicle and price spectrum, the top attributes include
fuel economy, reliability and pricing, according to consumer research firm J.D. Power
and Associates. There is no more important topic for our industry, in terms of the
revenue for different companies, than loyalty, says Jim Farley, executive vice president
of global marketing, sales and service for Ford. (WSJ) One way automotive makers keep
customers loyal is cash loyalty discounts they offer at various times.
The two charts below show the numbers proving brand loyalty. Ford has had an
upward trend in their sales when they improve their advertising cost. This shows that
consumers indentify Ford because Ford is so influential in their advertising.
Brand loyalty is huge in the automotive industry. It makes the threat of new
entrants high, barriers high and attractiveness high.
Advertising cost for Ford (starting from 2014 and going to 2010):
4.3 (2014), 4.4 (2013), 4.0 ((2012) , 4.1 (2011) and 3.9 (2010) all in Billions (SEC 10-K,
2015, 2012)
Sales:
3.186 (2014), 7, 148 (2013), 5,664 (2012), 20, 222 (2011) and 6557 (2010) (SEC 10-K,
2015, 2012)
Access To Distribution
Many firms have failed in the automotive industry due to lack of distribution. This
can come in many forms such as distribution of finished products to dealerships or even
just the amount of dealerships you have. Kia Motors discovered that lack of dealerships
in America made it difficult for entry in the distribution in North America. (Outline)
Finished vehicles are sold to franchised dealerships, which are independent
businesses. Automakers record these sales (net of expected marketing costs) when the
vehicles are shipped to the dealers. They work closely and share many costs with dealers
in developing national, regional, and local marketing plans. Car dealers usually aim to
stock a 60-day supply of vehicles in inventory. (S&P Capital IQ)
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Tesla is doing things differently than traditional automakers such as the Detroit Three; the
company is changing the supply chain by borrowing from the production of electronic
manufacturing services (EMS), thereby making Tesla more of a technology company
than a traditional automobile maker, according to HIS. (S&P Capital IQ)
Most traditional automaker manufactures will sell finished vehicles to franchised
dealers. Only a few firms stray from this practice. But since big firms have such large
manufacturing plants it makes the threat of entrants low, the barriers high, and the
attractiveness high.

Expected Retaliation
Competition in the auto industry is very competitive due to the high barriers. The
companies in the auto industry are the companies that are already big in the industry have
to compete with the other big companies. These companies offer rebates on their products
and incentive on interest rates. For example, Ford is offering right now doing ARR
financing as there incentives on financing in Greenville, NC. Below is the chart of their
APR financing for the 2016 Ford Explorer. These also offer lease afreement offers, retail
offers and different programs to participate in. These companies have to compete with
others in the industry to make consumers want their products instead.

APR Financing

0.9 % for 36 months


1.9 % for 48 months
2.9 % for 60 months
4.9 % for 72 months
or
500$ retail customer cash
http://www.ford.com/suvs/explorer/incentives/
The main area of competition that has retaliation is the manufacturing side of the
industry. Foreign companies have put their own factories in America, which helps their
distribution in America. Overall, I believe the retaliation is low in the auto industry and
the threat of entrants is low, but the barriers are high and the attractiveness is high.

Summary
Barriers for entry for the auto industry is high with working capital being so high it
makes it nearly impossible for new entrants. A company coming into the market new
does not have the credentials that the big three companies have because no one knows if
they are dependable. I think the largest factor in the auto industry is brand identity. Ford
has over 60% of their buyers come back and buy another Ford. That statistic gives new
firms almost no chance of surviving in the industry.
10

Overall in the auto industry as seen by the decision matrix shown below the threat
of entrants is low. New entrants cannot compete on the same level as the big companies
because it is hard to come up with the starting capital needed to survive in the auto
industry. The industry has low entrants, high barriers and is an attractive industry.

Decision Matrix for Threat of New Entrants


Economy of Scale
Working Captl. Requirements
Absolute Cost Advantages
Brand Identity
Access to distribution
Expected Retaliation
Overall Threat of new Entrants

Threat of Entry
Low
Low
High
High
Low
Low
Low

Attractiveness
High
High
Low
Low
High
High
High

Barriers
High
High
High
High
High
High
High

Weight
20%
15%
15%
20%
20%
10%
100%

SUPPLIERS
ANALYSIS
Automobiles suppliers come from steel/aluminum manufacturers, technology
manufacturers, plastic manufacturers, and rubber manufactures. Steel manufacturers
produce the frames/chassis of cars for which the automobiles are built on. Most engine
components put into cars are also built from steel. Automotive companies will receive
most interior products placed on the doors, dashboards, seats, and some other smaller
parts from their plastic manufacturers. Technology manufacturers are relied on for wiring,
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lighting, software, and any other way the automotive company wants to use technology,
whether it is for seat warmers, interior lighting, etc. Finally rubber manufactures will
supply the tires to be placed on the car.
SUPPLIER CONCENTRATION
Manufacturers far outnumber the amount of automobile companies. The adoption
to next-generation common platforms is going to lead to a consolidation of suppliers,
resulting in a small number of global players for OEM. Ford recently stated that it would
reduce its supplier base from 1,150 to 750 (Kakkar Turbulence & Technology). This
would give power to automotive companies over the manufacturers, as they are able to
pick and choose where their suppliers of parts to build their car fleets will come from.
Therefore, this would make the industry attractive
PRESENCE OF SUBSTITUTES
There are numerous substitutes the automobile companies can make, and are
going to make to meet the new requirements set. Many cars are built from steel and have
been for a long time. The auto industry is now having much of its focus switched to
improving the economy. Consumers want higher miles per gallon from their cars and new
standards are requiring the auto companies entire fleets to average a higher mpg. Auto
companies are now substituting steel bodies for aluminum, and the higher luxury cars
have started substituting in carbon fiber. Carbon Fiber is still far too expensive to
manufacturer to put on everyday cars. This lowers the power of the steel industry and
increases the power of the automotive industry.

DIFFERENTIATION OF INPUTS
The automotive industry used to be very diverse with each car company focusing
on a different aspect of the car. Ford and General Motors manufactured cars that did a
little bit of everything. They were stylish, performed well, moderate mpgs. Toyota and
Honda focused on quality and longevity of their vehicles, not so much on the
performance. Today, almost all car companies are manufacturing the same type of
vehicle. This is stemming from the regulations that have been set on all automobile
companies and have in a sense required every company to build the same car. Consumer
demand is showing that many people do not care anymore the make of their vehicle.
They feel that they are all the same and will buy any of them.
IMPORTANCE OF VOLUME TO SUPPLIER

12

Automotive companies today buy their parts to manufacture their vehicles from a
multitude of different suppliers. One supplier makes the upholstery and another makes
the headliner and so on. Now, there are suppliers who are becoming mega-suppliers.
These mega suppliers combine all the components necessary to manufacture a certain
aspect of the car, such as the interior, and providing complete, branded interiors to car
companies (Donovan Pg. 2). What this means is that the eventual result for automotive
companies, is that they are going to go from hundreds of suppliers to merely 10-15 mega
suppliers that manufacture all the parts for the cars. This is going to create a huge swing
of power from the automotive companies to the suppliers.
IMPACT OF INPUTS ON OUR COST OR ABILITY TO
DIFFERENTIATE
If the ultimate switch to mega-suppliers follows through, the power will be fully
in the hands of the suppliers. This doesnt necessarily mean that there will be less
differentiation then there already is for automobile companies, since they do not have as
many suppliers to choose from. The mega-suppliers are just going to be a way of
reducing cost, and effort that goes into manufacturing cars. But, with the switch to these
mega-suppliers the final products are going to be determined a lot more by the suppliers
than the automobile company itself.

ACCESS TO CAPITAL
The automotive industry is in a very profitable place over the course of the last 5
years 2010-2014. Which is quite the opposite to the previous ten years. The overall
industry has grown at a rate 1% (Morningstar).
The profitability of the Ford over the last five years has hit 14.97% and Toyota
has had a profitability of 14.17% (Morningstar). Inflation according to consumer product
index has averaged 2.16% between 2010-2014 (McMahon Historical Inflation Rate).
This industry is much more profitable today than between 2000-2008. Demand has
increased worldwide
Company Profits Compared to Inflation
Company
Ford
Toyota
Industry Average
Inflation

2010
19%
11.96%
12.34%
1.78%

2011
16.82%
12.52%
11.96%
3.42%

2012
13.82%
11.81%
10.86%
2.24%

2013
12.81%
15.51%
13.24%
1.59%

2014
12.40%
19.04%
14.27%
1.76%

13

16
14
12
10
Industry Average

Inflation
6
4
2
0
2010.0

2011.0

2012.0

2013.0

2014.0

Overall the industry profits far exceed the inflation rate. This means there is
adequate capital available for operations, with reasonable debt.
ACCESS TO LABOR
The Bureau of Labor statistics in 2014 reported that the annual salary per hour for
automotive manufactures was $21.42. The average hourly pay has gone down only a
dollar over the course of ten years. The amount of workers was at a peak in 2005 but
nearly was cut in half in mid 2009. Since 2010 the industry has seen a steady climb of
employees entering back into the industry. The reason for the large cut was the
economical downturn the economy took in the US. The automotive industry does have
unions. While more employees are entering back into the workforce this still limits access
to labor and will increase costs. Workers are required to have some type of mechanical
knowledge. Preferably an engineer or technology degree.
The present labor market is in high demand for auto technicians as more durable
cars are lasting longer more technicians are required for the increase in maintenance.
Growing population is adding more drivers to vehicles as well. Which is another reason
for the in the increase in demand in the present labor market. The current labor market is
expected to increase by 17% by 2020 (Locsin Work.chro

Table 1
(Thousands)
Occupation

2009
employment

2015
Employment

Change, 20092015

Percentage
change
14

Total
Manufacturer
Employees

684.5

903.3

218.8

32%

CONLUSION
The supplier power of the industry is low given the fact that automotive
companies have the ability to pick and choose, which manufacturers they want to use. If
mega-suppliers begin to take over the market, than the power will switch to high for
suppliers and become low for the automobile manufacturers. Labor is lower but workers
should be readily available to find. This would generally make entering into the industry
attractive, but the level of capital needed to start an automobile company is very high.
Because of this the attractiveness to enter is low as well.

Decision Matrix for Supplier Power


Supplier Power

Power
Low

Attractiveness
Low

BUYERS
The buyers for the automotive industry are composed of distributors and dealers.
These dealerships account for the primary distribution channel for cars. Vehicles are sold
to individual dealerships and then turned around and sold to fleet customers, rental car
companies, and the government. These dealerships are typically independently owned.
Buyers do not hold as much power as the firms. The car industry is unattractive as a
result of firms having more power over the buyer.
There are far more buyers than firms in the car industry. Ford Motor Co. has two
vehicle brands, Ford and Lincoln. Last year Ford and Lincoln combined sold to 11,980
dealerships worldwide (Ford 10-k). With a large amount of dealerships among the world,
the buyer supply is not concentrated. Firms do not depend on any single customer or a
few customers to the extent that a loss of the customer would have an adverse effect on
the business.

15

Buyers are not aware of what is going on in the car industry. Dealerships have no
competitive advantage over the manufacturers. Manufacturers have the advantage in that
they know what it takes to make the cars and have alternatives to products that
dealerships do not. For example, car manufacturers have an advantage over the
windshield wiper industry in that they know what it takes to make windshield wipers.
This is demonstrated by the relatively low margins in the windshield wiper industry. The
dealership does not know what it takes to make a windshield or a car door. In the
instance of a dealership needing parts for a vehicle, they have to order them through the
manufacturer.
The threat of backward integration for the buyer acquiring the supplier is not
present. Individual dealerships would never be able to acquire big car manufacturers
such as Ford and Toyota. A way that the dealerships can vertically integrate is to buy out
other dealerships to expand their line of product and to eliminate the competition.
The car industry is currently using the push method. It is trying to move to the
pull method. In the push method, manufacturers produce too many cars and trucks.
Overproducing results in discounted products, which causes a loss in profits. There is a
famous quote in the industry, Losing money on every car and making it up on volume.
Firms are trying to switch from a push to a pull model. Using a pull method would
result in supply matching demand while prices stay firm (Can U.S. Auto Industry Make
the Switch from Push to Pull).
Brand identity is very evident in automotive industry. For example, Ford has
recently profited the most off of its F-Series pick-ups. The sales of these trucks have
increased over the past year by nearly 5%. The increase in popularity of the F-Series
trucks gives the firm the advantage over the buyer since the demand for their product is
high.
Buyers are price sensitive as a result of elasticity of demand. Manufacturers can
drive demand and take market share. The industry is able to pass cost increases on to the
buyer. Higher demand results in prices becoming more sensitive. Fords F-Series trucks
have had a demand increase which results in buyers being price sensitive. Ford can be
stingier with their prices since buyers are willing to spend more on more popular products
(Foundation Pricing Principles).
The buyers purchases of this industrys product represent a significant percentage
of their total purchases. Dealerships purchase all of their products from the industry.
Once again this gives the supplier an advantage over the buyer. The dealership is
dependent on the manufacturer for a constant supply of products for their survival.

Decision Matrix for Buyer Power


Buyer Power

Power
Low

Attractiveness
High

16

SUBSTITUTE PRODUCTS
In the past few years, companies such as Chevrolet and Tesla have engineered
electric powered cars. This is a substitute for cars with an internal combustion engine.
Recently, Ford and Toyota have created their own versions of electric powered cars to
compete with the competition. Ford has created the Focus Electric, which is in the new
2016 line of cars. Toyota created the Prius Plug-In Hybrid that was on the 2015 line
models. A dealership may want to purchase cars from a manufacturer that makes electric
cars as apposed to one that doesnt. Buyers have substitutes in that they can purchase
from other car companies that are more in demand and have a higher profit margin.
Electric cars have not fully caught on to the general public yet because they do
not have the same performance characteristics that traditional cars have. The new electric
powered cars are also pricier than traditional internal combustion engine cars. However
there is a bright future in the electric car industry. Despite the benefits of the electric car
today, people dont really want it. Though the electric car is not a big deal yet, some
tweaks to it and making them more affordable may cause a high demand for them in the
future.

RIVALRY
DEGREE OF CONCENTRATION AND BALANCE AMONG
COMPETITORS
The automotive industry is a very competitive industry. In the 20th century, there
were over 300 firms in the automotive industry and now there are just a few major ones;
those being Ford, General Motors, and Toyota Motors Corporation ("Market Share by
Manufacturer | Edmunds.com." Edmunds. N.p., n.d. Web. 02 Oct. 2015.). These three
automotive giants control almost 50% of the market share between just the three of them.
If you add the top five automotive manufacturers in the mix, they control over 60% of the
market share. Those top five manufacturers are General Motors, Ford, Toyota Motor
Corporation, Fiat-Chrysler, and Honda ("Market Share by Manufacturer | Edmunds.com."
Edmunds. N.p., n.d. Web. 02 Oct. 2015.). With over 60% of the automotive industry
market share being controlled by these main five manufacturers, this leads to a high
degree of concentration which in turns, increases rivalry among competitors.

17

The industry is balanced among competitors as General Motors and Fords market
share is within 10% of each other. General Motors controls 17.8% of the market share
while Ford controls only 15%. Toyota is not far behind with a 14.5% market share ("U.S.
Market Share of Selected Automobile Manufacturers 2014 | Statistic." Statista. N.p., n.d.
Web. 02 Oct. 2015.y). Since the automotive industry is balanced, rivalry increases,
making the industry even more unattractive.
DIVERSITY AMONG COMPETITORS
The main automotive manufacturers within the automotive industry use the same
strategy by attempting to differentiate themselves from their competitors, through
marketing. This helps establish a high sense of brand loyalty in the automotive industry,
General Motors and Ford having the highest brand loyalty when it comes to their product
line. Since they are all using this marketing strategy of differentiation, this increases
rivalry within the industry. They all market the same type of product line (e.g. trucks,
crossovers, hybrid, etc.) just offer different features in their products than their
competitors. Although this may seem like a good strategy, this makes the industry
unattractive and hard to compete in.
INDUSTRY GROWTH RATE (PAST AND PROJECTED)
Over the past 5 years the automotive industrys annual growth rate and projected
growth rate have had a positive trend ("Sales Data | Alliance of Automobile
18

Manufacturers." Auto Alliance. N.p., n.d. Web. 06 Oct. 2015). With the inflation rate at a
negative 20% for the current year, the firms are able to grow without taking market
shares from each other ("Historical Inflation Rates: 1914-2015." US Inflation Calculator.
N.p., 24 July 2008. Web. 06 Oct. 2015). Since the inflation rate of the automobile
industry is lower than the growth rate, the industry is attractive.

FIXED COST TO VALUE ADDED


In 2012, Ford had reported revenue of 6.3 billion dollars which is nearly 72% of
sales ("Ford Motor Company (F)." Gross Profit for Ford_Motor_Company (F). N.p., n.d.
Web. 02 Oct. 2015.). They did not report any fixed costs to the public but have been able
to cover the costs since they still remain profitable. Economies of scale do exist in this
industry and Ford and Toyota have been taking advantage of them. General Motors has
being doing this since the beginning which is why they dominate the automotive industry.
Ford and Toyota do add value to their products by taking pride in their high customer
loyalty and brand image ("2015 Auto Industry Trends." 2015 Auto Industry Trends. N.p.,
n.d. Web. 02 Oct. 2015). With a high value added and fixed costs being low, this
decreases rivalry among competitors and makes the industry more attractive.
INTERMITTENT OVERCAPACITY
Capacity utilization for the automotive industry was running at 76.5% as of 2014
and has remained right around there ("Industrial Production and Capacity Utilization G.17." Industrial Production and Capacity Utilization). N.p., n.d. Web. 06 Oct. 2015..
Even though this is slightly outside of the normal capacity range, the automotive industry
is susceptible to intermittent overcapacity. This overcapacity causes an increase in rivalry
among firms and makes the automotive industry unattractive.

19

PRODUCT DIFFERENTATION
In the automotive industry, automotive manufacturers are able to differentiate
their products from each other. Although they may carry the same product line (e.g.
trucks, crossovers, hybrid, etc.) each product has different features than one another. Ford
takes pride in their classic F-150, a type of pickup truck Ford has to offer, while Toyota
Motor Corporation has a type of pickup truck, it does not come close to the F-150 ("2015
Ford F-150 vs. 2015 Chevrolet Silverado 1500, 2015 Ram 1500, 2014 Toyota Tundra Comparison Tests." 2015 Chevrolet Silverado vs. 2015 Ford F-150, 2015 Ram 1500,
2014 Toyota Tundra Comparison Test Car and Driver. N.p., n.d. Web. 06 Oct. 2015) .
This increases rivalry among the industry and makes it unattractive.
GROWTH OF FOREIGN COMPETITION
Honda is a foreign automotive manufacturer that has recently established
manufacturing sites for their product here in the United States. It is one of the main five
manufacturers mentioned earlier that control over 60% of the market share here in the
United States. Toyota Motor Corporation is a foreign automotive manufacturer as well
and is one of top three manufacturers, competing with the domestic General Motors and
Ford. From this you are able to tell that it is not hard for a foreign firm to penetrate the
United States market. This in turn increases rivalry among competitors and makes the
industry unattractive
CORPORATE STAKES
Since Toyota and Ford are mainly automotive manufacturers, they greatly depend
on this industry segment for revenue. They do provide financing as a side way to generate
revenue. Since these companies mainly get their revenue from manufacturing
automobiles, the corporate stakes are high. This combined with the high percentage of
revenue causes an increase in rivalry and once again makes the industry unattractive.
EXIT BARRIERS
Exit barriers in the automotive industry are high. It is very difficult for an
automotive manufacturer to transfer its operations from producing cars to another
product. Not only is it difficult, but it is very expensive and is likely to cause the firm to
hemorrhage money and eventually go out of business. Ford had to pay 750 million
dollars in the form of severance costs due to having to shut down their plant in Grenk,
Belgium ("Welcome to Market Realist." What Makes the Auto Industry Highly
Concentrated? N.p., n.d. Web. 06 Oct. 2015). This shows how there are heavy sunk costs
associated with exiting an industry. Although many manufacturers can be bought out, it is
hard to turn sales around for a car manufacturer that no one wants to buy. With exit
barriers being high, rivalry between firms is reduced and makes the industry attractive.

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CONCLUSION
Overall the automobile industry is unattractive due to the high level of rivalry
within the industry. The degree of concentration is very high and balanced, which
increases rivalry among firms. There is little diversity among competitors marketing
strategy, which also increases rivalry. The growth rate has been positive in the industry
and remained above the inflation rate, which decreases rivalry, but not by much. Fixed
costs to value added is low within the industry, which allows economies of scale to be
achieved. The automobile industry is susceptible to intermittent overcapacity, which
increases rivalry and makes the industry unattractive. Since there is some growth for
foreign competition, it increases rivalry among the competitors. With the corporate stakes
being high, it helps increases rivalry to make the industry even more unattractive. Lastly,
the exit barriers are high which reduces rivalry making the industry somewhat attractive.

Decision Matrix for Power of Rivalry


Rival
Intensity

Concentration and Balance


among Competitors
Diversity Among Competitors
Industry Growth Rate
Fixed Costs to Value Added
Intermittent Overcapacity
Growth of Foreign
Competition
Corporate Stakes
Exit Barriers
Rivalry Overall

Attractivenes
s

Weight

High
Concentratio
n/ Low
Balance
Low
Low
Low
High

High
High
Low
Low
High

Low
Low
High
High
Low

20%
15%
20%
10%
5%

Low
High
Low

High
High
Low

Low
Low
High
Low
Attractivenes
s

10%
15%
5%

High Rivalry
Intensity

100%

21

Bibliography
Morningstar
S&P Capital IQ
"Working Capital Management in the Automotive Industry 2015." M2 Presswire Jan 19
2015 ProQuest. 2 Oct. 2015 .
(http://www.businesswire.com/news/home/20150914006257/en/)
"Databases, Tables & Calculators by Subject." Bureau of Labor Statistics Data. N.p., n.d.
Web. 02 Oct. 2015.
"Volkswagen: The Scandal Explained - BBC News." BBC News. N.p., n.d. Web. 02 Oct.
2015.
"[Updated] September 2015 Sales Chart | Corporate." [Updated] September 2015 Sales
Chart | Corporate. N.p., n.d. Web. 02 Oct. 2015.
"2015 Auto Industry Trends." 2015 Auto Industry Trends. N.p., n.d. Web. 02 Oct. 2015.
Outline

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How Auto Makers Keep You Coming Back. Wall Street


Journalhttp://analysisreport.morningstar.com/stock/research?
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