Executive Summary
The following report focuses on the automobile industry analysis. This industry is viewed by many analysts as inherently interesting owing to its massive and competitive nature. Due to changes in the global trends and oil reserves, the automobile industry should be re-structured.
Method of Analysis of the Automobile Industry
This can be done by focusing on the historical description of the industry. In this report, Porter’s Five Forces Model has been used in the analysis to help in deeper understanding of the automobile industry. In this discussion, three market leaders have been chosen for the analysis. These top three companies are General Motors, Toyota and Ford (History of the Automobile, 2005).
Industry Overview
The industrial growth and expansion of the automobile are majorly influenced by vehicle components, fuel innovation, market changes, societal infrastructure, business structures, suppliers, and manufacturing practices.
For instance, the recent consumer empowerment and increasing sophistication trends have prompted the automobile makers and dealers to search for new markets, which are specialized, among the ones that are already saturated with customer diversity bases.
A good example of such a market is that of the United States. Therefore, it is important to venture in the newly emerging markets, especially in the Latin America and South East Asia (History of the Automobile, 2005).
This will promote the automobile dealers to establish production facilities in the overseas. Such establishments will in turn lead to business strategic partnerships and global alliances with foreign automobile dealers.
Using Porter’s Five Forces Model to analyze the Automobile industry
Michael Porter came up with five major forces, which influence the industrial performance. The forces identified are barriers to entry, supplier power, degree of rivalry, buyer power and threats of substitutes.
Considering other industries that operate under the free market and capitalistic economy, analyzing the automobile industry through the use of Porter’s Five Forces is very important to understand the market dynamics (Freyssenet & Shimizu, 2003). However, in this discussion, the main focus is on the analysis of the barriers to entry that exist in the automobile industry.
Barriers to Entry
The automobile industry has high entry barriers that only allow fewer firms to enter in the market. In fact, there are small numbers of firms that dominate the automobile industry since there are several barriers to entry. In such business environments, there are high economic rents, which make the automobile industry attractive to many investors, both the local and foreign.
However, firms such as the restaurants have few entry barriers due to low economic rents, which make them less attractive to the potential investors. The analysis presents some entry barriers that exist in the automobile industry (Freyssenet & Shimizu, 2003).
Working Capital Requirement
Every newly established company faces the threat of start up capital. It is such substantial barriers that are evidenced in the automobile industry. The working capital that is required so that a new company can set up a manufacturing capacity, which helps in achieving the intended level of production is prohibited.
Therefore, it is not easy to attain the minimum efficient scale of production. The limitation can be attributed to the nature of the automobile industry that has a very specialized manufacturing facility.
In case the automobile manufacturing facility fails, it is not easy to re-tool it. It is only possible for the new companies to enter the automobile industry through mergers, acquisition and strategic partnership arrangements (Hiroaka, 2001).
The start up capital is tied for the daily operation of the business, and this money is not invested elsewhere. Therefore, it is difficult for the small and up-coming companies to get enough money to finance their daily operation. This can force them to rely on borrowings from various financial institutions that offer loans at high interest rates.
Economies of Scale
The economies of scale that exist in the automobile industry create a high barrier to entry. Firms that operate in the automobile industry must meet the required scale size. Though, the firms can achieve the economies of scale, they do not enjoy the associated learning curve benefits in the short run. It is a difficult task for the firms to prove the existence and probably the non-existence of the economies of scale, which is not tangible in nature (Freyssenet, M. & Shimizu, 2003).
Brand Identity
It is a big challenge to the small firms in the automobile industries since their brand identity is still very low. For instance, the automobile buyers often make buying decision based on the company’s brand identity. This presents a major entry barrier in the industry (Freyssenet & Shimizu, 2003).
In such cases, the small companies tend to incur a lot of expenses against the sales revenue. Such a downward trend on the revenue earning discourages other small firms from entering the market.
Absolute Cost Advantages
Legal constraints such patents and copyrights in the automobile industry present a very high barrier to entry, and these are created by the legislation of the government. These government documents create monopoly in the industry, thus barring the new entrants.
References
Freyssenet, M. & Shimizu, K. (2003).Globalization or Regionalization of the European Car Industry? New York, NY: Palgrave Macmillan.
Hiroaka, L. S (2001). Global Alliances in the Motor Vehicle Industry. Westport, CT: Quorum Books.
History of the Automobile (2005). Retrieved from https://www.thoughtco.com/history-of-car-assembly-line-4072559