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Automotive Industry in the United States Essay

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Updated: Jun 24th, 2019

Abstract

The main purpose of operating any business entity is to generate profit. As a matter of fact, expanding the revenue base and maximizing profits are key concerns of any business enterprise located in a competitive business environment.

This implies that business organizations should create competitive advantages by developing viable marketplace strategies. The latter is necessary in order to outwit the stiff market competition. Hence, there is need to formulate a management process which is well structured in tandem with the market demands of an organization’s products.

An attractive framework has been offered by Michael Porter in this analysis. From the Porter’s Five Forces framework, it is possible for business enterprises to survive and remain profitable even in highly competitive markets.

For example, management teams in business organizations should not ignore to identify and manage the impacts of substitute products in the market. Any form of a substitute good or service is a real threat to the operations and sustained profitability of a firm.

This analysis relates the Porter’s Five Forces framework with the growth prospects of the automotive industry in the United States.

Introduction to the Auto Industry

A number of factors have generally influenced the transformation of the automotive industry.

For instance, manufacturing and assembling vehicle components, changes in the marketing of automotive products, development of supply chain, assembling practices, market fluctuation of fuel prices, development of infrastructures and the overall business structure of the industry have immensely evolved operations in the sector (Samuelson & Marks, 2012).

Historical records attest to the fact that the invention and innovation of engines marked the humble beginning of the development of automotive industry. This early development was particularly agitated by the emergence of new forms of transporting energy.

For instance, gasoline was used during the 19th century as an important source of energy. Hence, it experienced high demand in different locations. Therefore, new methods of transporting the product were necessary. Steam was also a crucial medium for fueling engines during the century.

After the full development phase of various sources of energy, initial automobile firms began to take shape. It can be recalled that the earliest motor vehicle companies were established after full discovery of oil and gas resources.

The development of other vital motor vehicle components such as the steering wheel and floor-mounted accelerators followed later towards the late 19th century and early 20th century (Siemiatycki, 2012).

As a result, the automotive industry experienced rapid development in terms of both manufacturing technology and the speed of assembling parts.

Contemporary vehicles have been made lighter, more fuel efficient, and simpler to use. Nonetheless, it is crucial to mention that the automotive industry is an equal opportunity employer in the United States and other manufacturing countries.

In spite of the recent 2007/2008 global economic recession, the future outlook of the industry is still impressive.

A considerable share of the market may not be guaranteed when substitute products enter the market. On the same note, it is inevitable for other competing firms to enter the same market. Managements in organizations should factor such risks when running their firms.

Rivalry experienced from other competitors can only be curtailed if thorough strategic planning is put in place. In regards to the buyers’ bargaining power, it is crucial to provide customers with a competitive pricing model that is more favorable than that of the immediate market rivals.

Besides, the bargaining power of suppliers is fundamental because they are part and parcel of the profit optimization plan of a business enterprise.

Industry Definition

The automotive industry in America is specifically concerned with both manufacturing and marketing of various types of vehicles. In the course of this core function, the industry also designs the automobile products according to the tastes and preferences of the targeted market.

Hence, this calls for continuous Research and Development (R&D) in the sector (Siemiatycki, 2012). Both the local and overseas markets are supplied with motor vehicles manufactured from the US automotive industry.

Statistical financial records indicate that over 70 million pieces of motor vehicles were manufactured during the 2008 fiscal year. These entailed both light and heavy commercial vehicles. Over the same period, the sales volume for brand new motor vehicles was about 80 million.

However, the onset of the global credit crunch in 2007/2008 affected the buying power of customers and equally led to high cost of raw materials. Consequently, the industry was compelled to undergo pricing pressure for its products. As it stands now, intense external competition is a major threat to the industry.

In other words, private vehicle usage has declined considerably as part of cost cutting measures by consumers.

Industry Profile

Consolidations of the American automotive industry as well as the size and growth rate define the industry profile of the automotive sector in the United States.

In addition, three leading manufacturers of light commercial vehicles (trucks) have punctuated the international investment portfolio of the automotive industry in the United States (Uzwyshyn, 2012).

Individual companies within the industry are also experiencing significant employment shifts especially when some workers are compelled by situations to change their states of residence. The industry is also a key contributor to labor relations organizations and health insurance schemes (Siemiatycki, 2012).

Industry Structure

The equipment, parts and motor vehicle departments employ more than one million American citizens besides expatriates. Ever since Chrysler, Ford and General Motors diversified their production segments in the market, significant shifts in the industry structure have been recorded.

For example, importation and local production of cars by other overseas firms were a common experience since the early beginning of the New Millennium. It is evident that the three main manufacturers diverted their attention in manufacturing light trucks instead of saloon cars (Uzwyshyn, 2012).

The foreign manufacturers are a real sourceof competition for Ford, GM and Chrysler motor companies. Due to the desire to restructure the local automotive industry in the US, these firms have already shed off 700, 000 employees. On the other hand, foreign firms have hired close to 400,000 workers in order to meet their production demand.

Future Outlook

Data obtained from the CAR group indicate that the growth in the sale of motor vehicles will still stagnate in the near future until negative economic effects are phased out completely (McAlinden & Chen, 2012).

Hence, the future depicts a slow recovery rate of the automotive industry in the US. Even if the US economy begins to perform strongly, the record pent-up demand will be the main driving force in the growth of sales. However, this scenario will only be possible with new vehicles and not used machines.

The industry is also expected to recover to the level it was immediately before credit crunch began in 2007. Nonetheless, the same level of recovery might not be attained in automotive employment (Gao, Hensley & Zielke, 2014).

After scrutinizing the US automotive industry, economic experts argue that this sector of the economy might not experience robust growth in the next few years. Nonetheless, the growth initiatives that have been put in place by the federal government are highly likely to accelerate growth in this industry.

If the current innovations are effective enough, then the industry may begin to recover gradually from the year 2016.

The double-digit growth in terms of sales may take quite a long time before it is realized. However, there is some hope that the industry will begin to gain momentum by increasing revenue base from 2016 onwards as shown in the graph below.

Industry is increasing revenue base from 2016

Source: CAR

Porter’s Five Forces Strategy Analysis as it applies to the Auto Industry

Bargaining Power of Buyers

It is critical for the automotive industry to establish a cordial relationship with consumers of its products.

The decline of the buying power of consumers may spell doom to the industry (Mucheru, Mwangi, Mandere, Bichanga & Gongera, 2014). In other words, the sector players should make sure that buyers receive the best bargain in the market.

The latter should have a sensible and favorable power to bargain products manufactured by the industry. Since the automotive products are relatively standardized, consumers tend to control more power when it comes to making buying decisions.

In addition, the competing brands within the same industry creates an impressive playground for consumers to bargain which products to buy and at what price. Nevertheless, the low production ratio compared to the high number of buyers will obviously make the industry relatively powerful (Porter, 2008).

Bargaining Power of Suppliers

The industry wields more power than suppliers in this case study. There are strong-willed buyers in the industry who are in a position to champion for their tastes and preferences when dealing with suppliers. This favors the industry players (Porter, 2008).

Since major proliferation of automobile firms is absent, buyers will remain powerful at the detriment of suppliers. About 90 percent of value shipment in the US is held by the main automotive firms. Besides, backward integration occurrence will be the main source of power for the industry.

Eventually, suppliers will experience a weak bargaining power (Uzwyshyn, 2012).

Competitive Rivalry in the Industry

Both the US and global automotive markets experience stiff rivalry. Chrysler, Ford and General Motors have apparently sought other external opportunities to sell their products instead of relying on local consumers. These firms have opted to globalize their competition arena as other foreign players take charge of the US market.

Poor engagement of these firms in the US markets has led into slow growth of the automotive industry in the wider North American region (Uzwyshyn, 2012). It is apparent that the three rivals have decided to adopt a non-aggressive method of competing at the local market.

Threat of New Entrants

There are significant entry barriers into this manufacturing sector. The minimum amount of capital required to initiate an automotive firm is quite large. Hence, the latter is a major prohibitive factor. As a new entrant into the industry, specialized automotive manufacturing facilities are required.

Nevertheless, old players in the industry are keenly expanding their operations through strategic partnerships (Uzwyshyn, 2012). The significant setbacks to venture into this sector have enhanced the profitability of existing firms in the industry owing to lack of perfect competition.

The global markets have provided a lot of success to most automotive firms.

Threat of Substitutes

Although there are substitutes to automobiles in the United States, the impacts have not been felt. As much as the American population may opt to travel using airplanes, trains or ships, none of these modes of transport is universally convenient like motor vehicles.

The latter offers the best independence and utility for most travelers within the US borders (Uzwyshyn, 2012). Additional time may be required when travelling using trains and ships.

Nonetheless, trains and ships are relatively cost effective and may provide a better substitute for travelers who are not in a hurry. A high elasticity of demand is common with substitute automobiles such as airplanes and trains especially in regards to price factor.

Conclusion

In spite of profitability, the automotive industry in the United States still faces numerous operational challenges. The aforementioned challenges in this industry can be effectively addressed using the Porter’s Five Forces framework.

As already discussed in the paper, the threat of new entrants is apparently the main advantage of the existing automotive firms in the US. Several barriers hinder new entrants into this industry and continue to guarantee high profitability for old firms.

In addition, substitutes in this industry do not pose any substantial effects as discussed in the paper. However, the bargaining power of customers and competitive rivalry are major issues that still impede the operations of firms in this industry.

References

Gao, P., Hensley, R., & Zielke, A. (2014). A road map to the future for the auto industry. Mckinsey Quarterly, 1 (4), 42-53.

McAlinden, S.P. & Chen, Y. (2012). After the Bailout: Future Prospects for the U.S. Auto Industry. Retrieved from

Mucheru, C.M., Mwangi, S., Mandere, E.N., Bichanga, J.M. & Gongera, E. G. (2014). The Application of Porter’s Five Forces Model on Organization Performance. European Journal of Business and Management, 6(16), 75-86.

Porter, M. E. (2008). The Five Competitive Forces that Shape Strategy. Harvard Business Review, 86(1), 78-93.

Samuelson, W. & Marks, S. (2012). Managerial economics. New Jersey, US: John Wiley & Sons, Inc.

Siemiatycki, E. (2012). Forced to Concede: Permanent Restructuring and Labour’s Place in the North American Auto Industry. Antipode, 44(2), 453-473.

Uzwyshyn, R. (2012). The US Auto Industry in 2013: Five Forces to Consider. Automotive Industries, 192(11), 221-223.

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