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Global Automobile Industry: PESTEL Analysis Essay

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Updated: Jul 8th, 2021

Attributable to the immense size of the automobile industry, its revenue and development are influenced by numerous factors. Aside from the manufacturing of automobiles internationally, this industry is also engaged in the sales and marketing of vehicles. Nowadays, innovation and technology act as the major sources of differentiation for automotive manufacturers (Hashmi & Biesebroeck, 2016). Other major factors of importance in the automobile industry include fuel efficiency and environmental concerns. Porter’s five forces and PESTEL analyses examine the attractiveness and profitability of the global automobile industry, in addition to explaining the sector’s strategic opportunities and threats.

Porter’s Five Forces

The threat of New Entrants: Weak

It is hard for new companies to venture into the automobile sector attributable to the huge investment needed to set up manufacturing plants, distribution systems, and employ skilled personnel. Another hindrance is the rate of competition from the already existing companies (Hashmi & Biesebroeck, 2016). Except in cases where new companies bring a novel and unique product, the likelihood of acquiring a significant market share is low.

Furthermore, penetrating other markets is difficult because some governments have enforced elevated import taxes as a way of discouraging foreign brands. Attributable to the concerns of safety, dependability, and resilience being fundamental, in addition to buyers basing their impression of a model on the brand’s earlier performance on such issues, new entrants find it exceedingly hard to compete. It might take very many years for new entrants to create a strong reputation to make them achieve a competitive benefit. All such aspects result in the threat of new entrants being very weak.

Bargaining Power of Suppliers: Weak

In the automobile sector, the bargaining power of suppliers is weak because the majority of them are small players. Suppliers have to stick to the regulations set in the industry. The automobile manufacturers hold significant influence since raw materials are always at their disposal (Hashmi & Biesebroeck, 2016). This makes it easy for the brands to switch from a given supplier to another hence making the bargaining power of suppliers significantly low.

Bargaining Power of Buyers: Reasonably Strong

Middle-class customers who purchase a single-vehicle form the biggest proportion of buyers. Nevertheless, some government agencies and corporations purchase fleets of automobiles and are in a better situation of bargaining for lower costs. It is easy for both small and major buyers to switch to a different brand. Private individuals, government agencies, and companies are the major vehicle buyers (Hashmi & Biesebroeck, 2016). Devoid of a few exceptions, buyers can choose to walk out on a purchase they do not like and proceed to a seller of the same brand or a completely different one. Anchored in the overall picture, the bargaining power of buyers is moderately strong. This compels brands to center on enhancing customer loyalty through quality, innovativeness, and competitive prices.

The threat of Substitutes: Weak

There are numerous alternative means of transport encompassing trains, airplanes, and buses. Nevertheless, no substitute can offer the convenience and accessibility that having a vehicle provides. Personal cars serve owners round the clock taking them to preferred destinations but missing a bus, train, or plane compels one to wait (Hashmi & Biesebroeck, 2016). This weakens the threat of substitutes irrespective of the fact that daily commuters find it cheap and easy to use a bus or train, and do not worry about their maintenance.

Competitive Rivalry in the Sector: Extremely Strong

The number of powerful and renowned brands in the automobile industry is low despite the exit obstacles being increasingly high. A company attempting to exit any market must be ready to incur huge losses. The degree of customer loyalty is high and though the sector is broad, it has advanced (Hashmi & Biesebroeck, 2016). Such factors strengthen competitive rivalry in the industry, which makes it very difficult to increase market share.

This makes different companies target diverse market segments but still find aggressive competition. Automobile corporations compete on grounds of design, price, technology, innovativeness, customer safety, and quality to mention a few. Competition in the automobile sector has become a strong force that companies should take seriously. Competitive rivalry in the automobile industry influences the profitability and attractiveness of the sector negatively. The profitability of the automobile industry is low. Governments can offer the essential infrastructural and monetary aid to increase the profitability of automobile companies hence making the industry reach a new height shortly.

PESTEL Analysis

Political

Governments across the globe are passing laws to ensure low emissions from vehicles and fixed fuel prices. Moreover, increasing taxes on motor vehicle import is a major threat facing automobile manufacturers. Environment-friendly automobiles have increased in demand internationally because they are obtaining high government support (Guajardo, Cohen, & Netessine, 2015). Varying government regimes and political directives may lead to favorable or hostile fluctuations.

Economical

When economic situations worsen, the sales of automobiles decrease significantly. This mainly affects high-priced and luxury vehicles. The economic conditions of a nation, as well as the prevailing financial situations around the world, have a crucial influence on the profitability of the industry (Lungeanu, Stern, & Zajac, 2016). Poor economic conditions result in the decreased buying power of customers. This acts as a major threat to the automobile sector since it is highly reliant on the purchasing power of customers.

Socio-Cultural

The automobile sector is greatly influenced by the varying socio-cultural inclinations and buyers’ preferences. Each year, automobile manufacturers have to make new models based on existing preferences. The outcome is that though a given model will excel in a certain market, it may not be as popular in another (Hashmi & Biesebroeck, 2016). This may pose a threat to the automobile industry as the changing socio-cultural inclinations might lead to older models becoming obsolete.

Technological

Technology and innovativeness offer major opportunities to automobile manufacturers. If a company adopts technology and becomes innovative, it has a great chance of succeeding in the industry and increasing its market share (Lungeanu et al., 2016). To tap this opportunity, many companies are focusing on low emission and environment-friendly automobiles while others are set to release driverless cars.

Ecological/Environmental

Laws associated with environmental friendliness and low carbon emissions are being implemented internationally. This is compelling the automobile manufacturers to abide by the set regulations in an effort of achieving or maintaining competitive benefits (Guajardo et al., 2015). Moreover, only the vehicles satisfying the laid down measures are authorized in some markets such as the United Kingdom.

Legal

Laws and regulations strongly influence the performance of automobile manufacturers and dealers. Pollution laws have been tough and companies have to adhere to them by manufacturing environment-friendly vehicles (Hashmi & Biesebroeck, 2016). Other safety laws have led corporations such as Toyota to recall vehicles attributable to defective airbags.

Conclusion

Porter’s five forces and PESTEL analyses assess the attractiveness and success of the automobile industry besides elucidating opportunities and threats. Competition in the automobile sector influences the profitability and appeal of the industry negatively. Governments should offer the necessary infrastructural and fiscal support to increase the profitability of the automobile industry hence making it get to a new height shortly. The relative significance of the political, legal, economical, technological, environmental, and sociocultural factors has risen in the twenty-first century.

References

Guajardo, J. A., Cohen, M. A., & Netessine, S. (2015). Service competition and product quality in the US automobile industry. Management Science, 62(7), 1860-1877.

Hashmi, A. R., & Biesebroeck, J. V. (2016). The relationship between market structure and innovation in industry equilibrium: A case study of the global automobile industry. Review of Economics and Statistics, 98(1), 192-208.

Lungeanu, R., Stern, I., & Zajac, E. J. (2016). When do firms change technology‐sourcing vehicles? The role of poor innovative performance and financial slack. Strategic Management Journal, 37(5), 855-869.

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IvyPanda. 2021. "Global Automobile Industry: PESTEL Analysis." July 8, 2021. https://ivypanda.com/essays/global-automobile-industry-pestel-analysis/.

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IvyPanda. (2021) 'Global Automobile Industry: PESTEL Analysis'. 8 July.

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