Within the automobile industry, the threat of new entrants is particularly low. There are several industry specific reasons why this holds true. These reasons are all tied to the concept of barriers to entry; namely, the obstacles and hindrances that make it difficult to enter the market and restrict competition. Multiple barriers to entry exist, which makes it difficult for any new automobile manufacturer to come into the industry and have success. One of the greatest barriers to entry in the automobile industry is the extremely high amount of capital that is required to purchase physical manufacturing plants, raw materials, as well as to hire and train employees. It takes a great amount of capital, not only for the manufacturing process, but also to keep up with the latest innovations in order to compete with the industry leaders. Research and development is an integral part of automobile manufacturing. New technologies are constantly being discovered that improve the quality of automobiles on the market as well as reduce costs throughout the manufacturing process. Given the nature of the industry, manufacturers must be able to achieve economies of scale. Therefore, manufacturing companies must also have the ability to mass-produce so that they can make cars affordable to customers. This can be a significant barrier for a prospective automobile manufacturer and is often a major deterrent. Another barrier to entry is the access of distribution channels. It can sometimes be difficult for a new company in the industry to find an adequate means of distribution because space within a dealership lot is limited. It is important to note that, while the average individual does not have the means to come along and start an automobile manufacturing company, foreign competitors such as Toyota have been able to enter the US market to compete with such companies as Ford, General Motors, and Chrysler. Many foreign companies are already well established in their own countries and have achieved a certain level of success and customer loyalty. Many foreign automakers have the capital, managerial skills, and required technologies that are necessary to be a strong competitor in the U.S. market.
POWER OF SUPPLIERS
Traditionally, suppliers of companies within the auto industry have had very little bargaining power. For example, if one supplier were to perform below an automotive company’s standards, several other options existed and the supplier could be easily replaced. Recently, auto manufacturers and suppliers have moved toward a tier based system, where the auto manufacturer would contract with a limited amount of suppliers who would then contract items further upstream. Ford, in particular, is having trouble with this system due to the current state of the economy. This shift has lead to an increase in the power of suppliers than in the former market environment. However, the shift in the market’s environment has not been a profitable one for suppliers. Given the volatility of current automotive production schedules due to the reduction of consumer demand, suppliers have very limited power over auto manufacturers in this respect. Suppliers’ production and overall success is dictated not only by the market conditions, but also by the way in which auto manufacturers choose to respond to those conditions. “The number of US automotive suppliers, currently counted in the thousands, has been steadily shrinking. Globalization and reduced volume from traditional US automakers are contributing factors, as are high material and labor costs, which have hurt the financial condition of domestic automotive suppliers” (Levy). Due mainly to globalization and the increased availability of cheaper foreign materials, US automotive suppliers have been forced out of the industry by means of consolidation and bankruptcy. Ford has supported the consolidation option and deals with only a limited amount of suppliers. In their 2009 10-K report, Ford stated that “we have been reducing the total number of production suppliers eligible for major U.S. sourcing from 3,300 in 2004 to approximately 1,600 suppliers today, with a further reduction to 750 suppliers planned.” With a plethora of suppliers in an environment where only a handful are required, the power of suppliers is significantly crippled.
POWER OF BUYERS
Ford also stated in their 10-K report that “many components used in our vehicles are available only from a single supplier and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and new contractual commitments that may be required by another supplier in order to provide the components or materials.” This means that a few key suppliers will retain some power. For example, a supplier facing bankruptcy could force a contract renegotiation rather than going bankrupt. Historically, the bargaining power of automakers went unchallenged. However as the average American consumer became dissatisfied with the products offered by US automakers, they began seeking alternatives; namely foreign auto makers (The Industry Handbook: Automobiles). As the foreign auto companies entered the United State’s market, the competition became more intense, adding power to the buyer. The foreign auto companies were producing with lower operating and material costs than the US automakers. Therefore, foreign competitors have been able to offer the American consumer a high quality product at a lower cost than its domestic competition. According to Ibisworld.com, in 2005, Toyota was able to produce their vehicles with an average per unit production cost of $2,500 lower than that of General Motors. This difference has been attributed to the inefficiencies of GM’s factories and their ever-increasing legacy costs in the form of pensions for retirees and benefits to current employees. Given that today’s auto industry is filled with a wide range of car brands, large amount of capacity, and zero switching costs between brands, consumers have a large amount of bargaining power. Within the current economic environment, consumers are holding back their purchases of new products. In fact, many consumers have opted to maintain and repair their current vehicles rather than purchasing new ones. (U.S. car repair shops getting mileage out of thriftier times). Another way that buyers have affected automobile production and sales is through consumer confidence. According to IBISWorld, the consumer confidence is expected to fall by an average of 6.1 percent annually over the next five years. (Car and automobile manufacturing in the US) The less confident consumers are, the more desperate auto manufacturers will get to sell inventory. The power of the buyer is not astonishingly high.
Fortunately for the auto industry, no one wants their suit trousers getting caught in a bike chain, nor do they wish to show up to work drenched in sweat after their ten mile morning trek. However, what the automakers should be concerned with is the growing rate of public transportation usage. Public transportation serves as a viable substitute to the products of Ford as well as all other car manufacturers. The graph shown in Appendix A is a representation from the New York Times of the increased rate of public transportation usage as gas prices rose from 1997 through 2007. Annual ridership of all forms of public transit has risen by almost two billion- a 25% increase over 10 years (NY Times.com). The largest increases come from busses and subway/elevated trains. The increased cost of fuel coupled with Ford’s inability to create more energy efficient vehicles in a timely and economic fashion is causing morning commuters to change their habits and arrange for public means of transportation. There has also been a recent, unprecedented push for high-speed trains to be developed in order to transport people from city to city by a means both expedient and economical. Such rail systems would be modeled after the many that span Europe. President Obama’s administration has reserved $8 billion of the controversial stimulus package for the Department of Transportation to develop such trains (USA Today). It is argued that these high speed train systems will save time, money, and city congestion. One thing is for certain; fewer miles driven results in a lower scrap rate, and therefore fewer vehicles purchased. Popularization of public transportation as well as a strong push for these high speed metropolitan trains could have a significant impact on new car sales for auto manufacturers.
INTENSITY OF RIVAIRY INDUSTRY COMPETITORSThe United States auto industry is dominated by five major auto manufacturers: GM, Toyota, Ford, Cerberus (which owns Chrysler), and Honda, in ascending order of market share [see Appendix B for graphic representation]. These companies comprise 74.3% of the US market. The strength of US auto manufacturers, GM, Ford, and the company formerly known as Daimler-Chrysler, were once the dominant forces in the US market, fueled in part by their strength in the American-specific segment for pick-up trucks. However, with an increase in globalization, domestic markets must now compete with foreign competition. As foreign companies have gained accessibility into the US market over the past decade, domestic car manufactures have found it increasingly harder to compete. Most foreign competitors have been able to obtain lower raw material and production costs while maintaining equal, if not better, quality of their product. The current market has been fueled by an attraction to European and Asian automakers and car models. There has been new consumer interest in fuel efficiency, which has created a void in the demand for larger gas-guzzlers like trucks and SUVs and an increase in demand for fuel technology. Ford & GM closed their electric car initiatives in the end of 2002 and the beginning of 2003, respectively, due to poor customer demand and a lack of public subsidy. This opened the market for alternative power sources for vehicles for a new market of green-sensitive consumers and gas-pump weary ones. These type of consumers flocked to Toyota with the advent of the highly successful Prius. The Prius was introduced in the US in 2001 and continuously outsold all expectations. Ford has since reached an agreement with Toyota to use their Hybrid fuel system on a licensed basis, which offers less of a competitive advantage for Toyota, but a new source of revenue.
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