We conduct an automotive industry analysis that is essential in knowing the current situation of the automotive industry and the level of competition in it.
Have you ever thought about what the world would be without cars? Yes, it would be a lot less polluted, but what would we actually do?
Let me imagine what I would do if there were no cars. First, I would wake up in the morning and get ready for the office, wearing a tie and a jacket. Then, after getting everything done, I would untie my Donkey and ride it to my office.
That's probably not how I would want to enter my office, not in this life at least. But that's how probably people would travel from one place to another before cars were made. I am so glad that's not the case anymore, all thanks to Karl Benz, who made the first automobile in 1885.
You guys must be thinking about why I am talking about all this. The reason to imagine a world without cars was to realize the importance of the automotive industry. If the automotive industry didn't exist, there would be no automobiles on the roads today.
Today, we have planned to conduct an automotive industry analysis. This analysis is essential to know the current situation of the automotive industry and the level of competition in it.
However, first, we have to get a little insight into the automotive industry to interpret the results of the automotive industry analysis in a better way.
The credit for starting the automotive industry must be given to Karl Benz since he was the first person to manufacture the first petrol engine automobile in 1885.
From then onwards manufacturing of automobiles started, and the automobile industry started growing.
After more than a century, today, more than 1.4 billion vehicles are on the road. Although the first automobile was manufactured by Germany, currently there are many countries all across the globe that manufacture automobile.
China is the world's largest manufacturer of automobiles. It manufactures around 28% of all automobiles manufactured. After China, other countries such as the USA, Japan, and Germany are the major automotive manufacturers.
The automotive industry has a significant economic value as It is one of the largest industries. In 2022, it was recorded to be worth $2.7 trillion. Isn't it tremendous?
Moreover, the automotive industry also provides livelihood to many families across the globe. It has more than 15 million people employed across the world, among which more than 8 million people are employed in China.
The automotive industry also helps countries to boost their exports. Since few countries in the world manufacture automobiles from A to Z, other countries import vehicles or, in some cases, parts of automobiles from these countries.
The exports in the automotive industry were $710.4 billion in 2021. Germany has the highest exports in the automotive industry, worth $139.1 billion; that's 19.6% of the total exports. However, Japan and the USA are also among the major exporters.
In the automotive industry, there are a lot of companies that produce vehicles and distribute them across the globe. The primary automobile manufacturing companies are Mercedes, Toyota, GM, Nissan, etc.
Toyota is currently the leading vehicle manufacturing company, having annual revenue of $248.6 billion. However, Tesla has recently emerged due to its innovative approach to manufacturing electric cars.
Now that we have already discussed the significance of the automotive industry and some of its significant players, let's move further and carry out an industry analysis of the automotive industry to see in what position the industry stands today and the level of competitiveness in the industry.
Automotive Industry Life Cycle
The first stage of conducting an industry analysis requires an investigation of an Industry's life cycle. The life cycle of any industry consists of 5 stages.
The life cycle of an industry starts off with the startup stage and then leads to the growth stage. After that, the industry experiences a shakeout and maturity stage before it finally declines.
Startup Stage
The startup stage of the life cycle represents the period when companies in the industry struggle to sell their products/services to consumers. In this stage, the companies try to gain market share by spreading awareness related to the product/service they offer.
The automotive industry came into being when the first car was made. But after that, it took some time to make people realize the need to buy an automobile. Meanwhile, awareness was being spread, and people were pursued to buy cars.
Growth Stage
The second stage of the life cycle is the growth stage. At this stage, the industry starts to grow as the products/services are sold. In addition, new companies have started entering the industry and are looking for ways to increase their market share.
It took some decades for the automotive industry to enter the growth stage. In 1910 around 300 companies had entered the industry in the US alone. That's when the growth of the industry started.
Shakeout Stage
The growth stage is followed by the shakeout stage. In this stage, the competition increases, and more prominent companies push smaller companies out of the industry to gain maximum share.
After the automotive industry experienced growth in 1910, soon the shakeout stage arrived. Almost 200 companies were pushed out of the industry due to high competition. By 1923, only 100 companies had left to compete in the automotive industry.
Maturity Stage
After the weak companies leave the market, the maturity stage arrives. At this stage, the industry is at its highest point. At the stage of maturity, the industry has no more potential to grow as it has maximized its market share.
The automotive industry has reached its maturity stage since only big names are left in the industry, and they are making huge profits. The automotive industry is currently observing slower growth, which shows that the industry is close to maturity.
Decline Stage
The decline stage is the last stage of an industry's life cycle. After the maturity stage, an industry starts to decline. That's when the demand for the products/services offered by the industry begins to decline. Mainly this stage arrives due to the availability of substitutes and changes in regulations.
Although the automotive industry is currently in the maturity stage, its decline is nowhere near. This is mainly because there is an efficient substitute available for automobiles. The automotive industry is currently a necessity for the entire world. That's why its decline seems close to impossible.
Assessing the Competition: Porter's Five Forces Model
Since we have completed the first step to conduct an automotive industry analysis, let's move on to the second step.
In this step, we will analyze the competition among the companies in the automotive industry with the help of Porter's five forces model.
Porter's five forces model helps in assessing the competition in an industry in 5 steps. The findings of this business model are used by companies that are planning to enter an industry.
Competitive Rivalry
This factor of Porter's five forces model analyses the quality of products of the companies that already exist in the industry so that the level of competition in the industry can be monitored.
A high level of competition exists in the automotive industry since every company tries to develop a better automobile than the other company. In 2018, the automotive industry spent $99.8 billion on R&D.
It would be difficult for any new entrant to gain market share in such a competitive industry. Moreover, customer loyalty is a significant factor in this industry that creates hurdles for a new company to enter the industry.
However, new companies can try their luck in the automotive industry through innovation and unique technology, just like Tesla.
Supplier Power
Supplier power analysis is the ability of suppliers to manipulate the prices in the industry. In the automotive industry, suppliers don't have much power to dictate prices since manufacturers' raw material is simple.
The supplier provides big manufacturers like BMW with raw materials such as steel, plastic, rubber, etc. There are many suppliers who can supply these raw materials.
Buyer Power
Buyer power in Porter's five forces model indicates the power of buyers to dictate the prices. The automotive industry empowers buyers to become price takers.
This is possible since many automobile manufacturers are present in the industry. Therefore, any manufacturer who will offer better quality and low-price products will attract buyers.
Threat of Substitution
This section analyses the threat of substitution that the existing and new entering companies face. Imagine if all the consumers suddenly decide to stop owning vehicles and completely shift to public transport.
This would seriously damage the demand of the automotive industry. However, the threat of substitution is shallow because that's very unlikely to happen.
Threats of New Entry
The last factor of Porter's five-factor model highlights the threats of new companies entering the industry already existing companies face.
It is challenging for new companies to enter the automotive industry due to the high need for investment. Moreover, already existing companies have achieved economies of scale. As a result, their prices would be relatively lower than the new entrants. As a result, there isn't much threat to the automotive industry's new entrants.
Environmental Analysis
Conducting an environmental analysis is the last step toward the completion of automotive industry analysis. In this section, we will conduct an environmental analysis with the help of SWOT and PESTLE analysis.
The environmental analysis will tell us about the industry's environment by analyzing the factors that impact the operations of companies operating in the industry.
PESTLE Analysis
Pestle analysis is a business tool that investigates the external factors that affect a company's operations. It highlights political, economic, social, technological, legal, and environmental factors.
● Political Factors
Governments worldwide are concerned about the increase in the number of road accidents across the globe. Due to this, governments may direct the automotive industry to take protective measures, or else heavy penalties would be imposed.
The addition of protective measures would increase the cost of production. It could thin the profit margins of the automotive industry.
● Economic Factors
After the Covid-19 and Russia-Ukraine conflict, it is predicted that the world might go through a recession. A global recession will lower the automotive industry's demand, and the industry will experience losses.
● Social Factors
Countries considered relatively conservative, like Saudi Arabia, recently lifted the ban on women driving automobiles. However, looking at the country's social norms, the ban may be imposed again. This would negatively impact the automotive industry's demand and result in losses.
● Technological Factors
Technology can really boost the automotive industry since innovation facilitates the consumers. Features like Autopilot that Tesla introduced can really attract consumers. Such use of technology will increase the automotive industry's demand and make it financially well off.
● Legal Factors
Legal factors like the issue of copyrights really have an impact on the automotive industry. For example, recently, a Chinese car manufacturing company Geely copied the design of the Rolls Royce Phantom. Such actions can result in lawsuits, and in the end, the automotive industry will suffer.
● Environmental Factors
Environmentalists target the automotive industry since it produces around 3 billion metric tons of CO2. Due to the damage, it is causing to the environment, heavy fines may be imposed on the automotive industry.
SWOT Analysis
SWOT analysis gives prominence to both internal and external factors responsible for creating an impact on the operations of a business. It analyses the strengths, weaknesses, opportunities, and threats an organization faces.
Strengths
One of the biggest strengths of the automotive industry is its vast consumer base. In 2021, around 79.1 million motor vehicles were produced. So naturally, such high demand helps the automotive industry to gain profits.
Weaknesses
The high cost of production and high capital needed for investment in the automotive industry are considered a weakness. These high costs squeeze the profit margins of the automotive manufacturers since they can't transfer the entire cost of production to the consumers.
Opportunities
New technological developments can be considered an opportunity for companies in the automotive industry. With the help of technology, manufacturers can produce environmentally friendly and fuel-efficient automobiles. This can increase their demand and market share.
Threats
The automotive industry continuously faces threats of heavy fines since it is one of the significant contributors to emitting CO2. The imposition of penalties will reduce its profit margins and damage the industry.
Make sure to check out our complete SWOT analysis of the automotive industry.
Automotive Industry Analysis: Final Word
Finally, we are now done with our automotive industry analysis. Let's summarise whatever we have done so far.
So, we started this article by highlighting the significance of the automotive industry. First, we learned that the automotive industry is one of the biggest industries that provides employment to 15 million people.
We then carried out the automotive industry analysis by analyzing its life cycle. After that, we used Porter's five-factor model to assess the level of competition in the industry, and in the end, we conducted an environmental analysis to wrap up our automotive industry analysis. We assume that reading this automotive industry analysis would help you understand the automotive industry's position and the level of competition that companies face that are a part of it.
