Potential of Survival after entering the Automobile

Industry in India- An analysis using Porter’s

five forces

Abhilash AgrawalRoll no. 1054

National Law University, Jodhpur

What does Porter say?

Porter five forces analysis

• A framework to analyse level of competition within an industry and business strategy development

• It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market

• Attractiveness in this context refers to the overall industry profitability

We’ll now understand these five forces in the context of the automobile industry

Briefly-The Automobile Industry in India

• Comprises of the automobile and the auto component

sectors.

• India is the world's second largest manufacturer of two

wheelers, fifth largest manufacturer of commercial vehicles as

well as largest manufacturer of tractors. It is the fourth largest

passenger car market in Asia as well as a home to the largest

motor cycle manufacturer

In continuation…

• It facilitates the improvement in various infrastructure facilities like power, rail and road transport.

• After delicensing in 1991, at present we have 15 manufacturers of passenger cars and multi-utility vehicles, 9 manufacturers of commercial vehicles, 16 of two/ three wheelers and 14 of tractor, besides 5 manufacturers of engines.

Indian Market: Status Quo and Potential

Relevance of Porter’s analysis

• Norms for foreign investment and import of technology have also been liberalised over the years for manufacture of vehicles.

• As has been stated in the previous slide, there are numerous manufacturers already present in the market.

• In such a scenario, how profitable will it be for an entity to venture into the Indian markets?

Brief Analysis of Porter’s Five Forces and the Automobile Industry

Force Industry Response

1. Threat of new entrants High level of entry barriers.

2. Power of suppliers Hold very little real power.

3. Power of buyers Hold very little buying power.

4. Threat of Substitutes Availability of both alternate offerings andalternative mode of transportation.

5. Competitive Rivalry Less reliance on price based competition

Threat of new entrants

• In the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threat include all barriers to entry such as upfront capital requirements, brand equity, legislation and government policy, ability to distribute the product. It's true that the average person can't come along and start manufacturing automobiles. Automobile industry is very specific industry, thus it has higher level of entry barriers.

Bargaining power of suppliers

• The bargaining power of suppliers is very low in the automobile industry. There are so many parts that are used to produce an automobile, that it takes many suppliers to accomplish this. When there are many suppliers in an industry, they do not have much power due to that industry manufactures can easily switch to another supplier if it is necessary.

Bargaining power of buyer

• While consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars. Generally, however, it's safe to say the customers have some buying power, but it depends on the market.

Threat of substitute products

• We are not just talking about the threat of someone buying a different car. You need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles. Trucks and sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller sedans and light trucks. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute.

Industry Rivalry

• The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales.

An Example

• Volkswagen has maintained its position as one of the world’s highest-selling vehicle manufacturers, and is in fact bidding to replace Toyota as the single largest automaker this year itself.

• Despite its success in various countries, including over neighbor China, it’s story in India has been of a major debacle.

Volkswagen sales in BRIC

• What has happened with Volkswagen is not a case in isolation but has happened or is currently happening to a lot of country that have entered the Indian market and haven’t achieve much success.

• Another striking example would be that of Nissan, Renault and Fiat, all having failed to capture a substantial market share.

Reasons for the same

• Volkswagen has positioned itself as a relatively premium brand, and thus doesn’t compete in this high growth segment.

• Moreover, Volkswagen’s sedan offerings such as Skoda Octavia and Superb and Volkswagen Vento haven’t been able to compete strongly with models such as Maruti Swift Dzire and Honda Amaze. With high growth for entry-level compact cars, and strong brand recognition of Maruti, Hyundai and Honda, which have vast dealership networks across India

Future Prospects for Volkswagen

• As part of its mid-term strategy, the group announced that it will launch a new product every year in India starting 2015, and launched the new facelifted model of its Vento sedan this month.

• While protecting its relatively premium brand image, Volkswagen aims to enter high growth segments such as SUVs and compact sedans, rather than smaller hatchbacks.

• Volkswagen will also invest around $250 million in India through the decade, to increase local content sourcing and production and introduce new models.

• Volkswagen aims to expand its production base in India, starting with building engines and gearboxes in the country itself.

Conclusion

• The prospect of growth in the Indian markets as far as automobiles are concerned is tremendous. With the liberalisation of the economy, many new producers have entered the market and were competing with home producers such as Maruti. The situation now is completely different from what it was in the beginning of the 90’s. Now, the players who had entered the Indian automobile industry then have deep entrenched roots in terms of market share. Newer players are finding it hard to enter these markets regardless of the huge quantum of funds that they invest in order to establish themselves. the case of Volkwagen that we have taken here is the perfect example of this phenomena. We have analysed how despite the rigorous impositions of sanctions, Volkswagen was able to succeed in China and has not been able to do the same in India. This has been due to the various other factors that exist now that did not exist then, such as available of substitutes and market competition among others. In conclusion, we see through the application of the five forces given by Porter how difficult it is to enter the market and establish yourself than it was earlier. However, we also concede that it is too early and many predictions may prove later.