U.S. Automotive Industry: 3-3.5% Contribution to GDP, Growing Exports - Essay Sample

Introduction

The United States automotive industry has significant contributions to the national economy. The carmakers and companies that supply automotive parts alone contribute 3 to 3.5% to the overall Gross Domestic Product of the US (Ray, 2016). Although China is the leading manufacturer of automobiles, exports from the US motor vehicle production industry has grown tremendously (Ray, 2016). Currently, the US annual car production is in line with that of Japan (Ray, 2016). Domestic market leaders in this industry include General Motors, Chrysler, and Ford. The division of the US market share, according to Ray (2016), is as follows: Toyota 15.3%, Ford 11.4%, General Motors 15.3%, Honda 8.5%, and Hyundai-Kia 11.4%. In total, these companies control 62.8% of the US car-manufacturing industry (Ray, 2016).

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Market Structure of the Industry

The US car- manufacturing industry is highly oligopolistic because of the presence of a few corporations whose actions have a significant influence on the profits of small competitors. Ray (2016) said that the actions of 10 or fewer automobile manufacturers influence the direction of the industry. Foy (2014) as well, noted that the US has 16 major car-producing companies whose annual sales exceed one million. In this regard, about 10 component makers supply a significant proportion of parts that these manufacturers use to build their vehicles (Foy, 2014). In this industry also, the fates of the major oligopoly companies are interdependent (Ray, 2016). This phenomenon, according to the author, is evident from the past economic crises where such firms faced similar challenges and went into severe financial constraints (Ray, 2016).

Porter's Five Forces Model

The Threat of New Entrants

There are high barriers to entry into the US car-manufacturing industry, which implies that the threat of new competitors is relatively low. The industry is capital intensive, and it would require significant resources for the new entrants to establish distribution networks. Moreover, it is challenging for potential competitors to venture into the motor vehicle production industry since it is costly to install manufacturing facilities.

In the newspaper article by Foy (2014), the author said that a small cadre of suppliers dominate the industry and have the potential to change the balance of power. This aspect implies that it would be difficult for the new players to form effective distribution networks, as it would be very costly to acquire automotive parts. Also, the few oligopolistic firms enjoy economies of scale from significant suppliers of automotive parts. This situation means the new players would have extreme difficulty competing with oligopoly firms as they cannot offer more competitive pricing to attract customers. Together, these points show that the threat of new players and the attractiveness of the automobile production industry is weak.

Power of Suppliers

The suppliers of parts in the automobile-manufacturing industry have strong bargaining power, suggesting that they can influence the profitability of individual firms. Car-making businesses, according to Foy (2014), rely on a few suppliers that are the dominant force in the industry. The author further said that a few existing suppliers, rather than the owners of the brand name, have become influential in this industry over the past few decades (Ray, 2016).

Nonetheless, the threat that the existing suppliers will integrate in the future is little. The reason is that they can maintain a steady revenue stream by making small adjustments to their parts. The supplier's situation is contrary to carmakers who have to incur billions of dollars in investment to meet the changing customer needs, such as the new designs (Ray, 2016).

Power of Customers

A significant proportion of automobile buyers in the country are individual customers that acquire single vehicles. However, government agencies at the federal and state levels, as well as large corporations, have the potential to buy fleets of vehicles from car manufacturers of their choices. Importing companies and foreign governments may also order motor vehicles from specific dealers in bulk. In this view, customers have moderately strong bargaining power as they can sway the prices of motor vehicles. Buyers do not have a perfectly strong bargaining power but instead moderately strong one since they cannot influence suppliers of parts who also shape the pricing mechanism of the manufacturers. In other words, buyers have little power over car manufacturers, but they have some influence within dealerships.

Competition from Substitutes

The threat of substitutes in the car-manufacturing industry is weak. The manufacturers of automobiles do not have alternatives to automotive components that are crucial for their businesses. At the same time, none of the alternative modes of transportation, such as planes and trains, can provide convenience and accessibility that cars do. Still, an increase in the price of fuel may drive car owners to use public transportation.

Competitive Rivalry

Competition in the car-manufacturing industry is intense, owing to the presence of influential firms that strive to control the market. Some of them are General Motors, Honda, Fiat Chrysler, and Hyundai-Kia. These firms compete on both non-price and price dimensions to attract the customers and also enhance their competitive advantages. In this industry, competitive rivalry is intense or very strong to the extent that firms are moving towards using technological frameworks, smaller and fuel-efficient cars to grow their customer base (Ray, 2016).

From the analysis of the industry, it is apparent that there are several barriers to market entry. The presence of oligopoly, incumbent manufacturers that enjoy economies of scale, is the primary factor that makes the industry less attractive to the new entrants. Moreover, the existence of dominant suppliers that control brand owners makes the industry not attractive.

Strategic Options for Car Manufacturers

The first option for carmakers is to unite and enter into strategic alliances. Through this partnership, firms in the car-making industry can pool their resources in pursuit of common goals while still maintaining their independence. Some of these objectives are to enhance innovation and to access new technologies. In doing so, manufacturers can form a dominant force that can exert significant power over the suppliers. Since the bargaining power of the manufacturers would improve, they would also attain a higher position than suppliers. The strategic situation of individual carmakers would also improve as they would reach a higher bargaining power.

The second option is collaborative sourcing. In this case, multi-sourcing arrangements would enable car manufacturers to access a wide network of suppliers at an international level, which, in turn, would spark competition among the local vendors. This strategy would improve the strategic position of car manufacturers since it would promote a transparent and honest business relationship with suppliers. As competition increase, vendors would embrace joint decision making on critical issues of mutual interest, a situation that will weaken their position.

The third strategic option is vertical integration, which would enable car-manufacturers to own and control their retail locations, suppliers, and distributors. In doing so, manufacturers would better control their supply chain and the underlying value. Also, they would attain a higher strategic position since vertical integration allows them to manage costs and, more importantly, control the flow of information along their supply chains.

References

Foy, H. (2014, May 18). Age of mega supplier heralds danger for carmakers. https://www.ft.com/content/50c272c4-dce9-11e3-ba13-00144feabdc0

Ray, U. (2016). The US auto industry in 2013: five forces to consider. American Journal of Business, 5(3), 12-17. https://www.researchgate.net/publication/295482693