PORTERS FIVE FORCES ANALYSIS- THE INDIAN AUTOMOBILE INDUSTRY SUBJECT STRATEGIC MANAGEMENT
Submitted by: Sandeep Kumar Singh
Submitted to:Prof. Hitesh Manocha
Pintoo Prasad Ujjwal Kumar Rameez Abbas Alok Kumar Ankit Saraswat Nivedita Singh Himanshu Bisht 1
INTRODUCTION: Indian automobile industry has grown leaps and bounds since 1898, a time when a car had touched the Indian streets for the first time. At present it holds a promising tenth position in the entire world with being # 1 in Two Wheelers and # 4 in commercial vehicles. Withstanding a growth rate of 18% per annum and an annual production of more than 2 million units, it may not be an exaggeration to say that this industry in the coming years will soon touch a figure of 10 million units per year. The automobile industry in India ² the ninth largest in the world with an annual production of over 2.3 million units in 2008 ² is expected to become one of the major global automotive industries in the coming years. As of 2009, India is home to 40 million passenger vehicles and more than 1.5 million cars were sold in India in 2009 (an increase of 26%), making the country the second fastest growing automobile market in the world. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads. A major chunk of India's car manufacturing industry is based in and around the city of Chennai (also known as "Detroit of India"), with the Indian city accounting for 60 per cent of the country's automotive exports. Chakan corridor near Pune, Maharashtra is another prominent vehicular production hub with General Motors, Volkswagen/ Skoda, Mahindra and Mahindra in the process of setting up or already set up facilities. Halol in Gujarat, Gurgaon neighboring New Delhi, Aurangabad in Maharastra , Kolkatta in West Bengal are some of the other automotive manufacturing regions around the country.
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Genre of Indian Automotive Industry: -
The above diagram shows the current genre of the Indian Automobile Industry.
Gr oss Turnover : The Indian automobile industry has seen a steady increase of its total turnover over the years. As of the last Financial Year 2008-09, the figure has been 38, 238 million dollars. Below is a table depicting the Gross Turnover of the Indian Automobile Industry in the past five years. GROSS TURNOVER OF THE AUTOMOBILE INDUSTRY IN INDIA
Year
3
(IN USD MILLION)
2004-05
20,896
2005-06
27,011
2006-07
34,285
2007-08
36,612
2008-09
38,238
Current Market Share of the Indian Automobile Industry: -
Current Market Share
Source: SIAM
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Industry Analysis: -
Five Forces
Model
INTRODUCTION Assessing the Balance of Power in a Business Situation The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it
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can be very illuminating when used to understand the balance of power in other situations too. Under standing the Tool:
Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are: 1. Supplier Power :
Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 2. Buyer Power :
Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 3. Competitive Rivalry:
What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. 4. Threat of Substitution:
This is affected by the ability of your customers to find a different way of doing what you do ± for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 6
5. Threat of New Entry:
Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. These forces can be neatly brought together in a diagram like the one below:
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Michael Porter identifies five forces that inf luence an indus try. These forces are
Degree of Rivalry Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies i n the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players. Threat
of Substitutes
The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offe red by automobiles. The switching cost associated with using a different mode of transportation, may be high in terms of personal time, convenience and utility.
Barriers to entry The barriers to enter automotive industry are substantial. For a new compan y, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnership s or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there.
Supplier¶s Power In the relationship between the industry and its suppliers, the power axis is tipped in industry¶s favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers.
Buyers¶ Power In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers¶ favor. This is due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands.
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SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points:
Strengths y y y y y
Large domestic market Sustainable labor cost advantage Competitive auto component vendor base Government incentives for manufacturing plants Strong engineering skills in design etc
Weaknesses y y y y y
Low labor productivity High interest costs and high overheads make the production uncompetitive Various forms of taxes push up the cost of production Low investment in Research and Development Infrastructure bottleneck
Oppor tunities y y y y y
Commercial vehicles: SC ban on overloading Heavy thrust on mining and construction activity Increase in the income level Cut in excise duties Rising rural demand
Threats y y y
Rising input costs Rising interest rates Cut throat competition
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Gr owth Forecasts y
y
The size of the Indian automotive industry is expected to grow at a rate of 13% per annum over the next decade to reach around 31.96 Million in 2016 from 14Million in 2009. The total investments required to support the estimated growth are around US$ 120-159 billion by 2016.
Recommendations: y
y
y y y
y
y
y y
Manufacture and export of small cars, Multi Utility Vehicles (MUV), two & three wheelers, tractors, components should be further promoted in lieu of the current export trends. Appropriate Tariff Policy should be followed to attract further investments in the Automobile Sector. Measures should be taken to expand the domestic market. Exports should be more encouraged. Policy initiatives for competitiveness and development of technology should be taken. Infrastructure development around identified automotive clusters should be undertaken. Emphasis should be on more product innovation and Value added services as the current customer demands better products and services aggressively. A road map for Auto Fuel Policy beyond 2010 should be considered. Setting up of virtual SEZ and Auto Parks for auto component industry should be considered.
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