AUTOMOBILE MANUFACTURING INDUSTRY PORTER ANALYSIS

Automobile Manufacturing Industry Porter Analysis

Automobile Manufacturing Industry Porter Analysis

Characteristics of the Automobile Industry

Although I will deal with specific characteristics of the industry in the next section using Porter's competitive strategy model, I would like to provide some general information about the auto industry at this point.

The industry is characterized by a high degree of operating leverage, i.e. most of its costs are of a fixed nature. Compounding this feature, the labor contracts of UK companies tend to guarantee the income of a worker, even if he or she is laid off. This converts what would normally be a variable cost into a fixed one. To be profitable, the manufacturers need to sell at high volumes and must keep the plants running as much time of the day, as possible.

Even though production technology in the auto industry has increased a lot over the years, the auto industry is still a labor intensive one. Ford employs over 370,000 people and GM even 650,000! This keeps costs at a very high level (Bond 2003 214-333). Companies have tried to cut the size of their work force over the past years to stay competitive and encountered stiff resistance from labor unions, particularly the Marks and Spencer. UAW-organized strikes at GM plants cost the company production of 96,000 vehicles in the 2nd quarter of '97 alone; Chrysler reported similar losses. It can be expected that the cost burden on auto-makers will not decrease over the short run, which heats up competition even more.

Finally, the UK automobile industry has seen some interesting developments in the last few years. Demand has been gradually shifting away from cars to light trucks. These include pickup trucks and the increasingly popular minivans and Sport Utility Vehicles (SUV) (Harrison Huntington 2000 348-612). In fact, car sales have steadily declined in the last few years, while truck sales have experienced healthy growth. Of the roughly 15.2 million vehicles sold in the UK in 1997, trucks accounted for nearly 6.8 million units or 44%! This percentage is expected to increase during the next few years and might even exceed auto sales over the long run.

Porter's Competitive Strategy Model

To evaluate the overall attractiveness of the automobile industry, I conducted an industry analysis, using Michael Porter's model of the 5 forces.

Degree Of Competition

The competition in the largest auto market worldwide is very intense. The largest portion of sales comes from the American "Big Three", General Motors (GM), Ford, and Chrysler, whose sales account for about 75% of total market volume; i.e. the UK market is highly concentrated. In addition, auto companies from all over the world, primarily from Japan and Europe fight for UK market share. A lot of the foreign competitors are already operating production facilities in the UK to avoid currency fluctuations and trade restrictions (examples include Toyota, Honda or BMW) (Clark Gertler and Feldman 2000 25). This makes competition even fiercer for the 3 domestic companies.

Because the market is very saturated and has low growth potential (cars have ...