Marketing mgmt assignment 3

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Marketing Management
Assignment-3

Topic – Porter’s model for automobile industry analysis

Submitted to: Submitted by: Mr. Krishan Gopal Sharma Rishabh

Note: this document is only part of assignment and not to be used as a firm source of information

Introduction
The Automobile Industry in India is one of the largest industries and a key sector of the economy. The Indian automotive industry started from 1991with the government’s de-licensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Since then many large global companies have set up their facilities in India taking the production of vehicle from 2 million in 1991 to 9.7 million in 2006. At present, India is the world’s • • • • Largest tractor and three-wheel vehicle producer. Second largest two-wheel vehicle producer. Fourth largest commercial vehicle producer. Eleventh largest passenger car producer.

General features of the Industry

Production: According to the Society of Indian Automobile Manufacturers, the Indian automobile industry has reached double-digit growth for the past three years in a row. In 2006, the industry produced 10.9 million vehicles, an increase of 16.22% over 2005. In 2005, production grew 14.5% over the previous year. The production of the automotive industry is expected to achieve a growth rate of over 20 per cent in 2006-07 and about 15 per cent in 2007-08. Exports: the cumulative annual growth rate of automotive exports during the period 2000-01 to 2005-06 was 32.92 per cent. Exports during 2006-2006 and 2007-2008 are expected to grow over 20 per cent. Imports: Europe is the biggest importer of cars from India, while African nations largely account for the import of buses and trucks. China is most recently making inroads into this market. The South-East Asian region is the prime destination for Indian two wheelers. Sales: • • • Passenger Vehicles: Growth in sales of passenger vehicles was 18.45% in 2006. This was almost three times the growth witnessed in 2005. Sale of passenger cars expanded by 20.0%. Export of passenger vehicles increased by 12.9% Utility Vehicles: 12.4% Two-wheelers, commercial vehicles and three-wheelers: Export growth at a rate of 24%, 26% and 72% respectively.

Investment: Among the car companies that are investing in India are US automakers General Motors and Ford, Germany's BMW and DaimlerChrysler AG, France's Renault, Japan's Suzuki, Toyota and Honda, and South Korea's Hyundai. There is also a boom in auto ancillary companies. India is an attractive outsourcing destination for global auto companies because of its strong engineering skills and low costs. Sourcing parts from India is 10-20% cheaper for US auto makers and about 50%

cheaper for their European counterparts.

Auto Components: This industry grew by over 28 percent between 1995 and 1998, and has been sustaining double digit growth, clocking 16 percent in 2004-05, and 15 percent in 2005-06. The Indian auto component industry is quite comprehensive with around 500 firms in the organized sector producing practically all automotive components; there are more than 10,000 firms total. India’s component industry now has the capability to manufacture the entire range of auto-components, for example, engine parts, drive, transmission parts, suspension and braking parts, electrical, body and chassis parts, equipment, etc The Industry's Challenge: Even though the automotive industry is robust, car manufacturers are complaining that the government's frequent change in policies is not encouraging the industry. Changing the policies and guidelines frequently severely hurts the companies’ plans. It also affects investment decisions in the country

Future Plans: The Government has prepared a ten-year Automotive Mission Plan (AMP) to draw a future plan of action and remove obstacles in the way of competition, such as that required infrastructure be put in place well in time to alleviate its constraining impact on the growth. The plan envisages a tax holiday for the industry on investments exceeding $225,000, 100% tax deductions of export profits, and deductions of 50% on foreign-exchange earnings. It also calls for a one-stop clearance for foreign-direct-investment proposals in the sector and deductions of 30% of net income for 10 years for new industrial undertakings. To bring down the cost of power and fuel, which accounts for 6% of the manufacturing costs in the auto sector, captive power generation would be encouraged to enable industries to access reliable, quality and cost-effective power.

Potential of the Automobile industry In 2008, Hyundai Motors alone exported 240,000 cars made in India. Nissan Motors plans to export 250,000 vehicles manufactured in its India plant by 2011. Similar plans are for General Motors. Turnover of Automobile Manufacturers(In USD Million) Year 2002-03 2003-04 2004-05 2005-06 2006-07 In USD Million 14,880 16,544 20,896 27,011 34,285

The figures show that the automobile sector in India has been growing robustly. The market shares of the different types of vehicles will clearly depict the demand pattern in this sector. Domestic Market Share for 2008-09 Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers 15.96% 3.95% 3.6% 76.49%

Automobile Companies
• • • • • • • • • • • • • • • • • • •

Audi Bajaj Auto BMW Chevrolet DaimlerChrysler (Mercedes) Fiat Ford General Motors Hindustan Motors New Car Launches Hero Honda Motors Hyundai Motors Mahindra & Mahindra Maruti Udyog San Motors Skoda Tata Motors Yamaha Motors Top Automobile Companies

Notable Multi-national automobile manufacturers Locally manufactured automobiles of MNCs
• • • • • • • • • • • • •

Audi: A4, A6. BMW: 3 Series, 5 Series. Chevrolet: Spark, Aveo U-VA, Aveo, Optra, Cruze, Tavera. Fiat: Palio, Grande Punto, Linea. Ford: Ikon, Fiesta, Fusion, Endeavour Honda: Jazz, City, Civic, Accord. Hyundai: Santro, i10, Getz, i20, Accent, Verna, Sonata. Mercedes-Benz: C-Class, E-Class Mitsubishi: Lancer, Lancer Cedia. Renault: Logan škoda: Fabia, Octavia, Laura. Toyota: Corolla, Innova, Fortuner Volkswagen: Jetta, Passat.

Cars sold in India as Completely Built Units
• • • • • • • • • • • • • • • • • • • • •

Audi: A8, TT, R8, Q5, Q7. Bentley: Arnage, Continental GT, Continental Flying Spur, Arnage. BMW: 6 Series, 7 Series, X3, X5, X6, M3, M5, M6 and Z4. Chevrolet: Captiva Fiat: 500. Honda: Civic Hybrid, CR-V. Hyundai: Tucson. Jaguar: XF, XK. Lamborghini: Gallardo, Murciélago. Land Rover: Range Rover, Range Rover Sport, Discovery 4, Freelander 2. Maybach: 57 and 62. Mercedes-Benz: CL-Class, CLS-Class, S-Class, SL-Class, SLK-Class, M-Class, Viano. Mitsubishi: Pajero, Montero, Outlander. Nissan: Teana, X-Trail. Porsche: 911, Boxter, Panamera, Cayman, Cayenne. Rolls Royce: Ghost, Phantom, Phantom Coupé, Phantom Drophead Coupé. Skoda: Superb. Suzuki: Grand Vitara. Toyota: Camry, Land Cruiser, Land Cruiser Prado. Volkswagen: Touareg. Volvo: S80, XC90.

Porter’s Five Forces Analysis
Michael Porter identified five forces that influence an industry. These forces are: (1) degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5) supplier power. For more on this framework proposed by Porter, please see Appendix C. Like other industries operating under free market, capitalistic systems, viewing the automotive industry through the lens of Porter’s Five Forces can be helpful in understanding the forces at play. Degree of Rivalry The automotive industry in India is no longer the playground of Suzuki and Tata; global companies Compete in the Indian market, while various companies have globalized themselves. The Japanese car makers Honda and Toyota entered a fairly disciplined Indian market and have been very focused in growing their shares of the market. The great diversity of rivals in terms of cultures and associated philosophies has intensified rivalry in the industry. Market growth is slow in the established markets and companies must fight fiercely to eke out gains or prevent losses in market share. However, growth is potentially huge in the rapidly industrializing in these booming markets; companies could take advantage of the opportunities to reap handsome rewards. The degree of rivalry in the automotive industry is further heightened by high fixed costs associated with manufacturing cars and trucks and the low switching costs for consumers when buying different makes and models. The industry is not yet in its shake-out phase and is still struggling to find the upand-coming stars and possibly topple the leaders. 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 afforded by automobiles. The switching costs associated with using a different mode of transportation, such as train, may be high in terms of personal time (i.e., independence), convenience, and utility (e.g., luggage capacity), but not necessarily monetarily (e.g., round trip train fare on MARTA would most likely be less expensive than the cost of fuel consumed on a similar round trip, daily parking, car insurance, and maintenance). The exception to this statement occurs in the urban areas with high population densities. In these areas, the substitutes available (e.g., walking, mass transit, bicycles, etc.) can be less costly than automobiles and thus alternative modes of transportation are often preferred. Also, there are inherent underlying social and cultural attitudes that keep people from owning automobiles in some parts of the world. The Indian dream of “a car [or two] in every garage” is not what the rest of the world currently wants or needs. However, the marketing arms of the global automotive manufacturers are certainly working very hard to change this paradigm, and with unprecedented production volumes worldwide, all signs indicate that they are succeeding. Most with the ability and means to own a vehicle, who live in a society with the necessary infrastructure (e.g., roads and fuelling stations), will do so. India is famous for its two-wheelers (bikes and mopeds) and three-wheelers. These are very real and obvious threats to auto manufacturers. Barriers to Entry The barriers to enter the automotive industry are substantial. For a new company, the start-up capital required to establish manufacturing capacity to

achieve minimum efficient scale is prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily retooled. Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies. All of the large automotive companies have globalized and entered foreign markets with varying degrees of success. In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist. However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold. In most markets, the capital and expertise needed to setup an auto or parts manufacturing facility, would be a great enough barrier to entry to prevent many new entrants from setting up. However, given India's incredible growth forecasts, infrastructure progress (especially new and better roads), and ever-expanding financing options to rural residents, the market is attractive. As such, we expect the threat of new entrants to be high.

Buyer and Supplier Power In the relationship between the automotive industry and its suppliers, the power axis is substantially tipped in the industry’s favour. The automotive industry is comprised of powerful buyers who are generally able to dictate their terms to their suppliers. There are specific characteristics that make members of the automotive industry powerful buyers: (1) there is not a grand proliferation of companies manufacturing automotives, and the four largest automotive companies in the U.S. have roughly 90% of the value of shipments and value added in the U.S. (see Appendix D); (2) automotive parts (e.g., oil filters, mufflers, belts, etc.) are standardized commodities and these parts are only used on automobiles; and (3) backward integration can and does occur, as seen in summer 2005 when Ford purchased struggling parts maker Visteon. In the relationship between the automotive industry and its ultimate consumers, purchasers of finished vehicles, the power axis is tipped in the consumers’ favour. Consumers wield the greatest power in this relationship due to the fairly standardized nature of the automotive commodity (a vehicle) and the low switching costs associated with selecting from among competing brands. However, the automotive industry remains marginally powerful due to the large customer to producer ratio. The automotive industry is a dynamic place. With the forces above at play, and with history as a guide, it is safe to say that the automotive industry will continue to change, evolve, and adapt. It is likely that the suppliers to the manufacturers have considerable bargaining power. They are not held ransom by one single manufacturer as they can market their products to any of the others in India. Buyers in India have a wide variety of choice. There are more than 20 foreign manufacturers selling in India (including ultra high-end such as Rolls-Royce and Lamborghini). Of course there are also a plethora of incredibly cheap choices, like the famous Tata Nano.

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