Porter's Five Forces: Bargaining Power of Suppliers and Buyers

Porter's Five Forces: Bargaining power of suppliers and buyers

What was earlier a highly vertically integrated automobile industry has changed in the present day. Auto manufacturers often produced most of the parts in-house and those that were not made in-house were purchased using a competitive bidding system. Now, in most cases, the in-house suppliers have been sold off and they cater to a diverse set of consumers. Also, the automobile manufacturers usually enter into long-term contracts with their suppliers called Tier-1 suppliers who now produce modules that comprise several components. This provides the suppliers an incentive as they don't have to compete in a bidding system and the suppliers are also held accountable for quality control. The companies can and do walk away from long-term contracts if the quality is poor. Additionally, the supplier manufacturing plants located closer to auto manufacturing plants to execute Just-in-time inventory system allows the buyers to exert more control over the suppliers.

As the companies enter into long-term contracts with their suppliers and have the option to walk away if the quality levels are not adhered to the supplier power is low in the global automotive industry. The industry is also dominated by a few powerful buyers i.e. auto manufacturers and there are many small auto parts suppliers giving the buyers bargaining power over the suppliers. Also, the auto manufacturers in the past produced parts in-house and can do so once again, which keeps the suppliers from raising component prices. Since the auto parts industry is fragmented the buyers can also switch suppliers and in effect play off the suppliers against each other to get the best price.

This provides the auto manufacturers an opportunity to work with their long-term suppliers to develop auto parts that are cheaper and customize them as per the manufacturers' designs. The bargaining power of suppliers is low and that of the buyers is high.

Entry by new competitors:

New players are entering the market such as Geely from China and Tata Motors from India, which acquired Jaguar and Land Rover from Ford and. By acquiring established brands these foreign companies are leveraging the brand loyalty of the customers to retain and increase the market share. Also, they now have access to the superior production technology and control of inputs such as labor, materials and equipment i.e. they now possess absolute cost advantage.

In the 1970s the Japanese and European manufacturers entered the US market facilitated by the rising oil prices and demand for fuel-efficient cars by the consumers. The response of the American companies was sluggish, which allowed the new entrants to capture the market share.

The foreign companies such as Toyota, Volkswagen, Hyundai and Subaru now have their manufacturing units in North America and this allows them to compete on prices with the American companies such as General Motors, Ford and Chrysler.

Intensity of rivalry

The automobile industry is an oligopoly and companies in the industry are, to a large extent, able to determine the industry prices. As the industry is not fragmented and companies don't indulge in price wars the industry has better opportunities to grow.

The competitors in the global automobile industry are facing the recession repercussions and their competing power has reduced giving new entrants from developing nations an opportunity to enter foreign markets more easily. In the early 2000 the US automobile manufacturers to some extent, were able to intensify competition because of the demand for the light trucks by American consumers, which was also compounded because of the low oil prices in the US. But in early 2008, oil prices increased and the customers switched to fuel-efficient cars made by foreign companies and even after the oil prices fell the perception that the oil prices would go up after economic recovery has taken hold and the demand for the American SUVs has remained low.

However, demand in developing nations has been growing and this provides the auto manufacturers in the US an opportunity to expand to newer foreign markets.

The cost conditions also affected the competition in the US. Auto manufacturers have high fixed costs and when the demand declined their sales fell below breakeven levels increasing the losses.

These factors also created high exit barriers, the companies are locked into an unprofitable industry where overall demand is declining and there is excess productive capacity. This has increased the intensity of rivalry.

Bargaining power of buyers

As consumers have a wide array of options to choose from they can exert relatively high bargaining power. There are low switching costs associated with selecting competing brands for a consumer.

Macroenvironmental Factors

Macroeconomic Forces

Demand for cars in developed countries decreased while that in the developing countries increased during 2008. China is predicted to become the largest consumer of automobiles. Fuel costs in America also shifted demand in the US from sports