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Porter's 5 Forces in the Automobile IndustryPorter's Five Forces, also known as P5F, is a way of examining the attractiveness of an industry. It doesso by looking at five forces which act on that industry. These forces are determinants of that industry'sprofitability.

The five forces are:

1. The threat of new entrantsIn the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threatinclude all barriers to entry such as upfront capital requirements (it costs a lot to set up a carmanufacturing facility!), brand equity (a new firm may have none), legislation and government policy(think safety, EPA and emissions), ability to distribute the product (Alfa Romeo has been out of the USsince the early 90s largely due to the inability to re-establish a dealer network. But if you are looking atSingapore, for example, only one Alfa Romeo dealer is needed!).

2. The bargaining power of buyers/customers Who in the US has ever bought a car without bargaining? Anybody? In 2009 especially, US dealers weregiving great deals to buyers to get the industry moving. While quantity a buyer purchases is usually a

good factor in determining this force, even in the automotive industry when buyers only usually purchaseone car at a time, they still wield considerable power.

However, this may be different in other markets. In Singapore it sure is lower than in the US, creating amore favorable situation for the industry but not the buyers.

Generally, however, it's safe to say the customers have some buying power, but it depends on themarket.

3. The threat of substitute productsIf buyers can look to the competition or other comparable products, and switch easily (they have lowswitching costs) there may be a high threat of this force. With new cars, the switching cost is highbecause you can't sell a brand new car for the same price you paid for it. A P5F analysis of the carindustry covers the new market, not used or second-hand.

But what about the threat of substitute products before the buyer makes the purchase? You need to knowwhether the market you are analyzing has many good alternatives to new cars. A vibrant used car marketperhaps? Used cars threaten the new market. How about a very good mass-transportation system?Product differentiation is important too. In the car industry, typically there are many cars that are similar -just look at any mid-range Toyota and you can easily find a very similar Nissan, Honda, or Mazda.However, if you are looking at amphibious cars, there may be little threat of substitute products (this is anextreme example!).

4. The amount of bargaining power suppliers have In the car industry this refers to all the suppliers of parts, tires, components, electronics, and even theassembly line workers (auto unions!). We know in the US the auto unions are tremendously powerful. Butwe also know that some suppliers are small firms who rely on the carmakers, and may only have one

carmaker as a client. So this force can be tricky to evaluate.

5. The intensity of the competitive rivalry (which is in part determined by 1-4)We know that in most countries all carmakers are engaged in fierce competition. Tit-for-tat price slashes,ad campaigns, and product developments keep them on the edge of innovation and profitability. Marginsare low and pressure between rivals is high.

All major car-producing nations experience this intense rivalry. This obviously includes the US, Japan,Italy, France, the UK, Germany, China, India, and more.

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State-owned car manufacturers like Proton in Malaysia experience less rivalry but are still under pressurefrom imports.

While a P5F analysis applies to all companies competing in one industry (and market) the same, whatdiffers is that those firms' profitability will vary between them. This is because of their own competitiveadvantages and varying business models. So just because all firms in one industry and market aresubject to the same forces doesn't mean they perform equally.

A P5F analysis should always be done in conjunction with other assessments, and should not beregarded as being absolute. It should only serve as an indicator, not absolute fact or even necessarilyaccurate.There are many critical assumptions that should be made and explained in one's P5F analysis. Themarket must be described, the competition must be explained, and the products must be defined.

For example, a P5F analysis of the car industry in the US would not necessarily apply in China. Themarkets are totally different, and the product life cycle is not even close to being the same.

Another example is the type of automotive industry. A P5F analysis of the electric car industry would beentirely different than one of the conventional car industry.

Porter's Five Forces in the Auto Industry Around the World

For a P5F analysis of the auto industry in the US, click here.To see a P5F analysis of the auto industry in China, click here.A P4F analysis of the Indian auto industry is here.

The Porters Five Forces analysis is designed to evaluate the competitive forces in the industry the firmoperates. If it determines that the combination of forces in the industry act to reduce profitability, it issaying the industry is unattractive. Even worse is an industry close to total competition.

Keep in mind that this exercise evaluates the industry, not the firm (General Motors). As such, thisassessment would apply to Ford, Chrysler, Toyota, Honda, or any other automotive firm manufacturing

and selling cars and trucks in the US.

"...manufacturing and selling cars and trucks in the US" is key. You must think about and clearly defineyour business unit before starting a P5F analysis. Is it in the US? China? India? Japan? Obviously thethreats and forces in these countries will be far different than in the US.

The Porter analysis examines three horizontal forces, or competition in the same industry: Threat of newentrants, threat of substitute products and threat of established rivals. Two forces are from verticalcompetition, or those from the supply-chain: Bargaining power of customers and bargaining power ofsuppliers.

This exercise would be relatively easy to perform if the industry were stable and uniform. None of theanswers to the degree of threat Porters Five Forces pose are black and white or clear-cut. In one case,

the bargaining power of suppliers, either extreme could be argued.

Moreover, the table in the appendix which tallies up the criteria for each of the five forces fails to identifymany of the current economic conditions and dynamics in the automotive industry today. As a result, thefindings may not be completely congruent with reality.

Keep in mind this analysis was written in the Spring of 2009, in the worst of both the automotive shake-upand the global economic crisis. Things have since changed.

A summary of the findings is below:

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1. There is low threat of new entrants2. The bargaining power of buyers/customers is low3. There is a huge threat of substitute products4. Suppliers do not have much bargaining power5. There is a significant amount of rivalry among competitors

The analysis above indicates that the industry is moderately favorable to profitability.

However, in another analysis of the industry, based upon industry-specific news and facts surroundingthe suppliers, buyers, competitors, and more, the results are very different. This is not based on the talliedresults in the appendix:

Footnote 10: Source, AFP:http://www.google.com/hostednews/afp/article/ALeqM5iXk3cCzM02V62eC50Iizk8S3tJFwAccording to this second analysis, the threats of substitute products, bargaining power of customers, andrivalry among competing firms are high, and are unfavorable to industry profitability.

The bargaining power of suppliers and threat of new entrants are moderate, which is not very favorable toindustry profitability. It should be noted, however, that the bargaining power of suppliers may be inducedupon them by force, as if they stop supplying it is not because they have money and are threatening theautomakers, but because they cannot afford to keep assembly lines open. This creates a negative-sumgame, hurting both parties. It could force the automakers to rescue the suppliers.

In summary, the industry is unfavorable to profitability.