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Introduction
The purpose of this study is to apply the Porter’s Five Forces Model and Industry Life Cycle in the analysis of Chinese automobile manufacturing industry. In addition, advantages and limitations of both models will be critically identified and some suggestions in dealing with the limitation will also be provided. Furthermore, some recommendations will be explained which aim to improve companies’ competitiveness by developing effective strategy through the analysis of two models.
The threat of entrants/Barriers of entry
IBIS World Industry Report (2011) highlighted that China’s car manufacturing industry was characterized by the high fixed costs from the car design and manufacture, economies of scale due to the mass production, as well as a large number of well-established competitors such as SAIC and Volkswagen etc. In addition, the requirements from Chinese government such as the National Development and Reform Commission as well as the environmental regulations in car industry had issued notifications and set certain limitation to create barriers for the entry of new firms (MarketLine, 2013). Furthermore, the access to the technology of major global automobile manufactures also acts as a significantly barrier for new entrants. Therefore, the barriers of entry are high and the overall threat of new entrants is weak.
Threat of substitutes
The main substitutes that could have the potential in threatening cars are variable. Motor bicycle, public vehicles and even bicycles and electric bicycle can be a substitute of cars for customers (Zeng, 2012). But from different aspects, this substitute do not provide the symbol of statues as cars do, neither enough space of comfort and safety for customers. Besides, in most big cities in China, motor bicycles are suffering with much restriction in the consideration of environment protection. On the contrast, several other substitutes like electric cars such as Tesla and solar energy cars that were developed with the support of environmental policies in China (IBISWorld, 2011). Nevertheless, this new energy substitutes are not regarded to be formed in a short period in the consideration of the difficulty of new technological research (Zeng, 2012).
For the further discussion of the car manufacturing industry, another main threatening substitutes in China is used cars. Car dealerships had realized increasing consumers started to avoid making huge purchases on new cars and were more likely to buy used cars than before (MarketLine, 2013). However, some published schemes by government such as used car replacement allowances had been incentivized consumers to purchased new cars and reduced the threat posed by used cars (Freedonia, 2011). Overall, the threat of substitutes is moderate.
Supplier’s bargaining power
The researcher had reported that there were more than 30 finished automobile manufactures and around 3000 factories that manufacture accessories in China (Zeng, 2012). The large number of competitive suppliers result in the most accessories are standardized and lack of differentiation, therefore, it is difficult to distinguish between suppliers’ competitiveness, which reduce the suppliers’ power. However, there are still some high technological accessories which could tackle with the cars’ emission, energy saving and safety are in shortage (Chow, 2011). Furthermore, some large-scale automobile manufacturers has established accessories manufactures in-house, rather than relied on the third party suppliers, which could also weaken the power of suppliers (Zeng, 2012). Overall, the lack of differentiation, the oversupply and over competition as well as the low production capacity in high-technological accessories result in the low power of suppliers.
Buyer’s bargaining power
Take the consumers, which are the end users, as the buyers on the assessment of buyer’s bargaining power, it can be showed that consumers have the ability to select favorable products partly due to the oversupply car capacity. Meanwhile, consumers also had the power to oppose certain types of cars and reduce its market share and brand reputation such as Japanese cars. The research of Nielsen (2014) also presented that the Japanese brands of Toyota, Nissan and Honda had only accomplished 66%, 63.6% and 53.7% of sales targets in China for the first three quarters of 2014. According to the ChinaBgao (2014), the market share of Japanese cars in Chinese car industry had been suffering a continuous decline from the start of 2010, especially after the incident of Diaoyu Island.
Furthermore, the new policies in decreasing the car tariffs, announced by Chinese government after China’s accession to WTO, had also significantly strengthened consumers’ bargaining power in choosing the favorable cars (Zeng, 2011). In addition, some large-scale clients such as leading state enterprise or government purchasing department often require a large number of procurement, therefore, increase their bargaining power by being offered for special discounts by the car manufacturers (IBISworld, 2011). Overall, the bargaining power of buyers can be concluded strong.
Degree of Rivalry
IBISworld (2011) illustrated that industry concentration was an effective method in the measurement of the extent to which companies dominate an industry. In china’s car manufacturing industry, the competition is between the large multinational companies and domestic companies. According the China Association of Automobile Manufacturer (2015), the top five domestic competitors (SAIC, FAW, DongFeng Motor, ChangAn, Beijing Automotive) accounted for 22% of market share in total in 2015, with 17% decrease of like-for-like sales.
More specifically, for the domestic car manufacturers, Shanghai automotive, FAW, DongFeng and ChangAn and Beijing Automotive had a fierce competition and each accounted for 17.5%, 15%, 14.5%, 10% and 7% of market share in 2013, and the market share of multinational enterprises, German, Japanese, American, Korean and French passenger cars were 19.2% 16%, 12.5%, 8.9% and 3.1% respectively (CAAM, 2013). The China Association Automobile Manufacturers (2015) stated that Chinese car industry represented a fairly-high level of industry concentration, with no one enterprise totally dominating the industry. Therefore, it indicates the requirements for the potential entry of a high technology skills, effective management level and a strong manufacturing strengths in the competition with the existing competitors. Overall, the degree of rivalry in the Chinese car industry is high.
Industry life cycle model
Development
The first stage of development for Chinese car industry was back to the year of 1950-1960. During this time, there were few competitors in the market and FAW was the mainly enterprise in the car industry (CAAM, 2011). The power of buyers was low as the supplies were limited and the consumers’ requirements were not yet clearly defined in the beginning of this phase. Besides, because of the low purchased volumes, the industry was relatively insignificantly for suppliers in the profit making and had not decided on the particular products that were able to meet customers blurred requirements (Industry report, 2000).
Growth
With the increasing knowledge and innovative technology research, the Chinese car industry soon entered the growth stage of its life cycle during the late year of 1960 to 1980. The market started to grow as both customers gained more information about the products and the massive newly introduced technology had assisted enterprises to produce more efficient and cheaper products (CAAM, 2011). In 1966, HongQi, as one of Chinese most representative brands, started to enter the age of mass production, and the new technology of V8 engine was also introduced during this time. Meanwhile, SAIC Motor had also improved its manufacturing equipments and product quality, and more than 17,000 cars were produced as the use of official cars and taxi by the year of 1979 (Industry report, 2000). The economics of scale in production allowed both prices and costs of cars to decrease, and the products were becoming more standardized. The innovative technology led the industry concentrated on producing cars more efficiently and cheaper (Mazzucato, 2005). During this phase, high-technology skills, huge capital investment and massive production ability were required for enterprises to enter this market, therefore, the barriers of entry were high, and only most efficient and large-scale firms were able to compete while smaller firms were forced to exit (Mazzucato, 2005).
Shakeout
The year of late 80s to 90s were defined as the shakeout phase to Chinese car industry. Some domestic automobile manufacturers began to work with foreign companies, which contributed to the industry expanding in the shakeout stage of its life cycle. In the middle of 1980s, SAIC Motor started to cooperate with Volkswagen and introduced newly equipments as well as technology improvement, which assisted automobile manufacturers significantly increase sales volume (Industry report, 2000). Under this phase, cars were no longer used specifically for government or as luxury items, instead, increasing households started to purchase cars. The rapid increase of the customers car purchasing and newly technology introduction resulted in a boost competition in the industry. Both domestic and foreign joint venture automobile manufacturers shared profit from the greater number of sales (CAAM, 2011).
Mature
Chinese automobile industry report (2015) illustrated that Chinese automobile manufacturing industry had been in a mature phase of its life cycle for the last ten years. Most household own private cars and customers demand started to concentrate on the replacements of their exiting cars. And the opportunities for technology innovation were relatively low, and manufacturers devoted more consideration into the improvement of manufacturing process, advertising and price competition (Mazzucato, 2005). Meanwhile, the price war and differentiated brands had created further barriers to entry for new and small companies, and the main purpose of existing competitors was to remain their market share. Clive Sinclair (2005) also noted that the highly competitive situation for the car industry had resulted in a narrow profit margins, yet they still had to discover the possible market segments where a vast amount of capital investment have to be made, as a consequence, fewer companies were willing to discover new generation of technology improvement. The similar products with a vast number of competitors contributed to a slower growth in profit, and companies under this phase were suffering a competitive price and promotion war in order to remain sales (Capozzi. 2008).
Conclusion and recommendation
With the above discussion, it can be concluded that Chinese automobile industry is an intense competitive market with both domestic and foreign automobile manufacturers fighting in gaining profit and market share. Meanwhile, with the advanced technology, high quality products and differentiated brand advantages, foreign automobile manufacturers account for a larger market share than domestic participants. However, the phase of mature life cycle had resulted in an intense price war, and as a consequence, the profit margin was less attractive for large-scale enterprises and, thus also contributed to their unwilling to enable innovative technology, which in the beginning was the key factor that promoted the development of this industry. And most companies are driven mainly by competing on extremely expensive advertising and price wars rather than product innovation (Mazzucato, 2005). Therefore, the future of Chinese car industry as well as the development of the car company are largely rely on the degree to which new technological opportunities will be introduced (OpenLearn, 2005). One of the most controversial problems is environmental problems such as pollution, emission, and different carcinogen gases that caused by cars. Therefore, electric, energy cars and other pollution free transportation will be massive required by the market with the support of governments with favorable policies to encourage innovative technology (IBISWorld, 2011). So in order to improve the competitiveness, companies have to devoted more consideration into developing a strategy with the research of advanced technology in automobile manufacturing.
In addition, more domestic automobile manufacturers are suggested to develop and expand the business into foreign markets such as central Asia, Middle East, South America and Europe (IBISWorld, 2011). In 2005, DongFeng Motor Corporation listed on the Hong Kong Securities Exchange, which represented the largest IPO in the international automobile industry during the year (CAAM, 2011). It was considered as the symbol of Chinese automobile manufacturer entering the global capital markets. With the driven of internationalization, the globally components sourcing can also be developed as a competitive strategy for automobile manufactures, and the cooperation with foreign-fund enterprises will also assist companies with a greater market share and sales revenues in automobile manufacturing industry (Mazzucato, 2005).
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