Automotive Industry – Competitive Structure and Resources
WS3A7-Team 1- MBAo221
Indiana Wesleyan University
An oligopoly is defined by Keat and Young (2009) as, “A market in which there is a small number of relatively large sellers.” The auto industry is considered to be to an oligopoly because there are a large number of sellers, thus leaving the consumer only a certain number of companies from which to purchase an automobile. The major manufacturers include Ford, Chrysler, General Motors (GM), Toyota, and Renault/Nissan.
According to Taylor (2012), profits are going to be derived from a handful of mega-companies in North America, Europe, and Asia. These companies include General Motors (GM), Ford, Toyota, Volkswagen, Renault/Nissan, Hyundai/Kia, and Fiat/Chrysler. The chart below, taken from Taylor’s article, demonstrates global sales of auto makers in 2011 and what is predicted to be the companies’ global sales in 2020. (Taylor 2012). This chart reflects which auto makers are at the top in terms of sales, so this could also be interpreted as the companies that are the strongest within the industry.
An industry is a group of firms that market products which are close substitutes for each other. Some industries are more profitable than others due to the dynamics of competitive structure of an industry. There are basically five forces that determine the long-run profitability of an industry; threat of entry of new competition, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and degree of competition (Porter, 2008). Many companies within the United States and world may look to the automotive industry as a possible “cash cow.” This is due to the large inelastic demand followed with a hefty pay off per sale. As a company interested in entering the automotive industry competition, one may find that it is easier said than done. Since 1860, there have been over 1,800 manufacturing companies that have entered into this competitive market within the United States. Of those 1,800 manufacturers, over 760 have gone out of business, leaving a success rate of less than 57% (Georgano, 2000). Entry into this manufacturing arena requires a huge down payment. Procuring machinery, personnel, factories, and raw materials can put a multi-million dollar price tag of investment and overhead before one sale is completed. Before these complicated pieces of machinery start rolling off the production line, sales strategies and logistics need to also be considered sinking more overhead and investment into start up costs.
For the manufactures that decide to exit this market, there is a large sum of invested money and jobs that are lost. In many situations, losing such a large degree of sunk costs in a plant closure tends to become the precursor to company bankruptcy or selling off of the company. The excess inventory, machinery, and other assets will need to be sold off to try to maintain survival of the existing company. If the company has debt, income from selling off assets or the bankruptcy will be utilized to pay these debts. Either way, exiting this market can cause great financial drain and costly repercussions of the company’s financial livelihood. In recent years, more manufacturers have taken the financial risk on and been able to enter into the market. The automotive market structure began as an oligopolistic structure due to the limited vendors. In this system, several large sellers have some control over the prices. As time progresses and more domestic and foreign manufacturers enter into the competition, a more perfect competition (many buyers and sellers, none being able to influence prices) is emerging (Business Dictionary.com, 2012) reducing elasticity within the market.
Education and training, wages, and technology are three major factors which impact the quantity and/or skill level of the labor supply in the auto industry. In reviewing the labor...
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Bureau of Labor Statistics (2012)
Business Dictionary.com. (2012). Market Structure. Retrieved September 20, 2012, from Business Dictionary.com: http://www.businessdictionary.com/definition/market-structure.html
Georgano, Nick (Ed.)
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Keat, P. & Young, P. (2009). Managerial Economics (6th ed.). New
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Porter, M. (2008). The five competitive forces that shape an industry. Retrieved from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-an-industry.
Taylor,A. (2012). The race to become the world 's uber-automaker. Retrieved from
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