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American Automotive Industry and Porter's Five Forces ModelResearch Paper

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American Automotive Industry and Porter's Theory

American Automotive Industry in the light of Porter's Five Forces Model

automotive industry contributes a great deal in global economy. It is huge and a truly global industry; has gone through major wave of recession and is now in recent years showing gradual improvement. It has severely faced challenges of globalization, decreasing oil reserves resulting in high fuel costs, changes in buyer's demand and diminishing buying potential along with threats from direct competitions especially from Asian manufacturers who are enjoying low production cost.

The research paper is an overview of the automotive industry in America which is further followed by an analysis of the industry's structural characteristics, its profile and its impact on U.S. economy with the behavior it is expected to show in 2012. This will provide an understanding of the U.S. automotive industry as a whole in its current state.

Along with this, an explanation of current industry model using Porter's five forces theory will also enable us in understanding the threats and opportunities currently encountered by American auto industry. This paper also includes brief on each major automotive player in the American automotive industry and lastly the success formula adopted by growing companies in the industry.

a) Introduction:

The American automobile industry has seen a lot of ups and downs, not only because of the major impact of recession but this down turn is also due to rapid technological enhancements, competitors with an advantage of comparatively low cost and cheap labor, increased awareness of global warming and ever-changing consumer demands and preferences.

These are major challenges which may result in curtailing profits and decreasing higher shareholder's profit value. Although the industry is picking up now but still the current scenario looks way different than its prior booming years where the industry was well supported by government interventions, supply-base changes, and consumer driven adjustments affecting the complete value chain.

The industry has shown encouraging improvement since 2010 onwards. As per the research (Plunkett Research, para.1, 2012), there was a sharp decline in sales from 2007 till 2009 i.e. from 13.2 million to 10.4 million. And further adding to this turmoil, two major players of the industry, General Motors and Chrysler filed for bankruptcy. Furthermore, small scale dealers, supplier and supplement manufacturers also suffered their share of shock. Later on, 61% of General Motor (GM) shares (Plunkett Research Inc. 2011, para,1, 2012), were bought by U.S. federal government a literal bail out, whereas Chrysler managed to exist only after an acquisition by Fiat.

Given below are the details of U.S. automobile sector which will further help in having better understanding of its behavior.

1) Industry Definition:

"Automobile industry, the business of producing and selling self-powered vehicles, including passenger cars, trucks, farm equipment, and other commercial vehicles. By allowing consumers to commute long distances for work, shopping, and entertainment, the auto industry has encouraged the development of an extensive road system, made possible the growth of suburbs and shopping centers around major cities, and played a key role in the growth of ancillary industries, such as the oil and travel businesses. The auto industry has become one of the largest purchasers of many key industrial products, such as steel. The large number of people the industry employs has made it a key determinant of economic growth." (encyclopedia2.thefreedictionary.com)

Since the invention of first automobile by a Germen Engineer -- Karl Benz in 1885 the industry has grown many a folds.

The members of the automotive family include self powered vehicles, passenger cars, heavy / light trucks and other commercial / special purpose vehicles. The growth of villages to modern suburbs can be attributed to the infrastructure and road system extended for the usage of vehicles minimizing the travel time, making the life of people much easier. Providing the back bone to the oil industry; this marvelous industry has provided employment to people all over the world and has contributed its major chunk in the global economy.

By definition the American automotive industry was marvelous until 2005, to understand the extent of innovation led by American engineers it is hard to believe that in 1929 before the great depression the world had 32 million usable units of automobile and American industry produced 90% of them. In 2006 Japanese automotive industry surpassed the American counterpart by a small margin only to lose its standing to China in 2009. The recent effect of global economic downfall on the American industry was felt the most. The first reason; decline in buyer potential as a result of economic downturn, secondly the increasing cost of labor, raw material and fuel and finally their prime focus that shifted to manufacturing sport utility vehicles (SUVs) and pick-up trucks with low fuel economy. This shift was motivated by confidence on brand value, the exhilarating engine power (muscle) of manufactured vehicles and relatively high profit margins on number of units sold. While the Asian competitors played smart and adopted creative marketing strategies for their fuel efficient vehicles. After the initial decline in sales suffered by the "big three" (GM, Ford and Chrysler) they realigned their focus to smaller, cheaper and more fuel efficient vehicles but too little and too late. During this period the competitors gained the market share and filled the void left by the "big three."

2) Industry Profile:

Given below is the industry profile of automotive sector in America. The profile constitutes of industry's current employment, skill sets borne by its employees, government support and its environmental impact.

2.1 Employment:

Figures of current employment in U.S. automotive sector as of Jan 2012 are given in figure 3, Appendix a. As mentioned in Occupational Outlook Handbook of Bureau of Labor Statistics,

"Employment of automotive service technicians and mechanics is expected to increase as fast as the average through the year 2014. Between 2004-2014, demand for technicians will grow as the number of vehicles in operation increases, reflecting continued growth in the number of multi-car families. Growth in demand will be offset somewhat by slowing population growth and the continuing increase in the quality and durability of automobiles, which will require less frequent service. Additional job openings will be due to the need to replace a growing number of retiring technicians, who tend to be the most experienced workers. (para 1)

Most persons entering seeking employment in the automotive industry can expect steady work, even through downturns in the economy. While car owners may postpone maintenance and repair on their vehicles when their budgets become strained, and employers of automotive technicians may cutback hiring new workers, changes in economic conditions generally have minor effects on the automotive service and repair business. (para 2)

Opportunities in the automotive industry should be plentiful in vehicle maintenance and repair occupations, especially for employees with formal automotive service technician training.(para3)"

2.2 Government Support:

The U.S. Government has been an unquestionable and unprecedented savior of American automotive industry, especially Detroit-based companies. Providing loans to different manufacturers in the market; the acquisition of 61% share of GM Motors (retrieved from 2012, Plunkett Research, para.1) by federal government is also a glaring proof that the government itself wants to rejuvenate the industry within America and bring it to par with other competitors globally. "Cash for Clunkers," an initiative for uplifting the industry offers up to USD 4500 (White Paper, Grant thornton, p.3, 2009) for older vehicles. This initiative is greatly welcomed by manufacturers and consumers equally as it is decreasing the number of used vehicles, paving the way for new car models being sold or mortgaged and providing consumers with enough cash in return of their old vehicles.

Approximation table of federal funding of automotive sectors is given in Appendix a in figure 4. Furthermore, as shared by Kilkenny (2010), "Department of Energy funds are helping to develop eight of the 20-or-so electric-drive models that automakers plan to introduce over the next two years. There's a $1.6 billion loan to Nissan to build its 100-percent electric Leaf in Tennessee; a $528 million loan to Fisker Automotive to buy and reopen a General Motors plant in Delaware to build plug-in hybrids; a $465 million loan to Tesla Motors to buy and reopen a New United Motor Manufacturing Inc. plant in Fremont, Calif., to build all-electric sedans; a $16 million tax credit to THINK an electric-car startup, to set up shop in Indiana; and a $5.9 billion loan to Ford Motor Co. To re-equip factories in Illinois, Kentucky, Missouri, Michigan and Ohio to produce more fuel-efficient cars." (para.4)

2.3 Skill Set:

Vehicles come with in-build functions as never seen before. The technology used in automotives has sophisticated to a great detail. Incumbents seeking employment with vehicle manufacturers service be it

Getting themselves acquainted with the right human resources and ensuring readiness for future challenges, some manufacturers now provide 2-year associate degree programs; where incumbents spend a considerable amount of time in the service department and take full-time classes. Updating students with modern technology trends in the industry, the American automotive industry is well-prepared… [END OF PREVIEW]

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