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The global automotive industry is a highly diversified sector that comprises of manufacturers, suppliers,
dealers, retailers, original equipment manufacturers or OEMs, aftermarket parts manufacturers,
automotive engineers, motor mechanics, auto electricians, spray painters or body repairers, fuel
producers, environmental and transport safety groups, and trade unions.

Threat of New Entrants

Bargaining power of Industry Bargaining Power of

Suppliers Competitors Buyers

Threat of Substitute
Product and Service

Industry structure, manifested in competitive forces, sets industry profitability in medium and long run
and also provides a framework for anticipating and influence competition over time. It also helps in
defining a distinct strategic positioning. Porter Five forces framework helps in analysing the industry
structure by looking at impact of the five forces acting in it. The five forces affecting the auto component
industry of the world are analysed below:


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High Rivalry among existing competitors limits the profitability of an industry. The degree to which
rivalry drives down the profits in an industry depends on:

a)‘ Intensity with which companies compete.

b)‘ Basis on which they compete.

In an auto component part industry, degree of rivalry is quite high as:

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 ë‘ There are number of players in the industry and market is fragmented and each player attempts
to attain a larger market share thereby disrupting the market.
ë‘ Fixed costs are high, raising the breakeven volumes and thus the rivalry
ë‘ Overcapacity, large corporate stakes and high exit barriers also contribute to increased
competition
ë‘ mith the advent of internet, information complexity has increased which has further intensified
the competition.
ë‘ There are few companies with distinct brand identity and the product differentiation as well as
the switching costs for the customer is low.

All the above factors increase the degree of rivalry in the industry and lower its attractiveness.


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New entrants to an industry bring new capacity and a desire to gain market share that puts pressure
on prices, costs, and the rate of investment necessary to compete. The threat of entry thus, put cap
on profit potential of an industry.

For an auto component industry, the threat of entry of new players is low mainly due to the
following reasons:
ë‘ Economies of Scale and proprietary learning curve of existing players, most of the players in the
industry have grown with the growth of automobile industry and has presence in the industry
since many years.
ë‘ arge capital investments are required in the industry which increases the entry barrier for a
new player.
ë‘ The strategic partnerships between the customers i.e. the automobile manufacturers and
existing players also reduces the threat of entry.
ë‘ The partnerships for and ease of access to distribution and necessary inputs by the incumbents
also deters the entry of a new player in the industry.
ë‘ The concerns for safety and environment and importance of the industry for the economy of the
nation calls for increased role of government in the industry and also increases the entry
barriers due to standards and policy adopted by the governments of various nations.


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A substitute performs the same or a similar function as an industry͛s product by a different means. The
auto component industry is historically well placed in this context as there are a few substitutes for the
parts manufactured but with the advent of internet and fast changing technology.

The market structure for the auto parts industry can be divided into the two categories namely the
Original Equipment manufacturers which normally service the Original manufacturers of the automobile
manufacturers and then there are the aftermarket segments which pose as a substitute to the OEs.

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Buyers are powerful if they have negotiating leverage relative to industry participants, especially if
they are price sensitive, using their clout primarily to pressurise price reduction thus influencing the
appropriation of the value created by an industry.

ë‘ Auto component industry faces high bargaining power of their customers mainly due to
following reasons:
ë‘ There are few automobile companies and thus buyer͛s market is highly concentrated which
increases their power to negotiate.
ë‘ The customers which are automobile companies in this case have large horizontal scope, huge
brand identities of the likes of GM, Toyota etc and large geographical scope; they are bulk
buyers and thus have an upper hand on the component suppliers.
ë‘ Though the substitutes are limited, the fragmented nature of industry and presence of large
number of players lowers the switching cost of the buyer.
ë‘ The increased presence of internet has reduced the effect of geographic boundaries and eased
the process of information gathering for the buyer and hence has helped in increasing their
bargaining power.
ë‘ The government policies on safety, environment, licensing, FDI etc and high and fluctuating oil
prices put pressure on buyer͛s profit which force them to have more negotiations with their
suppliers.
ë‘ Factors such as Pull-through, price sensitivity etc are high for the buyers and thus their
bargaining power increases.
ë‘ The product differentiation offered by the industry is low and the customers have the scale and
expertise to backward integrate (most of the big buyers already have their auto component
manufacturing units).
Thus, the industry faces high bargaining power of their customers.


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Powerful Suppliers capture more of the value for themselves by charging higher prices, limiting
quality or services, or shifting costs to industry participants and can reduce the profitability of the
industry that is unable to pass the cost.

For the auto component industry the major raw material used is carbon and steel. The suppliers pose
little threat of forward integration. Also the suppliers products are not differentiated thereby reducing
the bargaining power of the suppliers.

The above framework of industry analysis is extended by collaborating the critical role of the
complementors in the Value Net as shown below:

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Customers

Competitors Company Complementors

uppliers

Value Net Framework given by Adam Brandenburger adds a critical component required for the industry
analysis. Complementors are the participants from which the customers buy complementary products
or services, or to which suppliers sell complementary resources. They also have a large influence on the
success or failure of the business in the industry.

Complementors for auto component industry are: The insurance companies, aftermarket segments (act
as both a complementor as well as a substitute), internet, auto accessories, etc. The effect of some of
them is analysed below:

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: Complementors are more likely to have the power to pursue their own agenda
when they are concentrated relative to competitors and are less likely to do so when they are relatively
fragmented. In the case of auto component industry it could be seen that if the insurance companies,
aftermarket segment and auto accessories providers are concentrated then they could affect the
profitability of the firm in the industry.

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" mhen the costs to buyers or suppliers of switching across
complementors are greater than their costs of switching across competitors, that increases
complementors͛ ability to pursue their goal eg in auto component industry, if the accessories gives a
distinct positioning to the automobile manufacturer or when insurance or aftermarket product gives a
larger cost advantage, the bargaining power of complementor increase.

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" The ease with which the complementor can switch
to work with different competitors versus the ease with which competitors can switch to working with
different complementor also determine complementor͛s power over the player.

   
 $ " Complementors are likely to have more power when they can threaten
to invade competitor͛s turf more credibly than competitor can threaten to invade complementors͛ turf.
Clearly in case of auto component industry this threat from the complementor is minimum eg an
incumbent can easily go into accessories manufacturing but it is difficult for accessories provider to get
into component manufacturing.

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 $  " Competition with the complementors to claim value is likely to be less
intense when the size of the pie available to be divided among the complementors and competitors is
growing rapidly. In case of auto component industry, there is a sharp growth in the demand and market
of automobiles (shown in one of the exhibits above) which converts into high demand, growth and
profits for the industry, thus this threat is minimum.

From the above analysis it could be seen that auto component industry may  0   
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in terms of economic profitability as the industry has a comfortable position and favourable
environment in case of:

Threat of new entrant, bargaining power of suppliers, threat of substitute and relative power of
complementors, all of which are quite low.

But when it comes to Industry rivalry and bargaining power of the buyers, the industry must devise
strategies to deal with these forces to minimise their impact on its profitability.

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Despite having poor information technology infrastructure, India has a comparative advantage in the
automotive industry due to the following factors:

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a.‘ Its middle class is highly educated and its top educational institutions are world class

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‘ There is emphasis on engineering in the country

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‘ English is the working language throughout most of the middle-class Indians, giving
them the competitive edge to be able to communicate with foreign countries

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‘ mage rate for entry-level programmers are very low in terms of international standards

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a.‘ Though there is an increase in wage rate, there is also an increase in productivity
concurrently

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Satellite has removed distance as an obstacle in doing business for India, allowing for instant
communications.

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 7)‘ ë 

India is in a geographical position that has a time zone advantage that results in faster
communication with other countries in terms of time.

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ë‘ As ABC has been in business in India ë‘ It has a strong presence only in
since 1980, it has a strong presence India. It does not have any
and a good understanding of the operations in other countries.
Indian market. ë‘ It has not been quick to adapt its
ë‘ It has developed a respected brand business model to changing
name in Original Equipment and emissions and environmental
spares segments in India standards
ë‘ It has long standing and good ë‘ Did not adopt latest environment
relationships with customers, standards in its manufacturing
suppliers and distributors in India processes
ë‘ Exports account for 10% of its
revenues, indicating demand for the
product in overseas markets and also
that the product meets
internationally accepted standards
ë‘ Ýpgraded its technology and
capabilities for superior products
ë‘ It has invested in Human Resources
and in TQM thereby indicating that it
is an organisation with a modern
outlook and is aware of what is
required to develop its core
competencies and a sustainable
competitive advantage.

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ë‘ ABC can set up operations in other
countries so as to cater to a wider
market.
ë‘ It could diversify into new product
lines such as electronics that lead to
superior customer value for cars.
ë‘ It could set up manufacturing bases
in regions where it has low market
share
ë‘ By entering into Joint Venture with a
competent foreign company that
intends to enter the Indian market,
 
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ë‘ mith the opening up of the Indian
economy there has been an influx
of foreign companies that are
eating into ABC͛s market share. It
has seen a fall in market share in
spite of high growth rate of the
industry.
ë‘ Increasingly stringent environment
and safety norms is a threat to
ABC͛s current business model
ë‘ Downturn in the automotive
markets of the Ý.S and Europe
 the foreign company͛s technology could decrease its revenues from
products could be made available its exports
leveraging it with its strong
distribution networks

Ansoff͛s Product/ Mission matrix

Present
product New Product
Present   

Mission  
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New Mission %  
  % 


 
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  2 " Acquisition of technologically competent competitor based in Eastern India where

ABC͛s market share is low and competitor has a strong distribution network.

According to Ansoff͛s matrix, this is the market development strategy where ABC is introducing its
current product into a new market. The pros and cons of the same are given below:

Pros:
1.‘ Increase in sales and revenues
2.‘ Access to an already established supply chain
3.‘ Technology of the competitor could be matched with ABCs own core competencies to
develop products that are of a high quality

Cons:

1.‘ A strategic fit may not be achieved between ABC and the acquired company that could
result in a lot of extra cost.
2.‘ A hostile takeover could result in a lot of extra cost that may not be worth the benefit
that can be derived from the move.
3.‘ There exists significant political and economic risk in the region due to the Naxalite
movement and also due to the political outlook of the Communist Party of India that is
governing mest Bengal.

  #!
: JV in India for auto components with medium sized auto component manufacturer
from Japan seeking entry into the Indian market

According to Ansoff͛s matrix, this is the market development strategy.

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 Pros:

1.‘ ABC will be able to leverage its technological and OE with that of the Japanese
company and give a strong competition to the foreign competitors
2.‘ Increase in the market share due to lower prices, higher quality of products

Cons:

a)‘ oss of control

b)‘ ABC will still need to find newer markets to meet pressures of globalisation

  #$ " Foray on its own into select overseas markets for which investments will be made
abroad for developing a strong Supply chain

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Pros:

a)‘ New markets will bring better revenues and help ABC develop a strong brand value
b)‘ Investments in a global supply chain will enable ABC develop world class products for its
customers
c)‘ It can work on setting environmental standards in its manufacturing processes with the help
of global partners

Cons:

a)‘ ogistical issues in global supply chain

b)‘ It does not solve the problems in its dropping market share and sustainability issues in India

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Of the three alternatives given it is advisable that ABC goes for joint venture with the medium sized
auto component manufacturer from Japan seeking entry into the Indian Market. It would be advisable
to do so on following rationale:

ë‘ Rising costs of automobile manufacturing in the mest coupled with benefits of sourcing from
India such as low cost (which saves the automobile manufacturers about 25 to 30%) etc. have
been instrumental in driving mestern automobile manufacturers to source auto components
from India. According to the Automotive Component Manufacturers Association of India
(ACMA), domestic components production increased by 15% from 2004-05 to ÝS$10 billion in

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 2005-06. It recorded a compounded annual growth rate of 20% between 2000 and 2005 and is
expected to grow to ÝS$18.7 billion by 2009. So in order to increase the production and capture
the market share Joint venture will be a good strategy for increasing the production capacity
and capabilities in order to cater to the increasing demand.
ë‘ Exports of auto components grew at the rate of 35 per cent during 2002-07 and touched ÝS$ 3.6
billion in 2007-08. It is estimated to reach around ÝS$ 20 billion-ÝS$ 22 billion by 2015-16.
During April-January 2008-09, exports grew by 27.3 per cent to ÝS$ 2.12 million. A majority of
Indian exports are sent to Europe and North America. Exports increased by 28% in 2005-06 to
ÝS$1.8 billion from the previous year with Europe and North America respectively accounting
for 36% and 26% of the total auto components exports from India. So joint venture will in fact
be a good strategy to share the cost and profit of rising exports and to exploit the opportunity.
ë‘ The medium sized auto manufacturer gets the advantage of accessibility to the Indian market
and a low cost manufacturing centre for its establishments. In return ABC gets access to
advanced technology and better practices. In fact ABC can embrace best practices/standards
such as ean Manufacturing, TQM, Six Sigma, etc. They can invest substantially to improve their
production capacities and capabilities and use IT for design, development and simulation and
achieve flexibility in small batch productions. This in turn propelled modernisation and induced
dynamism in the industry. This would also help the company in dealing with the stringent
emission and safety norms.
ë‘ India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India
are 25 to 30 per cent lower than their western counterparts. Seeing the growing popularity of
India in the automotive component sector, the Investment Commission has set a target of
attracting foreign investment worth ÝS$ 5 billion for the next seven years to increase India's
share in the global auto components market from the existing 0.9 per cent to 2.5 per cent by
2015. Joint venture would again be instrumental for attracting FDI and sharing the cost of new
establishments.‘

Inspite of several handicaps there are a number of favourable factors, which are

ë‘ Trained and skilled human resources

ë‘ mide Industry base manufacturing 97% of component required
ë‘ Growing entrepreneurship
ë‘ Growing domestic market
ë‘ Expanding global markets
ë‘ Transnationalisation of world economy
ë‘ Investments by non-resident Indians
ë‘ Economic liberalization

There are several challenges, which the industry has to overcome at industry level and organizational
levels. Few of these can be mitigated by joint ventures

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(  9 " : The Indian auto component industry is wide with over 400 firms in the organized sector,
but small in sales turn over which is estimated to be less than Rs. 15000 Crores for the organized sector.
This sector is the fastest growing sector in Auto industry growing at the rate of 28%. The industry also
exports close to RS 180 Crores at around 12% of combined sales. It is currently a Small and fragmented
industry by global standards.

 
 " : An A.T, Kearney survey found that defect rates in India are in the range of 1000-2000
ppm against Japanese average of 100-200 ppm. In the past few years, as competitive influence have
increased, Indian suppliers have sought to improve their quality standards. This trend needs to be
reinforced if Indian players wish to become competitive global exporters. JV can help Indian players to
get access to higher quality manufacturing processes.

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" : The advantage of low cost labour is negated due to lower productivity level
of Indian work force. Indian abour productivity is lower relative to the rest of the world. JV can help
increase the labour productivity by adopting the management techniques used by foreign companies

 
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  ) " : Historically the sector has been dependent on the OEM segment
for product design and did not develop the engineering capability on its own. Most of the technology
improvements made by Indian manufacturers are through joint ventures or technological
collaborations. Foreign majors like Visteon and Delphi have recognized the advantages of production
base in India and a large number of joint ventures and technology collaborations are leading to up
gradation of technology. In the increasingly tired manufacturing structure, Tier-1 players are at the
forefront of technology transfer. If the Indian suppliers wish to upgrade technology they will have to
increase the global Tier-1 players operating in India up from 4 to 15/20 and develop relationships with
large global tier-1 suppliers. Over time there has to be a shift of design and development capability to
Tier 11 and tier-111 suppliers. Indian suppliers in these categories must eventuality raise their research
and design expenditure from current level of 0.5% to global level of 5%.

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