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to price (i.e., demand is inelastic with respect to price). The existence of close
substitutes means that customers will switch to substitutes in response to
price increases for the product (i.e., demand is elastic with respect to price).
The extent to which substitutes limit prices and profits depends on the
propensity
of buyers to substitute between alternatives. This, in turn, is dependent on
their
price performance characteristics. The more complex the needs being fulfilled
by
the product and the more difficult it is to discern performance differences, the
lower the extent of substitution by customers on the basis of price differences.
FIGURE 3.3 The structural determinants of the Five Forces of Competition
Rivalry between Established Competitors
For most industries, the major determinant of the overall state of
competition and
the general level of profitability is competition among the firms within the
industry. In some industries, firms compete aggressively ± sometimes to the
extent
that prices are pushed below the level of costs and industry-wide losses are
incurred. In others, price competition is muted and rivalry focuses on
advertising,
innovation, and other non price dimensions. Six factors play an important role
in
determining the nature and intensity of competition between established firms:
concentration, the diversity of competitors, product differentiation, excess
capacity, exit barriers, and cost conditions.
Threat of Entry
If an industry earns a return on capital in excess of its cost of capital, that
industry
acts as a magnet to firms outside the industry. Unless the entry of new firms is
barred, the rate of profit will fall toward its competitive level. The threat of
entry
rather than actual entry may be sufficient to ensure that established firms
constrain
their prices to the competitive level.


Economies of Scale ± Since Indian automobile market is of order $ 350 billion,

the
economies of scale are very high. Thus, threat of new entrants islow.


Product Differences ± Since there is hardly any difference in the offerings of

the various
providers, so product differentiation is low. So threat of new entrants ish igh .


Brand Identity ± Since there is no big Retailer like Amazon.com orWal-Mart in

India.
So threat of new entrants ish igh.


GovernmentPolicy ± Since the GovernmentPolicy has been quite restrictive till

now
with respect to the Retail market &FDI, so threat of new entrants isl ow.


Capital Requirements ± The capital requirements for entering in the automobile

sector
are substantially high( high fixed cost and cost of infrastructure), so only big names can
think of venturing into this area So, in that respect threat of new entrants isl ow.


Access to distribution ± Since in India there is no well established distribution

network.
So threat of new entrants isl ow.
Bargaining Power of Buyers
The firms in an industry operate in two types of markets: in the markets for
inputs
and the markets for outputs. In input markets firms purchase raw materials,
components, and financial and labor services. In the markets for outputs firms
sell
their goods and services to customers (who may be distributors, consumers,
or
other manufacturers). In both markets the transactions create value for both
buyers
and sellers. How this value is shared between them in terms of profitability
depends on their relative economic power. The strength of buying power that
firms
face from their customers depends on two sets of factors: buyers¶ price
sensitivity
and relative bargaining power.


Product Differences ± Since there is hardly any difference in the offerings of

the various
providers, so product differentiation is low. So bargaining power of buyers ish igh.


Buyer Information ± Today¶s customers are well educated about the various
product
offerings in the sector. So bargaining power of buyers ish igh .

Buyer Switching Costs ± Since customers don¶t have to pay a fat premium to be
registered for provision of services , so bargaining power of buyers ish igh.

Brand Identity ± High Brand Identity and trustworthiness reduce the bargaining
power
of buyers but, otherwise the bargaining power of buyers ish igh .

BuyerProfits ± Since dealers offers discounts and various bundling services like
0%
insurance, old car sale, etc, on different items. Hence bargaining power of buyers ish igh .

Bargaining Power of Suppliers

Analysis of the determinants of relative power between the producers in an
industry and their suppliers is precisely analogous to analysis of the
relationship
between producers and their buyers. The only difference is that it is now the
firms
in the industry that are the buyers and the producers of inputs that are the
suppliers.
The key issues are the ease with which the firms in the industry can switch
between different input suppliers and the relative bargaining power of each
party.


Product Differences ± Since there is hardly any difference in the offerings of

the various
suppliers, so product differentiation is low. So bargaining power of Suppliers islow .

Supplier Information ± Today¶s automobile manufacturers are well educated

about
different Suppliers. So bargaining power of Suppliers islow .

Supplier Switching Costs ± Since different Suppliers hold resources as per buyer¶s
requirements and a large inventory has to be maintained. So bargaining power of
Suppliers islow as they would have to incur a huge cost on switching. But if they get
automobile manufacturers for similar products who can pay higher Supplier switching
cost is low. In such case, bargaining power of Suppliers ish igh .


Brand Identity ± High Brand Identity and Trustworthiness of a Supplier increases

the
bargaining power of Suppliers. But, otherwise the bargaining power of suppliers isl ow.

Measures for more Conducive Growth

The automobile industry across the world has great potential to trigger
sustained
employment, mobility, inter- sectoral industrial growth and thus conduce
conditions for general economic and social well-being. However, there is need
to
promote and sustain international cooperation between Governments and
industry.
There is need for coordinated research and development, standardization of
designs
and broader technologies, effective cost cutting to enhance affordability and
loosening of trade barriers across the globe. There are separate measures,
which
require addressing at the national and international levels. Some suggested
steps at
both levels are listed below.
Suggestions at the national level
Further lessening the incidence of taxes and loosening of non-tariff
barriers has to
be attempted with a faster pace faster. A regime of single tax across the
country is
an ideal situation and possibilities of this should be explored.
A vehicle retirement programme which will assist not only in fleet
modernization
and reduction of emission but will also provide quantum fillip to the demand
should be put in place.
There is a need to brief the international communities on technological and
quality related capabilities of Indian automobile industry. Substantive efforts
are required for educating opinion leaders and build a strong µMade in India¶
brand in overseas
markets. Existing incentives for promoting exports are considered
inadequate. An institutional mechanism such as the Automobile
ExportPromotion Council, which can address industry-specific issues and
facilitate exports is urgently required.
Labor laws¶ reforms to facilitate better productivity and reduction in
manpower
costs as has already been committed by the Government should be
expedited.
Greater tax incentive on expenditure incurred on research and development in
automotive sector.
Tariff rationalization and taming of avoidable competition between rail and
road
transport sectors should be carried out. In this unhealthy competition, both the
industries are unable to realize their full potential.
Easier availability of market credit for funding automobile acquisition is
required.
Despite lower interest rates, availability of easy credit in rural and semi-urban
areas requires more focused attention. This can substantially spur the
demand.
Suggestions at the international level
Serious and sustained dialogue on regional cooperation in automobile sector
should begin at the earliest. Dialogue should be regular and focused in which
Governments and industry should both engage.
The recent statistics of custom duties show that the average tariff rates of
different
countries have declined. However, it has been noticed that the problem of
high
tariffs is still prevalent in certain sectors. These high tariffs are generally
noticed in
developed countries.
Reduction of peak tariffs is necessary to facilitate free flow of automobiles.
Non-tariff barriers should be phased out with mutual dialogue and consensus.
Mutual recognition should be accorded to the testing and certification
agencies in
various countries.
Countries should join hands in developing alternative fuels to replace the
existing
fossil fuels. Similar cooperation is required in other critical areas of
technological

Pestle Analysis of Automobile Sector

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