Business Policy and Strategic Management

Project On
“PESTEL And 5 Porter Forces In Automobile
Industry”

Submitted to ​ By
Mrs. Ruchi Khandelwal ​Rajul Agarwal (D12)
Jehan Chawla (D17)
Mukund Agarwal (D22)
Krishna Gupta (D27)
Tanish Singh (D49)
Introduction To Automobile Industry
India became the fourth largest auto market in 2019 with sales increasing 8.3 per cent
year-on-year to 3.99 million units. It was the seventh largest manufacturer of commercial
vehicles in 2018.
The Two Wheelers segment dominates the market in terms of volume owing to a growing
middle class and a young population. Moreover, the growing interest of the companies in
exploring the rural markets further aided the growth of the sector.
India is also a prominent auto exporter and has strong export growth expectations for the near
future. Automobile exports grew 14.50 per cent during FY19. It is expected to grow at a
CAGR of 3.05 per cent during 2016-2026. In addition, several initiatives by the Government
of India and the major automobile players in the Indian market are expected to make India a
leader in the two-wheeler and four-wheeler market in the world by 2021.

The industry produced a total 30,915,420 vehicles including passenger vehicles, commercial
vehicles, three wheelers, two wheelers and quadricycle in April-March 2019 as against
29,094,447 in April-March 2018, registering a growth of 6.26 percent over the same period
last year.

In April-March 2019, overall automobile exports grew by 14.50 percent. While Passenger
Vehicles exports declined by (-) 9.64 percent, Commercial Vehicles, Three Wheelers and
Two Wheelers registered a growth of 3.17 percent, 49.00 percent and 16.55 percent
respectively in April-March 2019 over the same period last year

PESTEL Analysis
Political factors
The Indian automobile industry has attracted many investors. All these are pooled in three
main regions despite the expansive size of the country. This is due to the fact that these areas
are more developed as compared to other regions. The government has a hand in this because
it has invested in the development of these regions.

Politically speaking, the automobile industry has greatly benefited from the government of
India. The government has set up bodies which help the automobile industry in carrying out
research and development. These bodies also maintain a monitoring system for the
automobile industry.
The Indian government is also urging the state governments to ensure continuous power
supply to the automotive manufacturing units as well as granting them with the preferred
plots of land. Captive Generation for the automobile sector has also been proposed. The auto
policy of the Indian government also includes the promotion of vehicles which are run on
alternative energy resources. Talks are also on for extensive research, development and
designing facilities that would effect modernization in the automotive sector.

The policies adopted by the Indian government for the growth and development of the
automobile sector, has led to a large number of foreign investments. It has also given rise to
an increased sales rate for two wheelers and other automobiles. India is also becoming the
ultimate outsourcing destination for global automobile companies like Ford, Mitsubishi,
Toyota, Hyundai etc.

Economic Factors

Economic factors have a significant impact on how an organisation does business and also
how profitable they are. Factors include – economic growth, interest rates, exchange rates,
inflation, disposable income of consumers and businesses and so on.
Governments use interest rate control, taxation policy and government expenditure as their
main mechanisms they use for this. Many automobile industries tend to focus on identifying
customer demands and fulfilling their needs. But sometimes these industries can affect the
growth of the economic trends. So there are few economic factors that affect the automobile
industry and decreases the gap between the customer demand and supply.

Let's have a brief discussion on each economic factor that affects the automobile industry.

Taxation
Another major economic factor of auto motive industry is taxation. The high tax on fuel
encourages consumers to shift from private vehicles to public transport. For instance, in many
cities car parking is expensive or inconvenient.

Demand & Supply Should Be Directly Proportional

In an automotive industry demand and supply plays a big role and both should be directly
proportional for the growth of the economy.

Government Regulations
On an average, the government regulations and laws regulate most of the industries in one or
the other form. If automakers didn't follow the government regulations and laws, then they
face stiff fines and penalties.

Environmental Impact
The top environmental factors of this industry are fuel economy and emission or clear air
regulations are few challenges, which have major impact on the growth of the economy. So
automakers and designers are working with these issues in order to develop the cost-effective
and fuel-efficient vehicles.

SOCIAL FACTORS

The market is influenced deeply by the socio-cultural forces. The automotives industry is also
affected by the changing socio cultural trends and people’s preferences. Social situations
determine how consumers and employees influence the automotive industry. Vehicle makers
have to adopt to these forces.
Every year new models are released keeping people’s preferences in mind. Moreover,
specific styles are preferred in certain cultures.

In some markets while the SUVs might be in higher demand, in the others the sedans might
be preferred. Age distribution in the various populations is also an important factor that
vehicle makers have to keep in mind while targeting the consumers. They should release
vehicles based on the preferences of their target population.

Technological
Technology and innovation have become important determinants of market share in the
automotive industry. The more innovative the company, the higher is its market share. Given
this fact, all the major players make huge investments in research and development. Brands
like Toyota, Hyundai and Ford are investing in low emission and environment friendly
vehicles. Toyota is even planning to release a driverless car in the coming years. Not just this,
the major technological players are trying to enter this sector of the industry. In the recent
years technological innovation has remained a major basis of differentiation for the
automotive makers. It is because the customers’ focus shifted towards fuel efficient and high
mileage vehicles. The sales of the low emission and fuel efficient vehicles is always high. It
shows that technology is one of the most important factors affecting the sales and
profitability of the automotive industry.

Environmental factor

Physical infrastructure such as roads and bridges affect the use of automobiles. If there is
good availability of roads or the roads are smooth then it will affect the use of automobiles.
Physical condition like environmental situation affect the use of automobiles. Pleasant
environment condition increases the use of automobiles.

Environmental factors have influenced automobile industry in India because more investors
are opting to manufacture environmental friendly vehicles. These include, vehicles that
consume less fuels and emit less fumes. There are also some investors that have chosen to
manufacture the electric vehicle in a bid to conserve energy and also the environment.

Legal factor
Car makers regularly have to navigate a maze of regulation that govern the manufacture of
automobiles. With new safety regulations and legislation being passed, copyrights and patent
laws changing shape as well as legal woes stemming from competition, the automobile
industry finds some relief in the developing nations where enabling regulations and tax-cut
are helping automakers to deliver newer models to consumer.

Legal factors have played a role in the recent expansion of the Indian automobile industry.
This is because the industry is extremely incentivized with investors being given 100%
foreign direct investment pass. So that their shows the growth in the nation economy. There
are also zero taxes for the investors who ship the cars to other countries from their
manufacturing bases in India. By easing the legal rules affecting the industry, the government
of India has encouraged varied automobile companies to set up shop in the country.

Apart from it from culture to culture, people’s style and preferences also differ. The result is
that while a particular model will sell in a market, it might not be as popular in the other.

Social trends also keep changing continuously affecting the popularity of brands and models.
Changing trends may some times make the older models obsolete or go out of fashion.

In this external analysis, the following sociocultural external factors significantly impact
automobile sector:
1. Increasing demand for electric vehicles (opportunity)
2. Increasing demand for self-driving vehicles (opportunity)
3. Increasing demand for vehicle-sharing and ride-hailing programs (threat)
The automobile market is marked with increasing demand for electric vehicles. This external
factor creates growth opportunities for automobile sector through the development,
manufacture and sale of electric vehicles under any of the GM brands. Similarly, the
increasing demand for self-driving cars can promote growth through the sale of such cars
from the company. On the other hand, the increasing demand for vehicle-sharing and
ride-hailing programs is a threat against firms.
For example, ride-hailing programs improve people’s access to convenient transportation,
corresponding to a potential decline in target customers’ likelihood of purchasing new
automobiles.

Porter 5 Forces

Porter Level 1
Competition in the Industry

The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company. Suppliers and buyers
seek out a company's competition if they are able to offer a better deal or lower prices.
Conversely, when competitive rivalry is low, a company has greater power to charge higher
prices and set the terms of deals to achieve higher sales and profits.
In the auto manufacturing industry, this is generally a very low threat because automobile
industry generally works over Oligopoly market. Factors to examine for this threat include all
barriers to entry such as upfront capital requirements (it costs a lot to set up a car
manufacturing facility!), brand equity (a new firm may have none), legislation and
government policy (safety, EPA and emissions), ability to distribute the product.
It is difficult for new brands to enter the automobile industry which is because of the large
investment required for establishing a car brand. At the initial stage, a huge investment will
be required to set up the manufacturing facilities, distribution network and for hiring skilled
staff. Another major barrier is the level of competition from the existing brands. Unless a
new brand brings an innovative and differentiated product to the market, chances to gain a
significant market share are low. While law was not a barrier for the new entrants earlier,
legal requirements have grown in recent years, creating one more barrier to entry. Brand
image and reputation can also be major challenges before new players. Brand image and
equity are some major advantages for the existing brands. Any new brand would have to
focus a lot upon engineering and product quality. Getting access to raw material can be easy
but then achieving economies of scale is difficult for small players. Moreover, penetrating
new markets is not easy either. Some governments have applied high import taxes to
discourage foreign brands. So, there are several factors that minimize the threat from the new
players. Apart from Tesla, there is hardly a new brand that has been able to make a significant
mark at the international level in the automobile industry.

Porter Level 2
Threat of new entrants

It is difficult for new brands to enter the automobile industry which is because of the large
investment required for establishing a car brand. At the initial stage, a huge investment will
be required to set up the manufacturing facilities, distribution network and for hiring skilled
staff. Another major barrier is the level of competition from the existing brands. Unless a
new brand brings an innovative and differentiated product to the market, chances to gain a
significant market share are low. While law was not a barrier for the new entrants earlier,
legal requirements have grown in recent years, creating one more barrier to entry. Brand
image and reputation can also be major challenges before new players. Brand image and
equity are some major advantages for the existing brands. Any new brand would have to
focus a lot upon engineering and product quality. Getting access to raw material can be easy
but then achieving economies of scale is difficult for small players. Moreover, penetrating
new markets is not easy either. Some governments have applied high import taxes to
discourage foreign brands. So, there are several factors that minimize the threat from the new
players.

Level 3
Threat of Substitutes

Rather than looking at the threat of someone buying a different car, there is also need to also
look at the likelihood of people taking the bus, train or air plane to their destination. The
higher the cost of operating a vehicle, the more likely people will seek alternative
transportation options. The price of gasoline has a large effect on consumers’ decisions to
buy vehicles. Trucks and sport utility vehicles have higher profit margins, but they also
guzzle gas compared to smaller sedans and light trucks. When determining the availability of
substitutes we consider time, money, personal preference and convenience in the auto travel
industry. Then decide if one car maker poses a big threat as a substitute.

Explaining substitute factors by example of Nano car’s

Price band​ – The threat that consumer will switch to a substitute product if there has been an
increase in price of the product or there has been a decrease in price of the substitute product.
If the price of the NANO car will increase the main expected customers ie the one switching
from bike to car will not move to car and will remain in the bike only. Thus the price is kept
checked in this manner.

Substitutes performance​ – The performance of the substitute sector will also play a
important role in the success of the NANO car. If the price of the Bike segment increases or
the price band of the small segment fall , it will have effect on the quantity required in the
market. Its just on the price but also the features and the other services associated or it may be
the status symbol story. The success of the electric car segment with player like REVA can
also effect the demand of the NANO.

Buyers willingness​ – Products with improving price/performance tradeoffs relative to

present industry products. It will determine the willingness of the buyer to but the NANO
car.The willingness of the customers to go forward try the new product in the market ie
‘NANO’. They might be willing to go for the test products like Maruti 800 , Santro etc.

Porter Level 4
Bargaining Power of Suppliers

The power of suppliers is mitigated by the number of existing potential suppliers in this
industry, but switching costs are high because establishing part designs and specification
requires a fair initial investment. On the other hand, there is little threat that these suppliers
will integrate forward. Auto manufacturers require inputs-labor, parts, raw materials and
services. The cost of these inputs can have a significant effect on profitability. Ford was
depended on different suppliers for various parts but soon it had the problem with the quality
of equipments and compatibility of parts made by different manufacturers became too
expensive as it was costing more comparing to buying from suppliers.
The bargaining power of suppliers in the automotive industry is weak for most of them are
small players. Only few of them are significant in size. The threat of forward integration is
minimum from the suppliers for the reasons discussed in the first category. These suppliers
have to play according to the rules set by the car brands. The vehicle brands like BMW, Ford,
Toyota and VW hold immense clout because the raw material is always available in plenty
and switching from one supplier to another is not difficult for them. In this way, the
bargaining power of suppliers is considerably low.

Porter Level 5
Bargaining Power of Buyers
Buyer power refers to the ability of individual customers to negotiate prices that extract profit
from the seller. Private individuals, commercial companies and governments are the primary
buyers of motor vehicles. With few exceptions, buyers have the power to walk away from a
purchase that they don’t like and take their purchase elsewhere to a dealer of the same
manufacturer or to a completely different manufacturer or platform. Individual consumers
have some influence over price within a given dealership, but little power over
manufacturers. Customers can easily, and with little cost, switch to other auto dealers.
A large part of the buyers are the small individual buyers that buy single vehicles. However,
there are corporations and government agencies that buy fleets of vehicles. Such buyers are in
a position to bargain for lower prices. Whether small or large buyers can easily switch to a
new brand. There are no big costs involved in switching to another brand or to an alternative
mode of transportation. The buyers are price sensitive mostly and would switch to another
brand that offers a better product at lower price. However, none of the buyers whether big
corporations or individual small buyers poses a threat of backward integration. Based upon
the overall picture their bargaining power is moderately strong. Brands focus on building
customer loyalty through design, quality and by offering competitive prices. Competition in
the automobile industry has grown intense and changing consumer trends have also led to
growth in the bargaining power of customers.