SECTOR PROJECT - 1

COMPARITIVE ANALYSIS OF THE AUTOMOTIVE INDUSTRY BASED ON

PORTER’S 5 FORCE MODEL

 AUTOMOTIVE INDUSTRY IN INDIA: SECTOR OUTLOOK

The Automotive industry in India is one of the driving forces of the Indian Economy and contributes to
over 49% of the overall Manufacturing GDP and 7.5% of the overall GDP. Indian automotive sector was
the 5th largest in the world in 2020 with over 26 mn units produced
In FY 2020. Passenger and commercial vehicles combined. India was
Also the 7th largest commercial vehicle manufacturer in the world and SECTOR FACTS & STATS
The sector’s value chain employs over 32 mn people.
India also holds a strong position in the international heavy vehicle 35 mn people employed
Segment being a largest tractor manufacturer, 2nd largest bus
Manufacturer and 3rd largest truck manufacturer in the world with 7% share in India’s GDP
over 4.6 mn vehicles exported annually.

The largest volume of production are two wheelers followed by 4th largest car
Small and mid-sized cars. Two wheelers and passenger cars account manufacturer
For 80.8% and 12.9% share in market share respectively and account
For a combined production of over 20.1 mn units.
7th largest manufacturer
INDUSTRY SCENARIO of commercial vehicles

Indian Automotive sector currently worth $118 bn is expected to

Reach $300 bn by 2026. Largest manufacturer
Indian Automobile export has also reached 4.7 mn vehicles in of two wheelers
FY 2020 i.e at a CAGR of almost 7% between FY 2016-20.
Two wheelers constituted 73.9% of the total exports followed by
Passenger vehicles at 14.3%, three wheelers by 10.5% & commercial
Vehicles at 1.3%.

SECTOR COMPOSITION NATURE OF THE MARKET

OLIGOPOLISTIC MARKET
Two wheelers
KEY MARKET PLAYERS
Passenger vehicles MARUTI SUZUKI
HYUNDAI
Three wheelers TATA MOTORS
MAHINDRA & MAHINDRA
Commercial vehicles
 INDIAN AUTOMOTIVE SECTOR : KEY STATS ON GROWTH & TRENDS

Leading factors driving the growth of Automotive sector in India:

➤ Rising middle class and young population coupled with increasing disposable incomes and
urbanisation is driving the growth of new vehicle sales in India. We also witnessed a 3x increase in
average household income from $6393 in 2010 to &18448 in 2020, which led to an increase in demand
for Automobiles.

➤ Urbanisation is a key driver of India’s automotive industry. Urbanisation rate was estimated at 33.2%
of India’s population and expected to reach 36.2% by 2025, resulting in a need for more vehicles.
Moreover, India is transforming into a global automotive R&D hub, with several players entering the
automotive manufacturing and development space.

➤ By 2021, India’s emerging and middle-class segments combined will

comprise nearly 900 million people (62% of India’s population) and will
open up new opportunities for businesses.

➤ India is transforming into a global automotive R&D hub, with several players
entering the automotive manufacturing and development space.
8% of India’s R&D expenditure is in the automotive sector.

➤ The EV market is expected to grow at a CAGR of 44% between 2020-2027 and is expected to hit 6.34
million-unit annual sales by 2027. The EV industry will create five crore direct and indirect jobs by 2030.
This is a major factor which may drive auto sales going forward.

➤ The government also launched the Faster Adoption and Manufacturing of Hybrid and EVs – II (FAME
- II) scheme in 2019, aiming to promote EVs and fund related infrastructure development. This is a huge
incentive for EV mobility development.

➤ Foreign Investments: The Government of India expects the automobile sector to attract USD
8,000-10,000 million in local and foreign investments by 2023. A study by CEEW Centre for Energy
Finance recognised US$ 206 billion opportunity for electric vehicles in India by 2030

➤ India's passenger vehicle industry is expected to post a growth of 22% - 25% in FY22.
 PORTER’S 5 FORCE COMPETITIVE POSITION ANALYSIS MODEL
APPLICATION OF THE MODEL TO ANALYSE AUTOMOTIVE SECTOR IN INDIA

1) BARGAINING POWER OF BUYERS : STRONG

FACTORS HOW THEY AFFECT THE AUTOMOTIVE SECTOR

✦ BUYER VOLUME & ⇒ Buyers are large in volume which includes Retail customers,
CONCENTRATION commercial companies and governments. Buyers in the automotive
sector have the power to move to a different manufacturer or dealer.
This puts them in a position where the process of choosing between
options is easy and thus they own bargaining power.

✦ PRICE SENSITIVITY ⇒ Even though median household incomes are rising, Indian buyers
OF BUYERS still remain price sensitive when it comes to Automobile purchases.
However price sensitivity is only intense when combined with other
factors such as mileage and other features. But looking at the bigger
picture, buyers are usually willing to pay a premium when it comes
to Car purchases since they see it as a necessity.

✦ SWITCHING COSTS ⇒ Customers can easily switch between different manufacturers at

INCURRED BY very minimal cost. Buyers usually collect all information based on a
BUYERS variety of factors and models because the switching costs associated
with buying from a different manufacturer is low.

✦ CHOICES ⇒ Customers have a wide variety of models to choose from. The

AVAILABLE availability of product differentiation between different companies
brings forth a greater level of freedom to choose between companies
based on a variety of factors.
 2) BARGAINING POWER OF SUPPLIERS: MODERATELY STRONG

FACTORS HOW THEY AFFECT THE AUTOMOTIVE SECTOR

✦ TYPE OF MARKET ⇒ The Indian Automotive sector is an Oligopolistic market i.e,

STRUCTURE there are a large number of companies operating, but only a few are
dominating the market share. The top 3 auto companies namely
Maruti Suzuki, Tata Motors and Hyundai occupy almost 80% of the
market share which shows the oligopolistic nature of the auto
industry.

✦ SWITCHING COSTS ⇒ Companies in the Automotive industry are heavily dependent on

OF SUPPLIERS a concentrated group of suppliers such as auto ancillary companies
like motherson sumi or battery manufacturer like exide. Switching
to other suppliers comes with high switching costs due to high
initial investment in establishing design specifications.

✦ HOW STRONG IS THE ⇒ Established companies have maintained a strong position in the
POSITION OF Indian Automotove sector and have created a strong brand image in
SELLERS? the process. Being fundamentally good companies, they all possess
high levels of capital leverage and can use it to foster innovation.

✦ PRODUCT ⇒ Automobile industry in India provides a wide range of product

DIFFERENTIATION differentiation as manufacturing models are being revamped every
couple of years. Companies like Tata Motors are manufacturing
automobiles ranging from low end basic cars to the luxury segment.
This range of products differentiates a company from its
competitors which gives it a higher bargaining power.
 3) RIVALRY AMONG EXISTING COMPETITION : STRONG

FACTORS HOW IT AFFECTS THE AUTOMOBILE SECTOR

✦ INDUSTRY GROWTH ⇒ Automotive industry is considered to be a mature industry with

few large players dominating the sector. This intense rivalry would
mean that the overall sector’s growth is stable. Numerous market
leaders are fighting to gain an edge in market share and all the top
companies have huge capital availability.
This fierce competition would lead to a flat growth of the sector.

✦ BRAND POWER ⇒ Branding has become one of the major criterias in purchasing
automobiles. Key market leaders in the manufacturing segment
utilise brand leverage well. This hampers the market penetration of
other lesser known brands.

✦ COMPETITIVE ⇒ The market demands innovative designs and models which align
EDGE to today’s trends. So companies which leverage newly available
technologies, design fuel efficient vehicles and cut costs of
( MOAT of a company) ownership to a certain extent are successful.
Eco friendly (EV) automobiles is the new trend and companies like
Tata Motors are working on stylish designs along with better range.
 4) THREAT OF NEW ENTRANTS : WEAK

FACTOR HOW IT AFFECTS THE AUTOMOTIVE SECTOR

✦ HEAVY UPFRONT ⇒ Barrier of entry for new entrants into the automotive sector is
CAPITAL extremely high due to high initial capital requirements in setting up
REQUIREMENTS manufacturing facilities and distribution network.
Setting up warehousing and production facilities are not feasible for
companies which are not rich in cash reserves.

✦ ECONOMIES OF ⇒ Well established companies benefit from Economies of scale i.e, they
SCALE produce in mass quantities and hence the fixed costs per unit are
reduced. New entrants into the sector are at a disadvantage as they are
yet to set up facilities and thus can’t capture economies of scale. This
affects their pricing and profitability.

✦ HIGH ⇒ Automobile sector comes with a overwhelming amount of

GOVERNMENT paperwork and regulations. Industry pollution norms such as conversion
REGULATIONS to BS-VI engines and safety norms make this industry heavily
regulated. These costs would not be feasible for a new entrant to bear.

✦ BRAND LOYALTY ⇒ Large cap established Automotive manufacturers are at a significant

advantage when it comes to customer loyalty as they have proven
business models and have built trust. People prefer familiar brands
which are already known for their safety and performance.
 5) THREAT OF SUBSTITUTE PRODUCTS : MODERATELY STRONG

FACTOR HOW IT AFFECTS THE AUTOMOTIVE SECTOR

✦ HOW LIKELY ⇒ Customers have a strong incentive to switch to alternate modes of
ARE CUSTOMERS transport such as metros and other public transport mainly due to
IN SWITCHING TO rising fuel prices and high cost of ownership of owning Automobiles.
ALTERNATE Even though EV mobility is gaining traction, efficient EV models are
TRANSPORT ? not in the affordable range.

✦ ARE ⇒ Substitutes include alternative modes of travel such as public

SUBSTITUTES A transport. Metropolitan cities are high crowded and a large number of
VIABLE workforce are willing to take the faster and cheaper metro facilities.
ALTERNATIVE? Second hand ‘used cars’ market is booming which brings a threat to
car manufacturers.

✦ COSTS ⇒ The switching costs on switching to substitutes are low when

INCURRED BY talking in financial terms but the qualitative factors such as ease of
BUYERS IN travel, vehicle ownership and time saved, cannot be ignored.
SWITCHING TO However if the cost of owning automobiles keeps rising, buyers would
SUBSTITUTES find it viable to shift to public transport since switching doesnt cost
much.
ME AS AN ENTREPRENUER LOOKING TO SET-UP A COMPANY IN THE
INDIAN AUTOMOTIVE INDUSTRY

Before thinking about setting up a company, It is important to look at the overall summary of the Porter’s
5 force model for the automotive industry.

SUMMARY THROUGH A HEAT CHART :

STRONG

WEAK

MODERATELY STRONG

Me as an entrepreneur looking to set up a company in the automotive industry :

As we can see the barriers of entry for a new entrant into the automotive industry is
quite high. So I would avoid the car manufacturing segment since the initial capital
requirement is huge. I would rather look at service segment of the industry such as
export of auto- ancillaries and dealership of cars & car rentals. Switching cost on
buyers in shifting to substitute modes of travel is low and hence car rentals would
make sense.
Once my business gains sufficient traction, I would consider shifting to
manufacturing of small scale auto ancilliaries and supplying it to small scale auto
manufacturers. Deals with established auto manufacturers would hopefully come
along the way.
I would try to follow the foot steps of Motherson Sumi ltd which is a market leader
in the auto ancillaries segment!

Thanks!
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