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The paper focuses to analyze the automobile industry and the challenges faced by the companies operating in it.



The paper focuses to analyze the automobile industry and the challenges faced by the companies operating in it. From the five-force analysis, the intensity of each force has been identified for the automotive industry. Only the competition from the rivals has a high effect on a company, while the other forces (threat of new entrants, threat of substitutes, bargaining power of buyers and suppliers) have a medium effect on the attractiveness of the company. We focus on the key external and internal driving forces which affect the industry and its day to day work. By using the PEST and the SWOT analysis, the strengths and weakness of the companies have been identified and an analysis is performed to know how a company can perfectly place itself inside the industry so as to grab as much value as it can.




  • What’s the scope of the research?


The research paper, here, analyses automotive industry. As an industry that built its base in the market by launching new products and technologies, it still has several questions to answer in front of it. The scope of this research paper is to address the challenges faced by these industries and, if possible, propose strategies and solutions that the industries can use, first to penetrate the market and then sustain.


  • Definition and a brief history 


The automobile industry contains companies that designs, develops, manufactures, markets and sells vehicles. It is a multi-billion dollar industry with a wide range of companies fighting for market share. Since its inauguration in the 19th century, it has been one of the major parts of the world economy in terms of revenue. With new markets emerging up, the market is expanding and opening a whole new customer base. 


  • Industry size and growth trends


The industry has seen a steady growth in the 5 years till 2018 with a 3.4% revenue growth amounting to approximately 2.3 trillion, while the coming 5 years projections have been relatively low and show a slow growth. Mature markets like Western Europe, North America, Asia, Australia, and New Zealand account for 31.8% of all sales. However, sales in developing nations are generally of lower value vehicles, meaning the distribution of revenue is skewed toward more mature markets. The major products of this industry are cars, SUV and commercial vehicle. The emergence of hybrid and the purely electric vehicle being relatively new and different can cause a disruption in the century-old fuel based types vehicle. Also, a high market concentration makes it difficult for newcomers to enter the market by creating an entry barrier. Due to its large size, the growth and revenue of the industry are impacted by several forces. Various key external factors such as income, loan rates, gasoline prices as well as heavy internal rivalry between the existing companies make the market very volatile and competitive. 


  • Key challenges issues


  1. New trends such as carpooling and carsharing
  2. Fluctuation in the price of steel
  3. Government reforms and regulations
  4. Environmental factors



Political Factors:

Government rules and regulation have a direct impact on the profitability of the automotive industry, thus, heavily affecting the revenue of the vehicle brands. The taxes on the industry play an important role, as a lot of the revenue goes to the taxes. The government provides subsidies and lower tax rates for environment-friendly vehicles. Having a tax benefit from the government can increase the profit by a much higher margin. Other ways the government affects the industry are :

  • Labor costs - low labor costs result in a low cost of production. China has been a favorite for a vast number of companies due to its low labor cost.
  • Regulations - various imports and exports regulations set by the government affect the profitability of the industry. Strict regulations make it difficult to get a widespread reach for the product.

Economic Factors:

The size of the economy and the overall economic conditions are of significant importance to the automobile industry. One of the major ways to assess the economic factors is the purchasing power of the customer. Good economic condition lead to high purchasing power hence increasing revenue and vice versa. More developed countries tend to have more revenue as compared to developing and under-developed countries mainly because of the comparative difference in their purchasing power. Also good economy leads to low borrowing rates from the government and hence acts as an incentive for the customers to make large transactions.s.

Socio-cultural factors:

People’s taste and preferences keep changing continuously and as such the automotive industry is also affected by it. Various regions and cultures have different tastes and choices, companies have to carefully target their customers based on their model or create a product of their choice. Social trends also keep changing continuously affecting the popularity of brands and models.

Technological factors:

Technology and innovation are one of the important determinants in the automobile industry. Companies spend millions on their research and development. In recent years, there has been technological development which has led to more fuel-efficient vehicles such as electric vehicles. In recent years technological innovation has been the base ground for differentiation between the competing companies. 


  • Like any other industry, the automobile industry faces many challenges too. Some of the various challenges they are currently facing are as follows:
  • Changing preferences towards more eco-friendly vehicles have forced companies to spend millions in their research and development so as to keep up with the market.
  • New trends such as carpooling and car loaning by individuals have resulted in less amount of vehicles sold when compared to previous years As the other options available in the market are much cheaper.
  • Opening up of a new market in BRIC nations brings new entrants with them, who wants a share of the market too.
  • Fluctuating steel prices is one of the main concern for any automobile manufacturer as it is the base of every product.

Factors affecting Demand and Supply:

A lot of factors influence the demand and supply. Some of the most important drivers are:

  1. Per capita income: the higher the per capita income, the greater is the demand for vehicles as it indicates a relatively high purchasing power.
  2. GDP of BRIC nations: As the GDP of BRIC nation grows they expand the market and also bring a whole new customer base and thus increase both the demand and supply of automobile vehicles.
  3. Price of oil: the price of oil has been an influencing factor since the invention of commercial automobiles. It directly affects the demand for an automobile as higher the cost of oil more is the cost of operating the vehicle.
  4. Price of steel: steel is the basic component of an automobile and the price of steel is a determining factor of the supply for these vehicles.
  5. Interest rates: low-interest rates attract more customer towards the market as they have a financing option available, thus, resulting in more number of customers buying cars. While in times of high inflation and interest rates the low amount of sales are recorded.



The business strategy of any company largely depends on the five forces as developed by Michael Porter. From an investment point of view, the five-force analysis becomes very important to know if the investment would be successful. An attractive industry here means the industry that is generating profits. If the five forces show little attractiveness of any industry, then the industry can be conceived to be making fewer profits or no profits. According to the theory, if the industry has a purely competitive market, the market would tend to be unattractive. Now, the fives forces and the individual effects of each of them is discussed in the further content.

Threat of New Entrants (Medium):

The first significant barrier of the automobile industry is the capital of investment. Further, the new companies (lower economies of scale) will be in direct competition with the already settled companies (higher economies of scale) in the industry which would be having a cost advantage of producing a greater number of cars for a lesser cost. The new entrant would require to market itself against the settled companies by selling the cars for lesser profits. The new entrant would need to make long-term contracts with many suppliers to get different parts for the car to be assembled. From the viewpoint of government policies, the new companies must comply with the strict regulations related to safety and the environment. This requires an investment in research and development. Although, the cost of RD can be reduced if the new company partner itself with an existing company in the process. As the opposite would be the case for an electric car producing companies in the government policies case, the government would assist such companies to grow because it would be environmentally friendly. And, also, there are tax credits for the companies and buyers that produces and uses electric vehicles. 

Threat of Substitutes (Medium):

While a consumer can take a car, there are other alternatives that the consumer can prefer if they do not buy a car. Such alternatives are buying a bicycle, motorcycle, SUV or prefer walking. There are a large number of substitutes available in the market but the decision that the consumer will take depends largely on their personal preference, demographics, length of travel, age, money, and convenience. This can be deemed to be a major threat to the compact or sedan cars. Another significant factor is the price of fuels. The price of fuel alone can make the consumer change their priority to go for a substitute. Now, the threat as a substitute to electric cars can be the gasoline run cars which are prevalent at the moment. To bifurcate into the types of fuels, petrol, diesel, CNG, and LPG can have an adverse effect on the sales of electric cars. Competition from Rivals (High):

Competitors within the automobile industry have always preferred to avoid the price-based competition. Lately, there has been a shift in the trend and now the companies also compete based on prices of the car. There have been discounts, cash-backs, different financing options available to the consumers because of the auto companies partnering with the financial companies. Also, the after sales services are considered by the consumers before making the purchase. The companies that provide better warranty terms to the consumers attract more consumers and has a better chance of increasing sales and hence the profits. For the auto companies, there is co-opetation (cooperation and competition at the same time) between themselves because the companies that produce gasoline cars have now started to produce electric cars.

Bargaining Power of Suppliers (Medium):

In this case, the suppliers do not hold much power in comparison to the manufacturers. This is because there are several suppliers for different parts of the cars and the firms manufacturing it are obviously in lesser number than the number of suppliers. The suppliers in this industry need to be very cautious of the demand from the manufacturer and more often comply with the firms. The internal rivalry among the suppliers is being leveraged by the automobile manufacturers to their profits and can also demand a lesser cost price of the parts. With the increasing technology and the technological changes have brought about an extended life of the vehicle which again is a negative news for the suppliers. For the suppliers, the firms cannot directly change the products from the them as the next product in the line of the firm might be requiring the same part to function and more often than not, changing the complete design of the car is not feasible because it will ask for a change in the number of other parts of the car. This serves as an advantage to the supplier.

Bargaining Power of Buyers (Medium):

The bargaining power of the firms in the case of the automobile industry is unmatchable. Buyers, like the suppliers, do not hold much power to bargain. This is because the customer is not going to buy a large number of cars at the same time, but just 1 car. Considering backward integration by the buyer, it is not always possible to know the cost price (for the firm) of any car because the car itself is a complex structure with thousands of parts. For the electric vehicles, there are not more options to be considered for the consumers. The only company that is just focusing on the production of electric cars is Tesla. Tesla is offering the customers with unchallenged features in the car. The earlier models of Tesla targeted higher paying customers like the Model S and Model X, but with the Model 3 car of Tesla, it is targeting the medium range customers.




Tesla, founded in 2003, is a leading and competitive company in developing and manufacturing high-performance fully electric cars in the automotive industry. The first challenge for Tesla is to find its position in the car market. Tesla has unique and new technologies, through which it can take advantage. For example, Tesla’s new product Model S has advanced electric powertrain which has only one piece in its engine - the rotor, which is different from other internal combustion engine made up of thousands of engines (Tesla,2018). Moreover, Tesla mainly sells high-end electric cars, while other companies in the automobile industry mainly focus on selling high-end internal combustion engines. Other traditional internal combustion engine companies do not have the brand effect of Tesla, and if they start to develop electric vehicles on a large scale, they will have to create a whole new customer base.

It’s obvious that Tesla's brand effect is very strong, the public pays close attention to Tesla's cars, and its sales volume is also amazing. According to the data from 2015 to 2018, its sales volume in the first quarter of 2018 reached 29,980 vehicles, and in the third quarter of 2018, it reached an amazing 83,500 vehicles, an increase of more than 50% compared with the second quarter (Statista, 2018).

Figure 1. Number of Tesla vehicles delivered worldwide, accessed Dec 8th, 2018. (Statista,2018)


Now, for Tesla, the price of its Model X is much higher than that of other internal-combustion vehicles, which is not acceptable to ordinary consumers. Tesla’s Model 3 starts at just $35,000, down nearly 60% from the $100,000 price of Tesla's Model X. Likewise, it has advantages over other traditional internal-combustion car manufacturers, and it will still have a competitive advantage when compared with the low-end models of Mercedes-Benz and Audi.

Another challenge is Tesla's research and development of new lithium battery technology which requires a lot of investment, and there exists a doubt whether it has a reasonable debt sufficient cash flow. Currently, Tesla has heavy debt load, its debt reached $10 billion at August 2017(SEC filings, 2017), and its $1.5 billion’s debt will mature between November and March, while the company only have $22 billion cash as of June. Also, due to the China and US trade-war, Tesla's Chinese market, which is an important source of trade for Tesla cars, may be affected by the 40% tariff China imposed on the vehicles. As a result, Tesla’s ability to pay the debt may be dampened, and this could have further implications for Tesla's production of the Model 3.

Figure 2. Tesla’s debt outstanding, accessed Dec 8th, 2018. (SEC filings,2017)


Tesla has been burning a lot of money these years since the cutting-edge technology of their powertrain system needs a lot of investment. At the same time, the company needs a lot of upfront investment as it builds a plant in Nevada to make the supercells needed for cars and plans to produce lithium-ion batteries by the end of the year.


  • Unique position and branding in the automotive industry
  • Products focus only on high-end electric cars and have changed the traditional image of EV
  • Sales volume of its electric cars is relatively large
  • Complete customization with a modern and futuristic look
  • Environmental-friendly products attract young generations who are crazy about clean technologies
  • Use of online sales and company-owned flagships only, which has significantly reduced the cost in the selling procedure


  • Large operation cost and few available liquid assets
  • Even harder to pay the debt due to China and US trade-war
  • Manufacturing capacity is limited, which becomes a big issue for company expansion
  • Heavily relies on suppliers
  • Lack of global EV market recognition except for China
  • Strategies for making profits are unclear


  • Start providing more affordable electric car like the Model 3
  • US government’s funding and support for electric cars
  • Have overpowering strength on full-auto driving based on its collection of driving data




  • A big company like GE (i.e. Cadillac) who already has a reputation in the automotive industry and owns more resources, can start producing electric cars with more advanced technologies
  • Haven’t built a trustworthy relationship with consumers



Automotive industry is a capital and technology intensive industry with high competition between the rivals (with the other forces having medium intensity impact on the industry), so that affordable EV cars will be the new trend in the near future. As a high-end and high-range product-oriented industry, automotive companies should pay attention to controlling its development speed and make prudent investment at the same time. As far as Tesla is concerned, it should make reasonable use of the government's investment policies and occupy a large part of the market by manufacturing an affordable model. Also, some environmental-friendly products attract young generations who are crazy about clean technologies should also be considered.