Porters Five Forces: High-End Premium Industry in China Analysis

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Structural Charakteristics oft he Market In this Section take a closer look at the main structural features of China’s automobile industry for luxury and premium cars. We use Michael Porter’s (1980) Five-Force model to analyze the industry. These five forces jointly determine the intensity of competition within the industry and in turn help firms to set their strategies. 1. THREAT OF NEW ENTRANTS New entrants to an industry will bring new supplies, new ideas and new competition. Therefore, the threat of new entrants is crucial to existing firms’ profitability.

We analyze domestic entry, foreign entry through imports and foreign entry through foreign direct investment (FDI). The automobile industry in general requires large fixed investments and is therefore characterized by very large Economies of Scale and Economies of Scope. A other characteristic is the fact that even long existing firms still need to provide a huge amount of resources to research and development (R&D) and marketing to introduce new models, obtain technological breakthroughs, and maintain and raise consumers’ loyalty as well as the firm’s market share and profits.

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Both, Economies of Scale and Scope and huge R&D investments and marketing cost put potential entrants in very disadvantageous positions because first they need to raise sufficient capital and second they must prepare to bear the debt for a long period of time, since these long-term investments cannot be recovered within several years. Pure local entry is very unlikely expected since there are already a lot of firms in the luxury-car market and because it is improbable that local governments will again heavily subsidize new entrants because the central government has been discouraging this type of investment.

On the other hand makes the continuing growing demand of luxury cars the Chinese market very attractive for local and global luxury-automobile manufacturers. The rapid growth of the high/upper class, caused by the rapid economic growth and the unequal income distribution, increases the demand of luxury cars. Chinas entering into the WTO leads to a gradual trade liberalization and to relaxed restrictions on introductions of foreign investments. This did not only increases automobile imports but also Foreign Direct investments (FDI).

Since existing luxury car brands already have brand equity, brand identification and customer loyalty in the Chinese market it is hard for new entrants to survive in this market. No protection of intellectual property rights in China is a big problem. Weak intellectual property laws allow for massive copying, which is faster, easier, and cheaper than research and development and genuine innovation The threat of new entrants is considered to be very low (and therefore favorable) if there is already a Chinese luxury car brand existing.

No threat cause all other brands already launched into the market The passenger car industry was delicensed in 1993. So no industrial licence is required for setting up of any unit for manufacture of automobiles. 2. THREAT OF SUBSTITUTES Substitutes restrict the potential growth, and therefore also the returns, of the automobile industry. Growth of these substitutes can reduce demand for cars and consequently impose price pressures and limit profit margins for automobiles. Substitutes for cars in general are bicycles, motor cycles, taxis and Public Transports, like trains, busses and airplanes.

Given that luxury and premium cars are not only means of transportation but also a symbol of economic and social status all the above mentioned substitutes should not be a threat to the demand for the luxury car industry in China. The only realistic substitute is therefore a second hand luxury car. Also renting and leasing!!! The threat of substitutes is considered to be very low and therefore favorable. 3. BARGAINING POWER OF BUYERS / CUSTOMERS The customers of luxury cars are mainly upper class people from urban areas etween 30 and 50 years who purchase these luxury cars for private and business use. These individual consumers do not have any bargaining power against the automobile producers since they simply take the market price as given and make their individual decision on purchasing. Especially luxury car producers do not only compete on price but rather on image, exclusiveness, environmental-friendliness etc. Consumers can easily switch between brands. That is why brand equity plays an important rule. The bargaining power of buyers is low and therefore favorable. . BARGAINING POWER OF SUPPLIERS Suppliers can influence the industry by deciding on the price atwhich the raw materials can be sold. This is done in order to capture profits from the market. Once we focus on automobiles, the suppliers are producers of raw materials as well as of auto parts and components such as seats, air conditioners, exhaust systems, wheels, automobile glass, car braking system, airbags, seatbelts etc. Since there are a lot very small local parts and components suppliers in China they do not have bargaining power with automakers.

Also the fact, that only a few large automakers, especially in the high-end class, dominate the Chinese market intensifies the automobile suppliers dependency on the carmakers as a client. In addition to that many large automakers have their own subsidiary component plants in order to maintain long-term relationships with the supplies and to ensure component quality. This vertical integration structure further weakens the bargaining power of local parts and components suppliers. Automakers also purchase some raw materials, like plastic, mental and steel, directly from the market (mainly imported from overseas).

Imports and the prices of these products are affected by world demand and supply. The price of the major input steal has a sharp and immediate impact on the product price. Furthermore are auto parts and components for the high-end-market mainly importer foreignly. Despite the high bargaining power of producers of raw materials the bargaining power of all the other producers is considered to be low. Favorable 5. RIVARLY AND COMPETITION The luxury automobile market in China is competitive and concentratedand consists mainly of imported luxury cars.

Hence the intense rivalry in the Chinese market is comparable to all the other car-producing nations such as US, Germany, Italy, France, India and Japan. The price competition within the auto manufacturers is increasingly high. The Chinese high-end auto market is considered to be increasingly competitive and is therefore unfavorable. Despite rivalry and competition the Chinese high-end car market is highly favorable. Since the rivalry and competition in this market is worldwide equal and therefore not more favorable somewhere else.

This industry is and probably will be in the near future therefore highly favorable. Even though Porter did not list the Government as a discrete force it has nevertheless a huge impact on all the other forces and on the industry itself. The governments influence on the high-end automobile industry is therefore analyzed later in the report. APPENDIX Table A shows the strong growth momentum of the Chinese economy and its comparison to other economies in the region Table A GDP Growth Rates in China, Hong Kong, Korea, Singapore and Taiwan (%) China Hong Kong Korea Singapore Taiwan 995 23. 19 6. 46 23. 32 10. 30 8. 49 1996 16. 27 10. 46 12. 48 9. 31 9. 24 1997 9. 41 11. 04 9. 48 8. 93 8. 09 1998 5. 23 -4. 81 -1. 43 -3. 22 7. 00 1999 4. 59 -2. 63 9. 38 0. 62 4. 10 2000 9. 50 3. 39 9. 29 14. 33 4. 56 2001 8. 47 -1. 43 7. 51 -3. 57 -1. 10 2002 8. 17 -1. 77 9. 99 2. 41 3. 00 Source: China Statistical Yearbook and International Financial Statistics (2004) ——————————————– [ 1 ]. Large fixed investments in machinery, equipment, land, factories, fabrication and testing of prototypes before formal production [ 2 ].

Economies of scale exist when the average production cost decreases as output increases [ 3 ]. Economies of scope exist when the average cost decreases as more product varieties are produced [ 4 ]. Which ones and how many??? Is it true? Are there also chinese luxury car brands? If not there will be probably soon because of the high and growing demand [ 5 ]. Most local automakers in China were supported by the Chinese government by subsidies and import restrictions (=protection) [ 6 ]. Where is that said and why is it like this? 7 ]. Are there still global manufacturers who did not launched in the Chinese market yet? [ 8 ]. All of this needs to be proofed!! [ 9 ]. WHEN [ 10 ]. Join Ventures [ 11 ]. Is trade protection still high in China??? [ 12 ]. BUT: Chinese customers would maybe prefer to purchase luxury cars from local brands than from west Europe or the US [ 13 ]. India or allgeimein??? [ 14 ]. That’s a guess finde proof. [ 15 ]. PROOF [ 16 ]. very large number of competitors [ 17 ]. very small number of dominant companies

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