Five forces Analysis of Two-wheeler industry Essay

As sh protest above, the busi ness beat is formulated as input motion output. For a both wheelwright manucircumstanceure, The inputs to the OEM constitutes of1. Import of separate the sancti one(a)d ingredients for model twist ar the parts such as drive chains, engines, comp unitarynts, transmissions and so forth 2. cable car Component Manufacturer in that respect argon 300+ players in the fabrication which manufacture auto parts components and perform tasks such as castings, forgings, tires etc 3. Raw material Supplier This forms the initial requirement for the development of every vehicle. The mad material of which it is composed of consists of sheet metal, aluminium etc. The process involves1. ManufacturerOriginal Equipment Manufacturer(OEM) The persistence is soaringly concentrated with 3 players constituting 80% of the grocery store sh ar, namely Hero Moto, Bajaj railcar & Honda Motors. This diligence has a upset of 55K Cr by producing over 13.33mn units i n the FY 2011. 2. dealership Ne bothrk lead In the Indian domestic commercialise, the dealer are numbered over 2000 Sub- Dealer The sub dealers, in any case k at fork overn as the touch points are over 12000. This dealership ne 2rk forms the combative advantage of a comp all in the trade Service Centers These bring home the bacon after sales service for the two wheeler sedulousness and form the part of primary(prenominal)tenance and helps in building customer loyalty.The output part of the business model comprises of1. Domestic Customers There is a low penetration in the domestic market with insurance coverage in agrarian market as low as 7%. 2. International Customers The major(ip) markets for two wheelers are Africa, Latin America & southbound East Asia INDUSTRY ANALYSISThe persistence is exalted gearly concentrated and there is a unvoiced foothold by 3 major players in the industry namely Hero Moto constituting 39% of the market share, Bajaj cable car constitu ting 27% of the market share and fin wholey Honda Motors with 14% market share. So, these 3 major players sum to 80% of the inwardness industry market share.The Indian Auto sector had a the great unwashed growth of 13% CAGR over the coating 5 years- Driven by two wheelers which account statement for 80% of the native volumes twain wheeler sales r from each oneed INR 55K Cr and volumes reached 13.3 mn units clocking a CAGR of 15% and 13% respectively over 2006-2011. This works to an average ack outrightledgment Rs 42000 or 1.2x the real per capita GDP of India.Domestic volume growth has been strong over the past five years growing at 11% CAGRExports take up been a signifi whoremongert factor to contri entirelye to overall volumes with a growth of 27% CAGR over the last 5 years.Year to date, the volume sales growth in two wheelers has surpassed all other automobile segments.FIVE FORCES ANALYSISWhat is it?Five Forces Analysis is a tool that enables managers to poll the key fa ctors in an industry environment that shape that genius of competition (1) opposition among current competitors, (2) threat of impudent entrants, (3) substitutes and complements, (4) actor of suppliers, and (5) reason of buyers. When do we subprogram it?In a strategic analysis, Five Forces Analysis is an excellent method to help you analyze how competitive forces shape an industry in order to vary or influence the nature of competition. Collectively, the Five Forces de lineine the attractiveness of an industry, its winnings authorization, and the ease and attractiveness of mobility from one strategic position to another. Becauseof this, the analysis is useable when firms are making decisions about entree or exit from an industry as well as to identify major threats and opportunities in an industry. why do we use it?This analysis was originally developed by Michael Porter, a Harvard professor and a noted authority on strategy. While all firms operate in a broad socio spar ing environment that allow ins legal, social, environmental, and economical factors, firms also operate in a much(prenominal)(prenominal) immediate matched environment. The structure of this war akin environment determines both the overall attractiveness of an industry and helps identify opportunities to favorably position a firm inside an industry. Porter identified five primary forces that determine the competitory environment (1) arguing among current competitors, (2) threat of new entrants, (3) substitutes and complements, (4) indi tin stoolt of suppliers, and (5) power of buyers.1. RivalryAmong the direct and obvious forces in the industry, existing competitors must initiative deal with one another. When organizations fight for the equal customers and try to win market share at the others expense, all must react to and anticipate their competitors actions.2. holy terror of EntrantsNew entrants into an industry fence with established companies placing downward pr essure on prices and ultimately profits. In the last century, Japanese automobile manufacturers Toyota, Honda, and Nissan represented terrible new entrants to the U.S. market, threatening the market position of established U.S. players GM, Ford, and Chrysler. The existence of substantive barriers to opening helps protect the profit likely of existing firms and makes an industry more attractive.3. Substitutes and ComplementsBesides firms that directly compete, other firms git cloak industry dynamics by providing substitute products or run that are functionally kindred (i.e., accomplishing the same goal) but technically different. The existence of substitutes threatens demand in the industry and puts downward pressure on prices and margins. While substitutes are a potential threat, a complement is a potential fortune because customers buy more of a stipulationproduct if they also demand more of the complementary product. For example, iTunes was established as an burning(pre nominal) complement to Apples iPod, and now the firm has leveraged connections among its suite of products including iPhone, iPad, and the like.4. Power of SuppliersSuppliers provide resources in the form of people, raw materials, components, information, and financing. Suppliers are important because they can regulate the nature of ex transmit and the potential value created farther up the chain toward buyers. Suppliers with greater power can negotiate better prices squeezing the margins of downstream buyers.5. Power of BuyersBuyers in an industry may include end consumers, but frequently the term refers to distributors, retailers, and other intermediaries. Like suppliers, buyers may clear important bargain powers that dictate the means of exchange in a transaction.According to Porter, successful managers do more than simply react to this environment they act in ship canal that actually shape or enact the organizations competitive environment. For example, a firms introduction o f substitute products or services can pull in a substantial influence over the competitive environment, and in turn this may induce a direct bear upon on the attractiveness of an industry, its potential profitability, and competitive dynamics.I. Bargaining power of buyers upliftedWho are the buyers of this industry Individual customers who purchase and use two wheelers for the economic consumption of transportation. This socio-economic class of customers considers two wheelers as a necessity than a luxury. In a developing country like India, especially in horizontal surface 2 and tier 3 cities, two wheelers are extremely everyday amongst families and students. Scooters are considered to be universal utility vehicles transporting a family of 2-3 at a clock and providing candid mileage. Bikes on the other hand come in a smorgasbord of segments. They can equal less, acting as utility vehicles.They can be costing very high, acting as luxury products for their owners. The a djacent points can be aggregated to determine the relative talk terms power of buyers against the automobile manufacturing firms. The dicker power in this case would mean to what uttermost the buyers can negotiate prices of the two wheelers. This buying power would determine the market price of the two wheelers in the long run. It also indicates the intensity of rivalry amongst the existing firms in the market. Product Differentiation LowThe features in two-wheelers produced by the Indian manufacturers like Bajaj, Honda, TVS etc. are very close to each other. These features include appearance, Price, Quality and other functional features. This implies that The buyers can shift from one product to another, as they do not stick affinity for any specific productInformation Availability risque blue availableness of information over the internet, leads to higher bargaining power with the buyer to analyse the respective(a) features and price of products thus leading to lower bargain ing power with the manufacturing firms.Type of Economy DevelopingIndia being a Developing economy, is a big hub for two wheeler manufacturers. A two wheeler is a necessity in small towns even today. The grand number of customers lowers their bargaining power to close to extent. However, this is start by the large number of suppliers. This is good news for the automobile firms as their product is going to remain in demand for a while at least and they adoptt micturate to worry about declining sales for nearly date in India.Number of Suppliers heightsThe number of companies manufacturing automobiles is high in India. With each major player opening showrooms in not only Tier I but II and III cities, the consumers have a wide variety of options to choose from. The number of buyers and sellers in market is high. These two effects offset each other. This implies that The bargaining power of consumers is high because of this effect as the consumers have the option of going to anoth er brand if they do not like the functional features or price of one brand. In case of utilityvehicles manufacturing category, Rohtak alone has two showrooms of the major players in the market. This implies an empowered consumer.Switching price ModerateThe faulting costs are higher than FMCG goods however are low compared to many other high involvement products. A basic two wheeler starts from about Rs 40,000. This cost maybe high for or so people and not so evidentiary for others. However as two wheelers hardly have any associated products, which would require compatibility with the product, the switching cost is low. as well as due to a well-established second hand market in India, the vehicles can be easily resold these days. This also covers up for the switching costs to some extent.II. Bargaining Power of the Supplier LOWOrganizations would be at a blemish if their suppliers are powerful. They should preferably not be dependent on any supplier. Now suppliers can be power ful if the number of firms providing thie concomitant service or product are few in number( eg. A monopoly, oligopoly).The number of the firms determine their bargaining power. The power gets by the increase in existence of switching costs for the various firms. Moreover, firms in an industry have power if they have many alternative sources of planning or if they have a credible threat of integrating backward to provide their own sources of supply. So even supply chain management is particularly important in industries where the potential power of suppliers is high. Now, for a 2 wheeler persistence there would be various suppliers which can be broadly classify into 4 broad categories-1)Steel industry2) tyre industry3)Auto components industry4) Battery industrySteel fabricationThe 2 wheeler industry in India broadly imports all the self-propelling steel. Around 65% of the steel is imported for automobiles. The twopenny import duty helps the 2 wheeler industry to import high q uality steel. So the prices ofsteel is determined by mostly internationalisticistic markets, so the bargaining possibility is less for the steel suppliers. Demand for automotive steel such as inner components and outer body parts comprises estimable 7-8 cardinal tonnes (mt) a year out of Indias essential production of about 78 mt, but is growing at 10-20% a year even as overall demand growth lags economic growth.The companies in India which develop automotive steel have now obdurate to expand in this area and many companies have entered into joint ventures with various international companies like Sumitomo + Bhushan Steels, Jfe+jsw, Tata+Nippon joint ventures. So the 2 wheeler industry has a exercise set of vendors both nationally and internationally to choose from. Thus, the bargaining power of the supplier is low.Auto components and Battery industriousnessBoth the Auto Components industry and the Battery industry in India are highly disunited .There suppliers highly outnum ber the 2 wheeler companies. Examples of a few companies which provide auto components in the automobile industry are Rico Auto Industries Ltd, JBM Group, Sona Koyo Steering Systems and Lumax Industries, Indication Instruments Ltd Aisin Seiki Co.,BorgWarner,Continental, Delphi, Denso Corporation, Eaton, FAG, Faurecia, GKN,Honda Foundry Co. Ltd., Honeywell,Knorr Bremse, Koyo,Magna,Magneti Marelli, Mando Corporation, Meritor,Mitsuba Corporation, NHK Spring,Robert Bosch,Showa Corporation, Sumitomo Wiring Systems, Toyoda Gosei, USHIN, Valeo, Visteon,Yazaki and many more. Amaron ,exide,luminous,kaycee ,sumangal,action,tata batteries are just a few examples of the Battery Companies in India.Thus, since the number of suppliers is huge the bargaining power they enjoy is low.Tyre diligenceIt can be clearly realizen in the pie chart below that for tyre industry in India, 53% of the tyre consumption is by the 2 wheeler industry. The benefits are given to them as they are buying in bulk and the relation gives the tyre firms a strong brand association.At present there are 40 listed companies in the tyre sector in India.Major players are MRF, JK Tyres, and Apollo Tyres & CEAT, which account for 63 percent of the organized tyre market. The other key players include Modi Rubber, Kesoram Industriesand Goodyear India, with 11 per cent, 7 per cent and 6 per cent share respectively. Dunlop,Falcon, Tyre Corporation of India Limited (TCIL), TVS-Srichakra, Metro Tyres and Balkrishna Tyres are some of the other momentous players in the industry. Thus , with so many players in the market and also with the power to give tyre companies brand association, the 2 wheeler industry is at a huge advantage and the bargaining power of the tyre suppliers is low.III. Threats of Substitutes LOWNumber of Substitutes mettlesomeSubstitutes can be cars, electrical vehicles, habitual transport and rickshaw/taxi. There are many players in the market for four-wheelers. as well, in metros and so me of the tier-II cities, public transport facility is quite good. Thus, this can be a prejudicially charged factor for two-wheeler industry. But two-wheeler may be a better option for 2 people in the same price range. Flexibility is also high compared to public transport. These facts nullify the negative effect of this factor.Public Transport Infrastructure ModerateAs of today, public transport is not very well developed in India but its developing day by day. In tier-1 cities, people have started preferring public transportation for routine tasks but people in other regions dont have an option.Scope of Differentiation HighThere is a high scope of innovation in this industry as the technologies are ever changing. Customization according to the customer require is important and attracts consumers attention towards one vehicle from another.Lifestyle in India ChangingCommon Mans lifestyle is changing in India and number of people working in a family are change magnitude. closely of them prefer one vehicle per headroom to commute. For a middle class family, two wheeler is the only operable option in such cases looking at its flexibility and affordability. Thus, changing lifestyleis a compulsive sign for this industry.Cost of Switching to Substitutes HighPeople switch to substitutes for a reason. Given below are some of the reasons why people switch to substitutes.CarsComfort, status Symbol, safetyPublic Vehicles Affordability, Safety, Cost, Pollution, while saving galvanizing VehiclesEnvironmental friendly, Maintenance costHere is the negative side of switching to substitutes. Public transport vehicles are not right away available for transportation inside the city/town/village remove in a few cities in India. For the regions where public transports are not available, only four-wheeler or electrical vehicles remains the substitute to a two-wheeler. Electrical vehicles at present not competitive with respect to present petrol running vehicles. No estab lished player is offering Electrical vehicles. Switching cost from a two-wheeler to a four-wheeler is quite high as investment pass on be needed to switch the product. Also running cost is more for a four wheeler.The above flurry shows the calculation of running cost of a two-wheeler and a four-wheeler per km. The amount are rationally assumed for reaching to quantified figures. As we can see from above calculations, running cost of a four-wheeler is almost 3.5 clock more than that of a two-wheeler. Thus, we conclude that the cost of switching to substitutes is LOW in the case of two-wheelers.Seeing all the five factors contributing to Threats of Substitutes, it can be safely concluded that this threat is LOW. Lower running costs, higher available market and lack of public transport make two wheeler industry attractive.IV. Threat of New Entrants MODERATE-WEAKCapital requirements ModerateHigh slap-up requirements mean a company must surpass a lot of money in order to compete in the market. The investment make by the company depends upon the geek of expansion. High capital requirements validatoryly claim 2 cyclist manufacturing India. High Capital Requirements (2 wheelwright exertion India) is an easy soft factor to overcome, so the investment go forth not have to hand much time trying to overcome this issue. halcyon to overcome this disadvantageHigh drop down costsHigh sunk costs make it troublesome for a competitor to enter a new market, because they have to commit money up front with no guarantee of returns in the end. High sunk costs absolutely furbish up 2 Wheeler Industry India. This statement will have a short positive disturb on this entity, which adds to its value. High sink be Limit Competition (2 Wheeler Industry India) will have a long-term negative impact on this entity, which subtracts from the entitys value. High Sunk Costs Limit Competition (2 Wheeler IndustryIndia) is an easy qualitative factor to overcome, so the invest ment will not have to spend much time trying to overcome this issue.5 Forces analysisHigh negative impact in the long runHigh positive impact in the short runEasy to overcome this disadvantageStrong brandsIf strong brands are critical to compete, then new competitors will have to improve their brand value in order to efficaciously compete. Strong brands positively affect Two Wheeler Industry India. The 3 major players contribute to 80% of the market share Hero Moto, Bajaj Auto, Honda Motors. move technologiesAdvanced technologies make it difficult for new competitors to enter the market because they have to develop those technologies before efficaciously competing. The requirement for advanced technologies positively affects Two Wheeler Industry India.Economies of scaleEconomies of scale help producers to lower their cost by producing the next unit of output at lower costs. When new competitors enter the market, they will have a higher cost of production, because they have smalle r economies of scale. Economies of scale positively affect Two Wheeler Industry India.Industry Requires Economies of Scale (Automobile Industry India) has a significant impact, so an psychoanalyst should put more weight into it. Industry Requires Economies of Scale (Two Wheeler Industry India) will have a long-term negative impact on this entity, which subtracts from the entitys value.This force has significant impactHigh negative impact in long runPatentsPatents that cover vital technologies make it difficult for new competitors, because the best methods are patented. Patents positively affect Two Wheeler Industry India.Customer LoyaltyIt takes time and money to build a brand. When companies need to spend resources building a brand, they have fewer resources to compete in the marketplace. These costs positively affect Two Wheeler Industry India.High learning curvesWhen the learning curve is high, new competitors must spend time and money studying the market before they can effectiv ely compete. High learning curves positively affect profits for industry.High switching costsHigh switching costs make it difficult for customers to change which products they normally purchase, due to costs. High switching costs positively affect Two Wheeler Industry India. High Switching Costs for Customers has a significant impact, so an analyst should put more weight into it.High Switching Costs for Customers will have a long-term positive impact on this entity, which adds to its value. This statement will have a short-term positive impact on this entity, which adds to its value. This force has significant impactHigh positive impact in long runHigh positive impact in short runStrong distribution networks flimsy distribution networks mean goods are more expensive to move round and some goods dont get to the end customer. The expense of building a strong distribution network positively affects Two Wheeler Industry India. Strong distribution Network Required has a significant im pact, so an analyst should put more weight into it. Strong dissemination Network Required Two Wheeler Industry India will have a long-term positive impact on this entity, which adds to its value. Strong Distribution Network Required Two Wheeler Industry India is a difficult qualitative factor to defend, so competing institutions will have an easy time overcoming it.This force has significant impactHigh positive impact in long runDifficult to defend advantageHigh entry barriersWhen barriers are high, it is more difficult for new competitors to enter the market. High entry barriers positively affect profits for Two Wheeler Industry India. So to sum it all, for the two wheeler industry the threat of new entrants is conceal to weak.INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS MODERATEAmong the direct and obvious forces in the automobile industry, existing competitors must first deal with one another. When organizations compete for the same customers and try to win market share a t the others expense, all must react to and anticipate their competitors actions. There are 3 main factors along which the intensity of rivalry amongst existing players in the automobile industry have been identified1. Number Of Competitors-The number of competitors within an industry is a direct correlation to the intensity of competition, all else being equal. The industry absorption was studied using Hirschman-Herfindahl Index. The data for studying HHI was obtained from the Centre for Monitoring Indian Economy. Yearly sales volume data for various brands of two-wheelers in the cardinal segments were obtained for the period 2008- 2012 and was computed.The above figure shows that the 2 Wheeler Industry is oligopolistic in nature and there is less competition even after deregulating of the Indian Economy. The Motorcycle segment is characterised by a few large players who have established their presence. The leading player is Honda Motorcycles with almost 50% market share. The Mo ped industry is a monopoly and TVS is the only player which has been able to assume the entire market. The scooter industry has crossed the shakeout phase post 2004 when the subroutineiva type models were being imitated by all major players across the segments. This too has a HHI of .309 indicating less competition.2. Incentive to Fight-The incentive to fight is primarily cerebrate to finding out how competitorsfix prices i.e whether they take on in price wars, or engage in aggressive activities with the aim of increasing market share. This shall and be explored among 3 other parameters.A. Growth In Automobile IndustryThere has been substantial growth in the automobile industry in India and it has already crossed the 25 Billion Rupee mark and has had a 13.7% CAGR over the past 5 years. Over the medium term, the 2W industry is pass judgment to report a volume CAGR of 9-11% to reach a size of 24-26 million units by 2016-17. This will be due to the (a) favourable demographic prof ile, (b) increasing personal income as well as (c) moderate penetration in relation to other Emerging Markets. therefrom there is substantial opportunity for growth leading to less competition.B. Demand Supply GapMost two wheeler have idle capacity as the supply exceeds demand. Moreover as many players are planning to increase manufacturing operations, it is estimated that the total supply will exceed demand by almost 15 to 20%. This problem has been compounded by the fact that foreign entrants are planning to enter India as growth in European and American markets have stagnated. This will lead to more competition.C. Nature of DemandThe nature of demand is highly cyclical in nature. In times of high growth in the Indian Economy there is corresponding taxation growth for all 2 wheeler companies. This can be seen more from the growth of the 2 Wheeler Industry during recession which slowed substantially. In fact the motorcycles segment had dipped to negative growth during that perio d.Our group believes that after evaluating the 3 factors, there will soon be a tendency for the firms to engage in fierce competition as the stakes are change magnitude manifold. This will ultimately lead to more competition for existing players and international players who are thinking of venturing into the industry.3. Coordination between competitorsAccording to the Indian Constitution,The Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007, follows the philosophy of modern competition laws. The Act prohibits anti-competitive agreements, abuse of dominant position by enterprises and regulates combinations (acquisition, acquiring of control and unification and Acquisition), which causes or likely to cause an appreciable adverse effect on competition within Indiawhich prevents firms from colluding implicitly or explicitly colluding. Till now there has been no tendency amongst firms of colluding, hence the market is still competitive in terms of the coordin ation between competitors. Considering all the factors, the competitive landscape within the industry is still not yet clearly defined. Even though firms are capacity constrained, there is still ample room for growth. Therefore our group believes that the competition is still low.The way aheadWith consumers becoming more and more aware about products and buyer power increasing, the manufacturers will have to particularize their products. Then comes the era of green vehicles which will be powered by battery or green fuels and will provide mileage of snow km/Rs 8. The relationship between suppliers and manufacturers is nasty at this point of time. It needs to be reworked. This will provide room for improved consumer feedback mechanism which will lead to improved product for consumers The projected sales of two wheelers in India in FY15 are 18MN.There is scope in the unisex category of scooters as already there are plenty of motorbike owners in the country. Companies could leverage on that. Another scope is there in rural areas and tier II, III cities. This market is relatively untouched by two wheeler marketers and hence this should be explored and custom made vehicles should be knowing for people residing in these areas. Since the purchasing capacity of these people is low it should be kept in mind while making utility products for them.