Five forces Analysis of Two-wheeler industry Essay

As sh deliver above, the business model is formulated as input process tabooput. For a 2 wheeler effort, The inputs to the OEM constitutes of1. Import of move the basic ingredients for model building are the percentages such as drive chains, engines, components, transmissions etc. 2. Auto Component Manufacturer at that place are ccc+ players in the assiduity which manufacture auto parts components and perform tasks such as castings, forgings, tires etc 3. Raw material Supplier This forms the initial requisite for the development of both vehicle. The raw material of which it is composed of consists of sheet metal, aluminium etc. The processing involves1. ManufacturerOriginal Equipment Manufacturer(OEM) The industry is highly concentrated with 3 players constituting 80% of the food merchandise share, namely Hero Moto, Bajaj Auto & Honda Motors. This industry has a turnover of 55K Cr by producing over 13.33mn units in the FY 2011. 2. Dealership Ne devilrkDealer In the India n internal market, the dealer are morseled over 2000 Sub- Dealer The sub dealers, excessively known as the touch points are over 12000. This dealership ne iirk forms the competitory advantage of a company in the market Service Centers These provide after sales service for the two wheeler industry and form the part of maintenance and helps in building customer loyalty.The output part of the business model comprises of1. Domestic nodes There is a low penetration in the domestic market with coverage in rural market as low as 7%. 2. International Customers The major markets for two wheelers are Africa, Latin the States & South East Asia INDUSTRY ANALYSISThe industry is highly concentrated and thither is a strong foothold by 3 major players in the industry namely Hero Moto constituting 39% of the market share, Bajaj Auto constituting 27% of the market share and finally Honda Motors with 14% market share. So, these 3 major players fit to 80% of the total industry market share.The Indian Auto sector had a volume evolution of 13% CAGR over the last 5 long time- set by two wheelers which account for 80% of the total volumesTwo wheeler sales reached INR 55K Cr and volumes reached 13.3 mn units clocking a CAGR of 15% and 13% on an individual basis over 2006-2011. This works to an average realization 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 set out been a propertyifi screwt doer to contribute 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 former(a) political machine segments.FIVE FORCES ANALYSISWhat is it?Five Forces Analysis is a cock that enables managers to study the key factors in an industry environment that shape that nature of competition (1) rivalry among current competitors, (2) threat of new entrants, (3) substitutes and complements, (4) origin of supplie rs, and (5) office of buyers. When do we control use of it?In a strategic abridgment, Five Forces Analysis is an excellent method to help you analyze how competitive forces shape an industry in order to adapt or influence the nature of competition. Collectively, the Five Forces determine the attractiveness of an industry, its profit effectiveness, and the ease and attractiveness of mobility from one strategic position to a nonher. Becauseof this, the analysis is useful when firms are make decisions most incoming 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 noned authority on strategy. While all firms operate in a great socioeconomic environment that complicates legal, social, environmental, and economic factors, firms also operate in a to a greater extent immediate private-enterprise(a) environment. The structure of this competitive environment determines both the overall attractiveness of an industry and helps identify opportunities to favorably position a firm at bottom an industry. Porter identified five primary forces that determine the competitive environment (1) rivalry among current competitors, (2) threat of new entrants, (3) substitutes and complements, (4) power of suppliers, and (5) power of buyers.1. RivalryAmong the direct and obvious forces in the industry, existing competitors must beginning(a) deal with one a nonher. When organizations compete for the same customers and try to win market share at the others expense, all must react to and forestall their competitors actions.2. Threat of Entrants refreshing entrants into an industry compete with established companies placing downward pressure on prices and ultimately profits. In the last century, Japanese automobile manufacturers Toyota, Honda, and Nissan represented formidable new entrants to the U.S. market, imminent the market position of established U.S. players GM, Ford, and Chrysler. The mankind of true barriers to entry helps protect the profit potential of existing firms and makes an industry more attractive.3. Substitutes and ComplementsBesides firms that directly compete, other firms can affect industry dynamics by providing substitute products or services that are functionally similar (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 probability because customers buy more of a givenproduct if they also demand more of the complementary product. For example, iTunes was established as an important complement to Apples iPod, and now the firm has l constantlyaged 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 dictate the nature of stand in 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 con centerers, but frequently the term refers to distributors, retailers, and other intermediaries. Like suppliers, buyers may have important bargaining powers that dictate the think ups of exchange in a transaction.According to Porter, successful managers do more than simply react to this environment they act in ways that actually shape or enact the organizations competitive environment. For example, a firms introduction of substitute products or services can have a substantial influence over the competitive environment, and in turn this may have a direct touch on the attractiveness of an industry, its potential profitability, and c ompetitive dynamics.I. negociate power of buyers naughtyWho are the buyers of this industry Individual customers who purchase and use two wheelers for the purpose of transportation. This category of customers considers two wheelers as a essential than a luxury. In a developing country like India, especially in tier 2 and tier 3 cities, two wheelers are extremely fashionable amongst families and students. Scooters are considered to be utility vehicles transporting a family of 2-3 at a time and providing good milage. Bikes on the other hand come in a variation of segments. They can address little, acting as utility vehicles.They can be costing very high, acting as luxury products for their owners. Thefollowing points can be aggregated to determine the relative bargaining power of buyers against the automobile manufacturing firms. The bargaining power in this case would mean to what extent 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 specialty 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 have affinity for any specific productInformation Availability spicy high school availability of information over the internet, antedates to higher bargaining power with the buyer to compare the heterogeneous features and price of products thus leading to lower bargaining power with the manufacturing firms.Type of deliverance 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 astronomical number of customers lowers their bargaining power to some extent. However, this is offset 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 male parentt have to worry about declining sales for some time in India.Number of Suppliers HighThe number of companies manufacturing automobiles is high in India. With each major player opening showrooms in not only Tier I but II and threesome 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 another 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 speak to ModerateThe switching co sts 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 some people and not so significant for others. However as two wheelers hardly have any associated products, which would require compatibility with the product, the switching cost is low. Also 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 disadvantage if their suppliers are powerful. They should preferably not be dependent on any supplier. Now suppliers can be powerful if the number of firms providing thie particular 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. except, firms in an industry have power if they have many alternative sources of supply 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 perseverance there would be various suppliers which can be broadly secernified into 4 broad categories-1)Steel industry2)Tyre industry3)Auto components industry4) Battery industrySteel laborThe 2 wheeler industry in India mostly imports all the automotive steel. Around 65% of the steel is imported for automobiles. The cheap import duty helps the 2 wheeler industry to import high quality steel. So the prices ofsteel is determined by mostly planetary markets, so the bargaining possibility is less for the steel suppliers. Demand for automotive steel such as inner components and outer body parts comprises just 7-8 million tonnes (mt) a year out of Indias total 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 decided 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 mound of vendors both nationally and internationally to choose from. Thus, the bargaining power of the supplier is low.Auto components and Battery assiduityBoth the Auto Components industry and the Battery industry in India are highly fragmented .There suppliers highly amount 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 metalworks 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 patienceIt can be clearly seen 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 significant 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 HighSubstitutes can be cars, electrical vehicles, national transport and rickshaw/taxi. There are many players in the market for four-wheelers. Also, in metros and some of the tier-II cities, public transport facility is quite good. Thus, this can be a negative 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 ModerateA s 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 needs 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 increasing. Most of them prefer one vehicle per head to commute. For a middle class family, two wheeler is the only feasible option in such cases looking at its flexibility and affordability. Thus, changing lifestyleis a irresponsible 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 substi tutes.CarsComfort, status Symbol, preventivePublic Vehicles Affordability, Safety, Cost, Pollution, Time savingElectrical VehiclesEnvironmental friendly, Maintenance costHere is the negative side of switching to substitutes. Public transport vehicles are not readily available for transportation within the city/town/village except 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 gasoline running vehicles. No established player is offering Electrical vehicles. Switching cost from a two-wheeler to a four-wheeler is quite high as investment funds volition be needed to switch the product. Also running cost is more for a four wheeler.The above table shows the calculation of running cost of a two-wheeler and a four-wheeler per km. The numbers 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 times 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 change to Threats of Substitutes, it can be safely concluded that this threat is LOW. Lower running costs, higher addressable market and lack of public transport make two wheeler industry attractive.IV. Threat of New Entrants MODERATE-WEAKCapital requirements ModerateHigh capital requirements mean a company must make it a lot of money in order to compete in the market. The investment made by the company depends upon the type of expansion. High capital requirements dogmaticly affect 2 wheel horse Industry India. High Capital Requirements (2 Wheeler Industry India) is an light-headed qualitative factor to overcome, so the investment bequeath not have to evanesce much time trying to overcome this issue. Easy to overcome this disadvantag eHigh sink costsHigh sunk costs make it rocky 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 positively affect 2 Wheeler Industry India. This statement will have a short-term positive impact on this entity, which adds to its value. High Sunk cost 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 investment 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 meliorate their brand value in order to effectively 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.Advanced technologiesAdvanced technologies make it difficult for new competitors to enter the market because they have to develop those technologies before effectively 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 smaller 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 analyst 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 signi ficant 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 effectively 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 C ustomers 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 networksWeak distribution networks mean goods are more expensive to move around 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 impact, so an analyst should put more weight into it. Strong Distribution 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 posi tive 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 moderate 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 at 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 concentration was studied using Hir schman-Herfindahl Index. The data for studying HHI was obtained from the aggregate for Monitoring Indian Economy. Yearly sales volume data for various brands of two-wheelers in the three 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 deregulation 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 Moped industry is a monopoly and TVS is the only player which has been able to capture the accurate market. The scooter industry has crossed the shakeout phase post 2004 when the Activa 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 related to finding out how competitorsf ix prices i.e whether they engage in price wars, or engage in battleful activities with the aim of increasing market share. This shall further 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 sensitive term, the 2W industry is expected 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 profile, (b) increasing personal income as well as (c) moderate penetration in relation to other Emerging Markets. Therefore there is substantial fortune 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 trouble 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 revenue growth for all 2 wheeler companies. This can be seen more from the growth of the 2 Wheeler Industry during niche which slowed substantially. In fact the motorcycles segment had dipped to negative growth during that period.Our group believes that after evaluating the three factors, there will soon be a propensity for the firms to engage in fierce competition as the stakes are increased manifold. This will ultimately lead to more competition for existing players and international players who are thinking of venturing into the industry.3. Coordination amidst 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, ill-use of dominant position by enterprises and regulates combinations (acquisition, acquiring of control and Merger 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 solace competitive in terms of the coordination 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 increasingly aware about products and buyer power increasing, the manufacturers will have to differentiate their p roducts. Then comes the era of green vehicles which will be powered by battery or green fuels and will provide mileage of 100 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 designed for people residing in these areas. Since the buying capacity of these people is low it should be kept in mind while making utility products for them.