Pest Analysis of Automobile Industry Free Essay Example

I would like to confer my heartiest thanks to my organizer of Service Environment and class teacher Miss Impreet Kaur for offering me the chance to expel and work in the field of Environmental Analysis, especially its useful applications. While preparing my job I got to have an in depth understanding of useful applications of the theoretical principles and absolutely the important things which I have found out will undoubtedly assist me in future, to analyze numerous processes going on in our economy.

I would also like to thank all those people who straight or indirectly helped us in accomplishing this project. Literature Review Competitiveness of producing sector is a really broad multi-dimensional concept that accepts various aspects such as price, quality, productivity, performance and macro-economic environment. The OECD meaning of competitiveness, which is most commonly priced quote, likewise considers work and sustainability, while being exposed to international competition, as features relating to competitiveness.

There are numerous research studies on car market in India, published by industry associations, consultancy companies, research study bodies and peer-reviewed journals.

In this area, various research studies on the Indian auto market are examined, under various heads referring to competitiveness, specifically, international comparisons, policy environment and development of the Indian vehicle market, performance, elements related to supply-chain and commercial structure and technology and other aspects.

PESTLE Analysis

PESTLE Analysis is an easy, beneficial and widely-used tool that assists you understand the “huge picture” of your Political, Economic, Socio-Cultural and Technological, Legal and Ecological aspects. As such, it is used by business leaders worldwide to develop their vision of the future.

PESTLE analysis is interested in the environmental influences on a business. Recognizing PESTLE influences is a helpful way of summarizing the external environment in which a service runs. However, it needs to be followed up by factor to consider of how a service should respond to these influences.

It is important for these reasons: * First, by making effective use of PESTLE Analysis, you ensure that what you are doing is aligned positively with the powerful forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it; * Second, good use of PESTLE Analysis helps you avoid taking action that is doomed to failure from the outset, for reasons beyond your control; and * Third, PESTLE is useful when you start operating in a new country or region.

Use of PESTLE helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment. The table below lists some possible factors that could indicate important environmental influences for a business under the PESTLE headings:

PESTLE Analysis of Automobile Sector Political.

* In 2002, the Indian government formulated an auto policy that aimed at promoting integrated, phased, enduring and self-sustained growth of the Indian automotive industry * Allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria.

* Formulation of an appropriate auto fuel policy to ensure availability of adequate amount of appropriate fuel to meet emission norms * Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world * Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry.

* Allowing automatic approval for foreign equity investment up to 100% with no minimum investment criteria. * Establish an international hub for manufacturing small, affordable passenger cars as well as tractor and two wheelers. * Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry. * Assist development of vehicle propelled by alternate energy source. * Lying emphasis on R&D activities carried out by companies in India by giving a weighted tax deduction of up to 150% for in house research and R&D activities. * Plan to have a terminal life policy for CVs along with incentives for replacement for such vehicles.

* Promoting multi-model transportation and the implementation of mass rapid transport system. Economic * The level of inflation Employment level per capita is right. * Economic pressures on the industry are causing automobile companies to reorganize the traditional sales process. * Weighted tax deduction of up to 150% for in-house research and R & D activities. * Govt. has granted concessions, such as reduced interest rates for export financing. * The Indian economy has grown at 8. 5% per annum. * The manufacturing sector has grown at 8-10 % per annum in the last few years. * More than 90% of the CV purchase is on credit. * Finance availability to CV buyers has grown in scope during the last few years.

* The increased enforcement of overloading restrictions has also contributed to an increase in the no. of CVs plying on Indian roads. * Several Indian firms have partnered with global players. While some have formed joint ventures with equity participation, other also has entered into technology tie-ups. * Establishment of India as a manufacturing hub, for mini, compact cars, OEMs and for auto components. Social * Since changed lifestyle of people, leads to increased purchase of automobiles, so automobile sector have a large customer base to serve. * The average family size is 4, which makes it favorable to buy a four wheeler. * Growth in urbanization, 4th largest economy by ppp index.

* Upward migration of household income levels. * 85% of cars are financed in India. * Car priced below USD 12000 accounts for nearly 80% of the market. * Vehicles priced between USD 7000-12000 form the largest segment in the passenger car market. * Indian customers are highly discerning, educated and well informed. They are price sensitive and put a lot of emphasis on value for money. * Preference for small and compact cars. They are socially acceptable even amongst the well off. * Preference for fuel efficient cars with low running costs. Technological * More and more emphasis is being laid on R & D activities carried out by companies in India.

* Weighted tax deduction of up to 150% for in-house research and R & D activities. * The Government of India is promoting National Automotive Testing and R&D Infrastructure Project (NATRIP) to support the growth of the auto industry in India * Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability. * Customized solutions (designer cars, etc) can be provided with the proliferation of technology * Internet makes it easy to collect and analyse customer feedback * With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed.

* With the development or evolution of alternate fuels, hybrid cars have made entry into the market. * Few global companies have setup R &D centers in India. * Major global players like audi, BMW, Hyundai etc have setup their manufacturing units in India. Environmental * Physical infrastructure such as roads and bridges affect the use of automobiles. If there is good availability of roads or the roads are smooth then it will affect the use of automobiles. * Physical conditions like environmental situation affect the use of automobiles. If the environment is pleasant then it will lead to more use of vehicles. * Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability.

* With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed. * With the development or evolution of alternate fuels, hybrid cars have made entry into the market. * Few global companies have setup R &D centers in India. * Major global players like audi, BMW, Hyundai etc have setup their manufacturing units in India. Legal * Legal provision relating to environmental population by automobiles. * Legal provisions relating to safety measures. * Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world * Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry.

* Establish an international hub for manufacturing small, affordable passenger cars as well as tractor and two wheelers. * Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry. Introduction The Indian automotive component industry is dominated by around 500 players which account for more than 85% of the production. The turnover of this industry has been growing at a mammoth 28. 05% per annum from 2002-03 onwards as illustrated in Fig. 1 which clarifies its emergence as one of India’s fastest growing manufacturing sectors. During 1990s, the auto components market in India used to be dominated by supplies to the aftermarket with only 35% exports sourced by global Tier 1 OEMs (Original equipment Manufacturers).

The industry made a sustained shift to the global Tier 1 market and today, the component manufacturers supply 75% of their exports to global Tier 1 OEMs and the remaining to the aftermarket. This is largely due to the growing capability of the Indian component suppliers in understanding technical drawings, conversance with global automotive standards, economically attractive costs (manufacturing costs are 25%-30% lower than its western counterparts), flexibility in small batch production and growing information technology application for design, development and simulation. Besides the burgeoning demand of auto components from global majors, the domestic automobile industry has been showing a sparkling growth caused by increasing customer base and affordable loans.

Based on this, the turnover of the Indian auto component industry is expected to touch US$ 18. 7 billion by 2009 and estimated to reach US$ 40 billion by 2014. Overview of Indian Automobile Industry The liberalized policies of the Indian Government paved towards steady evolution of India as a stable and market driven economy with the real Gross Domestic Product growth in excess of 8%, foreign exchange reserves crossing the $150 billion mark, growing value of Indian Rupee compared to US dollar and reducing inflation rate. 100% Foreign Direct Investment, absence of local content regulation, manufacturing and imports free from licensing & approvals in the automobile sector coupled with customs tariff or auto components reducing to 12.

5% resulted in increased number of multinationals establishing their bases in India and with export markets looking up, the Indian automobile industry is poised for a phenomenal growth. The automobile production in the sub-continent has been growing steadily 18. 53% per annum from 2002-03 onwards with total vehicle production standing at a mammoth 1,00,31,296 nos. in 2005-06 as is shown in Fig. 2. Among the automobiles, 2 wheelers account for 75. 77%, cars about 11. 09%, 3 wheelers to the tune of 4. 33%, tractors about 2. 95%, buses & trucks constitute 2. 19%, Multi Utility Vehicles (MUVs) to the tune of 1. 96% and Light Commercial Vehicles (LCVs) about 1. 71% of the total number of automobiles produced in the country.

Presently, India is the second largest market after China for two & three wheelers. In tractors production, India is one of the two largest manufacturers in the world along with China. The subcontinent stands as the 4th largest producer of trucks in the world. Coming to the passenger car segment, the country is positioned 11th in car production in the world. The Indian passenger car market is far from being saturated leaving ample opportunity for volume growth since the per capita car penetration per 1000 is only 7 compared to 500 in Germany. The production of cars in the country has been growing at a mammoth 27. 58% per annum from 2002- 03 onwards as is shown in Fig. 3.

In general, cars are broadly classified as Mini, Compact, Mid-Size, Executive & Premium varieties. There has been a steady rise in compact car production from 333,000 in 2002-03 to 715,000 in 2005- 06, mid-size cars from 122,000 to 204,000 nos. , executive cars from 2000 to 23,000 nos. and premium variety cars from 4000 in 2002-03 to 5000 nos. in 2005-06. The mini car segment production reduced from 150,000 in 2002-03 to 98,000 nos. in 2005-06. These statistics vividly reveal the increasing capacity of the Indian customer, thus driving the passenger car demand rapidly up the price ladder. Analysts speculate car production in the sub-continent to touch 1575,000 in 2009 and 2654,000 by 2014.

Cars and MUVs exports rose from 72,000 in 2002-03 to reach 176,000 nos. in 2005-06 with growth 48. 155 per annum from 2002-03 onwards. Out of the two wheelers produced in India, motorcycles account for 81. 59%, scooters about 13. 42% and mopeds to the tune of 4. 99% of the total production. The production statistics is shown in Fig. 4 which shows the growth of 2 wheelers 16. 58% per annum from 2002-03 onwards. Out of this, motorcycles have exhibited production growth 19. 99% per annum, scooters 6. 74% per annum & mopeds 2. 65% per annum from 2002-03 onwards.

Two wheeler production units in India constitute of Japanese OEMS (Original Equipment Manufacturers) which include Hero Honda Motors, Honda Motorcycle & scooter India (P) Ltd. , Yamaha Motor India (P) Ltd. & Suzuki Motorcycle India (P) Ltd. and Indian OEMs consisting of Bajaj Auto L t d . , TVS Motor Company Ltd. , LML Ltd. , Kinetic Engineering Ltd. , Majestic Auto Ltd. , Kinetic Motor Company Ltd. and Royal Enfield of Eicher Ltd. Out of the aforementioned, Hero Honda accounts for 39. 55%, Bajaj Auto about 26. 87%, TVS Motors 17.

98%, Honda Motors 7. 94%, Yamaha Motors 3. 27%, LML 1. 41% and the remaining 2. 98% of the total 2 wheelers production in the country. The exports of two wheelers made a significant growth from a level of 180,000 in 2002-03 to reach 513,000 nos. in 2005-06.

The latest estimates put up production of 2 wheelers to 13. 6 million by 2009. Current status of the industry The industry over a period of time has installed a robust capacity as given below: Table 1. Installed capacity in different segments of the automobile industry Against this installed capacity, the production over last few years has been as: Table 2. Vehicle production, 1996-2002 In order to illustrate the volume in economic terms, the Indian automobile industry achieved a turnover of nearly US$ 8 billion (excluding component industry) during the year 1998-1999. The imports of the industry during that year were of the order of US$ 0. 8 billion.

The auto component industry in the country has also made rapid strides and its turnover has almost doubled in last five-year period as the year-wise production given below indicates. 1997-1998 US$ 2. 51 billion 1998-1999 US$ 2. 71 billion 1999-2000 US$ 3. 41 billion 2000-2001 US$ 3. 58 billion (estimated) Automotive industry of India is now finding increasing recognition worldwide. A beginning has been made in exports of vehicles. However, the exports have largely remained static since 1996-1997. India is making serious efforts to tap the potential in this area. The following table indicates the situation. Table 3. Indian car exports, 1996-2001 Indian automobiles are being exported mainly to the following countries. Table 3. 4. Main export destinations.

The auto component industry in India now equipped with significant advancement in its technological capabilities, due to its alignment with major vehicle manufacturers in the country and abroad, has a high export potential. During the late 1990s, the export of auto-components has grown by a CAGR of about 20 per cent. Currently, the share of exports out of the total production of auto-components is 10 per cent. During the last 5 years, the exports of auto components have been as follows: 1998-1999 US$ 292 million 1999-2000 US$ 347 million 2000-2001 US$ 400 million (estimated) Future Projections Automobile industry With the domestic auto industry now moving in step with the WTO covenants, the stage is set for it to make rapid strides domestically and internationally to attain its rightful place in the world trade.

A global recession for last two years notwithstanding, the industry has shown appreciable resilience and adjusted to the challenges of the environment. Based on the general growth projections indicated by the Planning Commission of India for the next five-year period, automobile industry is expected to register growth pattern as given below. This growth estimate implies certain assumptions relating to segment-wise growth rates based on a study conducted by the National Council of Applied Economic Research (NCAER). Table 3. 5 Projections of India’s automobile industry, 2001-2012 Emerging trends in Indian Automobile Globalization is pushing auto majors to consolidate, to upgrade technology, enlarge product range, access new markets and cut costs.

They have resorted to common platforms, modular assemblies and systems integration of component suppliers and e-commerce. The component industry is undergoing vertical integration resulting into emergence of ‘systems and assembly suppliers’ rather than individual component suppliers.

Thus, while most component suppliers are integrating into tier 2 and tier 3 suppliers, larger manufacturers and multinational corporations (MNCs) are being transformed into tier 1 companies. Environmental and safety concerns are leading to higher safety and emission norms in the country. India has already charted out a road-map for reaching EURO-II norms across the country by the year 2005. Seven metropolitan cities of India would simultaneously move to EURO-III norms in 2005.

Most vehicle manufacturers are already producing EURO-II compliant vehicles in the country to meet special requirements of capital city of New Delhi where the Supreme Court verdict has already necessitated this. To meet the concomitant testing and certification activities relating to higher safety and emission norms, testing infrastructure in the country is being overhauled.

A substantive state funding is being planned in upgrading the testing infrastructure with participation of industry. Environmental pollution and the need to conserve existing supply of fossil fuels have led to search for alternative fuels. In addition to supporting greenfield research in this area, an ambitious phased programme to upgrade carbon fuel quality commensurate with higher emission norms is also being undertaken.

Foreign direct investment norms have already been considerably relaxed. Unhindered import of automobiles, including new and second hand vehicles, has also been permitted. Most non-tariff barriers have also been relaxed or removed. The Government has moderated and lowered taxes and duties on automobiles, including customs duty. Value Added Tax (VAT) is also proposed to be introduced across the country from 1 April 2001. The Government has also allowed private sector participation in the insurance sector. Norms guiding external commercial borrowings (ECBs) have been liberalized and lending rates within the country have also been reduced further strengthening the environment of investment.

An ambitious programme to upgrade the quadrilateral of highways in the country, the Government is laying an eight-lane expressway linking all metropolitan and several important capital towns across the country paving the way for movement of heavier haulage vehicles. Porter’s Five Forces Porter’s Five Forces of Competition framework views the profitability of an industry as determined by five sources of competitive pressure. These five forces of competition include three sources of “horizontal” competition: competition from substitutes, competition from entrants, and competition from established rivals; and two sources of “vertical” competition: the bargaining power of suppliers and buyers.

The strength of each of these competitive forces is determined by a number of key structural variables, as shown in Figure 3. 3. FIGURE 3. 2 Porter’s Five Forces of Competition framework Competition from Substitutes The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The absence of close substitutes for a product, as in the case of automobiles, means that consumers are comparatively insensitive to price (i. e. , demand is inelastic with respect to price). The existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (i. e. , demand is elastic with respect to price).

The extent to which substitutes limit prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, is dependent on their price performance characteristics. The more complex the needs being fulfilled by the product and the more difficult it is to discern performance differences, the lower the extent of substitution by customers on the basis of price differences. FIGURE 3. 3 The structural determinants of the Five Forces of Competition Rivalry between Established Competitors For most industries, the major determinant of the overall state of competition and the general level of profitability is competition among the firms within the industry.

In some industries, firms compete aggressively – sometimes to the extent that prices are pushed below the level of costs and industry-wide losses are incurred. In others, price competition is muted and rivalry focuses on advertising, innovation, and other non price dimensions. Six factors play an important role in determining the nature and intensity of competition between established firms: concentration, the diversity of competitors, product differentiation, excess capacity, exit barriers, and cost conditions. Threat of Entry If an industry earns a return on capital in excess of its cost of capital, that industry acts as a magnet to firms outside the industry.

Unless the entry of new firms is barred, the rate of profit will fall toward its competitive level. The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level. * Economies of Scale – Since Indian automobile market is of order $ 350 billion, the economies of scale are very high. Thus, threat of new entrants is low. * Product Differences – Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So threat of new entrants is high. * Brand Identity – Since there is no big Retailer like Amazon. com or Wal-Mart in India. So threat of new entrants is high.

* Government Policy – Since the Government Policy has been quite restrictive till now with respect to the Retail market & FDI, so threat of new entrants is low. * Capital Requirements – The capital requirements for entering in the automobile sector are substantially high( high fixed cost and cost of infrastructure), so only big names can think of venturing into this area So, in that respect threat of new entrants is low.

* Access to distribution – Since in India there is no well established distribution network. So threat of new entrants is low. Bargaining Power of Buyers The firms in an industry operate in two types of markets: in the markets for inputs and the markets for outputs. In input markets firms purchase raw materials, components, and financial and labor services.

In the markets for outputs firms sell their goods and services to customers (who may be distributors, consumers, or other manufacturers). In both markets the transactions create value for both buyers and sellers. How this value is shared between them in terms of profitability depends on their relative economic power. The strength of buying power that firms face from their customers depends on two sets of factors: buyers’ price sensitivity and relative bargaining power. * Product Differences – Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So bargaining power of buyers is high.

* Buyer Information – Today’s customers are well educated about the various product offerings in the sector. So bargaining power of buyers is high. * Buyer Switching Costs – Since customers don’t have to pay a fat premium to be registered for provision of services , so bargaining power of buyers is high. * Brand Identity – High Brand Identity and trustworthiness reduce the bargaining power of buyers but, otherwise the bargaining power of buyers is high. * Buyer Profits – Since dealers offers discounts and various bundling services like 0% insurance, old car sale, etc, on different items. Hence bargaining power of buyers is high. Bargaining Power of Suppliers.

Analysis of the determinants of relative power between the producers in an industry and their suppliers is precisely analogous to analysis of the relationship between producers and their buyers. The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The key issues are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party. * Product Differences – Since there is hardly any difference in the offerings of the various suppliers, so product differentiation is low. So bargaining power of Suppliers is low. * Supplier Information – Today’s automobile manufacturers are well educated about different Suppliers.

So bargaining power of Suppliers is low. * Supplier Switching Costs – Since different Suppliers hold resources as per buyer’s requirements and a large inventory has to be maintained. So bargaining power of Suppliers is low as they would have to incur a huge cost on switching. But if they get automobile manufacturers for similar products who can pay higher Supplier switching cost is low. In such case, bargaining power of Suppliers is high. * Brand Identity – High Brand Identity and Trustworthiness of a Supplier increases the bargaining power of Suppliers. But, otherwise the bargaining power of suppliers is low. Measures for more Conducive Growth.

The automobile industry across the world has great potential to trigger sustained employment, mobility, inter- sectoral industrial growth and thus conduce conditions for general economic and social well-being. However, there is need to promote and sustain international cooperation between Governments and industry. There is need for coordinated research and development, standardization of designs and broader technologies, effective cost cutting to enhance affordability and loosening of trade barriers across the globe. There are separate measures, which require addressing at the national and international levels. Some suggested steps at both levels are listed below. Suggestions at the national level.

Further lessening the incidence of taxes and loosening of non-tariff barriers has to be attempted with a faster pace faster. A regime of single tax across the country is an ideal situation and possibilities of this should be explored. A vehicle retirement programme which will assist not only in fleet modernization and reduction of emission but will also provide quantum fillip to the demand should be put in place. There is a need to brief the international communities on technological and quality related capabilities of Indian automobile industry. Substantive efforts are required for educating opinion leaders and build a strong ‘Made in India’ brand in overseas markets. Existing incentives for promoting exports are considered inadequate.

An institutional mechanism such as the Automobile Export Promotion Council, which can address industry-specific issues and facilitate exports is urgently required. Labor laws’ reforms to facilitate better productivity and reduction in manpower costs as has already been committed by the Government should be expedited. Greater tax incentive on expenditure incurred on research and development in automotive sector. Tariff rationalization and taming of avoidable competition between rail and road transport sectors should be carried out. In this unhealthy competition, both the industries are unable to realize their full potential. Easier availability of market credit for funding automobile acquisition is required.

Despite lower interest rates, availability of easy credit in rural and semi-urban areas requires more focused attention. This can substantially spur the demand. Suggestions at the international level Serious and sustained dialogue on regional cooperation in automobile sector should begin at the earliest. Dialogue should be regular and focused in which Governments and industry should both engage. The recent statistics of custom duties show that the average tariff rates of different countries have declined. However, it has been noticed that the problem of high tariffs is still prevalent in certain sectors. These high tariffs are generally noticed in developed countries.

Reduction of peak tariffs is necessary to facilitate free flow of automobiles. Non-tariff barriers should be phased out with mutual dialogue and consensus. Mutual recognition should be accorded to the testing and certification agencies in various countries. Countries should join hands in developing alternative fuels to replace the existing fossil fuels. Similar cooperation is required in other critical areas of technological development. Fragmented and limited research in each country may lead to delay and more expensive results. Affordability of quality automobiles should be focus of industry across the world to facilitate volumes and widespread ownership. Reasons of Growth.

Economic liberalization, increase in per capita income, various tax relief policies, easy accessibility of finance, launch of new models and exciting discount offers made by dealers all together have resulted in to a stupendous growth of India automobile industry. Market Share Automobile industry of India can be broadly classified under passenger vehicles, commercial vehicles, three wheelers and two wheelers, with two wheelers having a maximum market share of more than 75%.

Automobile companies of India, Korea, Europe and Japan have a significant hold on the Indian market share. Tata Motors produces maximum numbers of mid and large size commercial vehicles, holding more that 60% of the market share. Motorcycles tops the charts of two wheelers with Hero Honda being the key player. Bajaj by far is the number one manufacturer of three wheelers in India.

Passenger vehicle section is majorly ruled by the car manufacturers capturing over 82% of the total market share. Maruti since long has been the biggest car manufacturer and holds more that 50% of the entire market. Global recession has impacted, the Indian automobile industry also and can be seen clearly in the sales figures of the last financial year. Even then this industry has high hopes in 2009-2010, as banks have reduced loan interest rates and the major chuck of automobile customers belong to the middle income group who are becoming economically stronger with every passing day. Conclusions Easier and faster mobility of people and goods across the regions, countries.