What are the main barriers to entering the automobile sector?
The global automobile sector is among the largest industry sectors in the world based on net revenue. It includes a wide range of businesses involved in the design, development, manufacture, marketing, and sale of automobiles. The automobile manufacturers are producing a wide range of vehicles including cars, SUVs, trucks, vans and electric vehicles. They are also investing in development of charging infrastructure to provide their customers easy access to charging for their electric cars. Apart from that, these businesses are investing in software and digitalization to develop new technologies like autonomous driving and over the air updates. In 2023, the global automobile market was valued at USD 3,564.67 Billion. It is growing at a CAGR of 6.77% from 2023 to 2033. By 2033, it is expected to reach USD 6,861.45 Billion and the North American market is expected to grow the fastest during this period.
The automobile sector is highly competitive and requires significant resources and expertise. The possibility of new players entering this market is very limited due to several factors. In this post, we are going to analyze the main barriers to entry in the automobile sector:
High Capital Requirements:
The first major barrier that prevents smaller players from entering this industry sector is the very high capital requirement. The high capital requirement makes it impossible for smaller players to enter even at a local level. To establish an automobile business, companies need to invest a large sum in developing an automobile manufacturing facility first. That will require a huge investment in equipment, technology, and infrastructure. Without access to a huge amount of capital for investing in various things and mainly the manufacturing facilities, companies cannot even think of entering this sector.
Economies of Scale:
Another major difficulty before the new brands is achieving economies of scale. Established companies benefit from economies of scale which helps reduce their per-unit costs. For the established brands increased total output leads to savings on costs per unit. The new entrants struggle to compete on price without achieving similar scale. They will need to expand their product line and gain technical and managerial efficiencies as well as financial economies to achieve similar economies of scale as established brands.
Brand Loyalty and Reputation:
Established automobile businesses such as Toyota, Volkswagen or Hyundai enjoy strong brand loyalty. One of the important factors driving demand and sales is brand image. Established automobile brands have a strong brand image which translates to higher customer loyalty and brand recognition. On the other hand, the new players enjoy lower brand recognition and it can take a lot of time to build a strong reputation, making it challenging for new entrants to attract customers.
Regulatory Compliance:
The level of regulation in the automotive industry is very high. Apart from safety and emission standards, there are environmental standards that automobile businesses are required to meet. These regulatory barriers also deter new players from entering the market since compliance is a costly area for these businesses requiring a significant investment. On the other hand, noncompliance can result in hefty fines and losses which newcomers might be unable to bear.
Research and Development (R&D):
Achieving a sustaining competitive advantage in the automobile sector requires strong focus on innovation. Continuous innovation is crucial to growth and expansion in the automobile sector. The established businesses that are financially strong can spend huge sums on research and development. They are able to invest in the development of new technologies like AI, electric and autonomous driving etc. However, the high R&D costs for developing new technologies pose a significant barrier for the new players.
Distribution and Dealer Networks:
One of the key requirements for growing at a large scale in the automobile sector is a strong distribution network. However, before a new business can establish a strong dealer network, it will need to invest in many more things like manufacturing network and gaining strong brand recognition. Established manufacturers have extensive distribution and dealer networks. Their extensive sales and distribution network provides them with a competitive advantage in reaching customers against the new players.
Supply Chain Management:
Supply chain management is another critical area where focus is essential for both new and established businesses in the automotive sector. However, even the established businesses like Volkswagen and Hyundai deal with supply chain related challenges. So, supply chain management and ensuring a continuous supply of quality raw materials can become quite challenging for newcomers. Building a reliable supply chain for parts and materials is complex and requires long-term relationships with suppliers.
Technological Expertise:
Advanced technological expertise is essential to find success in the automotive sector. Without it companies will struggle to compete with established players having strong technological expertise and resources. It is also essential for managing higher customer satisfaction. Technology has become the main driver of growth in the industry sector, especially with the shift towards electric and autonomous vehicles.
Intellectual Property:
The established companies have patents and proprietary technologies which can prevent new entrants from using similar technologies. It can be a major disadvantage for new players while a leading source of competitive advantage for established players that own an extensive portfolio of patents and proprietary technologies.
Marketing and Advertising:
Another critical disadvantage for new players is lack of strong brand recognition and market presence. A new entrant needs to worry about positioning, targeting, and several more things including the promotion of individual products and the brand. To achieve strong brand recognition newcomers need to invest in marketing and advertising. In the initial stage, the focus is heavily in building brand awareness which requires a huge investment in marketing and promotions. Overall, while marketing is a significant area, newcomers are required to start from zero due to which they are at a significant disadvantage compared to the established players.
Skilled Workforce:
Another critical requirement for growing faster as a new automobile brand is the availability of a large and skilled workforce. Established brands also focus heavily on managing their human capital. However, securing a skilled workforce can be difficult for the new entrants while the established players have comparatively easier access to skilled and experienced workforce. It is true that a skilled workforce is the fundamental driver of all competitive advantages in any industry sector including the automobile sector.
Economic and Political Factors:
Economic conditions and political stability in key markets also have a significant impact on the market position of new automobile businesses. These factors can affect entry and operations. Trade policies, tariffs, and local government incentives or restrictions can also impact market entry. If these factors are not favorable, market entry can become very difficult for the new players.
Conclusion:
Overall, there are several barriers to entry in the automobile sector and scaling many of them can be very challenging for new businesses trying to start at a small or local scale. They need to secure a large amount of capital to invest in various areas including manufacturing, supply chain and other operational processes as well as marketing and advertising. Overall, while costs are high for entering the automobile sector, new companies also have to face legal and regulatory barriers as well as the competition from established firms. Technology is the primary driver of growth in the automobile sector and newcomers need to invest in gaining technical expertise as well as patents and proprietary technologies. These barriers create a challenging environment for new entrants, making it difficult to compete with established players in the automobile industry.