Porter's Five Forces Analysis - China

Porter's Five Forces Analysis - China

Porter's Five Forces evaluates the competitiveness and attractiveness of a given industry in a certain market. China is an interesting market to analyze for any industry, especially the automobile industry. China is experiencing tremendous growth, and in 2009 more cars were sold in China than in the US.

To see a P5F analysis of the auto industry in the US, click here.

To see a P5F analysis of the auto industry in India, click here.

In any P5F analysis, one must examine the following:

1. The threat of new entrants
2. The bargaining power of buyers/customers
3. The threat of substitute products
4. The amount of bargaining power suppliers have
5. The amount of rivalry among competitors

Let us address these one by one.

1. The threat of new entrants
This is very high in China and has many contributing factors. Just a few are:
-The number of new auto manufacturers in the past decade is staggering.
-China is in its early phases of the automobile life-cycle
-Weak intellectual property laws allow for massive copying, which is faster, easier, and cheaper than research and development and genuine innovation
-Last, and possibly most important, is growing demand. With a growing economy the market need for cars will continue to be filled until it matures and no more money is to be made.

Result: Unfavorable

2. The bargaining power of buyers/customers
This should be fairly high as it is a very competitive industry. Customers are not stuck with one or two manufacturers to choose from. These include both Chinese and foreign manufacturers.

Result: Unfavorable

3. The threat of substitute products
Mass-transit could hurt some car sales, but not much as most Chinese who have recently come into wealth may end up buying a car anyway. People see cars as status symbols, especially when the may have not grown up with one, and therefore might want to buy one as soon as they are finically able to, despite cheaper options like mass-transit or even bicycles.

Result: Favorable

4. The amount of bargaining power suppliers have
This should be high in a market with a seemingly-unlimited number of suppliers and manufacturers, especially for the automobile industry.

Result: Unfavorable

5. The amount of rivalry among competitors
Competition between manufacturers is likely cut-throat and brutal.

Result: Unfavorable

Overall, this simple analysis indicates that the Chinese car market is unfavorable to profitability. But do you agree? Has this really taken into account the future prospects? What about the growth we will see in China over the next few decades, as the market matures?