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A Porter’s five forces analysis of Fiat Chrysler Automobiles

Fiat Chrysler Automobiles (FCA) Five Forces Analysis

Fiat Chrysler Automobiles is a global brand of cars and SUVs headquartered in London, United Kingdom. The company was formed after the merger of Fiat and Chrysler in 2014. However, FCA has announced another merger with PSA which owns Peugeot and Vauxhall brands. This merger will grow the product portfolio of FCA larger. The company performed well financially in 2018 despite the decline in total number of vehicles sold compared to the previous year. The automobile industry has entered a difficult phase in 2019 and several companies have experienced a decline in sales. The industry is marked by heavy competition. Apart from having a global sales and distribution network, companies also need to invest in research and development to retain their market share and maintain their competitive position. 

FCA’s largest market is the United States where FCA sold around 2.24 million vehicles in 2018. Market share of FCA in the US improved in 2018 compared to the previous year, as vehicle sales grew compared to 2017 when it sold 2.06 million units. FCA has 102 manufacturing facilities around the globe and 46 research and development facilities. The company has also localized production in several key markets to control operating costs and cater to the local demand better. The competitive position of FCA is affected by several factors. This is a five forces analysis of the brand highlighting how Porter’s five forces affect the profitability of the automobile industry and the competitive position of FCA.

Bargaining power of suppliers :

The bargaining power of suppliers in the automotive industry is generally low except for some large suppliers that brands rely upon for specific parts. Due to a large number of suppliers around the world, the bargaining power of automotive parts and technology suppliers generally remains low.

Another factor contributing to the higher bargaining power of auto businesses against the suppliers is the size of the firm. Most suppliers or supply chain partners are smaller in size compared to FCA and depend on large brands for business. Most of them, apart from a few which are partner automobile brands, do not have the ability of forward integration either. 

So, all these factors together reduce the bargaining power of suppliers. Moreover, to become a supply chain partner of a large brand like FCA, a supplier must meet the quality and labor standards prescribed by the automobile brand.

FCA has applied a broad set of rules known as Supplier Management Principles that focus on managing suppliers and the supply chain. It buys more than 75% of the stuff to build its automobiles from suppliers located around the world. However, FCA has established a system focusing on building long lasting relationships with the suppliers that provide best in class quality and focus upon innovation. It has applied principles that empower such suppliers since despite the lower bargaining power of suppliers, their role in production is important and having strong relationships with them helps at maintaining a sustainable flow of good quality raw material.

Bargaining power of customers :

The bargaining power of customers in the automobile industry has grown a lot due to several factors. Apart from a higher level of competition in the industry, other factors like growing control in the hands of the customers, changing taste of buyers as well as higher availability of information have led to consumers considering several factors before making their final choice.

Businesses have grown their focus upon quality, after-sales service, marketing, and customer relationship management. Moreover, the growth of digital technology has also led to brands investing in technology and marketing so that their products fit easily into customers’ lifestyles. FCA has also focused on giving several of the brands in its portfolio a new look and feel according to customers’ desires. 

There are several substitutes and higher availability of substitutes including ride sharing services has also led to higher bargaining power in the hands of the customers. Some of the key factors that work to limit the bargaining power of customers in favour of FCA include product quality, research and innovation, after sales service as well as brand image and equity.

The overall bargaining power of customers remains moderately high. Fiat and Chrysler merged officially in 2014 which led to the birth of FCA. Now, FCA has announced another merger with PSA. Growth in the number of brands has helped grow the product portfolio of FCA and reach more customer segments across the world. This also helps achieve higher scale, reduce operational costs and make the product portfolio of FCA more attractive for the customers.

It influences the bargaining power of the brand. However, the size of individual purchases is still large and therefore matters for the company which is also a leading cause of the customers’ high bargaining power. In the case of fleet customers, the bargaining power can be higher than the average customer. FCA offers its fleet members exclusive deals and discounts as well as dedicated customer service plus access to better maintenance and service facilities. All these factors indicate that while the battle for market share among auto brands continues to intensify, the bargaining power of customers will also grow and companies will focus more on customer needs and preferences to remain their preferred brand.

Threat of substitutes :

The threat of substitutes in the automobile industry comes from several sources including competing brands, competing services like ride-sharing services or other sources of transportation including trains and flights. There are several competing brands in the market that make and sell similar products and services. Product quality and technology are the primary differentiators in the automobile industry and help mitigate the threat from substitute brands. It is why FCA invests a lot each year into research and development to improve existing products and update car models as per the changing needs and preferences of the customers. In 2018, the brand invested around € 3 billion into research and development compared to €2.9 billion in 2017. 

There are several leading competitors of FCA in the market including Honda, Ford, BMW, VW, Hyundai, Toyota and Chevrolet. The threat of substitutes also arises from ride-sharing services like Lyft and Uber. However, there are also some factors that mitigate the threat from substitutes. First of all, it is the product quality and the promise of a convenient and safe driving experience which controls the threat arising from substitute products and services. Owning a car offers a different level of convenience. FCA has maintained a strong brand image which also helps drive sales and maintain customer loyalty. Overall, the threat from substitute products and services remains moderate for Fiat Chrysler Automobiles.

Threat of new entrants :

The automobile industry has grown highly competitive and the entry and exit barriers have also grown higher. Several brands have either merged or formed alliances to benefit from the size and scale of resulting enterprises. Fiat and Chrysler also merged in 2014 and the merger helped the company find faster growth. In recent years, the legal and political barriers to entry in the automobile industry have also grown. The result has been a growth in the number of cross border partnerships between automobile brands and such alliances are especially on the rise in the Chinese market. In this way, the incumbent payers are doing their best to maintain their strongholds. FCA is working with its partner GAC in China to strengthen the GAC-FCA joint venture. Their focus on customer retention and after sales service has also grown. Huge capital investment and the need for skilled human resources are significant barriers that prevent the entry of new players in the automobile industry.

 For any new brand that is trying to set foot in the auto industry, it would be difficult to grow its market share unless it is working in partnership with an existing and well positioned brand. As the incumbent brands are trying to grow their hold on existing markets and market segments, the number of factors mitigating the threat from new players has grown. Apart from quality and technology, a large distribution and  service network is also a requisite for growth in market share. However, for new players, it will take both time and resources including capital. Marketing and growing legal scrutiny are also some factors that deter new players from entering the field. So, overall the threat from new firms entering the market and becoming a threat for a large and strong brand like FCA is absolutely minimal.

There are several challenges new players would need to overcome even if they enter with a strong value proposition. High entry and exit barriers have made the entry of new players nearly impossible. Suppose a company in another field with sufficient funds enters the market, then its profitability might be hurt by many factors including lack of critical know-how and an efficient distribution network. Moreover, generating returns can take time and coupled with other risks which are legal and economic in nature, even a mighty new player would not find the market and the industry highly lucrative.

Level of rivalry in the industry :

The level of rivalry in the industry is very high. Intense competition in the industry has led to existing players growing their focus upon customer trends and local production in key markets to cut down on their production and overall operational costs. Rivalry has also led to higher uncertainty and growth in the use of several customer acquisition channels by auto firms. However on the other hand it has also resulted in increased partnerships between auto firms to achieve higher scale and production efficiency. Moreover, with increased competition, the focus of research and development has shifted to reducing production costs.

 Large scale and cost efficient manufacturing processes have grown in importance. Cross border alliances like GAC-FCA joint venture or large scale alliances between leading global firms like the Nissan-Renault-Mitsubishi alliance are aimed at achieving economies of scale so as to minimize that production costs being driven higher by growing competition can be minimized. Growth of digital technology opened new marketing vistas for auto brands but it also fuelled higher competition. Several leading businesses including FCA and VW focused on growing their product portfolio and make it more attractive through mergers & acquisitions. Overall, competition in the automobile industry is a significant challenge before each player and one of the most significant factors affecting market share.