Car Rental Industry in China - Example

Car Rental Industry in China Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 Global overview 3 Impact of globalization on the industry 3 PESTEL 3 Political 4 Economic 4 Social 5 Technological 5 Environmental 6 Legal 6 Porter’s five forces 6 Competitive rivalry within the industry 7 Threat of new entrants 7 The threat of substitute products 8 Bargaining power of suppliers 8 Bargaining power of buyers 9 References 11 Global overview Even though the global economy experienced slowdown and recession recent years, car rental industry has been growing worldwide. The growth is expected to continue especially in developing economies such as China and India in addition to Australia and the Middle East (Tse, 2010). The industry is more organized in the US, Europe and Asia pacific countries as opposed to emerging economies (Tan, 2011). Car rental companies have in the recent past been exploring developing markets such as India, Australia, the Middle East and China due to recent economic downturn that has hit many nations in recent past. Car rental industry in China dates back to 1990 (Beck, Klobes and Scherrer, 2005). This was during the Beijing Asian games when car rental industry was launched to carter to the transportation needs of foreigners. Currently, the Chinese car rental industry is concentrated in Beijing, Guangzhou, Shanghai and Shenzhen cities. Impact of globalization on the industry Globalization has seen car rental providers expand their ventures from their country of origin to other countries (Tse, 2010). This has also stiffened competition within the industry with many players moving to emerging markets such as China (Tan, 2011). As a consequence of globalization, many international car rental firms such as CAGR, the Europcar, Hertz, Alama, Budget and Avis operate in Chinese car rental market (Beck, Klobes and Scherrer, 2005). PESTEL PESTLE is an abbreviation for Political, Economic, Sociological, Technological, Legal and Environmental factors. Political Political factors that can impact on a business include current and future taxation policies; current and future political support; trade bodies, grants, initiatives and funding; and the effect of worsening relations or wars with certain countries (Tse, 2010). In China, governmental departments prefer to hire cars rather than buying them for regular use (Lorat, 2009). This implies that the political class in the country support the use of car rentals. This is one of the reasons why the car rental industry in china is growing faster than anywhere else (Tan, 2011). Moreover, in China tourists are not allowed to take their own cars while travelling (Ijioui, Emmerich and Ceyp, 2010). As such, tourist and other foreigners visiting China are compelled to hire a car if they want total comfort. This is also an additional factor driving the growth of the industry in the country (Beck, Klobes and Scherrer, 2005). Economic Economic factors entail the general economic situation; consumer spending strength, current and future government spending levels; the ease by which people can obtain loans; the current and future level of inflation, unemployment and interest rates; specific taxation policies and trends and exchange rates (Tse, 2010). The purchasing power of customers and cost of capital of the company are usually affected by economic factors (Ijioui, Emmerich and Ceyp, 2010). China is experiencing a rapid growth in the number of business class individuals (Seth, 2006). This class of people are driving the demand for car rental high (McDavid and Echaore-McDavid, 2009). As a result, the potential for the growth of the car rental industry in China is high (Seth, 2006). This is mainly driven by growing number of business people in China. Moreover, most people in China are not able to buy their own car (Tan, 2011). The growth of the industry in China is also attributed to the booming Chinese economy (Beck, Klobes and Scherrer, 2005). Social Social factors which affect businesses include demographics, lifestyle patterns and changes, attitudes towards issues such as corporate responsibility, education and the environment; social mobility; ethnic and religious differences; and media views and perceptions (Tse, 2010). The main social factor driving the car rental market in china is the emerging business class in the region (Tan, 2011). Another social factor driving the growth of the industry in china is the high population that is unable to buy their own cars (Ijioui, Emmerich and Ceyp, 2010). Technological Technological factors that affect businesses include relevant current and future innovations in technology; the level of funding of research; the way in which consumers make purchases; intellectual property rights and copyright infringements and global communication technological advances (Tse, 2010). Technological factors minimize efficient production levels, lower barriers to entry and influence outsourcing decisions (Beck, Klobes and Scherrer, 2005). They include research and development activity, automation, rate of technological change and technology incentives (McDavid and Echaore-McDavid, 2009). Smooth operation of any business is greatly dependent on technology (Seth, 2006). Due to technological advancement, car rental has undergone rapid changes (Tse, 2010). The internet is increasingly being utilised in the industry for online bookings and check in (Ijioui, Emmerich and Ceyp, 2010). This is making it convenient both for the supplier and the customer (McDavid and Echaore-McDavid, 2009). Environmental Environmental factors, which impact on businesses, include the level of pollution created by the utilization of the product or service; recycling considerations; current and future environmental legislative changes and attitudes from the media, consumers and government (Seth, 2006). Currently, china does not have restrictive environmental legislations that can impact negatively on car rental industry (Tan, 2011). Legal Legal factors that impact on businesses include legislations guiding areas such as competition, employment and health and safety; future changes in legislation; changes in European laws; regulatory bodies and trading policies (Tse, 2010). According to Chinese laws, international driver’s permit is not valid in china and therefore one cannot be able to drive in China if he/she does not posses driving permit from the country (Tan, 2011). This in turn drives the growth for the demand for car rental among foreigners visiting the country (Beck, Klobes and Scherrer, 2005). Moreover, in 2010 purchase of car licence plates in Beijing was officially restricted. This has reduced the growth of car ownership in 2011 and as a consequence increased car rental market in the country. Porter’s five forces . The five forces include supplier power, threat of substitutes, and threat of new entrants, buyer power, and degree of rivalry. Competitive rivalry within the industry Competitive rivalry refers to the intensity of competition among existing firms in an industry. In an industry which is highly competitive, returns on investment are usually very low (Fleisher and Bensoussan, 2007). This is because of the high cost of competition (McDavid and Echaore-McDavid, 2009). Due to the easiness of new firms to enter the car rental market in China, competition is stiff (Tse, 2010). Some large firms like CARH reported an increase in its net loss to CNY151.4 million (Tan, 2011). Some firms such as the China Auto rental, which is the leading brand within the car rental industry in China, were forced to differentiate their products based on price and as such offering their service at a low price (Ijioui, Emmerich and Ceyp, 2010). Such moves have indicated that profit margins in the industry are very low within Chinese market. Threat of new entrants This refers to probability of new companies to entering the industry. If it is easier for new companies to enter the industry then competition is expected to be stiff (Tan, 2011). Threat of new entrants can be limited by several factors, which act as barriers to entry such as existing loyalty to major brands, incentives for using a particular buyer, government restrictions or legislations, and high costs of switching companies also act as barriers to new entrants (Seth, 2006). China still has low entry threshold. Any firm with a telephone and a few dozen cars can start a car rental business in china (Tse, 2010). Thus, any big enterprise can make a big bang in the industry if it has access to funds. As a consequence, reports show that in the year 2010, there were over 10,000 car rental firms in China, which had an average of less than 50 vehicles (Tan, 2011). Moreover, top five car rental firms only accounted for 9% of the car rental market in China. This implies that due to easier entry of firms in the industry, there is stiff competition (Beck, Klobes and Scherrer, 2005). The threat of substitute products This is the likelihood of customers switching to a competitive product or service. In cases where the cost of switching to a competitive product is low, then this poses a serious threat (Seth, 2006). There are several factors which affect the threat of substitutes such as the similarity of substitutes, substitute which is relatively similar and their pricing (Ijioui, Emmerich and Ceyp, 2010). Substitute products for car rental in China include leisure car rental and bus services (Seth, 2006). In spite leisure car rental supplying substitute product for car rental in Chinese market, they are highly priced and many people will prefer car rental to the leisure car rental (McDavid and Echaore-McDavid, 2009). On the other hand, bus services are often congested and may inconvenient some clients (Tse, 2010). As such, the three service provider’s car rental, leisure car rental, and bus services will continue to coexist to serve different segments of the market. Bargaining power of suppliers This refers to the amount of pressure suppliers exert on business (Ijioui, Emmerich and Ceyp, 2010). If one supplier has a large, enough impact that can affect the margins and volumes of a firm, then such a supplier holds a substantial power to influence the prices in the market of that particular industry. Suppliers may have substantial bargaining power in several instances (Tse, 2010). One of this is where there are few suppliers of a particular product that is essential for smooth running of business in that particular industry (Seth, 2006). Suppliers may also have higher bargaining power in instances where there are no substitute products for what they supply (Tan, 2011). In addition, if the cost of switching to another competitive product is high, suppliers may wield high bargaining power. If the product being supplied by the suppliers is extremely important to the business in such away that the business cannot function without it then suppliers also have high bargaining power. Due to increased competition in the market, and restriction to car ownership in some parts of the Chinese market, suppliers have seen the sales volumes deteriorate in recent past. This implies that more cars are supplied than they are bought (Tan, 2011). As such, car suppliers do not command a high bargaining power (Seth, 2006). This implies that car prices are competitive within Chinese market and hence car rental firms get cars at a fair price that can be transmitted to their customers. Bargaining power of buyers This refers to the amount of pressure buyers exert on business (Seth, 2006). In this case, one customer may hold substantial power if he has a large enough impact which affects the margins and volumes of a firm. Customers may have substantial bargaining power under several circumstances (Tse, 2010). One of such instances is where there are a small number of buyers. In this case, buyers may dictate the pricing of products and services since the supply exceeds demand. Another instance is where a single customer purchases large volumes (Ijioui, Emmerich and Ceyp, 2010). Furthermore, customers wield substantial bargaining power where the cost of switching to another competitive product is simple (Herzog, 2010). Another factor that may influence the power of buyers is the importance of the product to the customer (Tan, 2011). In cases where the product is not extremely important to the buyer in such away that he/she can do without the product for a period of time then the buyer has a substantial bargaining power. Buyers who are price sensitive also hold substantial bargaining power (Seth, 2006). In this case, buyers may shy away from companies, which have high prices for their products and services (Beck, Klobes and Scherrer, 2005). As reported above, competition in car rental is stiff. As a consequence, there are thousands of car rental firms that customers can choose from (Tse, 2010). This implies that car rental customers wield some bargaining power (Alder, 2010). However, legislations such as those that do not recognize international driver’s permit imply that foreigners have low bargaining power since they are forced to hire cars. References Alder, M. 2010. A Structural Analysis of the German Web Design Industry by Using the Model of Porter's Five Forces. London: GRIN Verlag Beck, S., Klobes, F., and Scherrer, C. 2005. Surviving Globalization? Perspectives For The German Economic Model. London: Springer Fleisher, C., and Bensoussan, B. 2007. Business and Competitive Analysis: Effective Application of New and Classic Methods. London: FT Press Herzog, C. 2010. Strategic Tools in Dynamic Environments: A Framework. London: GRIN Verlag Ijioui, R., Emmerich, H., and Ceyp, M. 2010. Globalization 2.0: A Roadmap to the Future from Leading Minds. London: Springer Lorat, N. 2009. Market Audit and Analysis. London: GRIN Verlag McDavid, R., and Echaore-McDavid, S. 2009. Career Opportunities in Transportation. Sydney: Infobase Publishing Seth, P. 2006. Successful Tourism: Volume II: Tourism Practices, 5th Ed. Beijing: Sterling Publishers Pvt. Ltd Tan, Y. 2011. Chinnovation: How Chinese Innovators Are Changing the World. Jakarta: John Wiley & Sons Tse, E. 2010. The China Strategy: Harnessing the Power of the World's Fastest-Growing Economy. Sydney: Basic Books Read More