Analysis of the Luxury Car Market in India - Report Example

Introduction

Macro environmental analysis becomes important for any business organization since it helps the firm in identifying the impending threat and opportunities that the firm may face in future. The macro environmental analysis is identical to all the industries and firms and that makes it inevitable for defining the parameters and the boundaries within which the competition can take place at a micro level (Baker, 2012). PEST is one of such mechanism that is used for the analysis of the macro environmental factors. Apart from this the internal analysis of the industry is also important to understand the profitability of the industry and factors impacting it (Graham, 2008). The study also focuses on Porter’s Five Forces analysis of the luxury car market of India.

PEST Analysis

PEST focuses on four important environmental factors that are to be scanned like political, economic, social and environmental. Each of these parameters are defined via this analysis and it influences the scope and activity of the organization. By having a broad view related to the categories that are studied under PEST the managers will be able to bring out innovative ideas and frame strategies that can fit into the situation most appropriately (Reddi, 2013; Solomon, Marshall and Stuart, 2009).

Political

The political factors signify the government rules and regulations that are framed and the company needs to work under that rules (Waters, 2006). The Indian automobile industry has been under the strict rules of the Indian government. In 1940 the assembly plant opened by the foreign manufacturers had been closed by the Indian government for not manufacturing car in India. The government even framed regulations regarding what type of car the manufacturers should design to protect themselves from the competition. During the period of 1950s and 1960s the industries along with the support from the government made significant effort towards the manufacturing the components to be supplied to the auto manufacturers. However, owning a car was considered luxury due to the restrictions from the government over granting licence and restricting both production and import that hampered the growth of the industry. The industry at that point of time was facing high sales tax, excise duties and custom duties on imports. In 1980s government policies and regulations were liberalised and further liberalization occurred in 1990s that allowed cars to be manufactured without licence but import restrictions remained intact. In the year 2002 new policy reforms were announced, which allowed 100% FDI in the automobile sector. In 2007 the sector emerged as a buoyant industry (Parmar and Thadamalla, 2008).

Economic

Until early 1980s the growth of the automobile sector was restricted. After that liberalization was initiated by the government. In 1990s economic liberalization took place that initiated growth in the sector. After the liberalization many players entered the Indian automobile market like Honda, Daewoo, Volkswagen, Toyota, Hyundai etc. Apart from the government regulations, availability of retail finance and low interest rate were the major reasons that lead to the development of the automobile industry. During the period of 2001-2006 the Indian automobile sector has shown a growth at CAGR of 18%. In 2006-07 India was at the fifth position in production of commercial vehicles. During the same period the production of passenger vehicle and commercial vehicle was 1544800 units and 520050 units respectively (Parmar and Thadamalla, 2008). The growth in the automobile sector was also due to over 9% growth in GDP. The penetration of vehicle financing was due to the growth of vehicle financing (Reuters, 2013).

Social

Fast growth was experienced by the automobile sector by 2007 due to the huge demand, growing purchasing power and tendency to spend. Due to the huge population of India, automobile sector became a booming sector. Previously the luxury cars were only used by the Maharaja’s but gradually they were sold to vintage car collectors. In 1970s the luxury car customers were satisfied by limited numbers of cars. In 2006 there was 37% rise in the number of Indian millionaire that instigated growth in the super luxury car segment. The number of luxury cars sold in India experienced a huge growth and was estimated to reach 10,000 units by 2013 (Parmar and Thadamalla, 2008). After the government liberalised its policies, the affluent segment of India shifted dramatically. The families having income of more than $230,000 was seen to be doubled and was seen to spread in 14 cities and inclined towards dual car ownership. Therefore the rise in affluent people and increase in purchasing power was added advantage for the luxury car market (Reuters, 2013).

Technology

The technological advancement in India is not only leading amongst the world but also offers challenges to some of the developed countries in the world. It is not only globalization which is great but also the technical capability and the technological development that will help the luxury car market to foster (The Economic Times, 2013).

Figure 1: Sales and production trend of automobile sector

(Source: Parmar and Thadamalla, 2008)

Porter’s Five Forces

Porter’s Five Forces is a generic framework that breaks the structure of an industry into five variables or competitive forces. The economic or competitive position of the industry is due to these five forces (Nemati and Barko, 2004; Solomon, Marshall and Stuart, 2009). The five forces are discussed below in context to the luxury car market.

Bargaining power of the customers

The numbers of luxury car manufacturers have increased in India due to the economic liberalization and reduction in the restrictions provided by the government. Apart from this the proportion of affluent society has also increased due to which the demand has increased (Parmar and Thadamalla, 2008). Thus the bargaining power of the customers is high since the number of choices has increased.

Bargaining power of the suppliers

Suppliers in case of automobile industry are the steel and plastic suppliers who provide the raw material for the manufacturing of the car. Most of the luxury car manufacturers that are dominating the market of India are based from Germany like BMW etc (Parmar and Thadamalla, 2008). They already have their own suppliers, who are generally reputed. Moreover, the luxury car needs to have the spare parts and other accessories of very good quality. So they preferably choose a reputed supplier and they pay them a good amount. Thus the bargaining power of the supplier is moderate for luxury car manufacturers.

Threat of Substitute

The luxury cars are bought by the affluent society who aims toward maintaining a distinction from other general class of people and to showcase their position in the Indian society. When people go for buying the car they look for brand name and price does not plays a very important role. Thus, threat of substitute is low since designing a substitute will require heavy investment.

Threat of new entrant

The manufacturing of luxury car requires very high investment and established brand image. Thus, the entry barrier is high. But the established international car manufacturers may get attracted towards the market of India owning to the increase in the number of high net worth individual, creating threat for the existing players. Hence the threat of new entrant is high.

Rivalry within the industry

The Indian Automobile industry is having a large number of players in the luxury car segment. Audi, Bentley, BMW, Rolls-Royce, DaimlerChrysler’s Mercedes Benz MayBach, Porsche and Jaguar are the major players. Thus the rivalry within the industry is high (Parmar and Thadamalla, 2008).

Figure 2: Luxury car brands in India

(Source: Parmar and Thadamalla, 2008)

Conclusion

The study shows that liberalised government policies, healthy economic environment, consistent growth in affluent society and advancement in technology has provided huge opportunity to the luxury car market to grow in India. The number of participants in this market has increased dramatically in the recent times. The competition within the industry is high and the players are trying their level best through various ways to attract the potential customers.