How Many Barriers To Entry Exist In The Automotive Industry?

Last Updated on January 24, 2023 by Leepu Da Maxim

Just like it is in any industry, there are some major barriers that people who want to enter the automotive industry would encounter. Some of these barriers relate to capital requirements, economies of scale, product differentiation, switching costs, and government policies.

Key Takeaways

• An established car manufacturing brand can produce vehicles at a low-cost thanks to their large-scale operations
• Brand recognition and customer loyalty play a very important role on the brand value of a car manufacturer
• Government regulations are a significant barrier to entry for new companies in the automotive industry
• Access to technology is a key barrier to entry for new companies in the automotive industry

Main 7 Barriers To Entry In The Automotive Industry

Barriers to Entry	Description
Globalized Economy	Only the giants in this industry have an advantage when buying large volumes of parts.
Differentiation Of Each Product	A small company must invest a large budget to overcome customer loyalty to a particular brand.
Requirements And Capital	Start-ups require large capital for infrastructure, R&D, advertising, and machinery.
Government Policy	Some government policies can be a major obstacle for emerging companies.
Switching Costs	When switching suppliers, an emerging company must invest a lot of budget in employee training, new equipment, and other aspects.
Scale-Independent Costs	The major auto industry giants have many exclusive advantages from suppliers.
Distribution Channels	Many common distribution channels are blocked by major automakers.

Main Barriers To Entry In The Automotive Industry

First of all, it is necessary to consider that a barrier to entry means a considerable obstacle that prevents a startup from entering the industry in a given sector of the economy. The automotive industry has a huge number of big international and global manufacturers.

So, in principle, the rivalry between these two automotive giants and startups is very overwhelming. There are at least seven main general barriers that prevent one of these startups from successfully entering and establishing itself in the automotive industry.

These barriers may be specifically designed to deter potential competitors. So, a startup that wants to enter the automotive market will need to overcome the following obstacles.

1. Globalized Economy

The economy of scale is one of the most important factors that these types of companies must consider and overcome. In this case, we are talking about large purchases of parts and equipment that are used to manufacture a car. The cost of each of these parts decreases as the number of parts ordered by a manufacturer increases.

So, to qualify for this benefit, manufacturers need to enter with a large number of purchased parts. However, at this point, there is a great risk about the reaction of each of the established operators. On the other hand, small companies also have the possibility of purchasing parts on a small scale or in a small volume.

Here, the big disadvantage lies in the unit costs of each of the parts and materials. The benefit of decreasing the cost of each unit is only available in cases where large quantities are purchased. When buying a huge quantity of parts or buying a small volume of these parts, small companies face large costs anyway.

2. Differentiation Of Each Product

Nowadays the general public who own some kind of vehicle usually also have a kind of loyalty to the brand of their car or some particular brand. This can be a particular disadvantage for new and innovative companies trying to enter this type of industry.

Such companies will have to allocate a larger budget to differentiate their products from the main competitors. This larger budget will have to be allocated to vehicle development to overcome the loyalties of different people to their car brands.

On a lot of occasions, there are usually a lot of resources and tools on the marketing side. However, the marketing required for this type of situation also comes with a large budget. Therefore, start-ups will need to invest a larger budget to attract an initial audience.

3. Requirements And Capital

Any business needs a set of main elements among which capital is one of them. Mainly we can talk about the financial resources needed for the development of marketing, advertising, research and development projects, machinery, and infrastructure. 

Without these resources, a company cannot function, as they are the main components for the development of any company. There is a certain tactic to be able to reduce costs by optimizing the numbers that each company manages. In this case, it is the outsourcing of labor and certain machinery.

4. Government Policy

Government policy is another of the most determining aspects depending on the specific location of each startup. In many cases, the number of controls by the government can be very overwhelming for startups. Here, certain requirements can be imposed such as limits on access to raw materials and licensing requirements among many others.

There are many countries that develop government policies to protect their national industries. So, this can be a big obstacle to access a certain international market in certain countries. So, avoiding all these obstacles may be too complicated depending on the geographical location of the company.

5. Switching Costs

In every company, certain one-time costs must be incurred when a company changes suppliers for any type of product. Some resources are really important for the proper functioning of any company. So, when these resources or products change, the whole company must be restructured around it.

When this happens, the people that make up a company will have some new equipment. Here, you can also incorporate the fact of new training for current employees and the development of new technical support. All of these require a certain amount of capital that the company will have to face as they are one-time but necessary costs.

6. Scale-Independent Costs 

Major automotive manufacturers can count on different advantages from their suppliers. All of these advantages are usually not available to potential competitors such as a startup. So, the absence of these advantages results in a larger budget that the company will have to rely on for certain objectives.

Some of these advantages or factors include government subsidies, favorable locations, exclusive or near-exclusive access to certain raw materials, proprietary product technology, domain expertise, and a learning curve. In its way, each of these factors represents one more obstacle that hinders the insertion of a startup in the automotive industry.

7. Distribution Channels

Finally, some access to distribution channels may be blocked by mainstream automakers. This is logical because large automakers seek to prevent small companies from entering the automotive industry and developing and then pose a major threat to competition.

References:

https://cleantechnica.com/2022/03/03/big-auto-had-the-ultimate-barriers-to-entry-then-tesla-broke-through/

https://www.sae.org/publications/technical-papers/content/2016-01-0329/