Example Of Essay On The Market For Automotive Parts: Autozone

The market for auto parts industry in the US is a major industry with a large number of units and a high level of employment. The auto parts industry is of course highly dependent on the operations of the automotive industry. In this paper we identify the market structure in which the auto parts industry operates taking an organization as a representative of this industry. We have based our study on AutoZone which is a large Auto parts chain across US and also extends in operations overseas. We also identify some strategies that this organization should adopt to increase its profitability in the long-run. We make an analysis of the relationship of this organization with the other organizations in the industry.

Industry Overview

The automotive parts industry produces two types of products, the Original Equipments and Aftermarket products. Around 70% of the production of this industry consists of Original Equipments which are purchased by the automotive companies for their service requirements and for the assembly of new motor vehicles . The aftermarket products refers to repair and modification work. The aftermarket parts consists of replacement parts that are used to replace worn out OE parts, and auto accessories. This part is 30% of the total industry output.
The automotive parts industry in the US generated annual revenue of $48bn in the year 2014, growing at the average annual rate of 0.9% from 2010-2015. It employs 304,268 people consisting of 18,106 business entities.

The Structure of the Market

Studying the industry characteristics we find that the setting up of an auto part store requires very little capital. In a situation of economic boom when the auto sales are high, the demand for the automotive parts also tends to be high. It is evident that the market for auto parts is characterized by pure competition. Let us analyze the market characteristics that make it a competitive market. First of all this industry is characterized by a number of sellers. There are more than 15000 units in the USA. Secondly, the entry to and the exit from this industry is also quite easy, which is another characteristics of perfect competition. Thirdly, the demand for auto parts is also high as the sales of auto parts are high in the US. So there are a number of buyers. In this respect we should note that when we consider the demand for Original Equipments, the buyers are mainly the automobile companies and in that case the number of buyers is restricted as the automobile industry is characterized by oligopoly or monopolistic competition. Fourthly, the products are almost homogeneous except for a few large chains of stores who have special brand of products for sale. Let us compare these characteristics with the characteristics of the other major market forms to support our contention that the auto parts industry is a perfectly competitive industry.
We know that a monopoly market is characterized by a single seller who sells to a large number of buyers. The monopolist has absolute market power and complete control over the product’s price. The entry into such a market is restricted which actually leads to the monopoly power of the seller. The monopolist enjoys super normal profit in the long-run by restricting output and raising the price.
In contrast, the perfectly competitive market , as we have already stated, consists of a large number of sellers and a large number of buyers. There is free entry into and exit from the market. The products are homogeneous. The sellers are price taker in this form of market as they cannot influence the price. Each seller faces a perfectly elastic demand curve. The sellers earn normal profit in the long-run.
The monopolistic competition consists of the elements of both perfect competition and monopoly. It is a market characterized by a large number of sellers and a large number of buyers. There is free entry into and exit from the market. These characteristics are similar to perfect competition. But what makes the difference is that the goods offered by the sellers in this market are not homogeneous but they are differentiated. The sellers make changes in the characteristics, appearance, packaging, after sales services and such others features, to make the product unique to the buyers. This differentiation of the product leads to some amount of market power for the seller as the preference for the differentiated product increases. The market power leads to super normal profit for the firm under monopolistic competition. This is the monopolistic element of this market structure. The firms compete for higher market share through product differentiation and advertisement, and by adopting other sales promotion strategies. In the long run there are more entry into the industry as firms are attracted to this industry for the super normal profit enjoyed by the producers in the industry. This leads to an increased sales and a resultant fall in the prices. The profits of the existing firms are reduced. In the long run the firms in this industry tend to earn normal profit like the perfectly competitive market.
Finally, let us discuss the oligopoly market. In an oligopolistic market there are few firms in the industry and a large number of buyers. There is stiff competition and rivalry among the sellers to capture the market. Each seller wants to extend his market share. The products may be differentiated or non-differentiated. The firms adopt a number of strategies to gain market power and hold on to their market share.

AutoZone and the Other Segments of the Industry

The auto parts industry consists of 3 tiers. The first tier consists of the sellers who sell their product direct to the manufacturer of the motor vehicles (, this is Tier 1. The second segment who sell component parts to the Tier 1 suppliers. This is Tier 2. The third part or the Tier 3 sells to Tier 1 and Tier 2 suppliers.
This means that AutoZone which is a Tier 1 supplier, purchases products and components from Tier 2 and Tier 3 suppliers, assembles them and sells to the automobile manufacturers. The automobile manufacturing segment is a major manufacturing segment in the US. It is dominated by a few major suppliers giving the industry an oligopolistic structure. That means AutoZone sells its products in an oligopolistic or rather oligopsonistic market. The demand for automobiles varies greatly with the income level of the population. During a recession the demand for automobiles fall leading to a fall in demand for the auto parts as well. In times of boom - as US is presently going through - the demand for automobiles increase. The automobile sector is enjoying significant amount of profit. This has increased their bargaining power with which they are dominating the market for auto parts where they are the oligopolistic buyers. They tend to put pressure on the auto part sellers to reduce the price of their product. On the other hand the AutoZone purchases its raw materials from Tier 2 and Tier 3 suppliers where AutoZone is one among a number of buyers. With a recent rise in the price of the inputs the auto parts market is facing a rise in costs .
As a seller AutoZone enjoys a significant amount of market power with a large chain of stores across the country. It is the second largest seller of auto parts in the market . It has 5200 stores across the US. It is evident that it controls a significant portion of the market that has a large number of small sellers. The competition is on the rise due to the proliferation in the number of foreign firms in the industry . There is significant amount of price undercutting by the foreign firms that is posing a challenge for AutoZone.

Long-term Strategies for AutoZone

Presently AutoZone is facing a challenging situation where there is pressure from the buyers to reduce the price of its products and phase of rising costs due to the rise in the input prices. In this situation AutoZone should, in the first place, employ cost saving technology. This will significantly reduce the average cost of production for AutoZone. Being a labor intensive sector using labor saving technology will reduce the coast on labor. AutZone will be able to fix prices which will maintain its competitive edge in the market.
Secondly, AutoZone should launch a chain of differentiated products and carry on with continuous innovations to launch new products that will increase its market share as the new products will be more attractive to the buyers than the products of the other firms like the success of its Valucraft and Duralalast series of products (.
Thirdly. AutoZone should seek newer avenues in marketing its products. Marketing through ecommerce channel will lead to a boost in its sales. The recent purchase of AutoAnything.com which was a seller of after -market auto parts through ecommerce channel, was a move towards this end. Innovative marketing strategies will lead to the expansion of AutoZone’s market in the long run and make AutoZone soar above its close and prospective competitors.

References

AutoZone. (2015, April 8). AutoZone. Retrieved from www.autozone.com: www.autozone.com
IBISWorld. (2015). Auto Parts Stores in the US: Market Research Report. IBISWorld.