This is why the automobile industry is considered an oligopoly

Last Updated on June 9, 2023 by Victor A

One of the most competitive, and unforgiving industries in the world is the automobile industry. Owing to the enormous amounts of money required to enter, the fact that most brands are controlled by a few companies, and that customers are often loyal, it’s no wonder why the automobile industry is considered an oligopoly. If you want to understand better why this is the case, you’re at the right article.

What is an oligopoly?

First of all, let’s define oligopoly:

• An oligopoly is a market structure where a few companies control the industry while they keep each other from having significant influence over the others.

When one company controls an industry it’s called a monopoly, and if two firms dominate an industry it’s considered a duopoly. An oligopoly happens when two or more companies are in control like it happens in the auto industry.

The automobile industry is dominated by a few key players

Even though there are plenty of car brands, most of them are controlled by a few companies. Twelve automobile companies control over fifty brands, while there are only nine brands that remain independent. 

Here’s an infographic that shows the situation:

In essence, this is how it goes:

• Stellantis owns Fiat, Lancia, Maserati, Alfa Romeo, Chrysler, Ram, Dodge, Jeep, Vauxhall, Opel, Peugeot, DS Automobiles, and Citroën
• Volkswagen Group owns Audi, Seat, Skoda, Bugatti, Bentley, Porsche, Volkswagen, and Lamborghini
• Renault–Nissan–Mitsubishi Alliance owns Dacia, Renault, Mitsubishi, Infiniti, Nissan, and Alpine
• General Motors Company owns Chevrolet, Cadillac, GMC, and Buick. 
• Hyundai Motor Group owns Kia, Hyundai, and Genesis
• Geely owns Volvo, Lotus, and Polestar
• BMW Group owns Mini, BMW, and Rolls-Royce
• Tata Motors owns Land Rover and Jaguar
• Toyota Motor Corporation owns Toyota and Lexus
• Ford Motor Company owns Ford and Lincoln
• Daimler AG owns Mercedes-Benz and Smart
• Honda Motor Company owns Acura and Honda

Even though control is exerted by those 12, 9 brands remain independent:

• Ferrari
• Tesla
• Aston Martin
• McLaren
• Mazda
• Suzuki
• Subaru
• Koenigsegg
• Pagani

It’s important to note that owning a lot of brands doesn’t mean higher revenues or profits.

This is clearly portrayed when looking at the 2020 top car companies by revenue, where Toyota Motor Corporation tops the list, while only owning two brands. However, we find here another reason why the automobile industry is considered an oligopoly, just a few companies get most of the revenue.

Here’s a list with the 2020 top 5 auto companies by revenue:

The automobile oligopoly has significant barriers to entry

When it comes to entering the automobile industry, things become quite complicated since it requires huge amounts of money due to its high costs; specialized knowledge on the products, the competition, the customers, and how the industry works; and understanding different government policies around the world.

It requires huge amounts of money

Researching, designing, developing, and advertising a car calls for a lot of money, it’s no wonder why we usually don’t see many new companies succeeding in the automobile industry. 

One of the keys to succeeding in such an industry are economies of scale. Producing cars in high quantities will allow a company to lower its costs, improve efficiencies and negotiate better prices with suppliers. 

But having a lot of capital resources doesn’t guarantee success. What can be expected is to lose money for a long time, as it happened to Tesla, which managed to have a profitable year for the first time in 2020, that’s 17 years after it was founded. (July 1, 2003).

Specialized knowledge

Having the right knowledge is as crucial as having the right amount of money.

The automobile industry has an excessive high competition in R&D (Research and Development). Companies spend millions every year in innovating and improving in many areas like safety, fuel efficiency, technology, emission, etc.

It’s common to regularly hear about how top-level executives, designers, and engineers are being hired from one automobile company to another. It just proves how much they value knowledge, and how much they are willing to spend to perfect their products.

Government policy

When an automaker decides to enter a new country, it needs to fully understand how the laws and the government work in said country. Some governments create policies that restrict market entry since they prefer to incentivize local companies rather than foreign companies.

A great example would be the People’s Republic of China, a very hot market, with countless potential customers but with laws that limit foreign investment.

Not so long ago, China required foreign companies to create a 50:50 joint venture with a local Chinese company, this was a big problem for many foreign companies as they had to transfer manufacturing capability, know-how, and intellectual properties to its partner, which could form other joint ventures with other companies, sometimes causing information leakage, and intellectual property infringements. 

However, on March 15, 2019, China adopted a new law that came into effect on January 1, 2020, that made foreign investment less troublesome, banning the forced transfer of technology and protecting intellectual property.

It depends on brand loyalty and image to generate sales

Brand loyalty happens when a brand successfully satisfies most of its customer’s needs, creating a degree of loyalty that difficult any attempt of luring from other brands. 

In the automobile industry, loyalty is based on people who decide to choose the same brand when buying their next vehicle.

Car brands understand how important customer retention is, as they will do many things to improve the experience of customers. This is a problem for new car brands as they will have to find ways to entice customers, which can be quite difficult if their needs are being satisfied.

According to the 2020 J.D. Power U.S. Automotive Brand Loyalty Study, Subaru has the highest brand loyalty, with 60,5%, followed closely by Toyota, with 60,3%, and Honda with 58.7%; find below a list with the Top 10 brand loyalty car brands:

The Bottom Line – Why the automobile industry is considered an oligopoly

It makes sense why we don’t usually see new companies succeeding in the automobile industry, it takes a lot of time, resources, and knowledge to become competitive.

Yet, once in a while there’s a company that manages to succeed despite all odds, the most recent one, Tesla. 

Tesla has been able to become a real threat to other automakers because they well-understood where the industry was heading, and acted, while the legacy automakers were too busy doing the same things. This gave them a head start and allowed them to create a well-established brand name.

Tesla recognized a need for innovation that automakers were not fulfilling. They focused solely on electric vehicles, while most automakers were either investing in internal combustion engines (ICE), hybrids, or just a little bit on electric. 

But Tesla did not only focus on the powertrain, they also looked for more innovations that many automakers were dismissing, like on autopilot, car chassis, infotainment, etc. 

After a while, Tesla is aiming to become a major player in the near future, as they start producing less expensive cars, and improve production efficiencies.

In essence, the reasons why the automobile industry is considered an oligopoly are:

• It has significant barriers to entry.
• It depends on brand loyalty and image to generate sales.
• It is dominated by a few key players.

Source: Investopedia (car companies by revenue), J.D. Power (Brand Loyalty), CFI, Business Insider