The entrant barriers for the automotive business can be perceived as lower. Ashish Bhatia wears the startup lens to study the dynamics involved.
With the transition to sustainable mobility and the increasing electronic content per vehicle, the traditional composition of the automotive industry has a new DNA. Here tech companies or startups with a faster go-to-market strategy and risk-taking ability have forced a rethink! It has resulted in more established players sticking true to their core DNA yet exploring newer avenues for growth. Many have succeeded with this exploration amounting to handsome returns up from nil. Let’s take a look at the factors that have influenced competition. Apt to lean on Porter’s Five Forces framework known to mankind as a useful tool for understanding industry dynamics.
The threat of new entrants
Arguably, the established brands in the automotive industry have a loyal customer base. This requires new entrants to invest significantly in marketing and promotion to build trust and loyalty. While existing companies often benefit from economies of scale, enjoying cost advantages that new entrants find hard to match. This is also a capital-intensive industry. The automotive industry is known to require substantial capital for Research and Development (R&D) and manufacturing. The high initial investment acts as a barrier for new entrants.
Bargaining Power of Buyers
It is understood that to reduce the power of buyers, companies must focus on higher product differentiation. Made up of unique features, quality, and brand image, it is believed to make customers less price-sensitive. Opening the channels of communication and letting it trickle down means that customers get a sense of empowerment. Empowering consumers with more information can reduce their dependence on a specific supplier, giving them more bargaining power. In the age of Google reviews, transparency and online reviews are known to play a crucial role here.
Bargaining power of suppliers
Imagine that there are a limited number of suppliers for critical components. They hold more power in theory. Diversifying suppliers or vertical integration can mitigate this risk. Here again, the high switching costs for changing suppliers can further increase the dominance of suppliers. To mitigate this, negotiating favourable terms and building strong relationships are deemed crucial.
Threat of substitute products or services
Companies must stay ahead of the curve in adapting to new technology. This in turn will help reduce the threat of substitutes. Case-in-point Electric vehicles are a substitute for traditional Internal Combustion Engine (ICE) vehicles today. Driven by the changing regulatory environment, changes in consumer preferences continue to lead to the emergence of new substitutes. Staying informed and adaptable is deemed crucial here.
Intensity of competitive rivalry
When the growth rate is slow it intensifies competition in the industry. Diversification into related markets or innovative product offerings can create growth opportunities. We all know the power of the Blue Ocean. Beyond entrant barriers, high exit barriers make companies more competitive as they are less likely to leave the industry. Perhaps, the lowering of exit barriers can make the market more dynamic.
In addition to Porter’s Five Forces analysis, consider incorporating the following strategies to break down entry barriers: Collaboration and partnerships can lead to the formation of strategic alliances with existing players. It can provide access to distribution networks, technology, and market knowledge. By falling back on innovation and technology adoption, staying at the forefront of technological advancements can be a definite competitive advantage. Setting aside resources for R&D to create innovative products or processes can also attract customers and partners. Do not undermine the power of government relations. Building positive relationships with regulatory bodies can help companies sail through compliance issues and regulatory barriers.
A prime example is the industry actively participating in industry associations and lobbying for favourable regulations. While theories are good on paper, the effectiveness of these strategies can vary based on micro- and macro-economic conditions and the nature of the automotive components and aftermarket segment in focus. New entrants must continually monitor industry trends and adapt strategies accordingly on a timely basis. Timing is crucial.
Government interventions
The Government has backed its intent to shape up a strong ecosystem for nurturing innovation, and startups. To encourage private investments in the country’s startup ecosystem, the Startup India initiative was launched on January 16, 2016. The eligibility conditions prescribed under G.S.R. notification 127 (E) dated February 19, 2019, are known to recognise entities as ‘startups’ under the Startup India initiative by the Department for Promotion of Industry and Internal Trade (DPIIT). Since the launch of the Startup India initiative in 2016, DPIIT has recognised 92,683 entities as startups as of February 28, 2023.
Startups or scaleups
The success or failure of regular businesses is measured throughout the operational period. In the case of startups or scaleups (established startups), the tag is more accurately measured by failure or success in a particular phase. That makes it difficult to cover all types of new businesses and their failure rate with any level of accuracy as per the government officials. It is hence not centrally maintained by the government. To back its intent though, the government lists various programmes undertaken to promote the relatively new entrants to help these go past the aforementioned barriers.
Among the priority asks from the industry is the evolution and the extension of the Production Linked Incentive (PLI) scheme. As a tool to attract investment in green mobility like EV component manufacturing, there have been requests to offer incentives to the non-automotive investor and or startup equivalent to the incentive available to the existing automotive investors. ACI
Number of entities recognised as startups by DPIIT
2018 2019 2020 2021 2022
8,635 11,279 14,498 20,046 26,542
Programs under the Startup India initiative:
Startup India action plan: The action plan for Startup India comprises 19 action items spanning areas such as ‘Simplification and hand holding’, ‘Funding support and incentives’ and ‘Industry-academia partnership and incubation’. It is claimed to have laid the foundation of Government support, schemes and incentives envisaged to create a vibrant startup ecosystem in the country.
Fund of Funds for Startups (FFS) Scheme: The Government has established FFS with a corpus of Rs.10,000 crore, to meet the funding needs of startups. DPIIT is the monitoring agency and the Small Industries Development Bank of India (SIDBI) is the operating agency for FFS. The total corpus is envisaged to be provided over the 14th and 15th Finance Commission cycles based on the progress of the scheme and the availability of funds. It is claimed to have not only made capital available for startups at the early stage, seed stage and growth stage but also said to have played a catalytic role in terms of facilitating the raising of domestic capital, reducing dependence on foreign capital and encouraging homegrown and new venture capital funds.
Credit Guarantee Scheme for Startups (CGSS): The Government has established the CGSS to provide credit guarantees to loans extended to DPIIT-recognised startups by Scheduled Commercial Banks, Non-Banking Financial Companies (NBFCs) and Venture Debt Funds (VDFs) under SEBI registered Alternative Investment Funds. CGSS aims to provide credit guarantees up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers viz. DPIIT recognised startups.
Regulatory reforms: Over 50 regulatory reforms have been undertaken by the Government since 2016 to enhance the ease of doing business, ease of raising capital and reduce the compliance burden for the startup ecosystem.
Ease of procurement: To enable ease of procurement, Central Ministries/ Departments are directed to relax conditions of prior turnover and prior experience in public procurement for all DPIIT-recognised startups subject to meeting quality and technical specifications. Further, the Government e-Marketplace (GeM) Startup Runway developed is a dedicated corner for startups to sell products and services directly to the Government.
Support for Intellectual Property Protection: Startups are eligible for fast-tracked patent application examination and disposal. The Government launched Start-ups Intellectual Property Protection (SIPP) to facilitate startups to file applications for patents, designs and trademarks through registered facilitators in the appropriate IP offices by paying only the statutory fees. Facilitators under this Scheme are held responsible for providing general advice on different IPRs, and information on protecting and promoting IPRs in other countries. The Government bears the entire fees of the facilitators for any number of patents, trademarks or designs, and startups only bear the cost of the statutory fees payable. Startups are thereafter provided with an 80 per cent rebate in filing patents and a 50 per cent rebate in filling the trademark vis-a-vis other companies.
Self-Certification under Labour and Environmental laws: Startups are allowed to self-certify their compliance under nine labour and three environment laws for a period of three to five years from the date of incorporation.
Income Tax exemption for three years: Startups incorporated on or after April 01, 2016, can apply for income tax exemption. The recognised startups that are granted an Inter-Ministerial Board Certificate are exempted from income tax for three consecutive years out of 10 years since incorporation.
International market access to Indian startups: A key objective of the Startup India initiative is to help connect the Indian startup ecosystem to global startup ecosystems through various engagement models. This has been done through international government-to-government partnerships, participation in international forums and hosting of global events. Startup India has launched bridges with over 15 countries that provide a soft-landing platform for startups from the partner nations and aid in promoting cross-collaboration.
Faster exit for startups: The Government has notified startups as ‘fast track firms’ enabling them to wind up operations within 90 days vis-a-vis 180 days for other companies.
Startup India Hub: The Government launched a Startup India Online Hub on June 19, 2017, as a one-of-a-kind online platform for all stakeholders of the entrepreneurial ecosystem in India to discover, connect and engage with each other. The hub hosts Startups, Investors, Funds, Mentors, Academic Institutions, Incubators, Accelerators, corporations, Government Bodies and more.
Exemption for Clause (VII)(b) of Sub-section (2) of Section 56 of the Act (2019): A DPIIT-recognised startup is eligible for exemption from the provisions of section 56(2)(viib) of the Income Tax Act.
Startup India Showcase: Startup India Showcase is an online discovery platform for the most promising startups in the country chosen through various programs for startups exhibited in the form of virtual profiles. The startups showcased on the platform have distinctly emerged as the best in their fields. These innovations span across various cutting-edge sectors. These startups are solving critical problems and have shown exceptional innovation in their respective sectors. Ecosystem stakeholders are claimed to have nurtured and supported these startups, thereby validating their presence on this platform.
National Startup Advisory Council: The Government in January 2020 notified the constitution of the National Startup Advisory Council to advise the Government on measures needed to build a strong ecosystem for nurturing innovation and startups in the country to drive sustainable economic growth and generate large-scale employment opportunities. Besides the ex-officio members, the council has several non-official members, representing various stakeholders from the startup ecosystem.
Startup India: The Way Ahead: The fifth-anniversary celebration of Startup India was unveiled on January 16, 2021. It included actionable plans for the promotion of ease of doing business for startups, the greater role of technology in executing various reforms, building capacities of stakeholders and enabling a digital Aatmanirbhar Bharat.
Startup India Seed Fund Scheme (SISFS): Easy availability of capital is essential for entrepreneurs at the early stages of the growth of an enterprise. The capital required at this stage often presents a make-or-break situation for startups with good business ideas. The Scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialisation. Rs.945 crore has been sanctioned under the SISFS Scheme for four years starting from 2021-22.
National Startup Awards (NSA): The National Startup Awards is an initiative to recognise and reward outstanding startups and ecosystem enablers that are building innovative products or solutions and scalable enterprises, with high potential for employment generation or wealth creation, demonstrating measurable social impact. Hand-holding support is provided to all the finalists across various tracks viz. Investor Connect, Mentorship, Corporate Connect, Govt. Connect, International Market Access, Regulatory Support, Startup Champions on Doordarshan and Startup India Showcase, etc.
States’ Startup Ranking Framework (SRF): States’ Startup Ranking Framework is a unique initiative to harness the strength of competitive federalism and create a flourishing startup ecosystem in the country. The major objectives of the ranking exercise are facilitating states to identify, learn and replace good practices, highlighting the policy intervention by states for promoting the startup ecosystem and fostering competitiveness among states.
Startup India Innovation Week: The Government organises Startup India Innovation Week around the National Startup Day i.e. January 16, with the primary goal of bringing together the country’s key startups, entrepreneurs, investors, incubators, funding entities, banks, policymakers, and other national/international stakeholders to celebrate entrepreneurship and promote innovation.
Also, read https://autocomponentsindia.com/the-aftermarket-landscape/
