With a constant stream of ‘black swans’ emerging and an already complex transition underway, the auto industry is going through a period of great uncertainty. Every company is affected to varying degrees, but in the luxury segment the impact is likely to be smaller than in the lower end and the recovery is certainly faster when analyzed in a previously published comparison.
However, while most of the big names in the luxury segment have seen a steady recovery and are posting record results, some are facing some major difficulties. McLaren is unfortunately one of them.
A few more days (unconfirmed) from when the company could release its full year 2021 report, until Q3 gave a pretty clear idea of last year’s trends for UK OEMs.
The recovery from an extremely difficult 2020 is significant, but still a long way from the record year 2019, and regrettably even from the previous two years.
McLaren Automotive Q3 financial report (2017-2021)
To try and assess the company’s current situation and what can be done from a strategic point of view, it is interesting to look at it from a Porter’s Five Forces Perspective.
Structure
Given the relatively young age of the auto business and low production output, The observed time horizon covers the entire life cycle of the companysince 2010.
As for the external factors that primarily affect automakers, there are different considerations to make. Environmental regulations have certainly impacted companies like McLaren differently thanks to their SVM (Small Volume Manufacturer) status. Accessing these alternative standards gives SVM more time to transition to electrification.
On the other hand, current events like Covid and global chip shortages represent a different kind of challenge.
Covid hits every car company with reduced demand, and then the lockdown. In many cases, these two factors and the sluggish 100% production recovery have created a severe financial deficit, as is evident in the table above.
Instead, the chip shortage could have different effects. While it seems less risky for SVM due to reduced supply demand, a small auto company has the potential to more exposed to supply chain disruptions than larger auto groups or other SVMs backed by larger OEMs like Lamborghini, Bentley or Rolls-Royce. In addition, these key industry-wide variables also affect the 5 Forces of the framework, so they will be discussed further later.
Frame 5 Porter .’s Forces
Threat of new entrants
This first factor is probably the one that has changed the most over the past few years because of electrification.
The automotive industry has always been characterized by high barriers to entry. This is an extremely capital intensive sector. In particular, the luxury segment, coupled with the demand for skilled craftsmen, technicians, complex supply chains and high fixed costs, requires significant R&D Spending. This is even heavier for small independent OEMs like McLaren. As seen in the discussion innovation in the field through Lamborghini case studiesfor some of these companies R&D can even exceed 20% of annual net sales.
Even so, the variables to consider are many. Although to a certain extent access to the low output segment may be easier for supply-side economies of scale, this would not be true for demand-side economies of scale, or network effects are extremely important in today’s market. The increasingly complex customer journeys developed by car manufacturers creates a deep emotional bond between the customer and the brand, increasing their loyalty and often turning them into brand advocates. They really become part of an exclusive club that can create a powerful network effect.
Equal remain high are barriers established by Client’s switching costs, capital requirements and incumbent advantages.
However, electrification is lowering many of these barriers, some in a relatively unexpected way. First of all, it simplifies important elements of a car like the engine, which is even more important for performance cars. Second, through this industry change, new entrants like Tesla and Rimac have set a “dangerous” precedent by showing that a new player can quickly gain a strong reputation and following by doing things differently, focusing on technological innovation, and serving a new generation of customers.
Threats of substitute products
The threat of substitutes is certainly not a big threat to high-performance automakers. Both with the product and the customer journey, they deliver a very unique experience that is already reserved for a very limited audience.
All in all, there is no other automotive or mobility solution that matches or replaces what companies like McLaren offer. However, within the same niche, changing preferences can lead to the replacement of “traditional” sports cars. As observed in previous post with example of Huracán Tecnicaand as industry-wide trends show, customers are increasingly looking for cars that deliver performance but also everyday use.
This is clearly what led McLaren to release the GT back in 2019But that can’t be enough with SUVs, and spacious and fast electric cars are dominating the market.
Bargaining power of customers
Buyer power is a big factor in this industry because while the choices are quite limited, as suggested in the previous paragraphs, they are growing and the customer base itself is limited.
They maintain a high level of bargaining power, albeit a bit unexpected at times, as not just the actual means of deciding purchase options. They can sensitive to factors such as distribution channels and customer service as proven in the interview Why buy a Ferrari: Words from a collector.
Surveyed owners with a single performance car versus multiple performance cars
Customers also have considerable power because they are not price sensitive. Also, go a little deeper with RFM Analysis (Recent Hits, Frequency, Currency Value)provide important additional details regarding customer value, especially with respect to the last two factors.
First, a large portion of real luxury car buyers own more than one carand of course, the monetary value of such purchases is very high.
Bargaining power of suppliers
In general, in this industry, the power of suppliers is great because the products offered must not only be of high and stable quality, in line with industry expectations, but also limited. Brands like Bosch and Brembo have an important relationship with the automotive sector and sell highly specialized products that are not easily replaceable..
Naturally, from an OEM point of view, the risk of vertical integration is low or none, but McLaren may face additional risks due to the recent political situation in the UK.
Back in 2017, after Brexit, McLaren had to move part of its supply chain and “move” it back to the UK as import duties will negatively affect its business. Former CFO Paul Buddin says FT that in the process, the company also £50 million investment in a new carbon fiber chassis production facilityreplaced a European supplier and increased the supply of domestic components from 50 to 58%.
While this has certainly made the business more efficient and sustainable, and a higher degree of vertical integration reduces the bargaining power of suppliersHowever, the pandemic and import tax on raw materials will have a negative impact on the company.
Competition among existing competitors
In the performance segment, McLaren has a powerful marketing tool that is hard to replicate, that is its sports car heritage and especially the Formula 1 team. In fact, in the industry, there is only Ferrari is a more influential brand, and Aston Martin is trying to achieve the same with its recent entry into the top motorsport series.
As observed in a previous article McLaren has adopted a specific marketing approach to both the automotive division and the F1 team, making it the most watched team in the sport. This adds to its already substantial competitive advantage.
In addition, in these 10 years, McLaren has stood out thanks to technology powerspecial focus on maximum performance, contributed to the success of models such as 720S and Senna. The automaker has also successfully introduced its first step in electrification with the new entry-level Artura hybrid.
However, as of now, the brand seems to lag behind its most direct competitors in terms of diversification. Its product line remains largely focused on pure performance vehicles, with the exception of the GT, while other brands are gradually expanding their offering consistently.
*Source: McLaren Media
Final, a confusing scope, too much reliance on special editions can also play a negative role. In the previous generation, eight different models were based on the same chassis and design. Then there’s the Elva example, originally planned for 399 units, and successively reduced, first to 249 and then to just 149 as well. Right now, instead, McLaren has also significantly strengthened its lineup, maintains a single GT and three models for the line of Supercars, the entry-level Artura, the 720S, and the race-focused 765LT with their relative spider-man versions. Add to that the Ultimate line, which usually sells out upon release anyway, which includes the Senna, Speedtail, Senna GTR, and Elva.
Inference
McLaren may not be out of the woods yet, but 2021 has seen important positives.
Innovation, weight reduction and top performance have always been its most important selling points, and Current unpredictability with the gas industry could be a risk. Also, competing brands have shown that heritage is not a condition. So new entrants could very well become dangerous competitors and a confident move towards full electrification seems to be the key for the years to come.
While the risk of supply chain disruption is severe, the current direction of chain consolidation and vertical integration could lead to further specialization in the long term, with lower volumes and margins. higher profits. However, this opinion is contrary to the general direction in the segment, where the majority of companies are actively looking for best-selling models (SUVs and GTs) to expand their reach and sharply increase sales. their sales.
