Tire industries in Mexico uses different competitive methods to remain in the market. The two top companies take a significant share of the market accounting for more than 50% of the total sales. Almost all the tire manufactures in Mexico produce fairly similar tire products (Dealer, 2015). Therefore, this means that the companies that have taken the cream of the market compete on other different parameters other than prices. These other parameters that should be taken into consideration by Madras Rubber Factory include reputation, product design, customer service, consumer convenience, payment terms, and performance. In this market, every company has ways of maintaining their reputation to the customers and the partners for managing them. There exists a very thin line between the products designs used by every company like the embellishing fine finishing that makes the products attractive to call for more buyers. To maintain the competitive market other some of the companies improve the customer service competitive parameter like giving after sales services to bring convenience to their consumers.
The high competition in the Mexican tire market puts a lot of pressure on the margins; thus the profitability is majorly dependent on the prices of the inputs. When prices of the commodities used in the production of tires rise, then some of it is passed on to the customers to a specific extent. This competition technique is very tricky and is discerned by every company in well-calculated ways in a way that the consumers do not suffer much, and the company too does not bear the entire burden (Rodrik, 1988). Apart from these clandestine competitive means, other companies like the ones with the largest market share sell other tire or rubber related commodities to help them meet the extra expense or neutralize any threatening problem. This helps them secure additional capital stream in to help them at hard moments and not to solely depend on tires. The revenue sourced from other products accounts for almost 15% of the revenue of the two main competitors in the Mexican tire market making them continue dominating the market.
To bring the true picture of Mexican tire market to the aspiring new entrants in the market like Madras Rubber Factory the value chain analysis of the industries in the market needs to be critically assessed. This helps to identify the industries cost structure to aid in comparing the main income item statements of the operating companies in the market. It also helps the new company to determine the operational companies’ net financial expenses and main operational expenses (Boatler, 1975). The average production expenses or the cost of goods sold in the Mexican tire market accounts for approximately 51.3% to 73.5% of the sales. Raw materials used in the production of tires by these companies take close to half of the cost of a tires production (Brown, Cummings, Mrozek, & Terrebonne, 2001). The raw materials used in the production of rubber are the textile taking the lowest side of the amount at 5%, then steel cords 7%, chemicals 13%, fillers, 17%, synthetic rubber 24% and lastly natural rubber taking 34%. These high numbers of the required raw materials make the tire manufacturing industries to be very sensitive to change in the market prices of their products (Super, 1976). Every company in the market has different COGS which could be because of the different locations of sourcing the raw materials. The major company’s production expenses are low as compared to the middle or low companies (Aichner, 2014). This is because major companies in the tire industry in Mexico concentrates on the premium tire segment thus earning good margins of their tire products. The low or the struggling industries in the tire market experience high cost of production because they mostly focus on low or mid-market segments. In this market, therefore, cost-effective production of the tire is a tradeoff that occurs between optimizing the raw material used like minimizing COGS. Which help the companies to competitively set the price of tires while not compromising the performance of the tire.
On selling, general and administrative expenses (SG& A), tire industries take varying methods depending on their aim in the market. Some of the companies have low SG $A expenses as a strategy to as a program of cost saving. Others have reduced the COGS but increase the SG&A expenses spent on SG & A expenses (Hendricks, & Singhal, 2001). The competitive strategy is mostly used by the companies eying at the premium segment on the market hence spending more resources in marketing and advertisements which is profitable to the company. The companies with very low COGS of less than 60% but taken to a high SG&A expense of around 21% have got very favorable EBITDA margins when other costs and operating income are excluded. Actually, the major companies have the lowest overall costs when their COGS and SG&A making the company’s EBITDA margin to be high while excluding other items (Hendriksen, & Hendriksen, 2015). Most of the companies in the Mexican tire market have the total costs of SG&A and COGS between 80-82.5% granting a reasonable scale advantage to these tire producers. Therefore, the operating margin in the Mexican tire market if fairly low which is not surprising because they are large scale producers of the product.
The other value chain analysis is the expenses on research and development(R& D) which help to identify how the tire industries have invested in innovation and new technologies development. In this market, the companies have invested between 2.0- 3.2% of sales in R&D which is fair (Hansen, Bertrand, Marshek & Hudson, 1989). The major companies have invested around 3.0% of sales which mainly focused on the products of high-end premium such as winter tires, ultra high-performance tires and run flat tires. Some of the tire industries in the market have directed R&D investments on the modernization of the company, while others have taken to vertical investments like raw materials while others horizontal R& D investment such as production and sales.
The last value chain analysis to be monitored by Madras Rubber Factory before market entry is depreciation and amortization. The expenses in D &A in the tire market of Mexico revolve around 3.5-5.0% of sales (Armstrong Jr, 1960). The depreciation and amortization of assets for every company differs. The companies that do regular equipment, plant and property servicing have low depreciation and amortization rate, and this dramatically affects the efficiency of production in the market. The major companies in this market regularly check on their machines hence efficiently and continuously produce the tire products.
In conclusion, from the competitive analysis of the market trend of the tire in Mexico is very rigorous and needs proper planning by the new entrants who would like to join the market. We can see from the competitive analysis that tire industry is a very competitive industry with the massive production cost chiefly consisting of the cost of raw materials. Furthermore, the COGS, SG& A, research and development and depreciation are also other issues that affect the tire industries competitiveness. All these methods are differently carried out by every company depending on their size and the types of the tire to produce. Other companies also do well in the market due to the production of tire-related products. Therefore competitive analysis is a significant activity to be carried out by entrants in new markets Madras Rubber Factory lest they suffer frequent loses.
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