AC Drives in the United Kingdom -FIVE FORCES ANALYSIS REPORT
The AC Drive market is growing as a result of developing economies increasing the desire for electronic automation in areas such as building climate control and industrial processes. Products are largely commodified, although players are constantly investing in R&D to differentiate their offerings, and buyers are pricesensitive. Suppliers' margins are under pressure due to rising raw material prices and cheaper competition from other components manufacturers with well-trimmed costs. New entrants face costs associated with government directives and capacity upgrades; however market growth is relatively strong and buyers are willing to switch players according to price and added extras. Overall, high rivalry and commodious growth figures result in an environment of moderate competition.
Buyer Power
Buyers in this market are usually distributors specializing in electronic equipment, many of whom sell AC Drives as part of a more complex product under their own brand. Buyers are geographically fragmented between markets throughout the globe, with most players intending their products for end users in as many countries as they can establish distribution partnerships for. AC drives are largely commodified due to technical similarity and decreases in price; however, players attempt to differentiate their offerings by adding value through distributors prepared to offer excellent after-sales service, plus improvements in the reliability and environmental credentials of their products. Switching between players has become more common since the product entered its commodification phase, although this has not become habitual for individual end-users as they often have long-term contracts with distributors and are not easily persuaded to try a new supplier. Buyer power is moderate overall.
Supplier Power
Suppliers are typically components manufacturers, although some larger players have backwards integrated to include their own part-making operations. Suppliers of raw materials such as copper are generally large mining companies, while parts manufacturers tend to be the same size or smaller than the players to which they sell. Makers of components are numerous and there is a moderate likelihood of them forwards integrating to become AC Drive market players themselves; however their large numbers and the similarity of their products limit their power. Suppliers have recently felt the pinch as new Chinese entrants to the components supply business have experienced lower labor costs, along with the benefit of government policy
favoring components manufacturers, and have undercut other suppliers. Switching suppliers may incur costs if there is a long-term contract involved, but nevertheless players have been changing supplier based on lower prices and similar quality. Meanwhile, rising costs of raw materials such as metals and plastics have
dented suppliers' margins due to the necessity of remaining competitive on the prices paid for their components. This decreases supplier power. Bolstering supplier power is the fact that they sell to a wide variety of players in addition to those in the AC Drive market - other markets include automotive, communications, industrial and aerospace - so although the loss of a major AC Drive maker would initially hit revenues hard, players are easily replaced. Overall, supplier power is assessed as moderate.
New Entrants
Market growth is the biggest driver of new entrants, with most players having an international presence and developing markets around the world showing stellar growth as a result of expanding economies. Many developed countries are looking to reduce their environmental impact, feeding the need for better and more adjustable motor control to reduce energy wastage. New entrants may include electronics manufacturers diversifying from similar markets, or components manufacturers hoping to forwards integrate.
Players are constantly investing in R&D in a bid to lower production costs and differentiate their offerings in the face of commodification, but the relative ease of switching in a market with such a high number of similar players serves to increase the likelihood of new entrants. Players new to the market will face a high degree of
rivalry, particularly on price, and those with plants in Europe will experience some difficulties and costs associated with compliance with RoHS (Restriction of Hazardous Substances) and WEEE (Waste Electrical and Electronic Equipment) directives. Overall, the likelihood of new entrants is assessed as moderate.
Substitutes
The threat of substitutes is moderate to strong, mainly because of the commodity status of AC drives. Buyers can be persuaded to switch players for a better price and improved technical help, while being confident that the product they switch to will be similar, or even offer advantages to, that of their incumbent supplier. Makers of equipment systems, which utilize AC drives, have begun treating them as switchgear components, which highlights their interchangeable nature. Players with lower overheads, perhaps because of a cheaper workforce and favorable governmental legislation in their country of manufacture, have the margin leeway to cut the sale price of their goods and consequently attract price-conscious buyers.
Rivalry
Drivers of rivalry in the AC drive market are primarily the size, similarity and sheer number of players. Their products are similar, for the most part differentiated only by branding, price and relative performance, which intensifies rivalry. It is also relatively easy for similar electronics manufacturers to diversify into the market. On the other hand, this is by no means a zero-sum game; with market growth expected to remain healthy for at least five years, there is room for internationally focused market entrants. Overall, rivalry can be classed as moderate.
