China Shenhua Energy is the largest coal mining company in China and is owned by the state. The company deals with the production and sale of coal and also the generation and sale of electrical energy from coal in the country. It also exports coal to other nations. It was found in 1995 with headquarters in Beijing, China. The company has more than 75000 employees across the country (Reuters, 2018). The company continues to grow through acquisitions of smaller coal mining firms to expand its range. On a global scale, it is the largest coal mining enterprise in the world.
Following is a detailed Porter Five Forces Model Analysis of China Shenhua Energy:
Competitive Rivalry – High
The competitors of China Shenhua Energy are Yanzhou Coal Mining Company, China Coal Energy Company, and Yangquan Coal Industry Group. Each of these competitors provides similar services as that of the company. The industry is not growing rapidly. The fixed costs of mining coal and producing energy are high. The products the various competitors offer are similar and there are only a few types supplied by each competitor. There are long-term commitments in the form of contracts that make it difficult to exit the industry. Customers can switch to another coal supplier at low switching costs as there are various suppliers available. The products are not complex and standardized. This makes the competitive rivalry between the companies intense.
The Threat of New Entrants – Low
There are only a few competitors in this industry and each of them has developed performance and cost advantages as a result of their experiences. The products are not proprietary. There is no concept of brands in this industry and the switching costs are low for buyers. The amount of capital needed to enter and start a business in this industry is immense. Those already in the industry have gained competitive advantages through experience. Also, government licenses and authorization are needed (FFU, 2018). There is difficulty in assessing distribution channels as well for a new entrant. As a result, it is not easy to enter into the coal mining industry creating a low threat of new entrants for the existing players.
Bargaining Power of Suppliers – Low
The inputs the company needs for its operations are standardized such as electrical energy, chemicals, and other items. This makes it easy for the company to procure from any supplier it wants at a low switching cost. The company provides the suppliers with great quantities of business that make it attractive for all the other suppliers as well. Once a supplier leaves a contract, it would be difficult to reenter the business. The business is important for the suppliers due to extraordinarily high value. As a result, they are in no position to bargain with the company over prices.
Bargaining Power of Buyers – High
The number of buyers is moderate and they procure in large quantities from the company. For both local and export sales, the quantities purchased by each buyer is in thousands of tons of coal. These are expensive purchases made through contracts and agreements. In certain cases, the contracts may be for long-term supplies through multiple transits. Customers can easily switch to another buy the next time if the company attempts to influence the buyer in any way. The buyer also needs only minor details about the products before making a decision (MBA Skool, 2018). The customer cannot start their mining operations as it requires government licenses and sophisticated machinery. The products are also not unique and all competitors offer similar varieties. This provides buyers with excessive bargaining power.
The Threat of Substitutes – Moderate
The substitutes of coal include furnace oil, natural gas, renewable energy, and other energy sources. Some of these have performance limitations in terms of cost, efficiency, and environmental impact. Also, customers will incur a high cost if they are using coal and wish to switch to a substitute. The substitutes can serve the same purpose of providing energy and can be used for burning. Customers may go for substitutes if they have the investment to switch to another source of energy or may even be forced under regulations to switch to more environment-friendly substitutes such as renewable energy sources.
References
FFU, 2018. China Shenhua Energy Company Case Study Analysis & Solution. [Online] Available at: http://fernfortuniversity.com/hbr/case-solutions/14242-china-shenhua-energy-company.php [Accessed 16 Dec. 2019].
MBA Skool, 2018. China Shenhua Energy Company SWOT Analysis, Competitors & USP. [Online] Available at: https://www.mbaskool.com/brandguide/heavy-equipment-and-engineering/5966-china-shenhua-energy-company.html [Accessed 16 Dec. 2019].
Reuters, 2018. Shenhua says won’t shift CTL plant to listed arm. [Online] Available at: https://uk.reuters.com/article/shenhua-china/shenhua-says-wont-shift-ctl-plant-to-listed-arm-idUKSHA9029720080306 [Accessed 16 Dec. 2019].