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Insight: The Competitive Landscape 2006

For those of you that are long-time readers of AD&P, I wrote an article exactly two years ago this month entitled “Why Japanese OEMs Do So Well—& What Detroit Can Do to Regain Market” (http://www.autofieldguide.com/columns/0104insight.html). Given all the turmoil in the industry over the last year, it seems to make sense to give an update on the state of the automotive market and the key issues facing the major players over the next two years.

For those of you that are long-time readers of AD&P, I wrote an article exactly two years ago this month entitled “Why Japanese OEMs Do So Well—& What Detroit Can Do to Regain Market” (http://www.autofieldguide.com/columns/0104insight.html). Given all the turmoil in the industry over the last year, it seems to make sense to give an update on the state of the automotive market and the key issues facing the major players over the next two years. While current conventional wisdom would suggest that things have gotten much worse since 2004, I would argue that progress has been made on several fronts and that talking about the “industry” vs. discussing the performance of the individual companies is misleading and misses the fundamental transformation that is occurring in the automotive industry. So we’ll look at the industry players that are in the best shape and work our way to those who are in the worst shape.

 

The “Big Three” Japanese

During the past 10 years, incentives per vehicle for the traditional Big Three (General Motors, Ford, and Chrysler) have gone from an average of $1200-1500 per vehicle to $4000-5000, while their sales have remained totally flat over the same period, with a declining sales trend since 2000. The Japanese, on the other hand, have increased their incentives from an average of $1000 per vehicle to between $2000-2500, but they have seen their sales increase by over 80%! The most successful of the Japanese manufacturers, Toyota, has seen significant market share gains over this period and has been primarily been constrained from further growth by capacity constraints.

Why have the Japanese manufacturers continued to strengthen? Because of the same things I cited in January 2004:

  • Consistency of vision
  • The dominance of engineering within the organizations
  • Product customization at mass market pricing

The biggest change in the last two years has been that these organizational and process advantages are now being applied to the light trucks as well as cars. With the decline in importance of the large SUV and minivan segments and the growing strength of crossover SUVs, the Japanese are perfectly positioned to continue to take market share, almost exclusively at the expense of Ford and General Motors.

 

The Other New Domestics

While their scale is significantly smaller, both the German and Korean New Domestics have performed well over the last two years. The Germans will continue to focus on maximizing per unit profitability (vs. market share) while the Koreans have quietly grown their share in North America. Hyundai has done a great job of improving overall quality and focusing product attributes for tightly defined vehicle segments. We anticipate they will continue to grow, although not as fast as their Japanese counterparts. We also anticipate that by the end of this decade, we will begin to see the first Chinese-produced vehicles appear. While we do not believe they will have a significant impact on overall market share, they will just be one more competitor in an already intensively competitive North American market.

 

Chrysler

Chrysler is the only one of the traditional Big Three that has stabilized their position in the last two years. The company actually gained market share in 2004, although it was less than 1%. Chrysler has made significant progress in designing cars that people actually want to buy, as in the cases of the Chrysler 300 and the Dodge Charger. While they are not completely out of the woods yet (they still need to improve their quality), we believe Chrysler will continue to calibrate their North American position and, worst case, not lose any additional share over the next 10 years.

 

General Motors

I have been the most disappointed with General Motors’ performance of the last two years as they clearly had the best opportunity to strengthen their competitive position during this period. Up until early 2005, they had been the most successful in stopping their market share hemorrhaging, basically maintaining share from 2001 through 2004. While they did it primarily by competing on price, I was supportive of the stated concept that they were trying to maintain market share until the new “Lutz-inspired” vehicles began showing up in 2005 and 2006. They had done a good job of improving overall quality during this same period, and it was hoped that better quality combined with better product design and marketing would result in at least some vehicles that could be sold on more than just price.

In early 2005, however, GM began to experience a significant decline in sales in several key segments and, in our opinion, management hit the panic button and they came out with the “Employee Discount for Everyone” program. While this helped them move a significant amount of product for a couple of months, it was a horrible decision from a marketing and strategic standpoint. They had spent the last five years trying to rehabilitate themselves in the eyes of the American consumer and be viewed as a credible alternative to their Japanese competitors, yet in one short, financially driven decision, they threw all that hard work out the window. They made it clear to everyone that they still believed they could only compete on price and their product was incapable of standing on its own merits. I believe the damage from this strategic capitulation will be come clearer over the next 6-12 months as they are required to aggressively incentivize even brand new (and much improved) product like the GMT 900.

If there are any lessons to be learned for General Motors, it is from the amazing resurrection of Cadillac. While the annual growth rate is relatively small, most analysts in the mid 1990’s, including IRN, were projecting the death of Cadillac by this time. What has caused its turnaround? Product and very aggressive (and smart) marketing. While GM needs to continue to get their cost structure in line, they need to spend at least as much time and energy focused on product development and strategic marketing as they do operational issues. While their overall footprint will be much smaller in the future, they can be successful in key segments if they get clearer about where and how to compete with weapons other than value pricing.

 

Ford

Finally, we come to the weakest North American manufacturer, Ford. Their situation has gone from bad to worse in the last two years, continuing a decline in market share that began in January 1997, from about 25% to about 17.5%. How do you lose that much market share in that short a period of time? And the scary part is that there does not seem to be a bottoming out of this trend any time soon. As the market has become more competitively intense, Ford has continued to drift strategically. There does not appear to be an organizational “vision thing” and, as a result, there is no consistent forward progress on any front. I believe the problem is still the same one it was two years ago: There is no cohesive management team with a clear and logical strategic pathway to stabilization and growth. While I am encouraged by some recent organizational changes, I have been encouraged several times in the past few years only to see key departures and/or organizational restructuring. Ford is rapidly losing the time and the critical mass to get the company back on track. They need to make some decisive moves and to make some very painful decisions to allow the company to have an independent future. (e.g. down-sizing). Experiencing another two years like the last two years is not an option for Ford and we hope the key players at Ford clearly understand that.

The good news out of all of this turmoil is that vehicle production in North America continues to grow and at least one out of the three traditional Big 3 are in better shape than they were two years ago. Hopefully we can say the same thing in 2007. 

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