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America Is Running Out of Subarus?

That was the headline in an article that appeared in the Wall Street Journal , May 30, 2013.  It’s difficult to imagine a headline that would have been less imaginable a few years ago.  After all, Subaru has a well-earned reputation of producing vehicles that appeal to a niche crowd of New England liberals. 

Subaru realized that this core demographic  was both an asset and a liability. On one hand, these buyers have sustained the brand for decades, on the other hand, the types of vehicles coveted by that demographic were largely unappealing to mainstream US buyers.

This is a familiar dilemma for many foreign automakers, especially small ones like Fuji Heavy Industries, which owns and produces Subarus. Expanding to foreign markets is a difficult endeavor and one way to minimize risk and cost is to export domestic market products with as few changes as possible. That approach is particularly prevalent in capital intensive industries such as automotive manufacturing. For reference, Subaru’s Japanese competitors all started its sales operations in the US by exporting Japanese market models. While global automotive tastes are slowly becoming more homogenous, there are still strong regional preferences that prevent models that do well in one market from achieving similar success elsewhere. 

Courtesey of SubaruForester.org

With this in mind, Subaru realized that it needed to de-emphasize its Japanese roots and customize its offering to the US market. The company was able to do this somewhat easily since it has been building  vehicles in the US for decades.  A prime example of Subaru’s success has been the Outback.  This model has been sold in the US for many years, largely unchanged from its Japanese twin. In essence, the Outback has always been an all-wheel-drive station wagon. Station wagons have limited market appeal in the US, where customers favor higher-riding SUVs and cross-overs.  Instead of abandoning the Outback name and goodwill, the company instead morphed the product into a cross-over that still resembles a wagon but with a higher ride height. The company took the same approach with its very popular Forrester model. It capitalized on the name and basically copied the cross-overs from Honda and Toyota to arrive at its bestselling model. Overall, Subaru has enjoyed a 34% sales increase in May 2013.

Instead of struggling in the US market as other, smaller Japanese auto manufacturers Suzuki and Mitsubishi have, Subaru is thriving.  It’s a lesson that other manufacturers are following as well. As much as US car enthusiasts have praised BMWs over the years, selling European models only got the company so far. To drive sales, BMW capitalized on its brand, started producing vehicles in the US and expanded its product line to include models for US buyers, namely SUVs. Similarly, many manufacturers tweak their models for the Chinese market, with long wheelbase models.

Of course, brand expansion can easily lead to lead to oversaturation and a loss of core values.  This affects niche and luxury brands more than mainstream brands. However, for Subaru the danger is real. Now that many consumers embrace Subaru models as an alternative to other Asian brands, will the brand lose it core customer base? Most likely, they will lose that core customer base and its rapid expansion will more than make up for it.

Note to Daimler, Stop Producting smart

There is no denying that purchasing the smart brand of cars from the Swiss company that procuded Swatch watches has been an absolute disaster for Daimler. Few automotive brands have had so little success and survived. It is time for Daimler to stop keeping this brand afloat.  It has been time to dismantle or preferably sell the brand for some time now, yet Daimler smart keeps the brand on life support.

The idea was attractive in 1994 when Daimler (then Mercedes Benz) decided to acquire the company.  A fun, urban runabout that could be easily customized. In a sense, the car would be a fashion accessory – similar Swatch brand watches.  It was an ambitious project. The joint venture had a complicated management structure and planned to make the production a point of differentiation whereby suppliers would be largely responsible for designing major parts of the cars and would have to install the parts in the assembly plant. The initial hopes for a hybrid powertrain did not come to fruition due to the associated costs and complexity.  The projects’ cost overruns and internal squabbles resulted in the Germans taking complete control. By all accounts, the project has been a financial disaster and losses are estimated at over €100 million annually.  Models have been limited to mostly different versions of what is now called the Fortwo.  The cars never garnered enthusiasm in the marketplace or automotive press.  With fewer than 100,000 annual worldwide sales, smart remains a niche player.  Penske Automotive Group decided to sell its US  franchise back to Mercedes-Benz USA in February 2011.

Unfortunately, the brand soldiers on.  Ahead of the 2012 Paris Auto Show, the company released images of a new concept vehicle the forstars.  Clearly a concept car, it will be powered by the existing electric motor used in the fortwo.  If past history is any guide, Daimler will commit more resources in the forms of R&D and advertising to the brand in the hope of creating a profitable business.  Past history would also suggest this to be a futile effort.

 

                        Courtesy: Daimler Benz AG

 

 

 

 

 

 

 

US Auto Sales Rebound Despite Economic Uncertainty

US auto sales increased unexpectedly in June, leading analysts to project 2012 US sales of 14 million units.  Naturally, industry sales volumes are important to auto manufacturers, who rely on economies of scale to decrease production costs and increase their margins.  They also serve as an important barometer for consumer sentiment. Weak economic growth, Europe’s debt crisis and persistently high levels of employment could make June’s unexpected sales gain the anomaly for 2012. 

While a larger car market provides opportunities for manufacturers to increase sales, its how each company achieves those sales gains that will prove important to investors. For example, General Motors, which for many years prized market share above profitability, wants to retain its status as largest worldwide manufacturer, which could lead to repeating the strategy of “moving metal” through higher incentive spending.  May 2012 data suggests that this is a persistent problem for Chevy, which offered the highest average discount in June; amounting to 10.7% according to Edmunds.com. 

Who were the big winners in June? Not surprisingly, Japanese companies Toyota and Honda saw the largest sales gains for the month. Much of this has been attributed to recovering inventories following last year’s constrained supply.  Perhaps the most interesting aspect of June’s sales data is that almost everyone benefitted.  Jaguar and Mitsubishi were the only brands with sales declines. 

BMW sales were almost flat. Sales of the company’s volume model, the 3-Series, were down 26% compared to June 2011. BMW will depend on broader availability of the new 3-Series, coupled with a more attractive model-mix to halt these sales declines.

 

January Auto Sales Off To Strong Start

via wardsauto.com

January 2012 sales data has just been published and for the most part, the industry is pleased.  If January sales gains are a reliable predictor of 2012 annual sales overall, we can expect 14.1 million units this year. That compares favorably to 2011's 12.8 million, but still a far cry from 2007 sales of 16.1 million.

The indsutry is slowly climbing out of the recession. While the total sales volume is increasing, auto manufacturers are competing for their slice of the pie. Mainly due to the natural disasters in Japan and Thailand, Japanese auto makers suffered the most in 2011.  Both Honda and Toyota suffered sales declines exceeding 7%.  Chrysler took up the slack and increased its sales by over 26%.

What can a single month's sales data tell us about the remainder of the year? Assuming the greater economic climate does not worse, we can expect a strong sales year. What we can't predict is how the fight for market share will affect the auto makers' bottom lines. Hopfully, incentive will be kept in check. Then again, if you're in the market, consider a GM product, their sales were down 6% in January.

Auto Manufacturers Bullying Auto Dealers?

The disconnect between auto manufacturers and auto dealers isn't getting any smaller. The manufacturers want dealers that sell what they make, ask few questions, and toe the line when it comes to branding and messaging. The dealers want products that bring in customers, heavy promotional spending, cheap financing and as few restrictions as possible. It's a business relationship aimed at making both parties successful. That doesn't mean that they have to like each other.

Ideally, each auto manufacturer would like to own its distribution channel, up to and including the dealership. That would afford them complete control over branding, messaging, and "the customer experience". When it comes to a brand, image is very important. That becomes even more important for luxury brands, regardless of industry. It's difficult to control that image when you don't control the actual interaction with the customer. A national advertising campaign can only go so far. Does that message get reinforced by the dealership experience? Does the local dealership personify the sophisticated and modern feel of the brand that most luxury brands rely on?

One way to prod local dealers into "compliance" with corporate branding is to encourage them to upgrade their buildings. It's tough to sell someone an $80,000 car from a facility with plastic chairs, stained tile ceilings and laminate floors. The customer experience is much different in any modern luxury dealership. These buildings are dominated by sleek glass, steel and concrete architecture. They offer their customers cappuccinos while lounging on modern leather furniture. Everything gleams and sparkles. The atmosphere exudes wealth and sophistication. Just the thing every Audi, BMW, Lexus, Porsche, etc. is looking for.

Image courtesy of Lance Mueller & Associates

Unfortunately, these palaces of capitalism are quite cost prohibitive, costing many millions of dollars. Naturally, dealers don't care for the practice of forced upgrades and are exercising their political clout in Colorado in an attempt to minimize the practice. House Bill 1188 was introduced to shift the power in the franchisor-franchisee relationship. As originally written, the bill would have "banned auto makers from requiring upgrades of $250,000 or more to dealerships more than once every 10 year" according to the Denver Business Journal.  Through successful lobbying on its part, the auto manufacturers have been able to reduce the dealer protection equations. 

Italy's Return to the US Market

While attending the local Cars & Coffee this Saturday, I found myself speaking with the rep for a new, local Fiat dealership. Yes, Chrysler franchisees that want to sell the new Fiat 500 and any other Fiat for that matter are building separate dealerships.

The rep "let slip" that the Fiat dealership will also start selling Alfa Romeos in the near future. According to him, that would take place in late 2011. While the time-frame is unlikely, Fiat has confirmed the return of Alfa to our shores. Technically, Alfa has returned already since it's been selling the 8C supercar. I've seen one - once.

To support the mainstream market re-entry, Alfa is not relying on one of its existing vehicles. Instead, the company has debuted an all-new model at the 2011 Geneva Auto show, the 4C.

Courtesy: Alfa Romeo

It's certainly pretty and sporty. Perhaps that's what the company is going after. It's difficult to change customer perceptions. Entering the market after a 17 year absence gives the company a chance to completely re-position itself. Sport and sex-appeal may be a winning combination. Not exporting some of its lesser models makes sense as well.  While US enthusiasts love the idea of Alfa Romeo, that's mostly due to their design. In Europe, the enthusiasm for the brand is more tempered, due to reliability, handling and weight problems of its current models.

Some Japanese Models in Low Supply

Apart from a horrific human toll, the earthquake and subsequent tsunami that hit Japan last week is also wreaking havoc with the Japanese economy.  Supply shortages are a concern for many industries, including the automotive market.  The global nature of the industry, coupled with a decades-long focus on reducing inventories, means that if a key supplier (or group of suppliers) can’t deliver the upstream supply-chain partners are impacted very quickly.  We see this in raw materials, medical equipment, chip-sets, memory, automotive components and complete vehicles. As suppliers race to find alternate sources, consumers will soon feel the effects as well. 

As the above graphic from AutoObserver makes clear, several popular vehicles have low inventory (measured in days) as it is.  Nissan’s new Leaf electric vehicle will be particularly affected.  Currently, all Leafs are assembled in Japan, although the company plans to produce them in its Tennessee plant soon.  The Leaf is a halo car for Nissan and a front-runner in electric-only vehicles.  While customers are likely to understand and forgive any upcoming shortages, this is a critical time for the Leaf to gain momentum.  One key advocate of electric vehicles, Tennessee Senator Lamar Alexander, publicly praised the Leaf as he took possession of his model earlier this year.  Nissan might not be able to capitalize on these types of high-profile endorsements should the supply situation not resolve itself soon.

Old Habits Die Hard for General Motors

Courtesy: Bloomberg

General Motors seems to be doing pretty well for itself.  After emerging from bankruptcy with fewer brands, fewer dealers and an attractive model line-up, the company went public, which went a long way in shedding its “Government Motors” reputation.  

Sales have been improving as well.  According to Ward’s Automotive Group, January and February 2011 sales for GM are up 34%.  Even more impressive, sales growth in Feb. 2011 compared to Feb. 2010 is almost 50%.  Considering the multitude of snow storms in Feb. 2011 (which translates into fewer days to sell automobiles) it sure seems like GM is back on the fast-track.  That’s impressive for a company whose executives had to beg members of congress for a bailout.

One tactic that got GM into trouble in the first place was not innovating in the passenger vehicle market and relying on SUV sales instead.  Another problem was the heavy use of incentives to spur sales.  This is a common problem for car manufacturers, especially large players with undifferentiated products.  Even Toyota, which has historically had much fewer incentives, has increased the use of this tactic to increase sales.

There are several problems with sales incentives.  For one, they reduce profitability.  With lower margins per unit, a manufacturer has to make up that gap with higher volume.  That’s a problem because customers get used to and start expecting large rebates and low (or no) interest financing.  Large up-front incentives tend to drive down the prices in the used-car market as well, which is problematic for leasing and financing operations.

Considering all these negative aspects associated with offering incentives, most car makers resist their use as much as possible.  GM is not one of them. 

Average 2011 model-year incentives (per vehicle) amount to $2,382 according to a recent analysis conducted by AutoObserver.com.  GM’s average was over $3,600 per vehicle.  That’s before GM announced the availability of zero percent financing on select models. 

Everyone wants GM to succeed, but their growth must be based on organic customer demand. Otherwise the vicious cycle of high-incentives, low-profitability, reduced R&D funding and mediocre products will repeat itself.

Smart Car Distributor Penske Cuts Its Losses, Sells smart back to Mercedes

Daimler AG, the owner of smart, is taking over US distribution of smart cars.  According to Penske's press release, this "marks a further step in implementing the future growth strategy of the smart brand." That's one way of interpreting these events.

Another, more critical, interpretation is that Penske is cutting its losses.  Smart has never been a profitable venture for Daimler.  Even before bringing the brand to the US, sales of smart in Europe were decreasing rapidly, causing Daimler to spend billions of Euros to rescue the brand. 

The model line-up has remained almost identical for years.  And the benefits of having such a tiny vehicle did not extend to a correspondingly high fuel economy.  The smart fortwo coupe and cabriolet EPA numbers suggest 36 mpg combined.  That's not bad, but a 2010 Honda Fit, which by all accounts is a much superior car, achieves a combined 31 mpg.  To make matters worse, the upcoming Fiat 500, which will probably sell in reasonable amounts due to its looks alone, should achieve 30/38 mpg. Most hybrids achieve even better mileage.

That Daimler decided it needed a partner to distribute smart vehicles in the US is telling.  Elsewhere in the world, Mercedes distributed smart vehicles.  Presumably, the company felt the need for a partner to decrease the financial risk associated with bringing these vehicles to market.  That appears to have been a sound assumption. 

As for the future, the company is expected to debut an electric fortwo in 2011. Apart from that, there are no additional models scheduled for three years. We will see if this will be enough to save the brand in the US market.

Not disclosed, but very interesting, are the details behind this transaction.  I seem to remember John McElroy advising Penske to sell the franchise once the brand takes off.  It looks like they took his advice, only a little too late.