Please welcome Seth Parks, a long-time contributor to TTAC and other outlets, with his post on product mix and its importance for the future survival of OEMs.
The consumer preference for light trucks, to include pickups, SUV’s, and crossovers, over cars is well known – but it’s impact on auto manufacturers is not well understood.
A common theme among consumers, enthusiasts, and journalists holds that any manufacturer eschewing cars in favor of light trucks is patently myopic, self-destructive, and perhaps even greedy. Original Equipment Manufacturers (OEM) such as Ford, which recently canceled four of its five North American car programs, are sure to alienate customers and bring themselves hardship when the current economic cycle takes its inevitable turn. As the logic goes, the best inoculation against customer defection and economic disruption is a balanced lineup of competitive cars and light trucks. This approach has been a reliable path to profit for decades.
Appealing to conventional wisdom is safe. Rarely is the logic of repeating what has worked in the past challenged. And the Detroit automakers have a lengthy history of looking in the rearview mirror for inspiration. Much of their collective past is a story of refusal, resistance, and finally reluctant adaptation. For example, had they been willing to genuinely account for shifting consumer preferences for fuel economy and safety in the 1970’s, they may have stemmed the tide of Japanese competition in the 1980’s. Instead, they applied what they already knew and built second rate penalty boxes like the Pinto and Chevette.
While the domestics looked inside themselves to see what they could adapt, Toyota, Honda, and others focused on customers. They did not just build small inexpensive cars, they build small, inexpensive, high quality cars. The domestic compacts that competed against Corolla and Civic were ill conceived, under-designed, and bereft of passion. As a result, the Detroit automakers churned through monikers after a generation or two as their nameplate equity predictably collapsed. GM has been the most prolific employer of vehicle renaming as a marketing strategy. Consider the Vega > Monza > Cavalier > Cobalt > Cruze progression.
We have seen this movie before. Domestic carmakers hold a dominant position but through hubris and inaction continue doing what has worked in the past, only to shed market share. Just as the Japanese manufacturers built inroads through the bottom of the market in the 70’s and 80’s, so too the European brands entered, this time from the top. And the erosion of market share continues. As recently as 2003, the Detroit Three owned 60 percent of US auto sales. Over the last 15 years they have quietly slid below half to 45 percent.
Nonetheless, the domestics once again face a landscape that plays to their strengths. They dominate the full-size truck market, as well as the vastly smaller, yet massively profitable full-size SUV segment. Tahoe, Escalade, Expedition, F-Series, Silverado, Ram, and yes Explorer, Grand Cherokee, and Wrangler. These are genuinely aspirational products with immense equity. They are customer magnets, reliably bringing buyers to dealer lots. Anyone who has worked auto retail understands most consumers maintain a thin automotive awareness. For example, they want an SUV with three-rows, are delighted by a reclining middle row, and are happily routed to a front-wheel drive unibody crossover they will later call their SUV. Aside from brand preferences based on the vaguest understanding of the products themselves, car shopping is about matching customers with something that has the features they want in a wrapper they like at a palatable payment. And for the majority of buyers who now want a light truck, the domestics have brand strength as robust as the 92 percent market share they command in full-size trucks.
The Detroit automakers are more nimble than their former selves. They bring vehicles to market more rapidly and product cycles are shorter than they were even ten years ago. However, auto manufacturing remains a capital intensive enterprise with glacial gestation periods followed by generational lengths eclipsed in consumer goods perhaps only by pharmaceuticals. Automakers undertake more advance planning than most businesses, because they must live with their decisions for a decade or more. And every new product generation is a billion-dollar bet.
If you are an OEM in a typical ten-year planning cycle, what does your crystal ball show?
In the near-term, covering a single product cycle of six to eight-years, the data shows car owners across the spectrum, from entry level to luxury, defecting to crossovers. Not only are sales volumes growing in these segments, but inventory cycles faster, and profit margins are often double those of the cars the domestics once sold. Not only that, but the risk of high fuel prices is not the specter some assume it to be.
Between 2002 and 2005, the price for a gallon of unleaded gasoline surged 70 percent. Over the same period, the auto market was flat while full-size truck sales climbed 13 percent. It took the largest economic disruption in US history to slow consumer demand for trucks. And from the depths of the recession in 2009, to recovery in 2014, full-size truck sales surged 46 percent, in lock step with a 43 percent increase in gas prices. Light truck sales are not causally linked to fuel prices. Just like the rest of auto market, light truck sales are more closely correlated with economic health. A broad economic disruption will negatively impact every automaker, no matter their lineup, making a light-truck intensive strategy less risky than one reliant on a resurgent car market.
Vision beyond eight years has never been clear, but it is opaque today. By 2025 the twin forces of electrification and autonomy will fundamentally alter the auto industry. One-hundred years of mobility will be profoundly changed. Electrification will require all new platforms and technologies. And autonomy will impact ownership modalities, while longer term impacts on safety will again fundamentally alter the car. Occupant safety will be managed by Vehicle-to-Vehicle and Vehicle-to-Infrastructure (V2X) technologies allowing cars to become lighter with designs unbound by crumple zones, rollover standards, and steering wheels. Change is on the horizon, it’s just not clear how it will unfold.
Automakers face a near-term future that recommends a light-truck heavy strategy coupled with a mid-term outlook defined by more questions than bankable predictions. And like just other companies this side of Apple, automakers cannot afford to place bets on each possible future. Therefore, companies like Ford, and soon FCA which will announce its next five-year plan on June 1, are investing in programs that are reasonably certain to deliver positive returns over the next few years. They will also hedge with modest investments in cars aimed at European customers as well as selective investments in future mobility players such as Lyft, Uber, and Strobe. One of the best ways they can prepare for an uncertain future is to capitalize on their competitive advantage now. It’s capitalism 101, seek customers where they are, not where you wish they were. Automakers need to focus on profit today, and avoid deploying hope as a product strategy.
Questioning the status quo is difficult. Change is hard. But a well-informed product strategy for each of the domestic automakers will rely on a light-truck intensive product mix.