Atomization Causes Car Makers to Lose, Not Gain, Focus
February 16, 2009
January 30, 2009, Tustin, CA: Over the past decade, the American auto industry has "atomized" with more and more new car and light truck models being added to the lineups of their brands each year. This rapid addition of nameplates has been an attempt by auto designers and marketers to provide products targeted to much more finely defined product niches. Consumers demand more and more focused products and today's automotive consumer research can identify exactly what those consumers want. Current product development techniques allow vehicles to be developed more quickly and efficiently than in the past. So, the conclusion is to develop a vehicle targeted at each identified buyer group.
The risks in adopting this strategy are numerous. When sales of cars and light trucks remain constant and the number of models increases sales per nameplate decreases. This means a vehicle has to be profitable at a lower volume. In down sales years, like 2007 and 2008, sales per nameplate drop precipitously and profitability becomes almost impossible to achieve.
The Industry Analysis office of automotive industry specialist research firm AutoPacific shows that 2008 was the worst year in decades for sales per nameplate and 2009 promises to be worse. Why do we care about sales per nameplate? AutoPacific president, George Peterson says, "Higher sales per nameplate usually mean that the vehicle is popular and profitable. Lower sales per nameplate usually mean that the vehicle is struggling to sell reasonable volumes and grasping at profitability. Industry wide, 2008 was a year where almost every nameplate achieved lower sales and lower profits."
At the previous industry peak in 2000 when sales hit 17.3 million units, there were 208 car and light truck nameplates sold in the United States resulting in an average sales volume of slightly over 83,000 units per nameplate. In 2008 when sales were 13.2 million units, there were 285 nameplates and only 47,400 units sold per nameplate a whopping 35,600-unit deterioration in the sales volume per nameplate. In just one year - from the end of 2007 through 2008 - sales per nameplate fell almost 10,000 units.
AutoPacific's Peterson says, "This is a direct result of dramatically falling overall sales volumes due to spiking fuel prices in the first half of 2008 that drove buyers away from high profit pickup trucks and traditional sport utility vehicles, followed by the housing, stock market and credit crisis. By mid-September there was the belated recognition that the United States has been in a recession since December 2007. These factors led to sales almost stopping from September 15 through the end of 2008.
Today, most new vehicle buyers are buying out of necessity. Their old car needed too many repairs to keep running. Their old car had too many miles on it. They needed a vehicle that gets better fuel economy. Their old car was stolen.
During the '90s, a good year was 15 million car and light truck sales. By early in the first decade of the 2000s, growing use of incentives caused the industry to expect 17 million sales per year. Companies began adding more and more nameplates to take advantage of these robust sales numbers and to target their customers more closely. As more nameplates were added, the market softened."
General Motors Irrational Addition of Models: A good example of a company's approach to this market condition is General Motors. Entering the decade with nine divisions (including SAAB), GM had 56 nameplates, and then within four years added another seventeen even after killing Oldsmobile. GM's sales per nameplate peaked in 1999 over 96,000 units per nameplate. By the time their nameplate count had peaked at 73 in 2004 and 2005 the market was softening and sales per nameplate dropped to 61,000 units. In 2006, GM began whittling away at nameplates and by 2008 was down to 60 with an average sales level of about 49,000 units. Clearly, GM's ambition to add new models for every taste came back to bite them and GM has not been able to restructure its product lineup and nameplate count to achieve profitable levels.
The old adage that "it's inexpensive to conceive children, but it's costly to rear them" certainly is true in GM's case. There are too many models for General Motors to support effectively and when they cannot be supported, they languish.
Honda Offers a Counterpoint to General Motors Strategy: The product proliferation (or non-proliferation) strategy adopted by Honda in the USA looks much more rational. Honda has rigidly maintained its nameplate count through much of the 2000s. In a bad year like 2008, Honda's sales per nameplate were over 100,000 units.