Atomization Causes Car Makers to Lose, Not Gain, Focus
Definition of Atomization: Adding new, incremental car and light truck nameplates to more accurately hit customer target needs, wants and desires, resulting in increased overall sales.
Over the past decade, AutoPacific has been monitoring and evaluating the impact and rationale behind the automotive industry's rampant atomization. With annual industry sales in the 16- to 17-million unit range, it appeared that carmakers could profitably continue to add models more closely targeted to specific buyers--if they could keep development costs, manufacturing costs and marketing costs in line. In other words, carmakers needed to make a profit while selling a lower volume of cars or trucks per nameplate. Since 2004, we have cautioned that atomization was shifting the battleground from product development to product marketing.
With 2007 showing more models and fewer industry sales, the industry became unstable. By the end of 2008, with the industry selling at a 10-million per year rate, sales per nameplate cratered. 2009 promises to be even more dire.
Background: More and more new car and light truck models are being added to manufacturer lineups each year, the phenomenon AutoPacific defines as atomization. This rapid addition of nameplates to the American auto industry is a result of auto product strategists and marketers attempting to provide products targeted at much more finely defined product niches. Consumers prefer 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. The conclusion has been to develop a vehicle targeted at each identified buyer group.
The risks in adopting this strategy are numerous, chief among them making profitability much more difficult to achieve. When sales of cars and light trucks remain constant and the number of models increases, the sales per nameplate must decrease. 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 nearly impossible.
AutoPacific's Industry Analysis office shows that 2008 was the worst year in decades for sales per nameplate and 2009 promises to be worse. Why should manufacturers care about sales per nameplate? Higher sales per nameplate usually mean that the vehicle is popular and profitable. Lower sales per nameplate often indicate the vehicle is struggling to sell manufacturer projected volumes and grasping at profitability. Industry-wide, in 2008 nearly every nameplate saw lower sales and presumably 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. This indicated an average volume of slightly more than 83,000 units per nameplate. In 2008, when sales were 13.2 million units, there were 285 nameplates, dropping the average volume to only 46,300 units sold per nameplate. This was a whopping 36,700-unit deterioration (~44%) in the sales volume per nameplate. In just one year - from the end of 2007 through 2008 - sales per nameplate fell over 10,000 units.
In 2008 sales volume in 2008 fell dramatically. In the first half of 2008, spiking fuel prices drove buyers away from high-profit pickup trucks and traditional sport utility vehicles. These were followed by housing, stock market and credit crises. By mid-September there was a belated recognition that the United States has been in a recession since December 2007. These factors led to sales slowing to a trickle from September 15 through the end of 2008.
In the past, the industry grew dependent on sales driven by desire - emotion. Today, most new vehicle buyers buy out of necessity. Their old car needs too many repairs to keep running. Their old car has too many miles on it. They need a vehicle that gets better fuel economy. Their old car was stolen.
During the 1990s, a good year for car and light truck sales was 15 million units. 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. But while more nameplates were being added, the market softened. Many models were left exposed to lower demand, and at a time when marketing dollars for incentives and advertising also dried out.
Future Viability May Depend on Surgically Removing Nameplates: As sales per nameplate in 2009 are projected to fall precipitously at forecast sales levels (11.5-million units), manufacturers must attack their offerings to maintain viable and profitable sales for each nameplate. Using a simplistic method of dropping nameplates and losing ALL their volume, for General Motors to get its sales per nameplate back to healthy levels they would have to drop 23 nameplates and 4 brands. Chrysler would have to drop one brand and at least 5 nameplates. More on that later.
This analysis is simplistic but leads to very rational conclusions...
Conclusion #1: There is a strong correlation between sales per nameplate and profitability. With the exception of premium luxury brands, those manufacturers with higher sales per nameplate tend to be more profitable and viable. While the era of pursuing every niche was exciting and might have been supportable in a 16-million to 17-million sales year, it is very, very tough to feed niche models in soft sales years like 2008 and 2009.
Conclusion #2: The customer rarely benefits from additional models. Many badge-engineered models do not result in enough incremental sales to justify their existence. So, why do they exist? These redundant badge-engineered vehicles exist to populate the sales lots of dealers who are themselves no longer necessary. Think Chevrolet Cobalt and Pontiac G5; Ford Fusion and Mercury Milan; Chrysler Sebring and Dodge Avenger.
Conclusion #3: Reducing nameplates means reducing brands (among the Detroit Big Three). Reducing nameplates means eliminating dealers. Both require a serious reorganization of the DB3 including eliminating nameplates, reducing the number of dealers, eliminating assembly capacity, reducing hourly and salaried headcount, restructuring union wage agreements. These actions likely cannot happen without bankruptcy of one or more of the DB3. Since "bankruptcy" is such a taboo word in Detroit perhaps the Car Czar can be given bankruptcy-like powers to be able to implement the necessary actions without referring to those actions as a "bankruptcy".
Conclusion #4: These reductions WILL happen over time. The MARKET WILL force it. The very viability of the Detroit Big 3 is at stake.
