15 Emerging Dynamics Defining 2011
By Dale Buss February 16, 2011
Automakers in the U.S. market are encouraged these days by indicators of stronger sales ahead this year and beyond. And compared with their hopes for a further recovery in the market, all other concerns are secondary. But 2011 already is bringing to the forefront some other crucial issues for the industry -- both short-term and long-term opportunities and challenges. Here’s a look at 15 of the most important dynamics in the U.S. auto business for this year.
The Need for Discipline
As sales recover, traditionally automakers have begun getting greedy for further gains, so they will be challenged in 2011 to take a measured approach in using incentives and other short-term tools. Incentive spending by nearly all automakers except the Japanese was down last year compared with the year earlier, according to Edmunds.com. And the two most desperate incentivizers of last year, Toyota and Chrysler, both have reasons to temper their generosity this year. Still, January already saw a deep-incentive sortie by General Motors, and Toyota has declared its intention to lead the market in subsidizing in February. Even the market’s momentum leader of the moment, Ford, has hinted that it could let its taut inventory levels rise toward spring if the market’s sales momentum continues, and it vows to add back 7,000 U.S. jobs this year and next year.
The Size of the EV Surge
The most interesting number of 2011 may be how many Chevrolet Volts and Nissan Leafs Americans actually buy. The production and sales spigots have been turned wide open, and there is sufficient buzz to power a small city. But will American consumers truly bond enough with Volt or Leaf to buy one – especially considering their hefty stickers? Will Volt lose out to other high-mileage small cars that also have an engine but aren’t hybrids? Will "range anxiety" doom Leaf? Will every other auto company wish they already had fielded an all-electric car – or be relieved that they haven't? The answers will shape the future of EVs.
A Paucity of New Products
Some automakers were trickling out significant new products even during the Great Recession, most notably General Motors, Ford and Hyundai. But aside from a few major launches scheduled for 2011 – including a new Ford Focus, Honda Civic, larger Toyota Prius, and the new, U.S.-built Volkswagen Passat – the industry pipeline will still suffer from product-development cutbacks made during the downturn. Still, Chrysler will be rolling out a bunch of reskinned or new products, and others will be joining the electric-vehicle derby. And all auto companies have been reminded of the ultimate importance of worthy new products in building consumer consideration, sales, loyalty and brand equity.
Market-Share Movements
Just two years ago, who’d have thunk it?: Toyota loses big; Ford gains hugely for the second straight year; and Hyundai reaches 5 percent. Yet all of that happened to shares in 2010. In a major shakeup of the architecture of the U.S. market, the second tier has moved closer to the leaders, creating a tighter cluster of seven or eight mainstream players. Things are more competitive than at any time since the Fifties. And this trend comprises the most significant break from pattern since Japanese brands shook the Big Three hegemony in the Eighties. Look for emboldened smaller players to try to shake things up even further this year.
Infotainment Wars
Automakers and their suppliers have been falling all over one another to up the ante in new "infotainment" systems and devices at the Consumer Electronics Show in January and since then. Now, consumers can even buy an OnStar "button" in the aftermarket. After Ford’s success with Sync, automakers are all determined to emphasize electronic connectivity in new products and marketing in 2011. But once they make sure a driver never loses smart-phone touch with the outside world, what else is there to do? Already, on-board connectivity is moving closer to commoditization in the U.S. market. The real action this year might be how automakers innovate to emerge from the digital pack.
Segment Sweepstakes
Crossover-utility vehicles have been the new-product story of the last few years, as car-based platforms took over from the boxy SUVs that drove sales beginning in the mid-Nineties. Minivans and pickup trucks have each taken their turns at propelling the U.S. market over the last few decades. What will be this decade’s big segment story, and will it become evident in 2011? The best argument at this point seems to be for rising demand for small cars, especially if gasoline prices keep rising. And small models now offer top quality and state-of-the-art amenities, negating two drawbacks of the past.
Whither Gasoline Prices?
Industry executives are expressing confidence about their ability to handle higher gas prices, but inside they've got to be quaking. The mid-2008 spike past $4 a gallon trashed a market that lately had given short shrift to fuel economy, helping instigate a two-year sales slump. As gas prices seem to be heading inexorably again to $3.50 and perhaps beyond, auto manufacturers are insisting that American consumers won’t be nearly as spooked this time around because today’s lineups are vastly better on fuel economy. Besides, there are even more hybrids to choose from, and now EVs. Maybe. But oil-price shocks still can hold a particular spell over the U.S. economy, and consumer polling in January indicated that many Americans already were worried. That was before this month’s geopolitical shock waves in Egypt.
More Financial Re-engineering
General Motors' $23-billion IPO was only the beginning of the conversion of government-controlled automakers back to the private sector. It’s possible that the U.S. Treasury will sell the rest of its GM stake yet this year, and in January, GM withdrew a pending $14-billion application for Energy Department grants. Another step in the unwinding of federal control of the sector could be an initial public offering this year of Chrysler stock. Fiat CEO Sergio Marchionne has said that the Italian company could lift its 20-percent stake in Chrysler to more than 50 percent in the event of Chrysler’s return to the stock market this year. But it’s far from a sure bet that investors will take to new Chrysler stock the way they did to new GM stock last November.
UAW Restlessness
Ron Gettelfinger got the United Auto Workers through the Great Recession still in one piece, but greatly weakened in numbers and compensation. Rather than simply manage further long-term decline, new UAW President Bob King is charting a proactive course for a “21st-Century union.” The first step is to go full-bore after foreign-owned "transplants" in the U.S. But unionizing these generally successful enterprises isn’t likely to be much easier now than it was when the UAW first tried it with Japanese plants here in the Eighties. This summer, the union will have to consider Big Three requests for a shift to a more contingent pay structure.
The Thaw in Consumer Lending
One major reason for the precipitate decline in sales in 2008 was that auto lending dried up almost overnight, part of the global credit crisis that brought on the Great Recession. First, subprime borrowers were shut out, but the contagion quickly spread to banks’ reticence to lend even to highly qualified customers. Automakers slashed leasing activity even in the luxury segment, and GM and Chrysler gave up on practically all leasing. Nowadays, lenders’ purse strings are loosening again, as Americans have improved their debt position, banks have boosted their solvency, and new players have entered, such as Toronto-Dominion Bank, acquirer of Chrysler Financial.
Top-End Turbulence
All of the vaunted competition between Lexus and Mercedes-Benz for the 2010 sales crown in the luxury segment belied the fact that the entire category remained relatively moribund last year. Is that the “new normal” for the luxury segment, or will upscale buyers come roaring back in an outsized manner this year, as they have after past recessions? Meanwhile, hybrids and even EVs are diversifying luxury lineups. Share-wise, Infiniti and Audi are staking bigger claims. Mercedes-Benz and BMW have important launches upcoming. Cadillac and Acura seem to be treading water. And Lincoln hasn’t made a comeback, though Ford vows to make reviving the brand a special project now.
Safety First
The dangers of texting-while-driving moved front and center in 2010. And with lawmakers and law enforcers stepping up their attention to this issue on every level – including the federal government -- expect efforts to battle driver distraction to reach critical mass this year. The marketplace will offer more potential solutions, including devices and software that thwart the habit by teen drivers. Toyota is poised to lead automakers’ efforts with a just-announced $50-million research initiative in Michigan that will focus on distraction issues. As long as consumers want to multi-task in their cars, their safety while doing so will remain a major concern.
Back to Marketing Leadership
One of the biggest factors in the onset of the advertising-industry depression of the last couple of years was how severely automotive advertisers cut back on outlays. But car brands can be counted on to boost ad budgets significantly this year, with a market recovery underway – and some important product launches looming. The biggest early indicator of this was the Super Bowl telecast on February 6: Eight auto brands enticed and entertained with ad spots, at a price of about $3 million for 30 seconds. Expect more attention by autos to other TV “events” such as the Oscars later this month. And GM already has struck a deal for sponsorship of the 2012 Summer Olympics in London.
The Arrival of “Pent-Up Demand”?
Through the Great Recession, auto company executives believed they would have an ace up their sleeve once an industry recovery began: looming "pent-up demand." They figure that this will become a major driver of U.S. sales this year, for at least two reasons. First, even after the Cash for Clunkers program in 2009 took a lot of wheezing cars out of circulation, the average age of vehicles on American roads – more than 10 years – is at its highest level in 13 years. And, right about now the 75-million-strong Millennial generation is surging into the family-formation years when new-auto demand typically strengthens.
Unique Agendas
Every brand, big and little, has its own goals for 2011, and they all bear watching as they try to meet them. For Toyota, of course, it’s forgetting the past and hoping that a few new models and higher gas prices will nudge the U.S. market toward their strength in small vehicles. For Volkswagen, it’s hoping that the new mid-size Passat made in Chattanooga provides a much-needed boost in the U.S. market. For Ford, Nissan and Hyundai, it’s figuring out how to keep the momentum they acquired in 2010 continuing throughout the new year. And for Honda, it’s time for a hit.
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