Obstacles Remain For Detroit, Including Japan

By Dale Buss November 9, 2011

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It’s impossible to know whether the Big Three’s recent gains represent a high-water mark or just a notch on a pole that will soon be exceeded by even stronger performance by General Motors, Ford and Chrysler. But one thing is certain: Lately they haven’t seen anything like the obstacles that are going to get in their way over the next few years. The fallout from federal-government bailouts, $4-a-gallon gasoline, and even the continuing economic struggles in so many global markets have only represented an adversity warm-up for Detroit as it attempts to parlay recent victories into a long-term return to dominance in the home market. Here are some of the primary challenges they face now:

Competition With A Cause
There’s every reason to believe that Toyota, Honda and Nissan will be coming back into the U.S. market with determination as they begin to climb out of holes created by various problems including the March tsunami and earthquake in Japan, Toyota’s recall woes, and Honda’s aging product lineup, and now the supply impact on both of the recent flooding in Thailand. At the same time, increasingly ambitious Hyundai-Kia, as well as a new determination by Volkswagen in the U.S. market, will get in the way of Detroit’s goals. “The Japanese are coming back,” said Doug Scott, senior vice president of auto-brand consultants GfK. “But none of the Big Three is going to want to give up anything that they’ve earned over the last couple of years. The food fight is going to be huge.”

Product-Cadence Problems
Nothing is more determinative of market-share gains and losses than new products, and in that regard, Detroit might be hitting something of a pothole. “If you take re-styling and nothing else, you can explain all but one percent of the increase in market share by the Japanese since 1996,” argued George Hoffer, an adjunct professor of economics at the University of Richmond who has studied the impact of new car models for decades. In the first two years after the major restyling of an existing model or introduction of an entirely new nameplate to replace an old one, market share typically rises by about 20 percent, but by the third year of the new model, “you get no kick at all,” Hoffer said. Even a “partial restyling” of a vehicle “gives you a 15-percent increase” in market share, but only in the first year. The only thing that comes close to garnering the same magnitude of share increases as an overhauled nameplate, Hoffer said, is doubling marketing spending on that model. The numbers apply essentially equally to every automaker, whatever its national origin.

Agreed David Leiker, automotive analyst for Robert W. Baird & Co., “Market-share shifts are really driven by the freshmen of product and product technology.” This reality foretells more imminent success for non-Big Three brands than for the domestics, Hoffer said. “The bottom line is that over the next two or three years, the styling cycle is such that the Japanese will regain market share, because styling sells,” he said. Richard Hilgert, automotive analyst for Morningstar, added, “It wouldn’t surprise me to see market share trading places, going back and forth, depending on model rotation. It’s a highly competitive business, so we could see a return to more incentives to protect market share in the interim. If your competitor’s got a lot more new product and your product lineup is growing stale -- and you’ve got another six to 12 months before you get new models into the showroom – you’ve got to do something with pricing to draw away from competitors.”

Crumbling Monolith
And even with sustained tailwinds, it’s likely that the Detroit Three will begin performing less and less like the relatively monolithic group they’ve been for the past few years, meaning that new stresses and strains could begin to affect one much more than the other. Over the past three years, GM, Ford and Chrysler have been more or less similarly affected by factors such as debt reservicing, UAW contracts and the weakening dollar. But differences among them are likely to assert themselves more prominently from now on.

For example, each company continues to rebalance its portfolio to get the mixes they want of cars, trucks, SUVs and other vehicles depending on factors such as profitability targets, product life cycles, government emissions and mileage standards, and their projections of gasoline prices. And while GM, Ford and Chrysler each has managed to do a good job of bringing fuel-efficient crossover utility vehicles into their fleets and supplanting gas-hogging SUVs, some believe that each of the Big Three continues to remain overly dependent on full-size pickup trucks. Fuel efficiency on the whole remains a challenging priority. “That is an important meta issue,” Scott said. Ford is “ahead of the curve on that,” he said, “and GM is next. They’re catching up. The question mark is Chrysler and how much Fiat and Chrysler together will be able to do in that area.”

As they continue to adjust their portfolios for such factors, the Detroit companies more and more diverge from one another. So while Ford is getting out of the compact-pickup market entirely with the demise of its Ranger nameplate in the United States, for instance, GM has just anted up for a renewed push in the small-truck segment with the promise of a new Colorado model. And while Ford and Chrysler haven’t made any moves toward clean diesel in their car portfolios, GM plans to bring out a diesel version of the Chevrolet Cruze. Overall, GM’s lead in advancing a global footprint will help it in the U.S. market; Ford has strengths in vehicle technology that the others don’t have, especially in power trains and infotainment; and Chrysler may keep pulling rabbits out of any hat that is worn by Sergio Marchionne at the helm of Fiat, yet perhaps is becoming over-dependent on his brilliance. Such emerging differences promise to vary the relative performances of each of the Big Three over time.

At the same time, experts expect a further evening out of dramatic advantages across the entire slate of competitors in the U.S. market. “The product cadence from every manufacturer has improved, with shorter life cycles, and faster freshening is at record levels from everyone,” said Mike Jackson, CEO of AutoNation. “I see a very rational future for our business. Share will have basically stabilized and it’s going to be difficult to make big moves. The extreme games of the past are behind us. There will always be the story of who’s hot for the moment or for the year, and taking some piece of share, but I don’t see any knockout punches where anyone is going to push the competition aside for year after year like we had for the past 25 years with the domestics.”

The Big Three have stepped successfully through a window of opportunity in 2011, picking up sales, market share, momentum, and even favorable new labor contracts. But can they take bigger advantage in a way that will reshape their fortunes, and the U.S. auto market, for the long term? Are GM, Ford and Chrysler capable of leveraging their new advantages in product balance, profitability and marketing into a reversal of decades of relative decline? "Rising," a new series by AutoObserver, looks at their chances.

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