GENEVA REVIEW: Niches offer volume gain hope in tight market
Many of the cars on show at the opening of the Geneva Motor Show this week were as seductive as ever (yes, I'll take that Alfa Romeo Spider home with me if that's okay). Glitz and optimism were not exactly in short supply and the choreographed presentations to show the industry's latest products were the usual slick affairs. There will be winners and losers of course, but there were a number of pointers to different growth strategies - in a tight market - for different companies, writes just-auto editor Dave Leggett.
Any observer of the auto industry's global industrial landscape knows that the industry has long been troubled by low margins and overcapacity, though company performances vary widely. For example, among the volume producers, Ford and GM are currently being pummelled financially by their US operations; Toyota is king of organic and long-term sales and profits growth; Hyundai-Kia is positioning itself to follow in Toyota's footsteps; Volkswagen has cost and brand overlap issues; PSA relies on collaborative strategies (and Fiat is now adopting that approach too); DaimlerChrysler needs to fix Mercedes-Benz, sort out Smart; and Renault enjoys more than a little help from Nissan.
Global footprint with respect to emerging markets with big sales potential may be a key determinant of long-term prospects through both demand and low-cost manufacturing strategies, but no manufacturer can afford to ignore the large bread and butter volume business that is closer to home.
In Europe, competition is tough and margins are low. In Western Europe, car ownership levels are high. Market growth is therefore closely related to the economic cycle and lately that has not been too supportive (although there are signs of some upturn in consumer confidence in Germany early this year). Further east, lower levels of car ownership suggest good potential for market growth, but joining the EU has sucked in vast quantities of used cars and depressed new car market growth. Further east still, Russia offers some quick bucks now while energy prices are high, but investing in Russia comes with big uncertainties on returns.
In short, Europe is not the most hospitable of environments for carmakers at the moment.
To make things even tougher for the established European players, a number of new entrants are quietly growing sales. The Korean carmakers are making good progress as they introduce new models. There were two prominent examples of this growing trend on show in Geneva: Chevrolet Captiva and Kia Cee'd. Chevrolet's (nee Daewoo) resurgence in a short time as GM's global value brand really is astonishing. You just have to cast your mind back to the wreckage that was Daewoo Motor and the widespread scepticism around then about the value in it.
The use of the Chevrolet brand name, drawing on the expertise of an Italian design house, cheap manufacturing capacity in Korea and investment in new product seems to be paying off as Chevrolet rapidly penetrates markets. The relatively cheap to build Captiva SUV also shares a platform with the upcoming Opel/Vauxhall Antara SUV (long-awaited Frontera successor).
The Kia Cee'd (pronounced as 'seed' - it's the 'seed' for Kia's future European sales growth) concept on show in Geneva is pretty much the production version of the car that will be coming out of Kia's new plant in Zilina, Slovakia, at the end of this year. The C-Segment car shown in Geneva was generally assumed to be very close to the production car that is coming. It looked good in the flesh; a whiff of Peugeot flamboyance in the headlamp design tempered with a generally solid and serious stance. Styled in Kia's new European design centre in Russelsheim, it really could have been a European-designed Nissan or Toyota and gut-feel was that it would appeal to European consumers especially with its likely very competitive price tag.
Those other possible nascent entrants to Europe, the Chinese, were absent from Geneva, by the way. Maybe that is not too surprising. There was a pasting for them in the media generally after last autumn's Frankfurt Show, where their offerings looked far from Europe-ready. And they have other fish to fry at home anyway.
Ford Europe goes for niches
If you have the necessary industrial infrastructure to develop them cheaply, niche models offer one route to achieve higher and more profitable volume in a tight market. Ford launched two niche models in Geneva - the S-Max sporty MPV and the Focus Coupe Cabriolet (developed with Pininfarina).
The S-Max sits somewhere between the Mondeo and the Galaxy MPV (S-Max is on the new 'CD' platform) and will be built in Genk, Belgium, on a 'flexible manufacturing line' alongside the Galaxy and, eventually, the next Mondeo.
S-Max embodies Ford's new design direction, dubbed 'kinetic' ('energy in motion' according to Ford) and its sporty credentials are underlined by the fact that it will include a variant fitted with the 5-cylinder turbocharged 220 horsepower engine used in the Focus ST.
To further emphasise the S-Max's sporty proposition Stephen Odell (VP Marketing Sales and Service, Ford of Europe) stressed Ford marketing initiatives such as the sponsorship (until 2009) of the UEFA football (soccer to Americans) Champions League.
"Linking ourselves with this great competition we are able to reach out and communicate with our target customer groups in a really exciting way," he claimed.
Will it succeed in the market and win back lost sales for Ford in the D-Segment? Opel/Vauxhall tried something similar with the Signum (different approach, but same aim) and that failed. The concern for Ford must be that a more affluent and aspirational 'Mondeo man' has gradually upgraded to premium brands over the last ten years. A sporty MPV with the blue oval on the grille may not, therefore, be enough to bring him back into the fold. More generally, there might be another concern that Ford, in covering all the MPV bases, risks confusing the MPV customer. How much differentiation will the consumer perceive between the S-Max and the Galaxy (or possibly even the C-Max - S-Max is available in five- and seven-seat configurations)?
Are there enough customers out there to justify Ford's approach? We'll see.
The danger with producing models for smaller sub-segments is that the market volume ultimately does not justify the investment.
Niche model development 'off the shelf'
If sub-segments and niche models are the thing, then the next question must be how to develop such products cheaply. Partnerships are one way to go (Ford is working with Pininfarina on the Focus Coupe Cabriolet, and replacing the Ka via a small car collaboration with Fiat). Working niche models off generic platforms works well for those makers with available platforms for the purpose. Flexible manufacturing techniques have also helped, bringing the breakeven point of production down and making lower volume niche production more viable. But that is not always the best route. Sometimes the appropriate vehicle architecture is not available at the right cost. Buying in that architecture could be an option.
In Geneva, Lotus Engineering displayed its APX (Aluminium Performance Crossover) concept based on its Versatile Vehicle Architecture (VVA) approach. APX is a four-wheel drive crossover fitted with a supercharged 3-litre engine with 5+2 seating layout. Lotus claims that the concept is a 'feasible prototype close to production' and that the APX could be taken away for modification with a view to production in a short period of time.
The VVA approach is designed to meet a gap in the market for the vehicle manufacturer looking to develop a sports-based niche car product. The idea is that it sits in between the two options of either, i) the large cost of developing a new platform, or, ii) working the vehicle off a mainstream platform but incurring design and/or performance compromises. The philosophy is based on the commonality and versatility of key elements in the vehicle structure so that a 'family' of niche vehicles can be developed. Use of aluminium keeps weight down.
"A vehicle maker looking for a range of niche products might be a suitable candidate for this," said Lotus marketing director, Rob Tickner, "and the APX shows how easily it can be done."
(Unfortunately, I had to brave the snowstorm and head for the airport before the unveiling of the Europa S production car at the Lotus stand. It promises a little more refinement and comfort for the driver. Production starts in a few months and expect a price of around £30,000 taking it squarely into Porsche Boxster territory.)
Retain and grow to higher margin products
Another strategy for success in a tight market is to move into higher margin territory - basically make bigger and more upscale vehicles with a bigger price tag and profit margin (the main fixed costs incurred in making and selling cars do not differ that much between the small car and the big car - we're talking same basic components that have to be put together). Renault, for example, sees itself growing operating margin as it gravitates towards higher margin products over the next few years. The tricky bit is doing that on the Renault brand, though an analyst I spoke to reckoned that Carlos Ghosn's strategy isn't quite as ambitious as it sounds when you compare Renault margins with those of PSA and look very closely at the incremental volume gains that Mr Ghosn is talking about.
Still on Ford, Lewis Booth (chairman of Ford of Europe with responsibilities for PAG also) stressed the importance of the PAG brands to Ford. He was speaking the day after he had told an investors' conference that Ford is fully committed to Jaguar, contrary to rumours that it may have been up for sale - to Renault, actually - at the end of last year. There were no press conferences at Geneva for Jaguar as there was no new product.
But there was a Land Rover press conference that majored heavily on future technology which will make Land Rovers more environment friendly. It's a multiple tiered approach, embracing, for example, bio-diesel (5% bio-diesel mix for Land Rover diesel engines now, rising to 25% eventually) and a belt-driven Integrated Starter Alternator running with an electric rear-axle drive.
These and other technologies could bring an overall fuel economy benefit of 30%, Land Rover's Matthew Taylor said. There was much mention of 'environmental sustainability'. One thing Land Rover must ensure is that it not only points out to customers the benefits of improved fuel consumption, but that it succeeds in pitching the Land Rover brand more generally as a modern and environmentally aware brand. Maybe that campaign has now begun in earnest.
But for Ford's PAG group there remains the formidable task ahead of turning Jaguar around.
Over at GM Europe the issue of Saab's treatment continues to rumble along. Rumours that GM would be interested in selling the loss-making brand have surfaced at various times in recent years. But these have been met, as in the case of Ford and Jaguar, with proclamations of commitment. In current industry circumstances, it is hard to see GM wanting to give up on a premium brand, though making Saab profitable looks like a pretty long haul. GM's Cadillac stand in Geneva was busy, though the Escalade SUV had me scratching my head a little (it is in a small niche against some strong competition in Europe, shortly to be joined by Audi's Q7). Talking to colleagues, the styling of the BLS seemed to polarise opinion. Just how will Cadillac's European adventure pan out? 2006 will give us a big clue.
Which way forward?
Which business model works for volume carmakers these days? There are many different questions to be posed from a manufacturing, marketing and retailing standpoint. The eastward drift of Europe's automotive manufacturing 'centre of gravity' is reinforced by the arrival of new low-cost (relatively) carmaking capacity in the new EU states of central Europe (even if the area is a little disappointing in demand terms). Hyundai-Kia is following in the footsteps of successful Japanese makers with its strategy to not only develop manufacturing capacity where it sells cars, but to design locally too. Kia Cee'd looked like a competent job and is another product that will further crowd the European market in an already very competitive segment.
But other makers are keen to exploit low-cost manufacturing locations too. And in a European context, it is not just central Europe; investment in Turkey (which enjoys customs union with the EU irrespective of its EU membership status) is continuing to build. That said, how far do you go? Decamping wholesale from western European manufacturing would be senseless. There is still a need to be close to the customer, to your suppliers and to protect brand values, protect the company even (or what is that corporate entity exactly? Why does it exist? Who are the real stakeholders?).
Collaborative production efforts are still all the rage, especially in small cars where margins are small. We have Toyota/PSA in the Czech Republic and Ford and Fiat are also getting together in small cars. Indeed, Fiat is rapidly emerging as an enthusiastic proponent of collaborative strategies along PSA lines. There's a tie-up with Tata that could be particularly interesting long-term.
It is just possible that the Italian and Indian automotive/business cultures have more in common than one might initially think. Could there be synergistic benefits there? You bet. Fiat's JVs with GM actually showed that it can successfully work with a partner (and Fiat also works extensively with PSA on commercial vehicles - Sevel JV). Working with Tata could be a good way into India for Fiat (where Fiat has tried and failed before) though what Tata will get from Fiat, at least initially, is a little less obvious (can't see Fiat dealers rushing to sell the little Indica somehow); it's more in the realm of future development collaboration.
It is hard to get away from the global context in the auto industry these days, though if there was one product message to emerge from Geneva this year it is probably that in a tight European market, manufacturers are searching high and low for new segments and niches. Differentiate your product from the crowd and you stand a chance of hitting a market sweet spot. Ford's S-Max was perhaps the boldest statement of niche market intent. But there were others: small SUVs and SUVs that are shaping up as 'crossovers'; luxury saloons; cute roadsters and coupes wherever you looked.
The apparent fragmentation of the European car market into yet smaller sub-segments has been made possible by better and more flexible manufacturing processes and techniques. If, as a vehicle manufacturer, you have your manufacturing infrastructure sorted out (including good relationships with key suppliers), know your market and have a product that sits solidly inside a brand that embodies the right values, your new niche model may well fly.
But there are no certainties in this business. Models that appear to be on the right path sometimes take an unexpected detour into lower than expected sales (see Renault Modus) and that can torpedo manufacturing plans. If you want to talk profitability per unit sold, having premium brands in your portfolio can help, but you have to look after those brands. One slightly 'off' model (eg Jaguar X-Type) can screw your manufacturing strategy up and cause all sorts of revisionist grief over following years. Renault is taking its time with Infiniti in Europe and that is probably wise, even if that imposes brand stretch hopes on the Renault brand that look, at the least, ambitious, in the context of Carlos Ghosn's 'grow to profitability' strategy.
Is there room in the European market for everyone to succeed and hit volume and profit growth targets? Of course not. The pie is not growing fast enough, especially in the western half of the continent. Shrink to fit has been employed by some carmakers in Europe and cost-cutting remains somewhere near the centre of most manufacturers' strategies. Some are lean and some still have flabby underbellies. But many are looking for volume growth on their lower cost base and the next few years will be decisive in seeing who has got the manufacturing/product/marketing mix right (in both Europe alone, and globally) and who hasn't.
Jaguar XK looked fine from behind
Land Rover's Matthew Taylor
Kia's Cee'd for growth
Someone at Saab likes their Sci-fi