The key to really making money in the car business is to have a brand premium. Of course, you need to get the basic commercial economics of car making and selling in order, but even if you can do all of that, turning a profit won’t be easy.
If your car brand works like a commodity product you’re not in good territory in the long run because you’re selling on price alone. Unless you are a Chinese manufacturer that is, and you figure that you can beat the industry incumbents through low manufacturing cost. Even that model of market entry – if you look at what the Japanese and Koreans did historically – eventually gives way to efforts to add value to product and brand in order to grow margin and revenues.
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If you are an established European vehicle manufacturer you want your brand(s) to possess positive values and associations that consumers are willing to pay for. It may be a complex mix – an understanding of a certain level of engineering, sports performance, attention to detail, luxury, design flair or cultural values even. But the upshot is that the consumer will pay a little extra for something that is not completely tangible and is bound up in the brand associations – the brand ‘premium’.
Vehicle makers pursue a multitude of different strategies to achieve that. Ford is focusing on fixing the Ford brand and removing other brand distractions. GM has trimmed its brand stable but has settled on several that it believes have distinct roles to play. Volkswagen‘s approach is built on industrial strength and scale, with brand differentiation overlaying that; it has embraced a multi-brand approach to market, a brand engineering strategy that has brought a degree of success (Audi and Skoda very good, Seat less so).
Renault has tried to take its brand upmarket and failed, putting more reliance on the alliance strategy of Carlos Ghosn and eggs put in the EV basket. That’s where Ghosn sees future brand differentiation for Nissan and Renault – in product and powertrain technology (as Toyota has partly achieved through its leadership in hybrids).
Which brings me to Fiat. Fiat has a good reputation in small cars but small cars come with small margins. It’s not a bad area to be strong in, but it won’t do on its own. Sergio Marchionne is looking to build a vehicle making group that is strong industrially, has global scale and has brands that can command premiums and maximise profit. He shares some of Ghosn’s philosophy on where the industry is heading, the importance of footprint and scale. Chrysler is part of the industrial strength driver, comes with some good infrastructure and complimentary market geography. There are good technology sharing opportunities in platforms and engines, also. The Jeep brand, obviously, is not to be sniffed at.
But let’s consider Alfa Romeo. It is a brand with heritage and a premium. I can quite imagine that the brand engineers at Volkswagen would very much like to get their hands on it. Fiat’s stewardship has not been spectacularly successful, but there are some encouraging signs on the product front. Selling it would put a big hole in Marchionne’s strategy for Fiat Auto – planned to be spun off from Fiat Group at some point.
Alfa Romeo’s overall sales slumped to fewer than 110,000 units last year and Marchionne has said that he wants it to sell at least 350,000 units annually by the middle of the decade. It looks pretty ambitious and requires higher sales in the BRICs, returning to the US market from 2012 and growing sales in established markets on the back of the wave of new product. Selling Alfa now would make no sense in terms of Marchionne’s avowed strategy for Fiat, even at a good price.
If, however, it becomes clear that the strategy for Alfa isn’t working, then offloading Alfa and opting for an alternative ‘One Fiat’ strategy that borrows from Mr Mulally’s ideas might be on the agenda. That would be a very big switch. At that point, of course, Volkswagen may still be interested in Alfa, but it would be a buyer’s market. And Marchionne’s reputation would have been severely tarnished. There’s a lot at stake in getting Alfa Romeo right.
