It is a basic principle of free market economics that consumers should have choice. By exercising this freedom to choose, consumers provide the incentive for producers to strive for lower prices and better products, and in this manner scarce social resources find an optimum allocation. Certainly there is scant evidence of vehicle manufacturers in Europe making excess profits. Recent strong performers such as VW Group and PSA have rather lost some of their shine. Others, notably Fiat, Ford and GM Europe continue to make losses as the market overall remains very flat. Dr Peter Wells and A Morreau of the Centre for Automotive Industry Research (CAIR) in Cardiff consider the role of market fragmentation.
So the European automotive scene remains one characterised by excess capacity, poor capacity utilisation, over-supply, and discounting – a picture not dissimilar to that prevailing in Japan and, more recently, North America. With the marked exception of China, the emerging markets of the world appear stubbornly resistant to emerging.
So, in stagnant markets with scant volume growth vehicle manufacturers have to respond with greater value per vehicle. Unfortunately for the industry, consumers have become much better informed, and much less loyal – either to brands or to dealers. The net result is market fragmentation, a feature that takes many forms. One manifestation is compressed product cycles. Another is greater product variety. These trends are in direct conflict with the overwhelming pressure to reduce costs – and hence attain profitability – through standardisation and economies of scale.
Economies of scale versus product variety
Historically the automotive industry has bee premised upon manufacturing technology strategy delivering least cost production economies of scale. Arguably the industry is increasingly forced to sacrifice scale economies in this sense, and achieve them elsewhere.
The main problem is that greater product variety adds complexity throughout the production system: for suppliers, logistics, and the assembly line also other aspects of the system such as parts numbers for the aftermarket, brochures and even training of sales staff in dealerships.
One established response is the use of platform or architecture strategies that consist of the systematic search for cost reduction through the use of shared parts. These strategies can exist within a brand, by creating multiple versions of the same model (e.g. Renault Megane) or models in different size segments (e.g. Honda). Multi-brand groups have more scope to pursue platform strategies, the VW Group being the best exponent to date.
More recently the inherent market risks of platform strategies have come to the fore. That is, platform strategies have been unable to resolve the fundamental tension between the least cost of standardisation, and the market demand for product variety. Along the way, a key problem has been the maintenance of brand identity. Commonality of design and components has resulted in ostensibly different brands looking and feeling rather similar. The recent spate of engine-sharing deals between rival vehicle manufacturers can be understood as a more flexible approach to achieving economies of scale in an area that the consumer increasingly is not very concerned about.
Models, body styles and variants in the UK market: an example
The scale of market fragmentation in recent years is rather surprising. As noted above, one way of measuring this is to look at product life-cycles where it is evident that the time particular models are retained in production has fallen dramatically. Equally, the days when the domestic ‘national champion’ dominated their home market and thereby were guaranteed core volumes have also almost gone.
However, another approach is to examine the proliferation of new brands, new models and new variants on the market.
Table 1 summarises the changes in the UK market over the period 1994 to 2002 in terms of the number of brands, models and variants available. The data are taken from the price lists published in the consumer journal Autocar for July of each year in question.
It is inevitable that any market will undergo a dynamic process of change, indeed this in itself is some measure of the health of the market. The UK market has been no exception. There have been exits from the market (e.g. Lada; FSO; BMW Alpina) just as there have been entrants (e.g. Smart; MINI). Equally, individual vehicle manufacturers may be expected to add or delete models from their ranges, and adjust trim levels and options packages. Nevertheless, Table 1 illustrates some key long-term trends.
Several vehicle manufacturers have sought to extend beyond the traditional range of the brand under their control. Hence Mercedes has moved into smaller size segments with the A-Class; Porsche has moved out of the pure sports car segment with the Cayenne, and VW has extended upward into the large, luxury segment with the Phaeton. To some extent these moves may be offset by other brands having a reduced product range: Ford for example did not replace the Scorpio. So, over the period from 1994 the number of models on the UK market has grown from 205 to 264. The temptation to extend the brand is huge. What is rather less clear is whether brands are in reality that elastic, particularly in the short term. Stretching a brand into smaller and cheaper segments risks devaluing the brand. Stretching it into larger and more expensive segments, or those that are not normally associated with the brand, takes the risk that consumers might not follow.
Figure 1 shows the number of models from 1994 to 2003.
MPV and other variants
It was really the first-generation Renault Megane that ushered in the era of multiple body styles on one model. The traditional saloon or hatchback has not been replaced as such, it has been augmented by other body styles much as the MPV or, more recently, the folding hard-top cabriolet. As a result, the number of body styles on offer has grown from 300 in 1994 to 374 by 2003. The small / medium MPV in particular has become a major competitive arena for the high-volume producers even though some (such as Ford and VW) were relatively late into the market. This shows it takes several years for such market changes to work through the product ranges of the vehicle manufacturers.
Figure 2 shows the number of body styles from 1994 on the UK market.
The market in Europe continues to shift towards diesels and the UK, though lagging behind, is no exception. In addition, in some cases vehicle manufacturers are offering previous-generation diesel engines alongside contemporary ones. Some brands, such as Volvo, Honda and Jaguar that have not been traditionally associated with diesel engines have been forced to adopt them or sacrifice market share. The growth in diesel engine offerings does not displace petrol engine versions, it just means that each model has more versions on offer. This factor alone is a major contributory cause of the explosion in variants shown in Table 1, from 1303 in 1994 to 2,823 in 2003.
Figure 3 shows the number of variants on the UK market from 1994 to 2003.
Overall economic conditions
Throughout much of the 1990s markets in Europe enjoyed reasonable growth. The early years of this century have not been so accommodating for the industry. In particular, the key German market has stagnated. The data in Table 1 shows a slight reduction in the rate of variety proliferation towards the end of the time period. In an economic downturn new product plans are reined in and so fewer new models and variants are introduced to the market. This applies especially at the margins of the market or where a brand is being extended beyond the normal range. An example might be the recently-abandoned Jaguar F Type.
Market fragmentation: the future
Current economic conditions might have slowed down the rate of variety proliferation and reduced the growth of choice for the consumer, but only for the short-term. Despite economic stringency, the vehicle manufacturers know that in a saturated and stagnant market consumers will be even more selective, even less loyal, and demand even more choice. Two key issues will shape the evolution of manufacturing and marketing strategies over the next few years:
- Segment dissolution
- Powertrain technology
In the search for market space unoccupied by competitors, the vehicle manufacturers are all searching for crossover vehicles that in various ways no longer fit into conventional segmentation. It is difficult to know how far this process can go. Alternatively, cars such as the Citroen Plurial show a willingness to consider the strategy of several cars in one. Usually this involves too many compromises for consumers, but as an indicator of future thinking this approach may well become significant.
The greater use of diesel engines is only the start of the dramatic revolution in powertrain technology awaiting consumers. Again it has to be expected that petrol and diesel will not disappear as alternatives are introduced. Various forms of hybrid will become widely available in the next few years, to be followed (possibly) by fuel cell electric vehicles.