Abc Growth

THE GLOBAL AUTOMOBILE INDUSTRY: FROM GOOD LIFE TO BLOODBATH AT THE TOP* Plagued with overcapacity, the automobile industry is intensely competitive. However, life is not equally stressful for companies in the three broad segment within the industry: mass market, luxury, and ultraluxury. The number of mass market players, such as Chrysler, Ford, General Motors (GM), Honda, Hyundai, Nissan, Renault, Toyota, and Volkswagen (VW), is numerous, and competition is intense.

For example, it takes an average of $3,400 of incentives per vehicle for the American Big Three to move their cars. This is not the worst: Saab broke a record by spending $6,200 on incentives per vehicle sold in 2007. These incentives crush industry wide profit margins, which on average stand at a low 5%. The luxury market has fewer players, such as Audi, BMW, Lexus, Mercedes, and Porsche. They use fewer gimmicks such as fat rebates or 0% financing, and their margins are at a relatively hea1thy 10%. Life in the ultra-luxury market seems to be most tranquil. Competition is more "gentlemanly," and changes come at a glacial pace.

The handful of players such as Ferrari, Lamborghini, and Rolls-Royce, produce a small number of cars each year for the world's most discriminating customers: approximately 10,000 a year for cars produced above $150,000. Profits per car may exceed $20,000. This is a world apart from the mass market profits, which sometimes can be as low as $150 per car thanks to incentives.

Overall in the ultra-luxury group, margins are comfortable, indicating a good life at the top. However, such a good life may be a thing of the past. It seems that every self- respecting carmaker is rushing to invade the lucrative ultra-luxury market, thus prompting a high- take drama never seen before. In 2003, three German carmakers launched three new entrants for the ultra-luxury market.

Mercedes offered a $320,000 Maybach, which traces it roots to the gull-winged legendary 1952 SLR model. BMW, which took over Roll - Royce in 1998, launched a $360,000 Rolls-Royce Phantom. VW, having bought Britain's Bentley, stormed into this high-end market with a $160,000 Bentley Continental GT.

Positioned as the "driver's car," the Bentley Continental GT outsold the Phantom and the Maybach by a 4-to-1 ratio (4,000 versus 1,000 cars) in its first year. Other players such as Acura, Cadillac, Jaguar, and Lexus are all looking forward to entering the fray. Facing such gathering storms, “old timers” such as Aston Martin and Maserati, also rush to add new models.

* Source: Global Strategic Management (2e) by Peng

With 40%- 50% growth of supply in the ultra-luxury market projected for the next decade, the multi million dollar question is whether so many new entrants will glut the market, repeating what is happening in the mass market. Carmakers emphasize that their ultra-luxury products are “not about transportation”.

They are more like jewelry, horses, and other items that are part of the affluent lifestyle. BMW, Mercedes and VW’s Bentley are confident that they can grow the market by offering wealthy buyers more choices. Carmakers are also eyeing virgin territory. In China, while overall growth is strong, the mass market already has a huge glut, forcing average vehicle prices to fall by 7% in 2007. Not surprisingly, the most lucrative cut is the ultra-luxury segment, where automakers enjoy the greatest pricing power. In China, sales of premium marques, the fastest growing segment, have tripled in the past five years.

In 2002, Bentley opened a dealership in Beijing. Now it has seven dealerships around the country. Mercedes was encouraged by the- fact that Mercedes buyers were in their 40s, younger than the typical 50s-plus customer back in Europe and North America. But still, the United States remains the largest and most competitive luxury market that can make or break a carmaker. Overall, it seems that a bloodbath is in the making; at the top of the global automobile industry.

Case Questions: • Why is the ultra-luxury car market turning from relative peace and tranquility to more head on competition? Why are firms that previously weren’t competing in this market now entering? • What are the responses of existing players (incumbents)? Of suppliers? • Are there any substitutes for these cars?

* Source: Global Strategic Management (2e) by Peng