Crisis management The money is on niche models

Renault Captur - chasing the urban fashion market

CRISIS MANAGEMENT

With the financial crisis soon to enter its fifth year, the mainstream automotive industry is well accustomed to unremittingly bad news. Manufacturers are increasingly pinning their hopes on fashionable new niche models. Tony Lewin reports.

lumping sales, disappearing margins, programmes put on hold or cancelled, workforces put on short time – all have become part of the automotive industry’s everyday vocabulary. But it is only in the past year or so that the elastic has actually begun to snap in a more abrupt way: all the levers for fine-tuning have been pushed as far as they can go, the inevitable can be delayed no further and the taboo of closing whole factories rather than individual departments is becoming reality.

One of the first – and certainly one of the most emotive – of these is the Ford plant in Genk, Belgium, where it makes its larger cars; also being closed are PSA Peugeot Citroen’s plant at Aulnay, near Paris, and General Motors’ Opel plant at Bochum. The axe has been hovering worryingly over a multitude of other facilities, too, including much of Fiat’s production network, while Renault has been locked in lengthy negotiations to avoid shedding jobs and closing factories in France and Spain. Even Honda, at its Swindon, UK plant, is railing back on its recent expansion and reducing headcount and capacity.

Ford’s planned closure of Genk will remove about one fifth of the group’s European capacity, while Aulnay takes out a slightly smaller proportion of PSA’s volume. For Opel, which already closed its smaller facility in Antwerp in 2010, the shuttering of Bochum will further help reduce its European capacity. However, if analysts are to be believed, these moves will barely scratch the surface of Europe’s enormous overcapacity problem in a market that in 2012 fell a further 8.2 per cent to 12.5 million vehicles sold – the level it was at in 1995. Yet excess capacity is hardly a new phenomenon: even in the European market’s 2007 pre-crash heyday, when almost 16 million cars found enthusiastic customers, there was talk that the boom was masking a serious underlying overcapacity issue. Today, that issue has swollen to the proportions of an existential crisis for several car groups.

Polarised market

Last summer industry analysts LMC Automotive put excess capacity across Europe at some 10 million units. Yet this alarming headline figure conceals something even more shocking – a market that is deeply polarised. LMC’s estimate of an average European capacity utilisation of 66 per cent is spread across two contrasting trends: on the one hand the heavily impacted volume producers, struggling to sell their products in a collapsing market and, on the other hand, the thriving, principally German, premium brands with strong exports, an expanding market share,

healthy margins and factories running full tilt. In short, it is the mass-market producers that are stuck with the bulk of the surplus overheads, so the situation for them is even more serious than the continent-wide capacity utilisation average of 66 per cent would suggest. Eighty per cent utilisation is normally considered the threshold for profitability, so the scale of the disparity is clear to see.

It could indeed be argued that the Ford, PSA and Opel closures show that the longpromised shakeout of Europe’s auto business has begun to happen, even if the dire warnings of Fiat CEO Sergio Marchionne of massive consolidations have yet to become reality. The worst-case scenario acknowledged by all is the financial collapse of a whole carmaking group: without exception, all those in the danger zone are working frantically to ensure they are not the one pushed over the edge, so further capacity adjustments and life-saving cooperative deals are a near certainty as the months and years unroll.

China: key to premium carmakers’ prosperity

At the opposite end of the scale the premium producers, almost all of which have proclaimed best-ever results for 2012, may not be as super-secure as the numbers would suggest. Audi, Porsche, BMW and Mercedes-Benz are all riding high on the boom in sales in China, now the world’s largest market for premium as well as everyday cars, and even Jaguar Land Rover is boasting the highest sales in its corporate history thanks to the China effect. More than ever, China is the get-out-of-jail-free card that is allowing the elite carmakers to cash in on boom conditions where consumers are prepared to pay high prices for a blue-chip brand name. But, as those with longer memories will testify, too much reliance on a single market is a risky mediumterm position: Porsche, in particular, was nearly wiped out when the US luxury car market took a temporary dive in the 1980s.

No such doubts have yet been formally expressed about China: the only serious anxieties seem to revolve round a slowdown (rather than a reversal) in the dizzy rates of expansion. Where the triumphalist rhetoric does however become tempered with a more cautious note, even among what Germans call the noble marques, is in predictions for Europe. Here, the tone is one of some considerable wariness, laced with warnings of continued difficult business conditions in the months and years ahead. Daimler, parent company of Mercedes-Benz and Smart, as well as Volkswagen, controller of Audi, Bentley and Lamborghini in the premium segment, are among the companies that have seen their share prices affected by such warnings.

Indeed, in what may later come to be seen as a tipping point, super-successful Audi witnessed an actual year-on-year fall of 3 per cent in its European sales in March this year, the first such reversal for many years. Some commentators were prompted to speculate that the premium bubble may at last have burst: certainly, analysts will be watching the figures for subsequent months with special interest.

Premium-level profits from brand-hungry consumers

Audi’s misfire may be momentary, but it does come despite the introduction of several new models designed to take the brand into new corners of the market. In this, Audi has led what is beginning to resemble a mania in the German premium establishment to fill every conceivable niche in the market, and even to invent some new segments, too, in order to extract premium-level profits from brandhungry consumers. Two recent phenomena have been coupé-like sports off-road models, an apparent logical contradiction which has proved a hit with image-conscious consumers, and low-slung four-door ‘coupés’ derived from their only marginally less sleek four-door counterparts, with all the attendant compro-

Audi A7 Sportback- trend-following four-door coupé

mises on rear-seat comfort and boot space. Some designers are now beginning to suggest open-topped off-road models – and it might be unwise to bet against still more mutations such as convertible estate cars or even sports cars able to traverse ploughed fields.

This frantic proliferation of model types – Audi, BMW and Mercedes-Benz each now have over 20 distinct ranges, compared with half that number a decade ago – is evidence of a desire to flood the market with every possible permutation and thus to reduce unit costs by maximising the volume of a core model and its four or five differently-shaped derivatives. Audi in particular has chosen to cash in heavily on its demonstrably smooth and clean brand identity, replicating its in-house design cues faithfully across its entire line-up and achieving instant recognition for any of its broad spectrum of products, be they city-dwelling third-car hatchbacks or red-hot supercars for rich men’s track-day indulgence. BMW and, especially, Mercedes-Benz display only fractionally more visual variety across their equally broad ranges.

Such uniformity may be useful in the short run when upwardly aspirational buyers want to identify with a desirable premium brand, but may begin to backfire when the elite owner of a €200,000 flagship model begins resenting the hoards of upstarts buzzing around in compact hatchbacks bearing the same unmistakeable family likeness but costing just one tenth of the amount. Yet there is no doubting the astonishing success of the formula, as practised by the three German blue-chip manufacturers; Range Rover and Jaguar are becoming adept, too, but Toyota’s premium division, Lexus, is still to establish a truly clear brand identity to carry over seamlessly from one model generation to the next.

Peugeot 208 - cashing in on predecessor’s kudos Models that transcend their brand

However tempting the premium example might seem, it does not offer a cure for the ills of the volume car makers: after all, it makes little sense to build up a monolithic brand identity for a brand that few people want to buy. Yet in the short and medium term, at least, useful lessons could be learned from two unlikely (and humble) mentors – Nissan and Fiat. In the premium sphere brand tends to prevail over model – buyers first decide on, say, a BMW, and only then do they decide what size they want. With volume producers, the brand is often less important than the model, even though reasonable models can themselves be held back by a mediocre reputation for the whole brand. It is only on rare occasions that an exceptionally good model is able to break away in image terms from a mundane brand. Recent examples that spring to mind are the Nissan Qashqai – a remarkable and enduring global hit from a brand seen as perennially dull – and the Fiat 500, the high-fashion must-have city car from a manufacturer universally regarded as cheap and not particularly cheerful.

By developing desirable individual models that transcend the indifferent reputations of their brands, these manufacturers have given themselves a chance to escape the stigma of failure, the vicious circle of price cuts, discounting and poor resale values afflicting the commodity products that form the bulk of their business. Nissan has repeated the trick with the Juke, a funky urban compact that has kicked off a fashion for small SUVs with a tough allure, and Fiat plans to broaden the use of the trendy 500 label until it has taken in almost its entire range of vehicles, much as Mini in the premium segment has grown to become a whole family of cars, some of them not so small at all.

Other models that have transcended their brands are the Clio, from Renault, and, in an earlier era, the 205 from Peugeot. In its struggle to power through the current crisis, Peugeot is hoping its new 208 hatchback can capitalise on the remembered glory of its 1980s antecedent, even if the stakes are even higher and the competition still tougher. Opel, a brand whose reputation remains at stubbornly low levels, is betting heavily on a new small model – the Adam – to deliver it fashion appeal and thus credibility among younger buyers, leading in turn to a transfusion of much-needed excitement into the broader Opel line-up.

As with the Peugeot 208, the jury is still out on whether the Adam strategy will supply the necessary psychological and commercial boost to company fortunes. But at least one thing is certain: big-volume carmakers must at all costs sustain the momentum of new model launches and keep the fashionable follow-ups coming, just as Renault has done with its Captur urban SUV derivative of the Clio hatchback. For in the real world outside of the premium segment, a fashionable model is the only route that can give a volume producer a chance of bringing in a positive profit margin. n