Automotive Insight--Forget Market Share, Go for the Dollars

Automakers love to brag that they're better than their competitors. They brag when they make more money. They brag when they have newer technology. And they really brag when they have more market share.

Japanese automakers were roundly praised by academics and analysts in the 1980s for managing their companies for maximum market share. At the time it looked like they were way smarter than American automakers, which seemed fixated on quarterly financial earnings. Toyota Motor Corp. even sent shivers down the collective spines of Western auto executives when it announced "Global 10," its strategic plan to capture 10% of the global market.

Today automakers are engaged in an all-out war - a market-share war. They're knocking their brains out to capture that next tenth of a percentage point of share. They're pouring on the incentives to gain share in the belief that this will keep their plants humming, cover their fixed costs, keep their unions quiet and make their dealers happy. And they're right, it will do all that. The only problem is that more than a few car companies have committed financial suicide in the process.

The bad part of focusing on how many units you sold versus the competition is that it's too limiting. It keeps you focused on what's going on in your immediate surroundings instead of opening up your vision to a new universe of opportunities to grow your business. Some executives already have recognized this.

Ford Motor Co. President Jac Nasser likes to tell the story of Coca-Cola's former chairman, Roberto Goizueta. The late Cuban-refugee once asked his executives how they were doing in market share. "Fantastic," came the reply, "we're absolutely killing Pepsi." Mr. Goizueta shot back that they were measuring the wrong thing. He told them he wanted to see a lot more growth than just carving out a few percentage points from Pepsi's hide. Then Mr. Goizueta opened their eyes to new opportunities. He asked them how many fluid ounces the average human being drinks every day (about 36). Then he asked them what percent of that was Coca-Cola. "Not much," they answered. That, he told his executives, is the new measure of market share.

Using Mr. Goizueta's logic, automakers should be looking at how much money consumers are spending on automotive transportation, and figure out how much of that they can get.

Several years ago, McKinsey & Co. determined that a typical car, on average, generates $75,000 in consumer spending in its lifetime. This includes the purchase price, insurance, fuel, maintenance and repairs, all the way to the $50 a junkyard pays an owner to scrap it. Yet automakers only capture about $20,000 to $25,000 of that, meaning they're leaving $50,000 per vehicle for someone else to pick up.

Some automakers already recognize the opportunity. That's why Ford just bought Qwik-Fit, the chain of automotive service shops in the U.K. And it explains why Ford is buying junkyards in the U.S. so it can disassemble and recycle used parts and sell them to body repair shops and consumers over the Internet. It expects to generate $1 billion in revenues a year from each of these businesses.

This is why General Motors Corp. created OnStar, the company that provides in-car communication via satellite. OnStar offers a host of services, ranging from route directions to opening the car if you accidentally lock the keys inside. GM Chairman Jack Smith believes that within a decade the automaker will earn more profit on small cars equipped with OnStar than it will selling the cars in the first place.

Think of the opportunities. Consumers in the U.S. spend roughly $314 billion a year on new vehicles. And they spend nearly another $100 billion on related services (insurance, maintenance, repairs, etc.) - almost none of which goes to automakers. More importantly, the profit margin on services is often much better than on making cars. And this doesn't even include the new range of in-car services that technology is making possible, such as Internet access.

Of course, it's not just a matter of getting into new services. Automakers have got to strip down to their core competencies: defining the product, managing the program and marketing the brand. They need to outsource carmaking to suppliers, liberating themselves to become purely brand marketers. This will free up billions of dollars in capital investment every year, money that can be poured into consumer-driven services, allowing them to double their profit margins.

By focusing so intently on market share, automakers are only measuring themselves against like-minded companies. By opening their eyes to the opportunities in front of them, they can embark on a journey of great growth, coupled to much higher margins. Not only will financial markets reward them with greater stock multiples, shareholders will warmly applaud the change.

- John McElroy is editorial director of Blue Sky Productions, producer of "Autoline Detroit" and "The Nightly Auto Report" for WTVS-Channel 56, Detroit