Upside of Downsizing Beginning to Emerge in North America

Special Coverage

State of the Industry: North America

Like soldiers who have endured an extended shelling, survivors of the North American auto industry’s last few years are peeking out of their foxholes to see what remains as the smoke clears.

Devastation is everywhere. A stunning 25 auto assembly plants have been closed since 2005, hundreds of thousands of good auto industry jobs have vaporized and production capacity for 4.5 million vehicles has been eliminated.

On the retail side, about 2,700 dealerships have closed their doors, most of them last year.

But former “Car Czar” Steven Rattner points out during a recent visit to Detroit that a true catastrophe has been averted: General Motors Co. and Chrysler LLC were not allowed to fail and drag the country into a full-blown depression.

Rattner acknowledges government bailouts are hugely unpopular with the American public. Nevertheless, he says had GM, Chrysler, GMAC and Chrysler Financial not been rescued with $82 billion from the U.S. government’s troubled asset relief fund in 2009, the entire U.S. auto industry and supply base would have crumbled, costing 1 million or more jobs.

GM and Chrysler would have closed their doors and taken Ford Motor Co. and other solvent auto makers with them, because they all would have been unable to buy parts from failing suppliers, Rattner says.

Those who suggest GM and Chrysler could have gone through bankruptcy and restructured on their own without government help “were in Fantasyland,” he adds.

Although economic recovery is occurring slower than anyone would like, Rattner declares the bailout of GM and Chrysler a great victory, signified by GM’s return to profitability, its surprisingly successful initial public offering and Chrysler’s better-than-expected positive cash flow.

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Who would have believed two or three years ago that GM could report big profits with a seasonally adjusted annual sales rate barely above 11 million units, Rattner says.

Indeed, the worm has turned. The upside of shuttering factories, closing dealerships and laying off workers is better capacity utilization, smaller inventories and higher profits.

Suddenly, it’s easier for auto makers to make money with an 11 million or 12 million-unit SAAR in the U.S. than it was with a 15 million or 16 million SAAR just two years ago. And it is beginning to show on the bottom line.

Ford raked in record profits in the third quarter, and numerous other global auto makers are doing well with what would have been considered disastrous sales levels only a couple of years ago.

Ward’s is predicting U.S. sales to end up at 11.3 million to 11.5 million units this year and 13 million to 13.3 million in 2011. That kind of jump has most auto makers optimistic about next year. But as we look to 2011 and beyond, the automotive landscape looks permanently altered. Tomorrow will not be a lower-volume version of yesterday.

A new group of hot brands and a changing product mix is transforming the U.S. into an almost surreal vision of its former self. Previous niche brands such as Hyundai, Subaru, Buick and Volkswagen are becoming major forces in the battle to win the hearts and minds of U.S. consumers.

Yet, stable, relatively low fuel prices continue to muddle the outlook. Just as auto makers are making an aggressive push into small cars with platoons of diminutive fuel-sippers amid tightening corporate average fuel economy regulations, the U.S. small-car market has grown cold and cross/utility vehicles and old-school muscle cars are flying out of showrooms.

Adding another plot twist to 2011 is used-car prices. Pre-owned vehicles are getting so expensive consumers soon may decide to buy new instead. When that swing begins, it will create a tectonic shift in new- and used-vehicle sales, pricing and residual values.

Auto dealer and North American International Auto Show Chairman Douglass Fox tells Ward’s this change could begin next year. He is starting to prepare.

Most of these trends tilt in favor of auto makers such as Hyundai Motor America.

“We’ll break through the 500,000 unit mark for the first time in 2010, so we’ll begin our march toward 600,000 next year,” says HMA CEO John Krafcik.

“It’s unlikely we’ll have the production capacity we need to get there in 2011 though. The good news is we’ve now got about 400,000 units of U.S. capacity, with our three best-sellers built here (Sonata, Santa Fe, and Elantra),” Krafcik says.

Volkswagen AG also is making a big play in North America, beginning in 2011, after decades of being an also-ran.

“Next year will be historic for Volkswagen. Not only will we have the all-new Jetta in market with its TDI clean diesel and GLI performance variants, we will also have the new U.S.-built midsize sedan. Those two cars will lead our transformation to a volume brand,” says Jonathan Browning, CEO of Volkswagen of America Inc.

The Hot Brands

Among the top seven auto makers, Hyundai Group (including Kia) showed the most year-to-year growth in the just-completed ’10 model year running from October 2009 through September 2010. Hyundai was up 20.6%, while the market overall was up 9.2% compared with the ’09 model year.

Hyundai is followed by Ford, which is up 19.1%. GM however easily maintained its No.1 position in the U.S., hanging onto 19.4% of the market compared with second-place Ford’s 16.4% share.

Toyota Motor Sales U.S.A. Inc. finished the ’10 model year with 15.9%, up just 3.7%, well below the overall market uptick of a little less than 10%.

Here’s where it really gets interesting: GM had the three fastest growing brands in the ’10 model year, led by Buick and Cadillac, up a whopping 49.2% and 34.9% respectively.

GMC also is up 25.4%, with GM’s volume-leading Chevrolet brand up 15%, handily outperforming the overall market’s rise.

“We have really defined what Cadillac stands for and what Buick stands for, and it is a great strategy for us,” says Joel Ewanick, vice president-U.S. marketing, GM.

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“If you look back at the Sloan model, at what was established for 70 years and was the way General Motors did it, we have covered the luxury market with two different brands. If you think about it, there isn’t just one luxury buyer, there are a lot of different luxury buyers.

“We’re going to be able to take Cadillac and attract one end of the segment and use Buick to attract the other end. It’s really a great strategy, it allows us to have two big players in the luxury segment,” Ewanick says.

However, to keep all the GM happy talk in perspective, it must be pointed out the auto maker’s closing of four brands in 2009 took its toll, giving the company as a whole a behind-the-market increase of just 4.8%.

The Ford brand was the largest-selling marque in the U.S., up a hefty 20.4%, followed by Chevrolet and the ’09 MY leader, Toyota.

Subaru and Hyundai were the fourth and fifth fastest-growing brands for the ’10 model year, rising 24.5% and 23.8%, respectively.

Japan’s Fuji Heavy Industries Ltd., maker of Subaru vehicles, is one of the niche-players that has succeeded against all odds during the worst of the recession, gaining sales and market share while most others have struggled.

Subaru has managed to connect with the psychology and emotions of its customers like few other auto makers, and it has made the brand almost recession-proof, says Alexander Edwards, president-Strategic Vision, Inc. “It has captured what is most important to their customers.”

“A Subaru vehicle is seen as being sensible, adventurous, protective and rugged,” he adds. “All these traits work together to create a unified image of what a Subaru is and why the targeted buyers will want to choose them when possible.”

Look for many other auto makers to try to capture Subaru’s magic.

Hottest Vehicles/Segments

Light truck sales grew13.4% in the ’10 model year, but the gains came entirely through the continued growth of CUVs.

Collectively, pickups, SUVs and vans underperformed, though certain traditional truck segments experienced some growth.

But CUVs are on fire, rising 22.6% overall. The Ward’s Middle CUV segment is up 27.2% and became the largest single segment for the first time, displacing the Ward’s Upper Middle Car segment.

Among Middle CUVs, the hottest vehicles are the Chevrolet Equinox and Subaru Outback, up 92.5% and 103.4%, respectively. The GMC Terrain, based on the same platform as the Equinox, also is selling well.

Strategic Vision’s Edwards sees no letup in demand as consumers come back into the market because CUVs offer the best combination of interior room, functionality and style.

Large Cars, led by a 95.2% surge from the Ford Taurus, also are experiencing a sizable 16% comeback.

Luxury cars as a whole underperformed the market, but key Ward’s luxury segments such as the Middle Luxury Car (15.5%) and Upper Luxury (35.2%) were big winners in ’10.

Upper Luxury was boosted by a 57.7% spike in BMW 7-Series sales, which nearly displaced the Mercedes-Benz S Class, up 18.3%, as the segment’s top-seller.

Wall Street’s economic collapse did not have a direct regional impact on Mercedes sales, says Ernst Lieb, president of Mercedes-Benz USA. In fact, he says the northeast region of the country has soared ahead to become the brand’s leading market. But the West Coast still is struggling, along with Florida.

Modern-day Detroit muscle cars also are seeing something of a renaissance. The Chevy Camaro sold briskly in its first full-year of production, outselling by more than 15,000 units the Ford Mustang, which nonetheless saw its own sales rise 15.2% in the ’10 MY. Dodge Challenger sales are strong, too, up 24.8%.

Coldest Vehicles/Segments

Brrrrrrrrr. On the opposite side of the burner are cold brands that are seeing hard times and a number of vehicles that once were on fire and now have fallen out of favor, mainly because consumers have ceased fretting about rising fuel prices.

Putting aside the recently deceased Pontiac, Saturn, Hummer and Isuzu (in the U.S.) – the coldest brands from October 2009 through September are Daimler AG’s Smart (-63.2%), Saab (-54.4%) which suffered from several months of malaise during its ownership transition from GM to Spyker Cars, and Suzuki (-49.5%)

Toyota’s once-hot Scion brand also saw ’10 MY sales plummet 30.7% while Mitsubishi’s already tiny sales numbers slid an additional 12.3% during the same period.

On a volume basis, Chrysler’s newly formed Ram brand lost the most sales year-to-year, dropping 25,826 units in the ’10 model year, representing a 12.3% drop.

But the Ward’s Small Car segment is the coldest of the cold. Down 1.2% from disaster-struck MY ’09, it is the only segment to see a volume decline even as the market expanded in MY ’10.

Small Specialty Cars fell a horrific 37.8%, the biggest loss among Ward’s segments. But the bread and butter Upper Small Segment’s (0.6%) failure to rise with the market is where small cars really lost their mojo.

Plummeting sales of the Honda Fit (-26.6%) and Toyota Yaris (-30.7%) illustrate how stable gas prices undercut sales of smaller vehicles whose value proposition is based largely on fuel efficiency.

Nevertheless, there is some hope for small cars in general for MY ’ll. The new Chevy Cruze and Ford Focus are attractive, roomier small cars that promise to be strong sellers and carry the new American small car banner forward.

Lower Luxury (up just 3.6%) probably suffered from a trend in which consumers opted for higher trim levels on Upper Middle Cars and Large Cars.

With sales up only 7.1%, pickup trucks underperformed the market, but the story is interesting. Large pickups (+10.7%) outperformed the market, but small pickups were dramatically off-pace, down 7.7% in MY ’10. This continues the trend away from SUVs and pickups for personal use in favor of the utility and flexibility of CUVs.

Hybrid-electric vehicles also are taking it on the chin. Across all segments, HEVs were down 3.8% during MY ’10. Once again, the Toyota Prius led all hybrid vehicles, making up 51.9% of all hybrid sales in the U.S.

The Ford Fusion Hybrid was a relatively big winner though, with sales jumping 77.5%, making it the third-biggest selling hybrid, behind the Prius and the Honda Insight, whose sales climbed an impressive 30.5%.

Although volumes will be very low at first, the Chevy Volt and Nissan Motor Co.’s Leaf will help form America’s first impressions of electric vehicles, along with numerous other EVs promising to enter the market.

All-in-all, for the first time in a long while, consumers and auto makers alike have a lot to look forward to in the coming year. It finally looks safe to crawl out of the foxhole.

– with Christie Schweinsberg, James Amend and David Zoia

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