China’s (and America’s) Booming SUV Market

Cadillac Escalade at the 2014 NYIAS
Cadillac Escalade at the 2014 NYIAS

Chinese SUV sales grew a staggering 49 percent last year. Let that sink in for a second – in 2014, we are again talking about SUVs as a booming sector of the auto industry.

This shift can in part be attributed to China relaxing its one child policy, with bigger families needing more room to accommodate little ones. Chinese customers also value the ruggedness, comfort, and versatility of bigger cars, and continue to embrace with open arms the 69 new SUV models introduced in 2014. The trend doesn’t appear to be slowing down either, as China’s current level of SUV sales only accounts for around 14 percent of the country’s auto market. Compare that with the West’s 35 percent average, and you get some giddy auto analysts predicting plenty of room for growth.

The news gets even better for SUVs. In the US, where gas prices have leveled off to “reasonable” levels and the Prius craze has forced truck efficiency technology into hyperdrive in recent years, Americans are again hungry for big cars. Over the past year, the US has seen gains of 10 percent in the SUV and truck space, with no sign of slowing in the near future.

This shift towards SUVs is particularly interesting for the US because we have seen a similar scenario before in the aftermath of the 1970s oil crisis, but this time the eco-trend is permanent. Instead of companies ditching the compacts and hybrids the moment gas prices went back to relatively normal levels, the eco-friendly car segment continues to grow. Maybe not at the same rate as the late 2000s, but still definitely growing.

In part, governments are now dictating fuel economy standards for car companies’ product portfolios, but average consumer eco-consciousness for the sake of eco-consciousness has definitely taken hold. Today, companies are producing cars for the US that have fuel economies from 15 to 50 miles per gallon, with a healthy number of customers making up both ends of the spectrum.

In the 2000s, everyone was ditching their SUVs out of necessity because no one could afford gas, and (US) automakers scrambled to make more fuel efficient cars because every consumer segment was screaming for them. With the recession mostly behind us and gas prices steady, companies must now broaden their strategy to include less gas-price sensitive consumers that have gotten off the hybrid, eco-friendly wagon in favor of their beloved SUVs. This is good news for most companies, as SUVs typically produce the largest profit margins, and it’s also a segment in which American automakers are historically very good at competing.

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Automakers and Their Dealers: A Case of Passive Parenting

Courtesy of Urban Realm

As Tesla has blatantly showed us, owning dealerships (in the US at least) is a giant pain, so much so that for established brands like BMW and Toyota, it probably is not worth fighting for in the short term. And historically speaking, automakers make lousy dealers. But that doesn’t mean that you simply ship cars every month and reward them for doing well like a rich parent giving your kids an allowance so that they don’t bother you. Automakers need to be more actively involved with dealers, who after all are the face of their company.

In general, dealers don’t make nearly as much money on cars as they do on after-sale parts and services. This means that they spend boat loads of money on beautiful showrooms that take up half of their usable space but produce very little profit.

The car industry is one of the remaining few that has yet to really be disrupted by the digital shopping trend. Even diamonds and jewelry have begun to be bought online in increasing numbers – often with price tags equal to or above that of many cars. It would seem like a dream come true for auto dealers to finally get rid of their expensive showrooms, sell cars online or in some other form, and free up space to expand the area of their business that actually makes money.

So why hasn’t this happened? It’s at least in part due to misaligned incentives. Automakers have let the dealers sell how they want as long as they meet their sales quota, in much the same way that some parents don’t care what their kids do as long as they get good grades. But is that setting up the dealerships (or kids) to be better, to push more cars into more buyers’ hands than before? Odds are against it.

Auto companies like BMW see future growth through scavenging every possible customer niche imaginable, which is why we now have a different car for every corresponding single digit or letter. While this may help boost short term revenues, it doesn’t ensure long-term growth. There are only so many digits and letter combos for so many distinct customer segments. So along with (or instead of) expanding the already-bloated product line to increase purchases, why not focus on the ways in which the cars are actually sold?

Here is where incentives might start to align between automakers and dealers. Getting dealers to innovate and improve their sales strategy comes as a result of automakers enabling them to make more money. If Mercedes rolls out an innovative, global online selling platform, then dealers could still sell a similar number of cars while being able to allocate some of their showroom square footage to revenue-producing services and parts space. Obviously an overly-simplified example, but part of the key to selling more cars in the long-run definitely includes managing the incentives of your main consumer-facing stakeholder.

For US Luxury Automakers, Mexico Matters

Courtesy of
Courtesy of

As BMW, Mercedes, Cadillac, and Infiniti turn their focus to the lucrative compact premium market, they all seem to have the same way of getting there – Mexico. Unlike most other plant locations like Spain or France or the US, Mexico is fast becoming the best place to produce cars.

Besides the obvious cheapness, international manufacturers are taking note of how far the Mexican government has gone to make their country fertile for foreign investment. They have undergone radical public works projects to drastically improve the country’s infrastructure. They’re a part of NAFTA, and have free-trade agreements with 45 countries (compared to America’s 20). And they have a highly-skilled workforce able to produce higher quality cars than practically anywhere else in the emerging Americas.

That’s why it comes as no surprise that luxury car makers looked beyond Texas in order to compete profitably in the booming compact corner of the US premium market. The likes of the Audi A3/4s, BMW 2/3s, and Mercedes C/CLAs for starters will be produced in Mexico in the coming years, with billions more in foreign direct investment towards additional production increasing Mexico’s auto exports for the long-term. In carmakers’ minds, Mexico has the ideal mix of low manufacturing costs, few transaction costs, and low shipping costs and times to their primary North American markets.

How are US consumers impacted? Well, quality is supposed to remain high as a result of the skilled labor force, and carmakers have a more central distribution point for some of their key markets. This could potentially allow them to further expand and test new product offerings while reducing price tags, which could be the needed nudge for many economy car buyers to make the splurge to pretty luxury compacts.

Original information provided in this post can be found here.

Mercedes Banks On America’s Little Pink Houses For Future Growth


Back in May, Fast Company questioned whether Mercedes’ focus on catering its lineup to a suburban America was a shrewd tactic or wishfully daft. It didn’t gain a lot of attention, but the impact of shifts in people’s living situations on car companies’ product planning and overall strategy cannot be understated.

“The myth is that people are tired of suburbs and moving into cities. That is simply not true,” stated a blunt Eric Larsen, director of Mercedes’s society and technology research group.

The Brookings Institute explains that the recent slump in suburban growth can be mainly attributed to a still-rebounding housing market. They conclude, somewhat blandly, that the general cycle of city-dwellers eventually moving to suburbs will continue to occur as it has in the past. Over the next decade, they forecast suburban growth to potentially climb higher, with urban areas continuing to experience growth as well. The below graph from Brooking can be misleading – suburbs aren’t shrinking, they’re definitely growing. Just not at the rate of certain urban cities.

Courtesy of Brooking Institute via Fast Company
Courtesy of Brooking Institute via Fast Company

Mr. Larsen summarized, “The U.S. is a unique market, with the rise of mega-suburbs, not mega-cities. It’s good news for our company.”

Later, I posed Fast Company’s question to Neil King, an automotive contributor at EuroMonitor. He agrees with Mr. Larsen that the US is a distinctive market in which Americans love owning all four walls for some reason. Shifts in urbanization notwithstanding, he believes that changing demographics of the inhabitants to be the most important changes for companies to adapt to.

Mr. King explains that more women in the workforce, lower birth rates, and later marriages mean smaller households which translates into smaller car needs. Shifts towards home delivery and online retailing further decreases the need for large SUVs, paving the way for the likes of the Audi A3s, BMW 2s, and Mercedes CLAs to make up a much larger volume of the yearly luxury purchases.

Interestingly though, new Chevy Tahoe sales are growing at healthy rates, BMW continues to bear down on the luxury SUV market with the massive X7, and S-Classes are practically selling as fast as Daimler can make them. Whatever the case may be, some variable is seriously missing in this equation.

To view the original article from Fast Company, click here.

Diverging from Google, Toyota Empowers the Driver

Lexus LFA in Geneva

In the past decade, Toyota and Google have both sunk sizable sums of money into the driverless car game, with Nissan, Ford, and most recently GM reluctantly following suit. Toyota and Google are arguably the most serious players in this space, and until recently seemed to agree on the future relationship of the car and driver. However, Toyota stated earlier this month that they have no intention of making a truly automatic car. Rather, they believe that neither computers nor humans are independently ideal, and both working in tandem creates the most safe environment for driving.

Whether Toyota started its trek into the auto-driving space with the same mantra, we’ll never know for sure, but Toyota’s new rhetoric is telling of what they believe will resonate with customers. Instead of framing car technology as taking away that which humans cannot do as effectively as computers, a notoriously Google-like approach, they see their R&D efforts as equipping humans to react to situations with the immediate and necessary information to make an informed reaction.

Toyota’s stance is that humans are still the essential ingredient in safe driving, and computers can never truly do away with us. Google’s car sometimes comes off as a warning about creating a car that doesn’t even have a steering wheel, a scary thought to non-Gen Y-ers and um, people who like driving. Unlike with its search engines, phones and many other products that free up time and enable humans to perform tasks easier, this automated car program has a subtle Big-Brother undertone, where nothing besides the music and air conditioning is within the driver’s (occupant’s) control.

Toyota understands that people want more control, not less, especially when it comes to something life-or-death like driving a car. No one has a problem with automating every process having to do with phones, homes and computers because they aren’t giving the control over their physical wellbeing to an unapologetic object. Particularly in the current age of recalls and faulty car technologies, computers have a large challenge of gaining the full trust from average people.

Toyota gives drivers the most control possible, whereas Google’s technology appears to take all the control away. Which company’s car are you going to buy (disregarding the laughably atrocious designs of the Google car)?

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