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Better Cars, Smaller Profits. The Automotive Industry at the Crossroad

Profits posted by the great automobile makers follow such a steep, descending trend that it becomes pretty obvious that their strategy for the future must change, and quickly. They’re probably aware of that, judging by the flood of „new” cars that are heavily based on old platforms and concepts and only come with minor details, the models for emerging markets, the warranty extensions and the so-called hybrids hastily slapped together from regular vehicles and undersized electric engines. So far, it doesn’t seem to do any good and it looks more like postponing the inevitable than an actual solution. Where’s all this going to take us?
During the 80s and 90s, the profit margin for the automotive industry was estimated at 18%, a level that seems unbelievable today. The gradual decrease that followed was further strengthened by the heaps of promotions, discounts and direct financing offers trumpeted by car dealers, while the recent global financial crisis acted as yet another nail in the proverbial coffin.

These days, with the exception of Porsche, who are being singled out because of the incredible results they posted – around 10-16%, all other manufacturers seem to have amassed in a weird bunch. A 6-8% profit margin is now touted as a resounding success, while less fortunate manufacturers act too embarrassed to post 2-3% margins and are left to face suspicions that their figures are actually negative.

To make matters worse, “kamikaze” brands such as Dacia manage, on the short term, to do wonders with EUR6000 to 7000 cars. They’ve been selling incredibly well, yielding average profits while completely avoiding the painful R&D investments the big names are forced to make in order to stay on top of the game.What can be done?
Well, that’s hard to say. Demand for new cars does exist but, at the moment, people seem to prefer vehicles that are simple, cheap and have the lowest fuel consumption level possible. Still, this is not a way to generate considerable revenue. Another look in Porsche’s book is enlightening enough - a 16% profit margin for each sold Panamera (about 28,000 Euro) is something every manager in the automotive industry daydreams about.

So what can anyone who’s not called Porsche or Ferrari do to make things better?

Well, a promising start would be to bring more innovation to the table, try to identify new or insufficiently catered-for market segments and, of course, decrease production costs. One thing’s certain, however - it’s tough being an automotive manager these days and it’s going to get even tougher.

BMW has recently announced 8.1% profits, while Mercedes struggled to get to 9.5% by adding up everything it had, including the trucks and buses divisions. Audi managed to reach a “staggering” 11% due to VAG’s extensive experience, surpassing Mercedes for the first time. Honda experienced a full-on comeback in 2010, up to 9% from last year’s meager 4%. Other manufacturers, however, are barely surviving.

It’s interesting to note how much the automotive industry has progressed during the last decade. Cars are now much safer, better equipped and there’s a ton of new and ambitious manufacturers as well. This, in turn, has lead to an overcrowded market and subsequently to lower profit margins. A kind of greed that threatens to kill the industry outright.

It seems as if everyone wants a larger and larger piece of the pie, failing to understand that demand for cars cannot be boosted indefinitely through advertising, product placement, feeding on people’s egos and sometimes even taking advantage of the potential clients’ lack of knowledge.

Reminiscent of the gold rushes of old, production plants relocate at an alarming rate as new, more profitable locations appear every few years, ready to serve those that haven’t been selling “just cars” for a long time. Instead, they’re peddling dreams on four wheels, ideals, image and a lot of... packaging. It’s all 100% marketing.

There’s still room to grow on emergent markets like India or China, where manufacturers have already started to move production facilities, in a desperate attempt to lower end-user prices as much as possible (while quality most likely suffers due to the use of less qualified workforce). But it won’t work forever and the numbers of those enthusiasts willing to accept a 70-hour work week for a $100 monthly wage will fade considerably. And then what?

Are there simply too many automobile manufacturers and brands? Has greed reached critical mass? Are there way too many similar cars, which look and perform the same, differentiated only by their badges and paint color?

Personally, I feel that the existence of some manufacturers is no longer justified, but time will tell. Everything changes at an increasing pace, sometimes erratically, just like consumers’ demands. It’s difficult to predict what’s going to happen next.

To be honest, I wouldn’t like to find myself in the position of an automobile manufacturer CEO too soon. A designer or engineer maybe, but leading such a company on the road to profit in an ethical fashion will be a very bumpy ride. Now, more than ever...


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