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AutoPacific White Paper: Impact of Atomization on the American Auto Industry

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Atomization Causes Car Makers to Lose, Not Gain, Focus
Definition of Atomization: Adding new, incremental car and light truck nameplates to more accurately hit customer target needs, wants and desires, resulting in increased overall sales.
Over the past decade, AutoPacific has been monitoring and evaluating the impact and rationale behind the automotive industry’s rampant atomization. With annual industry sales in the 16- to 17-million unit range, it appeared that carmakers could profitably continue to add models more closely targeted to specific buyers–if they could keep development costs, manufacturing costs and marketing costs in line. In other words, carmakers needed to make a profit while selling a lower volume of cars or trucks per nameplate. Since 2004, we have cautioned that atomization was shifting the battleground from product development to product marketing.
With 2007 showing more models and fewer industry sales, the industry became unstable. By the end of 2008, with the industry selling at a 10-million per year rate, sales per nameplate cratered. 2009 promises to be even more dire.
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Background: More and more new car and light truck models are being added to manufacturer lineups each year, the phenomenon AutoPacific defines as atomization. This rapid addition of nameplates to the American auto industry is a result of auto product strategists and marketers attempting to provide products targeted at much more finely defined product niches. Consumers prefer more and more focused products, and today’s automotive consumer research can identify exactly what those consumers want. Current product development techniques allow vehicles to be developed more quickly and efficiently than in the past. The conclusion has been to develop a vehicle targeted at each identified buyer group.
The risks in adopting this strategy are numerous, chief among them making profitability much more difficult to achieve. When sales of cars and light trucks remain constant and the number of models increases, the sales per nameplate must decrease. This means a vehicle has to be profitable at a lower volume. In down sales years, like 2007 and 2008, sales per nameplate drop precipitously and profitability becomes nearly impossible.
AutoPacific’s Industry Analysis office shows that 2008 was the worst year in decades for sales per nameplate and 2009 promises to be worse. Why should manufacturers care about sales per nameplate? Higher sales per nameplate usually mean that the vehicle is popular and profitable. Lower sales per nameplate often indicate the vehicle is struggling to sell manufacturer projected volumes and grasping at profitability. Industry-wide, in 2008 nearly every nameplate saw lower sales and presumably lower profits.
At the previous industry peak, in 2000 when sales hit 17.3 million units, there were 208 car and light-truck nameplates sold in the United States. This indicated an average volume of slightly more than 83,000 units per nameplate. In 2008, when sales were 13.2 million units, there were 285 nameplates, dropping the average volume to only 46,300 units sold per nameplate. This was a whopping 36,700-unit deterioration (~44%) in the sales volume per nameplate. In just one year – from the end of 2007 through 2008 – sales per nameplate fell over 10,000 units.
In 2008 sales volume in 2008 fell dramatically. In the first half of 2008, spiking fuel prices drove buyers away from high-profit pickup trucks and traditional sport utility vehicles. These were followed by housing, stock market and credit crises. By mid-September there was a belated recognition that the United States has been in a recession since December 2007. These factors led to sales slowing to a trickle from September 15 through the end of 2008.
In the past, the industry grew dependent on sales driven by desire – emotion. Today, most new vehicle buyers buy out of necessity. Their old car needs too many repairs to keep running. Their old car has too many miles on it. They need a vehicle that gets better fuel economy. Their old car was stolen.
Sales Per Nameplate
During the 1990s, a good year for car and light truck sales was 15 million units. By early in the first decade of the 2000s, growing use of incentives caused the industry to expect 17 million sales per year. Companies began adding more and more nameplates to take advantage of these robust sales numbers and to target their customers more closely. But while more nameplates were being added, the market softened. Many models were left exposed to lower demand, and at a time when marketing dollars for incentives and advertising also dried out.
Future Viability May Depend on Surgically Removing Nameplates: As sales per nameplate in 2009 are projected to fall precipitously at forecast sales levels (11.5-million units), manufacturers must attack their offerings to maintain viable and profitable sales for each nameplate. Using a simplistic method of dropping nameplates and losing ALL their volume, for General Motors to get its sales per nameplate back to healthy levels they would have to drop 23 nameplates and 4 brands. Chrysler would have to drop one brand and at least 5 nameplates. More on that later.
This analysis is simplistic but leads to very rational conclusions…
Conclusion #1: There is a strong correlation between sales per nameplate and profitability. With the exception of premium luxury brands, those manufacturers with higher sales per nameplate tend to be more profitable and viable. While the era of pursuing every niche was exciting and might have been supportable in a 16-million to 17-million sales year, it is very, very tough to feed niche models in soft sales years like 2008 and 2009.
Conclusion #2: The customer rarely benefits from additional models. Many badge-engineered models do not result in enough incremental sales to justify their existence. So, why do they exist? These redundant badge-engineered vehicles exist to populate the sales lots of dealers who are themselves no longer necessary. Think Chevrolet Cobalt and Pontiac G5; Ford Fusion and Mercury Milan; Chrysler Sebring and Dodge Avenger.
Conclusion #3: Reducing nameplates means reducing brands (among the Detroit Big Three). Reducing nameplates means eliminating dealers. Both require a serious reorganization of the DB3 including eliminating nameplates, reducing the number of dealers, eliminating assembly capacity, reducing hourly and salaried headcount, restructuring union wage agreements. These actions likely cannot happen without bankruptcy of one or more of the DB3. Since “bankruptcy” is such a taboo word in Detroit perhaps the Car Czar can be given bankruptcy-like powers to be able to implement the necessary actions without referring to those actions as a “bankruptcy”.
Conclusion #4: These reductions WILL happen over time. The MARKET WILL force it. The very viability of the Detroit Big 3 is at stake.


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2009 NAIAS: Chrysler Gets UConnected

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Along with looking at new-century powertrain options, Chrysler LLC showed off ideas for connecting drivers to their cars and houses in the future. This trick interior was found inside the stunning 200C concept.
Though the primary purpose of vehicles remains getting us from point A to point B, we live in an increasingly connected world. The technology is available to have your smartphone replace these new-fangled smartkeys, find your car remotely, find out if your friends are in the areas, and even see traffic real-time by connecting to city intersection cameras.
All manufacturers are working with partners to see how quickly and how well we remain seamlessly connected to our jobs, families, fun, and obligations as we move from home to car to work or school to car to destinations and everywhere between. Follow the jump to get an idea of the solutions Chrysler is looking for.

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Could this be the future of the gauge cluster?


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Road Noise: Congressional Rumble All-Out Attack!

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The Place: The Capitol, Washington D.C. The Players: Three captains of industry (Rick Wagoner of GM, Alan Mulally of Ford and Bob Nardelli of Chrysler), one union leader (Ron Gettelfinger of the UAW) and a big angry Congress.
And then there’s me, your humble chronicler, the only person left behind at Vehicle Voice World Internet Headquarters and Decorative Bamboo Plantation to tell this story, because everyone else is at the L.A. Auto Show. Follow me behind the cut, and let’s talk about the Detroit 3 (plus one)’s adventures in Washington.

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That’s…ominious.


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2008 LA Auto Show: BMW Diesel Pricing

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335d and X5 xDrive35d Introduced in Strictest Emissions State
Since these BMW diesels are not exactly secrets, having already been discussed at the 2008 Detroit auto show back in January (click here), the big news for BMW diesels in LA is the pricing. The 335d sedan goes on sale in November 2008 for $44,725, including destination and handling. The X5 xDrive 35d for $52,025. Ouch, right?

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There is a way to offset the cost, at least this year. These vehicles, like their Mercedes counterparts, qualify for the IRS Alternative Motor Vehicle Credit. Buying the 335d means a $900 credit, while the X5 gets a maximum $1550 credit. Not quite the same as taking that amount off the top of the vehicle price, but it could help ease the pain.

Posted in: BMW, The Car Biz

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Exhaust Notes #35: AutoPacific Sales Forecast Predicts Continued Grim Times Ahead

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AutoPacific, VehicleVoice’s parent company, just released its latest sales forecast numbers for the current year and beyond. We all know by now just how bad this year’s sales have been so far. It’s so bad, in fact, that the sales slump we saw earlier this year due to skyrocketing fuel prices almost seems like a happy memory compared to the much more dire and long term problems we are now facing. Indeed, it looks like the industry’s in for a long, hard road ahead.

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It’s gonna take some time to clean up this mess!


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Truck Market: Where is it Going? How Do F-150 and Ram Stack Up?

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With two new and important full-size pickup trucks this fall, at a time of extreme economic uncertainty, what do we see happening to the market in general? And how does the F-150 stack up against the Ram? Since our correspondent Jim Hossack attended both Ford and Ram driving previews, we asked him for some comments. Here we go!

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2009 Ford F-150 XLT

What’s happening in the Full-Size Light Duty Pickup market?
Contrary to mass media reports, the full-size light duty pickup market is not dead. In fact, after a few tough months, it is coming back – in terms of share of industry if not actual number of units sold.
The auto industry is down by around 4 million units compared with 2007CY. Full-size pickup share of industry fell from 15.2 percent in August 2007 to as low as 8.6 percent on May 2008, but has rebounded to 15.8 percent in September 2008. In part that may be a reaction to fuel prices, which increased and then decreased, in part it a recent compensation for deferred purchases earlier this summer, and in part due to ridiculously low transaction prices as Dodge and Ford clear out showrooms of the old trucks. It is also worthwhile to remember that holding onto 15.8 percent of a much smaller market still means a dramatic decrease in overall F-150 sales. If and when the economy recovers, half-ton pickup sales volume will recover, depending on how drastic the next fuel price spike is.
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2009 Dodge Ram Sport


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Exhaust Notes #32: More Detroit Merger Talk

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Are we nearing the end of Chrysler? Or the beginning of a new blended family? Or just another day at the rumor mill?
Late on Friday, the first stories began appearing about GM and Chrysler in possible merger talks. And at least in Detroit, dominated the weekend news cycle. GM’s stock went up this morning, but given that the Dow was up 5.6% and GM went up only about 3%, the stock bump might have happened without merger talk. GM closed on Friday at $4.89, a number some say is actually less than the company would be worth in capital assets alone.

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All of this merger talk, whether these deals are realistic or not, does nothing good for public perception. The economy is weak, last week’s events on the stock market don’t reassure anyone, and talking about GM and Chrysler perhaps needing to merge to survive only further erodes confidence in American business. While GM and Chrysler LLC, as well as any other maker in trouble right now, needs to consider even unthinkable options and test our common assumptions as they get out of this trouble, this merger does not inspire hope.


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Exhaust Note #31: Goodbye, TrailBlazer and Envoy!

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Oh, and Saab 9-7X, too
Last week was full of horrible sales results. The worst single month of sales since February 1993, in fact. In the midst of abysmal sales and the brouhaha to get the financial sector bailout passed, for better or worse, General Motors said production of the GMC Envoy and Chevrolet TrailBlazer will end in December 2008. This is two years earlier than once planned, though not much earlier than many guessed. Are you sad? Saying goodbye to a truly American vehicle?

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2009 GMC Envoy Denali: The end of the line.

We’re not, really. The TrailBlazer and Envoy have come to their logical end, not for being badly drawn or executed products, but because the General’s offerings today are better suited for real life. Envoy sales for 2008 are down 44.1% and TrailBlazer down 36.9%. In a tough economic situation where leasing and credit are more difficult to get and buyers seem perfectly happy to delay big-ticket purchases, why continue them for another year?
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2009 Chevrolet TrailBlazer SS: Will you miss the 390HP stompin’ SS? Or just move on to a Jeep Grand Cherokee SRT-8?


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Road Noise: Abandon Hope, All Ye Who Dial Here

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This week, I sat down for the sales conference calls from Ford and Chrysler. How are things, you ask, or don’t, as the case may be? Well, they’re both down about 35 percent. On the bright side, no one cried on the phone.

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“Run for your lives! The economy’s collapsing!”


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Save Detroit – Scrap CAFE

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This very insightful opinion piece appeared in September 10, 2008 issue of the Wall Street Journal. Written by Holman W. Jenkins, Jr. the article confirms the position of AutoPacific and VehicleVoice that CAFE is unnecessary and costs the industry and the taxpayer far more than it achieves.
How to Save Detroit… And $50 Billion
by Holman W. Jenkins, Jr.
September 10, 2008
For a sum small compared to their revenues but large in relation to their market caps, the Detroit auto makers were all over the two conventions. Their lobbyists had something to sell — a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue — because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.


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