Dynasties, destinies and dreams
Jesse Snyder takes a comprehensive look at the landmark changes the European auto industry has undergone during the last 10 years
The last 10 years have been a remarkable time in automotive history, a period packed with more substantial change than most of the decades since Karl Benz’s self-propelled wagon first chugged down a street in Mannheim, Germany, in 1885.
To many of us, each year of the last decade seemed to blend into the one before, with change occurring only incrementally. But when the 10 years from our launch in 1996 are looked at in total, it’s clear that the change was dramatic and that the industry has evolved into something a lot different than what it used to be.
In 1996, most European automakers were still clinging to their roots as national car builders. The home country, whether Germany, France or Italy, not only was the respective carmaker’s best market but largely defined and shaped its product lineup and design language.
While most automakers had envisioned what they would become by the middle of the first decade of the 21st century, they weren’t there yet.
Ten years later, many of Europe’s automakers are bigger, more global, more multicultural and far more complex. They adapted. Those that didn’t either closed or joined the growing number of subsidiary brands in big auto groups.
Here is a look at the profound changes that have shaped the European industry during the last 10 years.
Fiat Auto started the period as Europe’s highest volume automaker with a portfolio of proud brands: Fiat, Lancia, Alfa Romeo, Maserati and Ferrari. Now the carmaker struggles to survive on sales that are a shadow of what they once were. Also gone is Fiat’s appeal to other automakers as an acquisition. Once courted by Ford Motor, DaimlerChrysler and others, Fiat sold a fifth of itself to General Motors in 2000 for $2.4 billion. Five years later GM paid Fiat another E1.55 billion for the right to give back the Fiat stock it owned.
It has overtaken rival Mercedes-Benz in prestige and in global sales too. But the last 10 years have not been easy. Until it got rid of its stake in Rover, BMW was in deep trouble. It lost momentum, money, time and a whole generation of key
executives. But by selling off Land Rover and endowing MG Rover, it saved itself. And it turned Mini into a superb new franchise that also will help it toward meeting EU CO2 emissions targets.
Schrempp’s dream of a Global Motors fails
Jürgen Schrempp’s grand vision of turning the Mercedes franchise into the world’s biggest automaker dissolved even before he left office on December 31, 2005. Between 1998 and 2000 Schrempp snapped up Chrysler Corp. in the US, took a controlling stake in Mitsubishi of Japan, bought a stake in Hyundai of Korea, took full control of Smart, revived Maybach and almost bought Nissan. Ultimately, shareholders, board members and management tired of Schrempp’s dream and the low share prices and
corporate turmoil it engendered. In the last two years D/C has sold its stakes in the Asian carmakers and started a major
turnaround of the Mercedes Car Group. Long term, the most harmful and lasting effect is Mercedes’ loss of sales and
prestige leadership to BMW.
PSA rides diesels to victory
Nobody has done a better job of tapping into Europeans’ unique lust for diesels than PSA/Peugeot-Citroen. The reward has been high profit margins and the No. 2 sales spot among European auto groups.
Toyota’s conquest of Europe
Toyota has had a strong presence in Europe since it built its first plant in Burnaston, England, in 1992. But 10 years ago its European operations were one of the company’s few weaknesses. Not anymore. Since 1995 Toyota has doubled its market share in Europe to 5.3 percent. This is one of the reasons the carmaker has passed Ford to become No. 2 in global sales.
Automakers must have critical mass to stay alive, and the minimum critical mass is getting larger with time. That reflects the rising relative level of capital needed for development of a new generation of products and the higher cost of meeting government regulations. The saga of MG Rover over the last 10 years is the best example of what happens without critical mass. Long part of a bigger body – whether one of the various British national conglomerates or Honda and then BMW – Rover was utterly dependent on others to provide the capital to develop new products. BMW couldn’t digest the British automaker. In 2000, it sold Land Rover to Ford and sold Rover to Phoenix Venture Holdings. Phoenix paid £10 and was given a £500 million (then E800 million)
interest-free dowry from BMW primarily for new product development. BMW only kept Mini. But while MG Rover created MG versions of existing Rover models, it never developed an all-new platform. When the last potential buyer of the carmaker decided not to take over the company in April 2005, MG Rover was forced to close.
Premium brands rise
BMW, Mercedes and Audi own the large sedan market. Mass-market brands have virtually abandoned the upper-medium and large segments (also called the D and E segments), which in the 1990s were among their most profitable. The luxury brands also have greatly increased the range of their lineups, entering the SUV and minivan segments. They are now starting to move further downscale into the lower-medium segment. Even smaller premium brands such as Volvo and Land Rover have grown, but the level of success is uneven. GM’s Saab brand essentially missed the wave. Its volume is nearly flat in a decade in which premium-brand sales have soared. Jaguar has boosted volume, but it has not matched parent Ford’s investment or expectations, and the British carmaker is wallowing in heavy losses.
Renault regains the low end
Renault lost the ability to sell premium vehicles under its own brand, but has done something even harder: rediscovered the secret to high-volume, low-end cars. The French company found its roots.
Mass-market brands buy luxury specialists
No significant European luxury marque remains independent. VW owns Bentley, Lamborghini and a revived Bugatti brand. DaimlerChrysler recreated Maybach and has ties with McLaren. Ford has a stable of premium brands in Aston Martin, Volvo, Land Rover and Jaguar. Fiat bought up Ferrari and Maserati before 1996.
As automakers increasingly go global, they force their Tier 1 suppliers to follow them – or risk losing business. For suppliers, that requires a global outlook, and a certain minimum size. Some suppliers succeed in becoming worldwide players, often by acquiring those that don’t – or those that have been overextended by trying to become global players.
Manufacturing and markets move east
As central and eastern Europe rebounded from the 1990 breakup of the Soviet Union, the European market grew. In the last 10 years, that has had a double effect. First, partsmakers started to shift manufacturing to the East to take advantage of the region’s low wages to meet automakers’ demands for lower costs. Then automakers built new assembly plants in central and eastern Europe. The other effect is that central and eastern European markets are growing and new-car sales are booming. Essentially, Europe got bigger. Since the European Union added 10 countries in 2004, the shift eastward has accelerated.
The supplier squeeze backfires
Automakers are forcing suppliers to keep reducing prices. The pressure is relentless, especially in the mass-market segments where products are becoming commodities. To save money and reduce risk, automakers also demanded that their suppliers accept more responsibility to develop, build and deliver modules and even complete systems. But as Tier 1 suppliers assumed the responsibility, they also took on more power and control. If an automaker overestimated sales volume for a model using the supplier’s new technology, then the component maker made sure that its new, expensive-to-develop technologies went to another automaker. The three major players with the most confrontational approach over the last 10 years – Ford of Europe, GM Europe and VW – now have the worst supplier relations in Europe. The three pay more for parts than their rivals and have trouble getting new technology. Ford and GM are paying even more per part on component purchases as their volume falls.
Alternative fuels and hybrids
Hybrids are taking off in North America and Japan, but Europeans remain wed to diesels. The risk is that European automakers will lose out if consumers here decide they want hybrids in appreciable numbers. Absent any push by European makers to develop hybrids, only Japanese and US manufacturers could meet that demand.
Cars become commodities
For increasing numbers of consumers, cars have become commodities.
Quality-wise, one is pretty much as good as another, so the lowest priced car with all the necessary features wins out. The earlier novelty of mobility is gone. In an era of price-driven marketing, prevalent car rentals on vacation and the rise of many other luxury goods, a car brand commands very little price premium. As a result, mass-market brands must find other ways to generate the reasonable profits they need to keep reinvesting in the next generation of products. One result: the introduction of new models and vehicle types that do generate a price premium, such as minivans, SUVs and convertibles. The other common response is to cut costs, which fuels both outsourcing and industry consolidation to seek economies of scale.
Prestige is not a commodity
While mass-market brand vehicles are becoming commodities, premium brands retain their status. An increasing number of affluent buyers want vehicles that fit their lifestyles and reflect their status. But success is uneven. Saab has gone nowhere in a 10-year period when the premium market has soared. Mercedes, BMW and Audi have done well in volume and profits. Volvo also has done well. Lexus has prospered in the US, but fared poorly in Europe. Nissan’s Infiniti has been mundane in the US but now is showing signs of doing better on the world stage. It will be introduced in Russia next year and in Europe as soon as 2008. While Jaguar has greatly increased its sales volume, it has been a profit flop for parent Ford.
European Union regulators keep imposing tougher controls on the auto industry.
These rules effect how cars are sold, how much pollution they emit, how safe they are to pedestrians and how they will be disposed of.
The debate continues on the effectiveness and cost of the rules, but both automakers and legislators agree the level of regulation is rising.
Contract manufacturing evolves
Ten years ago, virtually all contract manufacturing involved convertibles, coupes and other specialty vehicles by coachbuilders in Italy, France and Germany. The coachbuilders often had long-term ties to individual manufacturers: Pininfarina and Bertone to Fiat, Heuliez to Renault and PSA. But in recent years, that traditional model has morphed into a more conventional automaker-supplier relationship with the lowest bidding coachbuilder winning contracts. Another change is that manufacturers have turned to each other for direct supply-purchase deals. The clear winner among contract manufacturers over the last 10 years is Magna Steyr.
In 1996, the four-wheel-drive components specialist built low volumes of the Jeep Grand Cherokee, Mercedes G class and
E class 4Matic version. By early this year, Magna Steyr offered full design and development engineering services and manufactured eight models for five automakers. When automakers aren’t outsourcing entire specialty-vehicle projects, they are looking to their peers as buyers or sellers.
There are seven supply contracts planned or operating in Europe, such as Suzuki manufacturing an SUV for Fiat in Esztergom, Hungary.
Jesse Snyder joined Automotive News Europe as managing editor in 2001. Previously at Crain Communications, he was Detroit bureau chief for Advertising Age and Los Angeles bureau chief for ANE’s sister publication Automotive News. He has been covering the automotive industry since 1979.
Quality fades in importance
Quality was a big product differentiator 10 years ago. Now it is not. It has been a weak point for most European automakers, who trail their Japanese and even American rivals in general. But quality has lost much of its power as a selling factor. Mass-market automakers improved their quality to the point that consumers no longer see big differences between the major brands.
But some manufacturers have suffered brand damage by letting quality slip. The most obvious case is Mercedes, where a cost-cutting squeeze on suppliers has resulted in documented declines in quality. Mercedes has vowed publicly to restore quality levels in the next few years. Even Toyota is devoting more to worker training to try to reduce the number of product recalls.
You can reach Jesse Snyder at firstname.lastname@example.org.