The Puzzles Facing the Car Industry – Oil Prices and Consumer Biases
By Martin Swig
Car selling requires a long-term strategy. Consider Hyundai. In their first ten years in the U.S. they wandered all over the map. They then “idled” for about five years. Finally they found a sound strategy and produced a succession of very good cars. At long last they are recognized as a major producer of very desirable cars. Reputation: UP. Resale value: UP. Dealers: TOP NOTCH. Sales: SKYROCKETING. A track record like that requires a good strategy, good execution and good forecasting.
Today, we have governments demanding electric cars, consumers being primed to want them to reduce our dependence on oil. So far electrics have less than 1% of the market. But what if oil is actually plentiful, as some experts are beginning to believe. Citing huge reserves in Alberta and North Dakota, and recent discoveries in Brazil that may exceed the reserves in Saudi Arabia, these sources suggest that oil prices could decline precipitously. If that happened, demand for electrics and hybrids would likely collapse, wiping out the considerable investment in them.
Remember the Chevy Vega, Plymouth Horizon and Dodge Omni?
We’ve been there before. In the early ‘70s our not-so-wise legislators created CAFÉ (Corporate Average Fuel Economy). These regulations required that the average fuel consumption of all the producers’ cars achieve a certain average. There is a separate average for trucks. A company like GM couldn’t average its imported product with its domestically produced cars – a sop to the Auto Workers Union. The result was that U.S. companies were forced to build money losing small cars. Remember the Chevy Vega, Plymouth Horizon and Dodge Omni?
Since government couldn’t force consumers to buy them, it took big discounts to sell them. This was eventually a factor in the bankruptcies of GM and Chrysler. Will something similar happen again?
The Hard to Read Consumer
In 1962, my sister asked me what car her family of four should l buy. I suggested a Chevy Corvair wagon. She never asked my advice again until now. After an ownership history of Range Rover, Infiniti FX and Mercedes-Benz ML, I suggested her next car be an Audi Q5. She likes it, but isn’t quite convinced.
I told her to shop a Cadillac SRX, Ford Edge or Flex, maybe a Chrysler 300 for variety, or possibly another Mercedes-Benz or Infiniti. Her response: Japanese or German, but no American car. I pointed out that the American quality is way up, fully competitive with the competition. She was happy to know that, but Cadillac and Chrysler were OUT because she didn’t want to reward a company that accepted a bailout and bankruptcies that so obviously discriminated in favor of the UAW.
Ford will get a grudging look. She will reconsider the Infiniti and Mercedes. My guess: The Audi will win out, based on style, economy and well-earned reputation.
Interesting minefield for corporate planners in a marketplace feasting on very good cars from every manufacturer.
[Source: Martin Swig; photo credit: Audi AG; Flickr]