Marketing and innovation

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GLOBAL INVESTOR 2.05 Automobiles—24 Driving the future For the car industry, developed countries are replacement markets, where new customers can only be acquired by gaining market share from the competition. Marketing and sales incentives are key elements of this strategy, but in mature markets like Europe and North America, they rapidly become a zero-sum game. Markus Mächler Penetration into fast-growing emerging markets is one response to this problem, but the competition is fierce here too. The other response would be to try to re-invigorate the developed markets through radical innovation, for example, in new fuel systems or utterly new market segments such as ultra-lightweight urban vehicles. Instead, the major automobile manufacturers have focused on relatively marginal innovation, which is rapidly copied and ultimately is little better than marketing spending in terms of the benefits it brings to companies and consumers. US and European car registrations reached their peak in 2000, followed by a sharp correction of the economy (due to post 9/11 shock, the economic slowdown and end of the so-called technology bubble). As consumer confidence diminished, especially in the USA, the automobile industry increased sales incentives and marketing led strategy did achieve its narrow objective of sustaining sales volumes. As Figure 1 shows, this marketing-led strategy did achieve its narrow objective of sustaining sales volumes. However, it did so at the expense of margins. This was a deliberate choice by the US mass-market manufacturers, which were not flexible enough to cut volumes substantially due to their pension and healthcare costs. Measured as a percentage of sales, average incentives per automobile have risen steeply in the last six years, while R&D spending has fallen (see Figure 2). The US and the European market are both over-saturated car markets. Despite greater spending on marketing, only a few car manufacturers have managed to grow during the last few years. Consumer response to higher incentive spending is decreasing. Pressure from raw-materials prices has become an issue and does not allow carmakers to further cut prices either. The question is how to keep consumer spending at least stable. In our view, only serious innovation can help bring the automobile industry out of this current predicament (see Figure 3). Increasingly, the major automobile manufacturers have concentrated on what we would describe as “pseudo-innovation,” i.e., changing the size and shape of cars as part of a marketing-led strategy to appeal to image and perception, without fundamentally altering their functionality. The rapid growth of the sports utility vehicle (SUV) market is an example of this. In the short term, this can be highly successful, allowing early movers to capture significant market share. But over time, it becomes a zero-sum game as others enter the new market segment and drive margins Figure 1 US consumer confidence and new passenger car registrations Source: Autodata 150 130 110 90 70 50 30 01/76 07/78 01/80 07/82 01/84 07/86 01/88 07/90 01/92 07/94 01/96 07/98 01/00 07/02 01/04 US consumer confidence index SADJ (l.h. scale) US new passenger car and light truck sales (r.h. scale) millions of units 18 17 16 15 14 13 12 11 10 9 8
China is currently the third-largest car market after the USA and Japan The Middle Kingdom experienced phenomenal growth in demand for automobiles following the WTO entry in December 2001. China has a large number of local car producers facing increasing competition from Western car manufacturers in their home market. Will they be able to export their products to the Western world?
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