Picking winners

In many parts of the industry, one of the most important questions at the moment is who (or what) are going to be the winners.  The focus for many is on manufacturers as new entrants heap pressure on the established players, but manufacturers themselves are also having to make choices as they seek to manage their investment and maximise their chances of being amongst the winners.  As the outcomes of the latter feed into the assessment of the former, I’m going to keep things simple by considering only the question of what factors will result in some manufacturers coming out on top. 

As a spoiler alert, I’m not going to name names here not only because that’s not commercially very smart with either my ICDP or Auto West London hats on, but because I genuinely think that the outcome is not certain.  If that were the case, then life would be much easier for all of us.  The point is that there is still uncertainty, or from a manufacturer perspective, opportunity to be a winner.  This is what makes decision making challenging for everyone whose business is influenced by the manufacturers they work with.  There are a number of criteria that you should take into account in this process, but I want to pick on just four.

Perhaps most obviously, what is the current scale and trajectory of the business?  Whilst newcomers will undoubtedly affect the leading brand groups such as Stellantis and VW Group, both with over 20% market share, a 15% share would still leave them in the top tier, even if such a loss would have implications for which brands within the group survived.  It would also have implications for their ability to maintain investment levels after such a dramatic loss of share.  If we look at the many players with shares in lower single figure percentages, then trajectory becomes important.  There is a huge and obvious difference between new entrants with a growing 2% market share, and established brands with the same share but stable or under pressure.  Brands with low and declining market share, and no sign of a specific recovery plan must be at risk of a European exit, and perhaps an existential risk if they do not have strong positions in other global markets.

Given how much uncertainty surrounds the question of future powertrain options, the capability of a manufacturer to respond to the swings in demand and regulation must also be a determinant of long-term viability.  The majority of people in and around the industry would bet on pure battery electric propulsion being dominant in the European and Chinese new car sales mix by 2035, but what is becoming clear is that there is an increasingly broad spectrum of technical performance in both motors and batteries, as well as enabling technologies such as aerodynamics.  There are also many other global markets which may be much less advanced on electrification for a variety of reasons.  On the road to 2035 however, the path will not be smooth and there will remain demand, even in Europe, for combustion engine and plug-in hybrid vehicles.  If a manufacturer can only afford to stay at the leading edge of a single technology option, or sets a strategy that has a sole focus, or limits their sales opportunities outside Europe, this must increase the risk of being caught on the wrong side of the market trends for an extended period, weakening the manufacturer and their partners, and further depleting their ability to stay the distance.

Dealer networks – whether they follow franchise or agency models – are key to completing retail sales and supporting cars for their aftersales needs, regardless of how they will evolve.  Ultimately a weak dealer network will restrict the potential of a manufacturer brand, and the converse is true that good quality dealers will not invest their time and effort in a brand that they do not see as having good potential and the promise of strong financial returns.  This can become a self-fulfilling downwards spiral – that if good dealers start to abandon a brand, then it will weaken the manufacturer, which in turn makes the franchise even less attractive to other dealers.  Dealer attitude surveys are a very visible indicator of sentiment as seen by those who are currently invested.  Manufacturers need to take these seriously, rather than dismiss it as ‘dealers having a moan’.

One influence on that, but worth mentioning in its own right, is the market approach of a manufacturer, linking supply chain strategy and network structure.  There is not a single correct approach to market – the arm’s length wholesale approach adopted by many new entrants, but also by some long established and respected brands like Suzuki, is not in itself inferior to the highly integrated standards-focused approach used by the traditional premium brands, as long as the total business model adds up in terms of return on investment.  If however, excess complexity is pushed into a wholesale model, or the exclusive brand positioning required to produce the returns needed to fund a premium approach is lost through high discounts, this will drive lower financial returns.  A rush for volume by a new entrant buying market share or a desperate push by an established player to protect share through discounting and pushing more product through low margin channels, will ultimately destroy the brand proposition, residual value and customer loyalty. 

There are clearly other factors that play an important role – not least the attractiveness of the product itself – but those have always been there and will remain a factor.  What is different in the current uncertain climate is that the brand trajectory, powertrain flexibility, network strength and market approach are all going to be under pressure as they have never been before.  Coming from very different starting points, they are as critical to a new entrant as to an established player, and will determine who the winners and losers are.