By Peter M. De Lorenzo
Detroit. The auto industry never ceases to amaze me. It can soar and impress with stunning grace and wild exhilaration, yet it can churn and burn with an inevitability that’s relentlessly mind-numbing. And the propensity for this business to collectively shoot itself in the head and snatch defeat from the jaws of victory remains constant and unyielding.
Given that, I feel ill winds starting to gather in the gloaming. Things don’t appear to be what they are and other things, well, are turning out to be exactly what they appear to be.
There’s a simmering chaos that seems to be building in this swirling maelstrom that defines this business, and with each glowing prognostication that suggests that the good times are just getting started, I’m feeling just the opposite, that we’re getting closer to a major conflagration, which will result in a downward correction of brutal consequence.
Right now this business is percolating at a prodigious rate, but to where is the question. My gut says it’s to nowhere good. Why? More brands are clamoring for the same space in the market, with every single manufacturer angling to succeed in the $35,000 to $55,000 price transaction sweet spot.
Only they can’t all fit. And there will be more losers than winners you can count on that. But in the meantime we’ll have to sit through the constant bleating and pronouncements from the various manufacturers suggesting that they will succeed, and that it’s only a matter of time before they attain a new level of greatness. Except that when you tally all of the sales and market share boasts from the jockeying manufacturers, you realize that the various shares of the pie would add up to about 235 percent.
On another subject, we have collectively moved on from the democratization of technology phenomenon - whereupon new technology gradually descends from the luxury segments down to the more mainstream automotive offerings, increasing value and content – and it is now yesterday’s news. Because it has now been officially replaced by the democratization of luxury.
The democratization of luxury - which finds luxury automakers pushing down into more mainstream segments with product entries that have enough design cues and engineering features to qualify as the “real thing” – at least to consumers who wouldn’t have considered the brands before - is now consuming everything in sight in this business.
Some manufacturers (BMW and Mercedes-Benz, to name just two) insist that the democratization of luxury is merely the cost of doing business at this point, that it’s a required operational strategy in order to increase volume and profitability, attract younger buyers and buyers new to the brand, and to ensure these companies’ ultimate long-term success.
But the ever-present danger is that in the process of embarking on this strategy, the luxury brands are upending the market’s stability and demeaning and degrading their brand integrity, bringing their “specialness” into question.
The ominous part of all of this is that there’s an air of “we can do no wrong” with this strategy among the manufacturers practicing it, because it’s clear that they feel there is no downside to what they’re doing. And when you look at some indicators, for example Mercedes says that the new Mercedes-Benz “Jr.” - aka the CLA - has succeeded beyond even their rosiest predictions, maybe they’re on to something. In fact the success of the CLA has emboldened Mercedes strategists even further, and now they’re ramping up to churn out even more.
But the reality is that there is a not-so-subtle downside to this strategy unfolding, which could have dire implications going forward. And that is that the luxury automakers’ push down-market is not only putting added pressure on overall pricing and costs for the market as a whole, it’s also putting intense pressure on luxury brands to prove their worth at the higher end of the pricing stratosphere, in order to justify the ever-increasing premiums these companies are charging for them.
And therein lies the essence of the looming marketing conundrum for these manufacturers: If consumers become conditioned to getting Mercedes or BMW or Audi models that are “just like” these manufacturers’ more expensive offerings, at what point is there a seismic shift in the market where consumers just stop buying the more expensive step “up”? For instance, at what point does an Audi Q5 intender say out loud, “I’m just going to get a Q3 and save myself a ton of money.”
The time-honored product ladder strategy, which had consumers trading up to more expensive vehicles as they progressed through the stages of life - and which was originated and executed to perfection by the legendary Alfred P. Sloan at the old GM – is so fundamental to this business that these manufacturers may in fact be setting themselves up for long-term failure while they continue to high-five over their short-term sales success.
The lesson here is that there are always consequences in this business, but I’m afraid that the manufacturers who are insisting that this democratization of luxury strategy is infallible have forgotten that.
But that’s just one example of the simmering chaos that’s roiling this business right now.
The others? The scorched-earth pricing policies as practiced to varying degrees by all manufacturers – especially when it comes to pickup trucks – is a train to nowhere good, you can count on it. Massive incentives and overly long loans are driving the business right now, and the manufacturers are all saying something like this: “What’s the problem? Our double-secret indicators are suggesting that it’s all good, that we’re going to ride this wave for a long time to come.”
Except that we all know this isn’t the case, because what they’re really doing is pulling ahead sales and hoping that they can ride the momentum to dizzying heights and profits, while turning a blind eye to the long-term consequences. History has proven time and time again that it doesn’t work that way in this business, and it looks like a new wave of managers will have to learn that lesson the hard way too.
On another topic, there are some very smart people in this business who believe that the rising tide of car sharing services in this country and around the world will ultimately workout just fine and not negatively impact the industry. In fact some manufacturers are even embracing the services by making cars available for their use.
I flat-out disagree.
Yes, new ideas and new solutions that attempt to alleviate the urban chaos are commendable, but if I read one more quote from a person saying something like, “It’s so nice that I don’t need a car anymore, that I don’t have to deal with the costs and the hassles, etc., etc.,” I just have to ask the leaders of the auto companies out there proselytizing on how great these car services are: Really? Do you really think the emergence of these car sharing services is ultimately going to be good for your business? Do you really think that the rising tide of anti-car rhetoric and actions is going to be good for the long-term health of your companies?
I suggest you think long and hard about it again.
And finally, much hand-wringing has gone on since it was announced that Sergio Marchionne was going to be taking over Ferrari, adding to his already over-served agenda fueled by his maniacal, micromanaging ego. In fact several auto journalists and assorted automotive fan boys have gone on to suggest that Marchionne will do just fine with Ferrari, that if Porsche can transform itself from a niche player of cult-ish sports cars to a full-line manufacturer of sports cars, trucks and crossovers, then Marchionne can use that model and do the same for Ferrari, bringing even greater profits to the table.
Except that there is no scenario under which Ferrari and Porsche can or should be lumped together. In fact, the two car companies couldn’t be further apart in terms of histories and legacies. Enzo Ferrari built and sold street machines bearing his name to fund his racing efforts. He didn’t suffer fools and he didn’t care what people thought. “Friends” of the factory were more often than not just people who kept coming back for more and had the cash in hand. His coldly calculated belligerence and abrupt demeanor were all part of the persona that he cultivated.
In spite of all of that, or more accurately because of it, in the end Ferrari wasn’t just a car company, it was a source of intense pride and devotion for a majority of Italian citizens who have an unwavering emotional connection to the brand that lives on furiously to this day. The average Italian couldn’t give two shits about Fiat, and Alfa and Maserati were mere shadows of their former glory, but Ferrari? They lit votive candles in its honor. And still do.
It could be argued that Porsche also built sports cars so it could fund its racing, but in reality the two car companies were always much different. Porsche was always a more coldly calculating car company, cynically extracting profits in ever-more creative ways, while selling sports cars and race cars with abandon. As for the German citizens’ devotion to their automotive stars, they had Mercedes-Benz and BMW to think about as well as Porsche, so the loyalties and passion were spread about accordingly.
Porsche was just one part of the German technical juggernaut, while Ferrari was the standard bearer of Italian passion, pride and performance. That’s a huge – and fundamental - difference.
What will Marchionne do? Ramp-up Ferrari production, of course (something his predecessor would never do) and start using Ferrari bits and pieces to prop-up Maserati and Alfa Romeo. Will Marchionne’s plan negatively affect the Ferrari brand? We will have to see, but I would argue that the decline has already begun. There are too many Ferrari “worlds” catering to tourists, too much Ferrari merchandise and too much of, well, everything with the Ferrari logo on it.
At one point Ferrari was the most desirable and exclusive high-performance brand in the world, a brand that stood above the rest with a passion that resonated and a studied arrogance that was purposeful and carefully calculated. Not everyone could afford one, which was exactly the point. And the automotive world was comfortable with that.
But it’s a different world now. That democratization of luxury and technology I spoke about earlier? It has let the genie out of the bottle, and now every automaker can dial-up a set of ingredients and say that they’re ready to play in the rarefied atmosphere that was once the exclusive domain of Ferrari.
I can assure you that Marchionne – the consummate mercenary - isn’t interested in any of what has come before him. He knows better and he knows best – just ask him - and if he can squeeze out another 4,500 units for Ferrari, so be it. The profits are too good and the brand will survive, in his estimation.
But Ferrari was never, ever supposed to be just another “me too” car company swimming in a pool with the rest of the brands. It was always special and a cut above.
It looks like those days are gone forever now, and it really is too bad.
The next trend I’ll be watching for in this business?
The democratization of stupidity.
And that’s the High-Octane Truth for this week.