New Road Map For Automakers

Despite record car sales last year, the U.S.' biggest industry must adjust to changing business models and consumer demands.

It was the best of times, it was the worst of times." Dickens' words aptly describe the auto business in 1999. While this global economic engine closed its books on a record finish to the millennium, that's not the whole story. Managing for growth, market share, and profitability has never been tougher. The industry's challenge: to resolve conflicting demands of consumers and the environment while leveraging the new, revolutionary business models that the Internet has introduced. At January's Automotive News World Congress, William Clay Ford Jr., chairman of Ford Motor Co., equated the Internet's significance with his grandfather's mass-production innovations. He predicted the Internet similarly will improve productivity, lower costs, and delight customers. But he also said that changes in the vehicles will be equally significant. Together, the process and product innovations will reinvent the industry. Transforming the product will be mass-production alternatives to the internal combustion engine. Ford's initiatives in that direction include the Prodigy, a hybrid-electric concept car that is as large as a Taurus sedan, yet is capable of 80 mpg. Introduction is targeted for the 2003 model year. Ford believes such hybrids could represent 20% of the market in 10 years. (General Motors Corp. recently unveiled a similar concept, while Honda Motor Co. Ltd. and Toyota Motor Corp. have hybrid-electric vehicles in production.) Supporting Ford's strategy is the dedication of a new brand -- Th!nk -- for the development and marketing of alternative-fuel powertrains and vehicles. Th!nk's products are designed to be environmentally friendly in manufacture, operation, and afterlife. North American marketing efforts will begin with three products: a low-speed electric runabout and two electrically assisted bicycles, one a folding type. Supporting Ford's observations on the influence of the Internet is a new survey of automotive executives by the professional services firm KPMG LLP. "We're seeing the transformation of one of the world's most important industries just as it enters a Web-based universe where information is king," says Detroit-based Brian M. Ambrose, KPMG's national industry director for industrial products and automotive practice. "For example, the research emphasizes that the auto giants are shifting their focus from producing cars to marketing them . . . a radical concept for managers who have grown up in this business." The "best of times" certainly applies to the record numbers of vehicles sold in 1999. In the U.S. alone, sales of light vehicles totaled an unprecedented 16.89 million cars and trucks, surpassing the 1986 record by a million. "Last year was the ultimate ride, the roller coaster just kept going up, up, up," says Dick Colliver, executive vice president of sales for American Honda Motor Co., Torrance, Calif. Honda's 1999 sales of nearly 1.08 million represents a 6.7% increase over 1998, an all-time record. Mercedes-Benz USA Inc., Montvale, N.J., also reports record-breaking sales of 189,437 in 1999, an 11.3% increase over 1998. In December, its upscale S-Class recorded the best month on record. Mercedes, followed by Lexus, now leads Cadillac and Lincoln in the U.S. luxury sector. That sales performance even surprised Jrgen Hubbert, managing director of Mercedes-Benz's parent DaimlerChrysler AG, who observed that becoming No. 1 in that sector was not the company's target. GM's sales rose 9% in 1999, with trucks up 12.9% and cars 5.5%. Ford reported a car sales increase of 9.4%, while truck sales rose 10.7%. But behind those increases were slight market-share declines at Ford, DaimlerChrysler, Honda, and Toyota. GM's share climbed slightly -- to 29.45% from the 29.4% reported for 1998 when a strike impacted its sales. Back in 1962 GM had 51% of the U.S. market for cars and trucks. While vehicle sales in the U.S. may be booming, the industry is facing a faster, tougher, and more competitive market. Technology is putting the consumer in charge. Customers are demanding both innovation and high quality at the same or lower cost -- which explains the move to the Dell Computer model. That Internet-enabled scenario is based on make-to-order rather than make-to-stock, a manufacturing model in which information becomes a substitute for inventory. "The new model is going to be about servicing customers rather than just stamping out cars," responded one executive in the KPMG survey. Ambrose says nearly all of the respondents cite Internet technology as the driving force behind this move to a consumer technology model, and point to the following sweeping changes in the automotive marketplace:

  • Customer relationships will be enhanced via improved communication, customer service, and innovations in aftermarket services.
  • Branding and customization for differentiation will be emphasized.
  • Real-time communications with suppliers will mean transaction cost reduction, more efficient design planning, scheduling, and logistics, as well as improved inventory management and cash flow.
  • The shortened cycle times will require consolidation into much larger "supersuppliers" that will take over much of the design, engineering, and manufacturing functions.
To support the new model, Internet deals are proliferating. They outnumbered the announcements of new-model cars and trucks at January's North American International Auto Show at Detroit's Cobo Convention Center, quipped Ford's chairman. Ford announced an alliance with Yahoo! Inc., Santa Clara, Calif., and GM linked with America Online Inc., Dulles, Va. Both provide personalized services for customers. Another example with broader implications is Saturn Corp.'s $300 million project to facilitate customer service over the Web and integrate databases across the enterprise. The project will take 15 months to develop and a year to deploy. The project team includes Computer Sciences Corp., El Segundo, Calif., Siebel Systems Inc., San Mateo, Calif., and Reynolds and Reynolds Co., Dayton. "We are creating the industry's first integrated, open, real-time, and standardized system that will seamlessly link all Saturn retailers, customers, and GM support units," says Lloyd Waterhouse, president and COO, Reynolds and Reynolds. "The architecture will streamline communication to customers; permit Saturn retail specialists to review vehicle information anywhere within the Saturn customer network; provide real-time access to the history of any vehicle; and be built on a foundation of total integration. Every transaction is captured when it occurs -- instantly and automatically updating every other piece of information it affects throughout the system," adds Waterhouse. "This is all about taking care of the customer and offering them more value," says Cynthia Trudell, Saturn's chairman and president. "Our system is a prototype within the GM organization, demonstrating how technologies like the Web can expand our range of services and help us to stay closely tuned to customers." Adds Jill Lajdziak, Saturn's vice president of sales, service, and marketing: "While customers will be able to use the system to pursue vehicle purchases, our retailers will be an integral part of the transaction process as well." As automakers rethink strategies to accommodate the Internet and hybrid powertrains, the popularity of trucks also is influencing decisions. That is apparent on the car show circuit. At the Detroit show GM demonstrated its commitment to the public's taste for trucks with a variety of concept vehicles, including a small Hummer, the H2, which will be translated into production for the 2002 model year. (AM General Corp. sold the Hummer brand to GM in December.) The original is renamed Hummer H1; show-goers quickly named the new H2 the Hummer Lite. Those will be followed by additional models that will be even smaller and less expensive, in order to bring in younger customers, says Ron Zarrella, president of GM North America. GM also displayed concepts in the "crossover" category, vehicles that merge the functional and design characteristics of car, pickup, and even vans. Chevrolet's example is the Avalanche, featuring sporty styling combining four doors with a pickup bed. Other GM crossover prototypes: Chevy's Triax, Pontiac's Aztek, and Saturn's CV1. All three concepts represent efforts to leverage the appeal of sport utilities and vans in one design. Chevy's SSR (Super Sport Roadster) is a highly styled crossover concept that evokes strong roadster themes in a small pickup configuration. America's continued fascination with light trucks and crossover designs means that car sales may eventually dip below a 50% share, says CIT Group, Livingston, N.J., a commercial and consumer finance organization. That potential is behind an organizational change at GM that will merge the North American car and truck group into a single engineering and manufacturing organization. The savings potential is in the hundreds of millions of dollars, say analysts. GM's Zarrella says the changes are a response to market trends that are blending the design elements of traditional cars, trucks, sport utilities, and vans. GM also is expanding its utilization of partnerships and alliances -- a practice that until 1970 was against the company's formal policy. In addition to its long-standing alliances with Suzuki, Toyota, and Isuzu, the company has cut deals with Fuji Heavy Industries and Honda. "No automaker today has the resources to achieve leadership in all regions and all product segments on its own," explained John F. Smith Jr., GM's chairman and CEO at the Automotive News World Congress.
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