3 Reasons German Victory in the Car Business Is Not Guaranteed
If you want to look for bright, bright spots in the global auto industry, you need to look no farther than Germany. BMW has been racking up epic profits (close to 15%). Mercedes has been similarly successful. Volkswagen is nowhere in the U.S., but it's a serious player everywhere else. And of course Porsche... well, there's still no substitute.
Neil Winton offers this reportage in the Detroit News:
None of the three Germans burnt cash for more than a couple of quarters in the crisis -- all ended up with stronger balance sheets at the end of 2009 then they had in 2007....So how long will it be before the the German carmakers completely take over and put everybody else out of business? Well, it could be a while...Boosted by big sales in China and a rebounding U.S. performance, BMW's second quarter profit margin was a Ferrari/Porsche like 14.4 percent, while Volkswagen subsidiary Audi racked up 11.8 percent and Mercedes-Benz 10.7 percent. Analysts expect more of the same in 2011.
- You can't build a dominant global business on luxury. The natural advantage, if you will, that BMW, Mercedes, and Audi (owned by VW) have is that they play at the high end of the market, where fat profits dwell. As you might imagine, however, growth is limited there. It's harder to make rich people than it is to make middle-class people. BMW and Mercedes have attempted to solve this problem by creating less expensive vehicles that still evoke the mystique of their respective brands. Unfortunately, there's also a limit to how far down into the aspirational mass market you can push a luxury nameplate before it starts to seem, well, less luxurious. This is why General Motors (GM), Toyota (TM), and Ford (F) have mass-market brands as well as luxury brands. Market segmentation is their killer hedge.
- Luxury does not usually equal fuel economy. Look at BMW: it builds high-performance cars and SUVs. High-performance and high MPGs usually don't get along. And as fuel-economy standards are being raised around the world, elevated MPGs are going to need to be part of a business and product strategy. What this means is that BMW will have to start cutting into its big profits to create, for it, risky vehicles that have lower horsepower, hybrid engines, electric motors, and the like. The company will be forced to square the circle of high MPGs and high performance -- and they loyal BMW buyership may not go for it.
- Luxury profits are not based in real people spending money. The luxe biz is pretty snappy right now because rich folks are the only ones with money to spend. (Well, not the only ones, but the ones who can spend without fear.) Eventually, however, growth will be driven by what it's always been driven by: the vast middle. What will be different this time around is that mass-market carmakers have begun to pump more luxury features into their middle-of-the-road rides. Additionally, some of the traditional luxury aspects, such as unguent upholstery and luscious wood-trim, have become less important to buyers than kickin' technology. You can have a near-luxe car with awesome technology that winds up looking better than a true-luxe car that has iffy tech.