Refuelling for a US auto race

The US car industry, which a few years ago seemed destined for oblivion, has reconditioned itself by overhauling production systems and learning to give customers what they want.

While the American stock market has had a setback in recent weeks, at this stage it is just a normal correction after a big rise. If the European morass severely damages the world banking system then US shares, along with those in Australia, will take their share of the hit.

But for the moment optimism is stirring in the US partly because American companies are doing better after they took the hard knocks in the global financial crisis – something that did not happen in Australia.

Nothing illustrates this better than the US car industry, which a few years ago was written off as destined for oblivion. And the story of the turnaround reveals a fascinating cultural change in the US. It's the beginning of the end of the throwaway society which has dominated the US for the last 60 years.

Last year the big American carmakers managed to increase market share in the US at a time when the market itself was growing. In part, this was explained by the Japanese tsunami disrupting the supply chains of big manufacturers like Toyota, Honda, Nissan and Mazda.

With the tsunami behind them the Japanese expect to recover lost ground, but the Detroit three appear to have learned some new tricks.

According to new research from Booz & Company, 86 per cent of auto supplier executives and 72 per cent of original equipment manufacturers believe General Motors, Ford and Chrysler will at least maintain their higher market share in another year of growth, or increase it.

Speaking to Business Spectator, lead researcher Brian Collie says the primary reason for this optimism is the most obvious one: "They’re making cars that people actually want to buy.”

That’s great as far as it goes, but Americans aren’t buying nearly as many cars as they used to. In 2007, Americans were purchasing vehicles at a rate of 17 million a year. In 2011, that number was stuck at 11 million.

Volumes are slowly improving, but the climb back to 17 million will be a long one. Many Americans used to turn their cars around in three to four years, leaning on their mortgages for the finance. Now real estate values are in the toilet and only just showing some initial signs of recovery, and the lack of job security means US drivers are holding on to their cars for longer.

So why are US motor executives so buoyant?

The answer is that the restructuring of the US car industry (production downsizing, supply chain reorganisation, dealership network shrinking and brand rationalisation), is paying greater dividends than even the optimists might have hoped. The bottom line is that America produces less cars for a greater profit per vehicle. Every new car sold is worth more to its vendor than it used to be.

The cars themselves have changed as well, observes Frost & Sullivan research director Veerender Kaul.

"I think they (the Detroit three) have invested over the last few years into small cars, more fuel efficient cars,” Kaul says. "They had these big product gaps when it comes to smaller vehicles and they have been able to insert products in those segments which have been well received by the US consumer.

In General Motors’ case a key role was played by the former Australian General Motors chief Alan Batey, who is now responsible for sales distribution, retail advertising and customer service the Chevrolet dealer network. Chevrolet is GM’s main brand.

Batey recognised the design and production talents of the Australian operation so, as part of the US drive to market cars Americans want to buy, the Chevrolet-badged Commodore will go on sale in late 2013 as a high performance sports car that and will form the basis for the GM’s entry in Nascar sports event

The Australian deal is also reflecting how the US car industry opened its mind to new managers including those from other industries in an attempt to get a new perspective on how to handle an enormously complex supply chain.

"The automotive industry in North America was very deeply entrenched,” Kaul says. "They had a very myopic view, which was inward looking as to how business was done as usual. So they all wanted to break away from that mould.”

Which brings us to Ford, currently run by former Boeing chief executive Alan Mulally. By avoiding bankruptcy, Ford was able to separate itself as a superior operator against the likes of GM and Chrysler and continues to quietly trade on this distinction.

But US consumers aren’t persuaded just by whether or not a company was bailed out. They’re becoming more appreciative of quality. In the old days, with 17 million cars flying out the door, it was difficult to focus on quality, particularly when customers were getting rid of vehicles after three to four years. But attitudes are slowly changing. This generation of American college graduates are getting a taste of what it’s like to live in hard times and they’re primarily driving the shift towards smaller cars – which means they want more bang for their buck.

Everyone remembers that two years before the GFC, on BBC’s Top Gear – which boasts a viewership of 350-400 million people – presenter James May introduced the Chrysler Crossfire Convertible, which was based on an old Mercedes SLK, with the following warning: "That’s not a very good recipe to be honest. Because the old SLK was a bit naff and the Americans can’t build cars.”

Now that American car makers appreciate quality they are finding new opponents because the big three are hardly the only companies to realise the newfound appreciation American car lovers have for reliability and fuel economy.

The Booz & Company survey also indicates a vast majority of automotive executives believe Hyundai and Volkswagen/Audi will make the most significant market share gains in 2012.

The reason is brand appeal and perceived quality. While Audis don’t rate within the top 10 for reliability, Volkswagen has some of the most respected performers on the road – it is German after all.

Hyundai, which used to have a reputation as a cut-price producer, has cottoned onto the new trend and is now dishing out some of the most stylish family cars on the road that aren’t too thirsty…and have a ten-year warranty.

With younger US consumers unable to see a near future with a boot-full of housing equity, they have to look for alternatives. Hyundai is leading the way, with additional financing options and a solid returns policy.

The Detroit three have reawakened with a more efficient way of giving the consumers they know best of all what they want. If they’re to build on this, GM, Ford and Chrysler will have to further improve the reliability and fuel efficiency of their vehicles and utilise their superior knowledge of US consumers to hit the style points as well.