59-Nearing End Game for the Domestic Auto Industry

 

Very large, established industries change slowly. This pace of change allows competing companies to adjust to those competitors making effective strategic moves… If they want to do so. Here is an industry where relatively new competitors continue to march up to the top ranks of the industry. Everyone can see them coming. But no one seems to be able or willing to slow them down. The Blog tells the story of the last 17 years.

Posted 11/10/08

Consumer Reports recently had a load of bad news for the domestic auto manufacturers. The big car retailers had even worse news.

Consumer Reports issued a report showing that the three domestic automobile manufacturers, GM, Ford and Chrysler, trailed Asian manufacturers in quality. The Chrysler cars were rated very low on the quality scale. The GM cars were hit and miss: some of good quality, others of poor quality. Ford generally rates as the best of the domestic automobile manufacturers in automobile quality. The knock on Ford from Consumer Reports is that its car styling was boring.

We have observed, through thousands of customer interviews that all customers purchase using a hierarchy of criteria: Function, Reliability, Convenience and Price, in that order. (See “How Customers Buy” in the Perspectives section of StrategyStreet.) Automobile styling is a form of Function. Automobile quality is a measure of Reliability. In all Hostile markets, those industries with overcapacity, the winners in the industry succeed on the basis of high Reliability. Function and Price usually mean little because competitors copy any successful Function or Price innovation very quickly. Convenience is important. However, a company that loses its Reliability will also lose its Convenience, even if it is the leader in the industry.

The domestic auto manufacturers have lost their reputation for high Reliability. Now they are losing their Convenience, as the big car retailers write off the value of their domestic branded stores. Recently, the third and the fourth largest automobile retail chains, Sonic and Group 1, wrote off the major portion of their remaining investment in GM, Ford and Chrysler stores. In each case, the dealerships of the big three automakers accounted for less than 20% of the sales in the group. These big retailers are Very Large wholesale customers, those who determine the future of the industry and the Convenience with which retail customers may purchase automobiles. Many of the domestic brand of stores will close, particularly in these large dealership groups. Very few new outlets will open. As a result, the Convenience advantages previously enjoyed by the domestic automobile manufacturers will slowly ebb away. That leaves them with little left to stand on. Neither Function nor Price will save them. Convenience has been their major strong point, but they are losing that as their Reliability slips.

You might ask why Reliability has slipped. The companies made choices that reduced the quality of their automobiles. This is an example of a self-defeating cost reduction, which sinks many competitors in Hostile marketplaces. (See “Success Under Fire: Policies to Prosper in Hostile Times” in StrategyStreet.com.)

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Update 2022:

In 2016, Fiat Chrysler severely cut back its production of sedans. GM and Ford followed the same approach later. These US manufacturers have largely abandoned the sedan market, which makes up about 30% of new vehicle sales. In 2018 and 2019, the largest US manufacturers, GM, Ford and Stellantis decided to largely withdraw from the sedan market in the US. The companies faced fierce competition, especially from Japanese and Korean auto manufacturers. Ford no longer offers a sedan. GM offers three sedans across its several brands. Stellantis offers very few sedans as well. Meanwhile, in 2019, recent entrants Hyundai (1986) and Kia (1992) sold over 700,000 and 600,000 vehicles respectively in the US market.

While the US based auto manufacturers struggled, their Asian counterparts continued to gain share.  As other competitors, particularly the Koreans, have grown their market shares with high quality products, Toyota’s US market share has stagnated.  In 2008, Toyota’s US market share was 14%.  By the end of 2021 its market share was 12.75%.  In 2020, Toyota still led the global market with a share of 8.5%.  Volkswagen followed at 7.8%.  Hyundai was 3^rd at 5.4%.  Ford was 4^th at 5.1% and Honda was 5^th at 4.8%.

The shifts in market share have had little effect on concentration among retail dealers of automobiles. In 2009, the industry sold only a little over 10 million cars. By 2019, that number was closer to 17 million cars. In 2009 there were 20.5 thousand light vehicle dealerships.  That number fell to around 18,000 in 2012 and has remained relatively stable around that number through 2021. In 2021, 93% of dealerships had 5 or fewer stores, only 2% had more than 10 stores.

Why don’t failing companies and their capacity simply close down and leave the industry? HERE is an explanation

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Update 1/2026

Hyundai and Kia continued to gain market share in the US domestic automobile market. Toyota and Honda maintain their market shares, at 14 to 15% and 8 to 9% respectively. The Korean’s market share gains have come at the expense of domestic manufacturers. The Korean market shares picked up steam beginning about 2019 as they adopted some new strategic initiatives. Here are some of these initiatives described by the Customer Buying Hierarchy Components.

Function. The Koreans introduced new Performance Leader Price Point products in the SUV and hybrid categories to compete in markets where they had been relatively weak with limited product offerings. Importantly, their styling improved dramatically, attracting new customers with their forward designs.

Reliability. The Koreans have always had the best warranty in the industry. In the last few years their quality has risen to the point where they rank highly in third-party quality ratings. There is less risk today in buying a Korean automobile.

Convenience. The Korean marques branded storefronts have grown while competition has remained relatively stable in store counts. More on that below.

Price. The Koreans use low price as a strategic weapon. Their automobiles average $4000 to $5000 less than industry average for comparable automobiles (example of a Leader’s Trap). They complement this low price with very good financing incentives.

As the Koreans have scaled their business they have reached the point where their infrastructure is comparable to that of Honda. They now produce 62% of their automobiles domestically in the inexpensive Southeast of the US.

The growing presence of the Korean manufacturers emerges in both the number and value of their domestic storefronts. In the market as a whole, the total number of US dealer stores fell slightly over the last five years, but the average sales per store rose. The domestic brands slowly reduced their stores as they consolidated their networks and cut out weaker franchises over the last five years. GM maintains about 4000 stores, Ford roughly 3000 and Stellantis about 2500. Toyota and Honda stores are growing slowly, with Toyota at roughly 1300 stores and Honda about 1100.  The big winners were the Koreans who increased their store counts by 130 stores. Hyundai now has 862 stores while Kia has 802.

The value of these stores also reflects the growing consumer appreciation for the Korean manufacturers. Toyota leads the pack with prices for its dealer stores at $12-$18 million. Honda follows at $9 – $14 million. In a tier down, GM and Ford dealers are worth $7 -$12 million each. The Koreans at $6 to $9 million value per store are in the third tier but are rising steadily and are approaching the values of the domestic branded stores.

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