By Jason Simpkins
The automotive industry is one of the most competitive in the world. It's so competitive that the Ford Motor Co. (F), founded in 1903 by Henry Ford the legendary pioneer, innovator, and father of the assembly line, has fallen all the way to the third spot in U.S. auto sales. Just a few weeks ago, Ford was ousted from its longtime No. 2 spot by the Japan-based Toyota Motor Co. (TM), a clear sign that the strategic landscape in the auto sector is changing, and that nothing can be taken for granted.
Innovation has long been an industry hallmark and, as oil hovers near $100 a barrel, fuel efficiency has emerged as the latest way to get ahead in the race for auto sales.
The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration.
AAA, formerly the American Automobile Association, recently reported that the average price for a gallon of regular gasoline nationwide is $3.07, up from $2.32 a year ago. The record national average of $3.23 per gallon was set last May.
"It's hard to predict, but the chances are good we'll reach record high prices at the pump this year because of record prices for crude oil and high demand," Elaine Zeinner, spokeswoman for AAA, told the Charleston Daily Mail.
Zeinner said the AAA and industry analysts estimate that the price of gas could range between $3.40 and $3.70 a gallon this year. Some believe the price could climb as high as $4.00 a gallon.
Soaring gas prices and environmental concerns have blown the door wide open for fuel-efficient hybrid cars. Registrations of new hybrid automobiles increased 35% to nearly 290,000 vehicles in the first 10 months of 2007, according to data from R.L. Polk and Co., an auto information and marketing company.
Toyota Taps an Emerging Trend
Toyota is the world leader in hybrid technology. The company sold 277,750 hybrid vehicles last year, up 44% from 2006. Toyota's Prius, Camry, and Highlander are considered the best hybrids on the market today. In fact, the Prius is the industry's best-selling hybrid vehicle.
The latest addition to Toyota's hybrid family is the company's A-BAT, a concept truck set to debut at the 2008 North American International Auto Show in Detroit. According to BusinessWeek, the vehicle is roughly the size of Toyota's smallest SUV, the RAV4. Its oversized grill and rugged body type are designed to appeal to truck enthusiasts, but the heart of the truck is its hybrid engine. Analysts have labeled the pseudo-truck as a bold attempt to capitalize on a market shift toward fuel-efficient and eco-friendly vehicles, without alienating traditional "red-state" truck owners.
"This is classic Toyota," Erich Merkle, of automotive forecasting firm IRN, told BusinessWeek. "They're positioning themselves ahead of the curve, preparing products for a generation of consumers that is still coming up."
It's such innovative thinking that's helped Toyota leapfrog Ford in U.S. sales, and possibly even to supplant General Motors Co. (GM) as the global leader in auto sales. GM is still first in the United States, but Toyota is gaining fast.
So now GM has launched an aggressive plan of its own as a counterstrike.
GM Cleans Up In China
Saturn, the General Motors specialty nameplate, is trying to establish itself in the hybrid market with a compact SUV. Like the A-BAT, Saturn'stwo-mode hybrid, is an attempt to reach consumers by combining towing capacity with fuel-savings.
The "two-mode" hybrid system has also been showcased on the Chevrolet Tahoe and GMC Yukon SUVs. And it will be appearing on the Chevrolet Silverado pickup and Cadillac Escalade later this year.
GM isn't stopping with its product line either. The company's taking its eco-renovation to China, where pollution has become an epidemic. In October, GM announced plans for a $250 million research and development center to be built in Shanghai. The center will focus development on eco-friendly technology, such as alternative fuels, hybrid cars, and more efficient power trains. The R&D center will also serve as headquarters for GM's China and Asian-Pacific operations.
GM is trying to use China's well-known pollution problem as a means of strengthening its toehold in the world's second-largest – but fastest-growing – automotive market. It also capitalizes on the growing trend toward global diversification.
More than 7 million cars were sold in China in 2006, already outpacing Japan. And 4.58 million vehicles were sold in China in the first nine months of 2007, a 23.8% jump from the year before.
Two weeks ago, GM proudly announced that it was the first automaker to sell a million vehicles in China in a single year.
"From day one, GM and our partners have been committed to continually rolling out new and upgraded models with specific engineering done in China for China to satisfy the needs of Chinese vehicle buyers across the country," said GM Chief Executive Officer .
The partners Wagoner mentioned are a big reason why GM was the first to hit the million-car milestone. GM's flagship joint venture in China, Shanghai General Motors Co. Ltd., sold 500,308 vehicles in 2007, a 22% increase from a year ago, Shanghai Securities News reported.
According to Kevin Wale, president of GM's China unit, the company won't be tapping the brakes on its China-focused investments anytime soon. He recently told Bloomberg News that GM would spend about $1 billion a year on production and sales in China over the next five years. Wale estimates that China's total automotive demand will rise to 9.5 million to 10 million vehicles in 2008.
"GM's main hope is put in Asia-Pacific within which China is the most important part," Ashvin Chotai, an analyst with Global Insight Inc., told Bloomberg. "Even with this $1 billion a year, it'll be tough to remain No. 1 in China. With China becoming the most important strategic market in the world, it's crucial to have their investment to stay in the race."
Who Else Is On Track For Global Diversification?
Wagoner expects that GM alone will get 75% of its car-and-truck sales from outside the United States in the next decade. That's a staggering assertion, considering GM has been one of the biggest names in the American automotive industry since 1908. But it's become increasingly clear that global diversification is the way of the future, and GM and Toyota aren't the only ones capitalizing on the trend.
In the past, the Rolls-Royce brand struggled to expand its client base beyond the super-wealthy. Owning a Rolls has traditionally been more about prestige than profit, but that's all beginning to change.
Sales of Rolls-Royce cars for 2007 are expected to be up nearly 25% from 2006. And that increase in sales has been largely attributed to success in China. China is Rolls' third-largest and fastest-growing market, accounting for 10% of sales in 2007. According to TIME magazine, one well-heeled Bejing property developer paid $2.3 million for a stretch Phantom, a customized version of the company's most popular model.
Many industry analysts believe China will be the company's No. 2 customer by the end of 2008, surpassing its one-time home market of Great Britain. The United States remains Rolls' primary customer, accounting for 45% of the company's sales.
Even BMW is willing to admit that if the company hit a rough patch, the Rolls-Royce brand would be first to go up on the auction block, but as the brand flexes it global muscle it's becoming increasingly viable.
BMW isn't the only company to pounce on a luxury brand either. Tata Motors Ltd. (TTM) is the leading candidate to obtain Ford's Jaguar and Land Rover brands. Tata Motors is a well-known player in the Indian automotive market. While primarily a truck company, it also accounts for 17% of the country's passenger vehicle sales. The acquisition of Jaguar and Land Rover would bump up its brand equity, giving it two platinum nameplates that would increase its prestige, boost its overall visibility and likely also enable it to access customers in much-higher income classes.
"The acquisition of the Jaguar and Land Rover brands will expose the company to the luxury product category, as well as to broader geographies; these are areas in which TML lacks experience," Elizabeth Allen, senior analyst at Moody's Corp. (MCO), told the Economic Times.
In the meantime, Ford – which owns the Jag and Rover brands – is looking to slim down in order to better expand its foreign-market initiative. As part of that, it may also be reducing its involvement in the U.S. and European markets, to better focus on the higher-growth markets of China and India.
The move looks to be paying off.
The company's retail sales in China rose 30% – to a record 216,324 vehicles – in 2007, Reuters News Agency reported. Ford also said its joint venture with Chongqing Changan Automobile Co. Ltd., and Mazda Motor Corp. (PINK: MZDAF) enjoyed a 60% increase in wholesale volume.
Ford and its joint venture partners operate three vehicle assembly plants and one engine manufacturing plant in China. The company also announced recently that it would put half a billion dollars into the expansion of its manufacturing facilities in the India city of Chennai. The investment will bring total capital expenditures in India to $875 million.
"We have embarked on a strategy of growing our business across Asia Pacific,", Ford's executive vice-president for Asia Pacific & Africa told BusinessWeek. "We want to grow our manufacturing-and-supply footprint in China, Southeast Asia, and India."
Parker estimated that Asia, the Pacific, and Africa would account for 70% of the growth in demand for passenger cars in the next decade.
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