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Nearing End Game for the Domestic Auto Industry

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 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.)

Posted 11/10/08

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