The Homa Files

Excerpted from  brandchannel.com, “Detriot’s Big Three: Car Brands a Pile-up ” by Dale Buss, February 9, 2009

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The Big 3 are looking to cut costs by eliminating brands, but it’s not quite that simple.  The incremental cost to maintain brands built on common manufacturing platforms may be minimal compared to the cost savings due to higher capacity utilization. Plus there are many other costs incurred by discontinuing brands.

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Despite its looming demise, the American auto industry dismissed demands for brand reduction in December 2008. Forced by the federal government into a mea culpa that was supposed to include plans for drastic cost-cutting and other reformative measures, GM was expected to agree to eliminate a handful of its brands.

But GM went no further than admitting it should streamline Pontiac, keep Hummer for sale and maybe ditch Saab. Saturn, GM said, faced an indeterminate future—but only in terms of its ownership, not existentially.

Consider Mercury, too: Everyone has talked down Ford’s secondary brand for decades as unnecessary. But given many chances to dump Mercury, Ford has kept it around.

And as Chrysler is widely considered to be in the most danger of imminent dissolution, only two aspects of the company are given a decent chance of surviving: its minivans and its brands. If Chrysler does go out of business, Jeep and its iconic identification with SUVs probably would survive.

Even the much-damaged Chrysler brand is given some respect in discussions about what a Fiat-Chrysler combination might do with Fiat-designed or -built small cars that could be imported to the United States under their new partnership. Almost invariably, industry experts predict such vehicles would be badged “Chrysler” rather than “Fiat”—a brand that has been missing from the American market for 27 years.

“Brands in the auto business are everything…and it’s a much more complex decision to either minimize or kill a brand than most people realize.”

For a variety of reasons – including historic loyalties, production strategies, internal politics and dealer investments – car brands possess a ton of inertia and are very difficult to kill even when there’s a clear business-school case to be made against them.

But profound challenges to Detroit’s automotive brands keep arising. They snuffed out Plymouth and Oldsmobile years ago. And today’s marketplace presents a strong apparent rationale for accelerated brand consolidation in the industry, including share shifts, segment disruption, the demands of developing new models more quickly and the huge costs of supporting a brand with marketing.

Add to that the extremely intensified imperative to cut costs that now is being shouldered by each of the Big Three.

“The rationale for decision-making now isn’t whether brands are strong or not—it’s that the business won’t support them,”

On the surface, it sure looks as though GM will have to say goodbye to some brands. In its business plan unveiled to Congress in December, GM said that it would slash US$ 600 million in marketing spending by 2012. It will reduce its vehicle nameplates to just 40 in 2012, down from 48 this year and 63 in 2004.

And GM told Congress that it will avidly support only half of its eight brands: Chevrolet, Cadillac, Buick and GMC. Those four account for 83 percent of GM’s US vehicle sales and much more than 83 percent of its profits.

Yet in the fine print, congressmen found that GM wasn’t actually as dedicated to brand elimination as first thought. GM CEO Rick Wagoner said that Pontiac will continue as a specialty niche brand within the Buick-GMC division—essentially, what it is now. Saab may go on the sale block along with Hummer, but since most of the brand’s vehicles are sold in Europe, GM’s evaluation of Saab is being done there.

And Saturn, GM executives told Congress, will be the subject of exploration of “alternatives” to a simple termination or sale of the brand, in large part because the company has unique franchise arrangements with Saturn dealers.

Pontiac’s manufacturing and product development already are highly integrated with those of Buick and GMC, so the marginal cost of maintaining Pontiac as a separate brand mainly lies in marketing. And the ongoing integration of Saturn’s lineup with that of Opel, the company’s leading brand in Europe, will help GM continue to build a case for preserving Saturn.

GM also is still smarting from the lessons of Oldsmobile, which it deep-sixed in 2004. First: Beware dealers. GM ended up spending an estimated US$ 2 billion in write-offs and settlements with Olds retailers.

Second, in nixing Oldsmobile, GM voluntarily sacrificed volume in the tens of thousands of units, partly in the expectation that its other brands would recover much of that. The problem was that “they gave up all that volume and it never went anywhere else inside the GM organization,”

The main reason that Mercury has survived has boiled down to the few extra points of market share that it gives Ford and how it helps the company’s overall manufacturing utilization.

At the same time, having to churn out Mercury-badged products as well as Fords “gives higher capacity utilization to Ford’s plants, maybe 95 percent with Mercury—which would be only 80 percent without it,” said David Cole, chairman of the Center for Automotive Research.

Edit by NRV

Full article: http://www.brandchannel.com/start1.asp?fa_id=463

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