car blog

Cars By The Pound (posted 2/8/2008)

Last week, Carlos Ghosn (of Nissan-Renault fame) was interviewed by the Wall Street Journal. Many car writers and pundits commented on the portion of the interview where the WSJ asked, "When it's all over, is there a native U.S. auto industry?" Ghosn replied, "Frankly, I don't know. I can tell you it's going to be very different from today. But whether there is going to be one left or two left or none left I don't know." He pointed out, "The market share of the Big Three, which is shrinking, is going to continue to shrink."

I was far more interested in this remark: "We've been in a slump in the U.S. now for four years. It's not only in number but also in segment. You are moving from large pickup trucks, vans, luxury products to smaller cars. You know that many car manufacturers don't make any money on small cars. They make money on the larger cars, so when the market moves this way it's a double impact in terms of profit on most of the car manufacturers, if not all of them."

It is a business axiom that, if you make money on everything you do, you'll make a profit at the end of every month. Ghosn knows this because he used to work at Michelin, where profit is king and the marketing goal is to sell premium tires at premium prices. In the rubber biz, the mantra is: the more $/pound one can charge, the more profitable the product ... and the company. Because he is an auto outsider, Ghosn does not have the historic branding/multiple model hang-ups of inbred Detroiters.

auto blog about carsThirty years ago, the coffee industry was a low-margin business. Restaurants offered coffee as a loss leader, quoting low prices and touting free refills. Then Starbucks (and other specialty roasters) came along and popularized the concept of boutique coffee - sold at a much higher $/lb. Starbucks took the idea to the retail brewed market ... and the 25¢ cuppa vanished, replaced by Venti Mocha Frappucino Whatevers at $5 apiece.

Domestic car companies are still in the 25¢ mode and that's why they're losing money, especially on smaller cars. For example, a Chevy Cobalt sells for about $4.20 per pound. The BMW 328i is almost identical in overall length and only weighs 100 pounds or so more than the Cobalt but sells for almost $12.00/lb. The Hyundai Accent competes in the same price arena as the Chevy but weighs 800 lbs. less and sells for over $6.00/pound. Then there's the similarly-priced Smart which pulls over $8.50 per pound.

There is also price disparity in the premium auto segment. The Lexus ES350 and Lincoln MKZ are the same length. But the Lincoln sells for less than $9.00/lb. compared with $10.50 for the Lexus. Move into the upper end of the luxury car market and you'll find prices in the $16-$20 per pound range for the big Lexus, Mercedes and BMW models. Meanwhile the Lincoln Town Car and Caddy DTS languish at the $10/lb. level

Detroit will succeed only when automakers are able to charge premium prices for their products. This requires a major changes - dealer upgrades, reverse decontenting of product and brand repositioning to change public perception. If they can't implement such changes quickly, Detroit will go the way of 25¢ coffee.


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copyright 2008 - Joseph M. Sherlock - All applicable rights reserved


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The facts presented in this blog are based on my best guesses and my substantially faulty geezer memory. The opinions expressed herein are strictly those of the author and are protected by the U.S. Constitution. Probably.

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