Friday, January 10, 2014

Can US carmakers compete with the Germans?

With the European auto market in decline, American companies can expect to be squeezed from all sides.
By Jason Overdorf
GlobalPost - January 10, 2014

BERLIN, Germany — Opening with a gala this weekend in bankrupt Detroit, the North American International Auto show will be all glitz and glamour as ultra-expensive luxury sedans and high-performance sports cars compete against fashion models for media attention.

But the real news will be in the boring old bread-and-butter “value segment,” where the competition promises to be stiffer than ever thanks to developments across the Atlantic in Munich, Stuttgart and Wolfsburg.

American automakers have never sold many cars in Europe. But the steep decline of the car market here nevertheless spells trouble for them partly because the ongoing euro crisis is accelerating German auto companies’ expansion drive in the US, industry analysts say.

“They're not just being squeezed by the huge advances that companies like Kia, Skoda and those kind of brands have made,” says Tim Urquhart of the global research firm IHS, “but also all the big premium players are moving down market into their traditional territory.”

A spike in December sales in France, Italy, Belgium and Spain has raised hope of a modest recovery.

But overall European sales last year were down 25 percent compared with the pre-crisis level in 2007, and many remain skeptical that buyers will ever come back in those numbers, Urquhart says.

“There are all kinds of debates about changing demographics — older populations, young people who are less interested in buying cars — because the car isn't the great status symbol it once was,” he says.

“Whatever recovery there will be will be very weak and fragile. That's the general consensus.”

Matters look better elsewhere.

New car sales in the US last year were a whopping 50 percent higher than during the depths of the recession.

And the consultancy firm McKinsey & Co. forecasts that carmakers’ global profits will rise another 50 percent over the next five years.

As the world market continues to change, will US companies be able to keep up?

More from GlobalPost: Early divisions augur hard going for Germany’s grand coalition

In December, GM announced it would stop selling Chevrolets in Europe in order to marshal its resources around its Opel brand — sold only in Europe and virtually unknown in the US — in a move that would be comparable to Coca-Cola scrapping Coke to focus on Fanta.

The same month, both Ford and GM announced they would shut their plants in Australia — where the strength of the Aussie dollar made paying workers too costly — even though GM's Holden is the country's second-most popular brand.

In China and India, meanwhile, Ford and GM continue to lag far behind Volkswagen, Hyundai and Suzuki, even as the threat from upstart Chinese brands grows.

And in the resurgent US market, Americans can expect more and more competition not only from Volkswagen — which aims to surpass Toyota as the world's largest carmaker — but also from Audi, BMW, Mercedes and Porsche.

The downturn in Europe has prompted German companies to push sales of luxury cars more aggressively, making it increasingly difficult for Cadillac, Lincoln and other American brands to claw their way back into the game.

At the same time, the Germans are threatening to carve a big slice from the middle of the American market — the most profitable segment — by introducing lower-priced cars that can compete head to head with successful American models such as the Chrysler 300.

Last year, Daimler launched the four-door, sub-$30,000 Mercedes CLA with a 60-second advertisement during the Superbowl, starting an assault that helped Daimler beat out BMW and Lexus in the US for the first time in a decade, Bloomberg reported.

Volkswagen, whose drive to become the world's largest carmaker was set back by flagging US sales last year, is expected to fight back by announcing plans to open an SUV plant in America in Detroit next week.

“Volkswagen doesn't really have the right models for the US market,” German automotive journalist Dietmar Stanka says. “They need a different product policy for the US.”

And while Lamborghinis and fashion models will be grabbing all the attention in Detroit this weekend, Audi, BMW and Mercedes will all be showcasing sedans and so-called “crossover” SUVs in the $30,000-range.

All that could add up to a bigger headache for US companies.