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Fragmentation: The New Car Order?

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2003 Detroit Auto Show Coverage by TCC Team (1/19/2003)

First came the van, then the minivan. But what do you call the new Chrysler Pacifica?

True, the vehicle that will soon begin rolling out of the automaker’s Windsor Assembly Plan shares many of its components with the likes of the Dodge Caravan and Chrysler Town & Country. But while it also offers three-row seating, it’s definitely not a minivan. Nor does its aggressive styling and higher ground clearance make it an SUV. Chrysler has dubbed it a “cross tourer,” whatever that is. A crossover? Industry jargon that doesn’t really mean much.

The simple fact is that the new Pacifica doesn’t easily fit into any traditional category. Nor does a growing list of other vehicles, including the new Cadillac SRX and Nissan’s FX45.

It’s not just that carmakers are breaking down traditional automotive categories. They’re also flooding the market with an ever-expanding assortment of products targeting ever-smaller niches of the U.S. market. A decade ago, Cadillac had just three passenger car models in its lineup. By the end of ‘03, it will boast eight, with even more under development.

Then there’s Volkswagen, which sold little other than Beetles for its first few decades. Today it offers everything from the New Beetle to the upcoming Phaeton luxury sedan, as well as the new Touareg, a sport-ute crossover it developed as part of a joint venture with Porsche.

Reality changing

That reflects a basic reality of the automotive industry, according to VW Chairman Bernd Pischetsrieder: the rapid fragmentation of the global market as automakers struggle to give consumers vehicles that more precisely meet their needs and desires.

The precise number of product segments varies according to each manufacturer’s count. But according to Pischetsrieder, it went from nine to 33 between 1985 and 2001. By 2005, VW forecasts it will grow to 40 worldwide.

While the market has grown substantially over the years, it’s not kept pace with this product proliferation. As recently as the 1960s, when consumers had relatively few variations to choose from, a mainstream model such as the Ford Galaxie or Chevrolet Impala could roll up sales of as much as 1 million units a year. Today, you can count on one hand the number of products that come even close, and these are truck lines, such as the Ford F-Series. The best-selling passenger car in the U.S. market, the Toyota Camry, racked up sales of just about 400,000 units last year.

And the downward trend “will keep on going,” forecasts auto analyst David Healy, of Burnham Securities.

2004 Chevrolet MalibuConsider the three new products Chevrolet launched at the 2003 Detroit auto show. Together, the new Malibu, Equinox and Colorado should generate sales of perhaps 500,000 units a year for the automaker — far less than the Malibu alone sold in its heyday.

There are a variety of reasons behind this market fragmentation. Competition is key, of course. As Pischetsrieder noted, automakers are in a bitter competitive battle. And even small manufacturers are being pressed to expand their lineups.

The light-truck boom has also been a critical factor. While TV commercials might talk about taking an SUV up to the side of a mountain, the average owner is far more likely to use it for a trip to the mall. So motorists want vehicles attuned to the realities of their individual — and usually more mundane — lifestyles. While they still might want the security of all-wheel-drive, they need less off-roadability and more on-road comfort and handling.

Planning a nightmare

Fragmentation may be good news for consumers, but it can create nightmares for industry planners faced with having to come up with more products they must be able to sell at significantly smaller volumes. Until recently, carmakers wouldn’t even dream of selling anything that couldn’t rack up sales of at least 100,000 units annually.

The new industry reality, predicts General Motors’ Chief Financial Officer, John Devine, is that volumes of as little as 50,000 to 100,000 for a product “will become much more the norm.”

That won’t be easy to pull off, but here’s where several trends conveniently coincide. Faced with grinding pressure to cut costs, most manufacturers have begun adopting a strategy of sharing the components consumers don’t care about — things like windshield wipers, battery cables, electric window motors and other commodities. The differentiation comes with what the consumer can touch, see, and operate, like sheetmetal, seats, and instrument panels. By increasing component commonality, a carmaker can shave off months of development time — making it easier to respond to market trends and reduce costs by thousands of dollars a vehicle.

It makes it easier to come up with vehicles that share the same platform, like the Pacifica, the Caravan and a host of other models Chrysler product chief Rich Schaum hints are now under development. The variations can be tremendous. The Caddy SRX will share the same platform as the compact CTS sedan, as well as the larger STS sedan coming in 2004.

Of course, even the successful manufacturers have to face their limits, cautions Ford Motor Co. Design Director J Mays. “At some point,” he warns, “the pie will be cut into so many pieces it will crumble.”

How many more pieces can be cut before that happens? No one is quite sure, but as the recent Detroit auto show suggests, the industry will keep slicing as long as possible.

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