Volume is the holy grail of the auto industry…but should it be? The case for stronger brands.

A casual observer could be excused for thinking that volume is the only thing that matters to the auto industry:

“The annual global industry sales leader for 76 years.”

Headline on GM’s website

“Toyota ends GM’s reign as leader in global sales”

New York Times, April 24, 2007

“VW Group has declared its intention to become the global leader, overtaking Toyota by 2018”

Fortune 10/11/10

GM may have been the leader for 76 years, but we all know how that worked out.  The quest to be the global leader in sales drove Toyota to the breaking point where it lost its legendary focus on quality and reliability.  The result?  The biggest series of product recalls in history, allegations of unintended acceleration, thousands of lawsuits, and a decline in brand perception that will take years to recover.  Now Volkswagen has set its sights on the global sales crown and some are questioning the wisdom of the company’s leadership.

You can’t spend much time working in or around the automobile industry without feeling the relentless pressure of needing to sell more.

The problem that auto manufacturers face is that their business has extremely high fixed costs.   Unlike “variable” costs that go up and down based on the amount of vehicles produced, fixed costs remain the same regardless of volume.  Fixed costs include all the developmental investments, labor expenses and the costs of the factories themselves.  With such high fixed costs, the more vehicles the manufacturer can produce, the lower the cost per unit and the better the margin.  In short, higher volumes equal higher profits.

So bigger is better?  Maybe.

The performance of the automotive brands in Interbrand’s “Best Global Brands 2010” study might lead to another conclusion.  Interbrand’s study uses 10 principles to assess “brand strength” and ultimately places a “value” on the brand.  Ten automotive brands made the list of the top 100:

What’s interesting is that the brands that made the list fall into two distinct camps; big volume global brands and relatively small global brands.  Brands with 3.5MM or more in unit sales: Honda, Volkswagen, Ford, Hyundai, Toyota.  Brands with less than 1.3MM in unit sales:  Ferrari, Porsche, Audi, Mercedes-Benz, BMW.

Particularly interesting is that while the biggest volume brand, Toyota, is the most valuable automotive brand, the second and the third most valuable are from the small volume group (Mercedes-Benz and BMW).  Obviously there is more to an automotive brand than just volume.

Another way to look at the brands is assess their level of “definition” versus one another as well as volume:

One thing that the “small” brands have in common is that they are among the most well-defined and understood automotive brands.  Consumers clearly know what to expect from BMW, Mercedes-Benz, Porsche, Ferrari and Audi.  They are also specialty manufacturers, all in the luxury segment with relatively clearly defined target customers.  The strength of their brand definition makes up for what they lack in volume.

In contrast, the big volume, mass market, brands are not as tightly defined.  They market an exhaustive range of vehicles in multiple categories to virtually every customer segment imaginable.  These brands are “big tents” that by virtue of their broad range of vehicles and customers, are very difficult to tightly define.  What these brands lack in definition they make up for with volume.

So both approaches can result in strong, valuable brands.

But despite this fact, the pressure to increase volume is relentless on all manufacturers and often results in decisions that inevitably undermine the credibility of their brands.

For the smaller more tightly defined brands the desire to increase volume tests the brands’ elasticity.  For example, Volkswagen, having purchased Porsche wants to dramatically increase sales by expanding the product line to include smaller cross-overs and more affordable sports cars.  At what point is Porsche, no longer Porsche?  BMW has recently said that it will develop and produce front wheel drive cars.  After 35 years of teaching us that The Ultimate Driving Machine means rear wheel drive, the opportunity to enter new segments and expand volume (while also helping to meet CAFE standards) is just too hard to resist.

The high volume brands have a different set of issues.  Incentives are the bane of the volume brands.  Over the last decade, we have taught consumers to “buy the deal.”  The need to drive volume led to prolific use of incentives on an on-going basis that in turn led consumers to buy based on price…the ultimate commodity market behavior.  Lack of brand differentiation and increasing recognition that today’s vehicles are consistently high in quality will inevitably lead to lower margins and profits as every manufacturer competes on price.

Despite the “proof” offered by Interbrand’s study, that brand value is not solely dependent on volume, and that brand building does matter, the industry seems to chase volume at all costs.  Has anyone ever been present in a meeting where the decision was made to reduce incentives and shift the money to brand building?

What’s an automotive marketer to do?  Here are a few suggestions.

If you happen to have a relatively small volume but well-developed brand recognize that:

  • You shouldn’t chase volume for volume’s sake.  Your brand’s value derives from the fact that it clearly stands for something, not simply volume.
  • Your brand does not have limitless elasticity.  At some point you will stray too far and reduce your brand’s leverage (BMW and Porsche need to be careful).
  • Taking care of your brand’s clear positioning is every bit as important as increasing volume and it will require on-going investment.
  • You can’t rest on your laurels, you must continually re-educate consumers as to your brand’s values (Mercedes-Benz has obviously learned this lesson, all of its current communications are reaffirming the brand’s core values).

For those who have large volume brands that are less clearly defined:

  • Recognize that building your brand is essential if you are to break free of the commodity like behaviors of the competition and command respect.
  • A stronger brand identity will increase your leverage, margins, and ultimately sales.  Despite all Toyota’s recent troubles, it still commands higher margins and customer loyalty than its competitors.
  • Figure out what you stand for and stand for it. Don’t excuse a lack of brand definition by saying that you compete in too many segments and have multiple customer types.   Unlikely that you will be the only company that offers something, but you could be the only one that stands for it (other companies offer quality and reliability, but Toyota stands for it).
  • Invest in brand development. Consider the possibility that investing in your brand may make more sense than throwing more money at incentives.

As an industry we need stronger, better defined brands to push back against our self-inflicted commoditization.  In the “new normal” automobile market, the best brands win.  With Toyota and Honda slipping, Ford and Hyundai could very well be the next industry juggernauts if they can tighten up their brand identities.

By the way, if you ever have been part of a meeting where it was agreed to reduce the incentive budget and increase the brand-building budget, I’d love to hear from you!

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