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Automotive Industry

The challenges of niche production

Automotive Design & Production, Nov, 2005 by John Cleveland

It is typical in mature consumer markets for competitors to seek to differentiate themselves by creating increasingly narrow "niche" products that appeal to smaller and smaller sub-segments of the buying population. This trend has accelerated in the mature North American automotive market, and is expected to continue into the foreseeable future. These new niche vehicles represent both a challenge and an opportunity for suppliers who want to take advantage of the market they represent.

The Fragmentation of the Market Place

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From 2000 through 2008, the average units produced per North American nameplate (total production divided by the number of nameplates) will drop by 26%, from 122,000 to 90,000. (1) During this same time frame, the number of nameplates running at less than 50,000 units per year will increase by 50%, from 50 to 75. These low-volume nameplates will account for 40% of the total nameplates produced in this market. Many of these sub-50,000 unit vehicles will be highly targeted vehicles expected to be produced in volumes of 5,000 to 20,000 units per year.

OEMs produce these vehicles for a variety of reasons. Some are what are referred to as "halo" vehicles--high profile, radically designed cars whose main purpose is to have a "novelty" or "cool" factor that draws customers into the showroom, where they then purchase more traditional vehicles. Marketers have studied the effects of these halo vehicles and determined that successful ones can increase showroom traffic by as much as 2%. (On this basis, it could be argued that the P & Ls for these vehicles should really show up in the marketing department budgets.) Or low-volume vehicles are designed to appeal to particular lifestyles or affinity groups. In still other cases (e.g. the PT Cruiser), cars designed to be low-volume niche vehicles hit a nerve with a large mainstream segment of the market and became high-volume nameplates.

The explosion of niche nameplates indicates that North American producers, long known for the overall lack of imagination in their styling, have finally woken up to the fact that design really does matter and shouldn't be a tacked-on afterthought to performance, quality and pricing. Consumers will buy "cool cars"--and will often buy a cool car when they weren't even planning on buying any car at all. And the taste for styling is growing.

The Low-Volume Profitability Problem

As nameplates proliferate and lower-volume vehicles claim an increasing share of the market place, OEMs will be faced with the challenge of figuring out how to profitably produce these vehicles. If the main purpose of a niche vehicle is to be a marketing device for your traditional models, you don't worry about making money on each unit. In fact, assuming you are losing money on each sale, you want to sell as few as possible and still get the "halo" effect. (Maybe this is why Pontiac has plans to build only a limited number of Solstice vehicles, the evident demand notwithstanding.) As the popularity of niche vehicles continues to grow, these economics don't make sense and the OEMs will have to get serious about redesigning their production processes and supply chain to drive down the break even point of low volume vehicle models. In turn, suppliers will have to figure out how they can make money supplying to these new niche vehicles.

What Suppliers Need To Pay Attention To

The Center for Automotive Research (CAR) in Ann Arbor has initiated a research project to address low-volume vehicle production issues, focused on the car body, where profitable production is especially problematic. (2) The Low Volume Vehicle Production Consortium includes OEMs, Tier 1 assemblers, die and mold builders, equipment suppliers, and fabricators. Some of the issues that suppliers need to consider as they develop their strategies for this market include:

* NEW "TIER 1.5" CUSTOMERS. It is likely that more and more of these low-volume vehicles will be designed and/or assembled by a new breed of "Tier 1.5" suppliers like Magna Steyr and ASC (who cleverly changed its name from the American Sunroof Company to the American Specialty Car Corporation without having to change its acronym.) Magna already assembles vehicles for BMW in Europe, but has not yet gotten into the assembly market here in the U.S. (although the addition of Mark Hogan to Magna's management has provoked considerable speculation on this subject). ASC is currently the only North American company that has placed itself squarely in this niche, describing itself as a "specialist body engineering and assembly company for low volume production vehicles." (3) The company emphasizes its focus on developing "cool cars" and its website announces its intention to attract "car nuts" to the company. The company culture is very much a "design" culture. As this niche continues to grow, suppliers will need to develop relationships with these new vehicle development and assembly players--and understand and connect to their "culture of design."

Automotive Industry

The challenges of niche production

Automotive Design & Production, Nov, 2005 by John Cleveland

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