Market share or profits

Automotive Industries, July, 2004 by Maryann Keller

In the past month the managements of Ford and Volkswagen both stated that profits and not preservation of some arbitrary market share was their corporate objective. But in the real world, should there be a choice between one and the other goal? Shouldn't the company objective be the market share that reflects its production capacity. This should be supported by an underlying cost structure that will maximize profits at that level of output. I am frankly baffled at managements that somehow think it's virtuous to tell the world they won't defend their share or that they can't defend their share. Of course, it doesn't make sense to give away cars but then it also doesn't make sense to have such cars in the product line up either.

In the case of Ford, its financial fortunes are improving and for several consecutive quarters earnings have been better than expected. Ford Motor Credit, which is a major beneficiary of low interest rates and higher prices on the used cars, has been the major contributor of bottom line profits. Ford has also come through several years of cost cutting that reduced production capacity and overall employee headcount. While its profitability from assembling cars worldwide are still lower than necessary to support long-term investment in the business, there is evidence of a turnaround. Management is stable, employee morale has improved and a new wave of products is about to come to showrooms.

But in May, Ford's U.S. market share tell to a near historic low and the company took some vehicles out of its third quarter production forecast. At the same time, the company increased its profit guidance for the quarter and the year leading Larry Kudlow of CNBC's Kudlow and Cramer to suggest that Ford is earning more by building less.

Volkswagen, by contrast, has done little to resolve its fundamental product and structural cost issues. The Phaeton luxury sedan, built in an expensive new factory in Dresden, has been a disaster while the Volkswagen line up is aging and is under assault in the U.S. and in Europe from Asian and American challengers, VW announced that it would invest billions in China even as its penetration falls along with prices in that country. VW's situation is different from that of Ford, yet its CEO uttered the phrase about profits over share just days before he cut prices in China to stem the downward drift in its penetration.

General Motors management also said that market share didn't matter during the 1990s. Market share was no longer a metric of success as long as they were making a profit on what they did sell. Unfortunately for GM, its share continued to erode and now stands at a historic low even as the company now targets 30 percent share of U.S. sales. GM is now gamely defending its market share.

I contrast this behavior with Toyota's continued challenge to its employees to attain a higher share of individual and global markets. Toyota targeted 40 percent of its home market, 10 percent of the global market and now 15 percent of the global market. As each target is achieved a new and higher one is set. This has kept everyone in the company focused on product issues that were impediments to attaining the share goal. That's how Toyota came up with Scion to bring young customers back to the brand and why it is increasing its presence in light trucks in North America even while creating vehicles that appeal to European and Asian customers. The company's obsessive focus on market share has not only made Toyota number two in the world, it has also made Toyota an extremely rich company.

Suggesting that you don't care how low your share fails is an admission that there are models in the line up that can't be sold to cover their variable costs. If that is the case, then the answer is to fix those product problems and target a higher share instead of just giving up customers who, once gone, will never come back.

Maryann Keller is a veteran auto industry analyst and author of the books "Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors" and "Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century."