Automotive: Why (almost) everybody in this business is getting poor

Wondered why these days it is so cheap to buy a new or used car? Ever wondered on whose account this goes? Who is winning and who losing?

Yes, besides us, consumers (who no longer care that much anyway), quite everybody in the automotive industry and car business is on the losing side. Long before 2008 and Lehman Brothers, the European automotive industry started losing its revs.

How comes?

Until the outbreak of the first petrol crises, times were simply too good to be true. Just consider how little was invested in each new model in the sixties and earn money just with a slight upgrading of the previous design and no much technical progress demonstrated. In Europe, European makers had the filets entirely in their hands.

The seventies were marked not only by the two petrol crises, but also by the horrendously strengthening Japanese competition, forcing the European car makers to invest much more in R&D from then on. Still, most of the brands survived and continued to invest, not only in R&D, but also in production capacities, most of them having disproportionate ambitions about their market shares.

Emerging cost-killing practices, pioneered by a certain Jose Lopez of GM (later VW), were extremely efficient at the beginning, but their downside soon became apparent: suppliers restructured, power became concentrated in a handful of strong ones who suddenly became a much stronger stakeholder in car business. Suddenly it was not a carmaker who dictated the development, but suppliers. Ever wondered why, since a decade or two, we cannot speak of many brand specific features, but see each technical innovation so quickly becoming common?

At the break of the centuries, discrepancies between available production (and trading) capacities and the demand became evident. Production costs kept at about 50% of the customer price, the rest invested in sales network support and marketing, mostly discounts of any kind. Sales volumes were top priority; no price was too high to keep production sites turning. Management was judged by the achieved market share as the only success criteria.

In the sales sector, Mario Monti's block exemption regulations and the corresponding industry's reaction made life of your average dealer much more difficult and his profitability went down, but made the handful of survivors stronger towards manufacturer, if not much richer.

And then the customer. Car as status symbol has been significantly degraded during the last twenty years. Today, your cars' performance and design are as much a piece of interest as your new hoover.

Demand became dependent on discount and financial services. As long as the used cars could massively flow east- and southwards, the new car market went reasonably fine. Once even these markets were saturated, used car prices decreased rapidly and, in most cases, used car became a viable alternative for a an average new car buyer.

There comes the 2009 earthquake, where our story begins. Stay with us next Friday.