Where to now?

It has been a trying year for the American auto industry - and that’s putting it mildly. With two of the Big Three auto manufacturers receiving government bailouts after filing for bankruptcy and countless others coping with the recession through layoffs and dealership closings, the instability left consumer confidence in American automakers shaky at best. Data from AutoPacific, a Tustin, Calif., research company, shows that when respondents were asked in June 2009 if they would be concerned about purchasing a vehicle from General Motors, the result was a staggering 58 percent yes. Chrysler fared even worse, with 62 percent of respondents answering in the affirmative.

The good news, however, is that the worst of it appears to be over. Consumer reluctance to buy Chrysler or GM models dropped double digits once both manufacturers had made it through bankruptcy in July 2009 (42 and 53 percent, respectively). Granted, those figures are still high compared to the likes of Ford, Toyota and Honda, but the numbers are clearly heading in the right direction for automakers, and the Big Three’s existence is no longer in flux.

The auto industry has taken steps based largely upon guidance from market and trend forecasting studies to keep current with (and - ideally - ahead of) consumer needs, wants and expectations. With a minimum four-year life cycle from R&D to the showroom floor, automakers rely on research projections to take them from rock bottom to rock solid in both sales and public opinion. We may not be out of the woods yet, but researchers are working diligently to analyze the effects of the past 18 months and help auto manufacturers move forward. The crisis has pressed them to trim the fat, reevalute demand and seek to define consumers’ ever-evolving (and always personal) definitions of “value.”

In August, to gain some insight into what went wrong and what the future might hold, we spoke with three such researchers, whose companies have an auto industry focus, to assess the current state of car-making.

Back on board

Their consensus was that the outlook is surprisingly bright, as perhaps now more than ever automakers are poised to deliver products that are competitive and more precisely in line with consumer demand. But, they noted, there is still much work to do. No longer able to rely on high-margin SUVs to prop up their bottom lines, automakers are facing a host of new production-related financial realities. Further, American car makers must convince consumers of their financial security and overall trustworthiness, and they need new products hot enough to compel car buyers to take the leap of faith and get back on board with domestics.

The good news is, satisfaction is high among purchasers of vehicles, and the level of quality differences between the top and bottom are smaller than they’ve ever been, according to Dan Hall, vice president of AutoPacific. “If you listen to Washington, they’ll tell you that the problems we’re having right now are the result of car makers making vehicles people don’t want to buy, and up until we had a banking crisis, that wasn’t a problem. We were having no problems selling vehicles … I think vehicles are better now than they’ve ever been, and I think they match consumers’ desires more now than they ever have.”

So what do consumers want these days? That’s easy: value. The hard part is defining what value means to car buyers. It’s a broad concept that takes into account price and features, as well as the total cost of ownership. Where upfront cost and fuel economy may be the most valuable attributes to one person, quality and resale could be equally as important to another. This is how even high-end luxury car buyers believe they’re getting good value, says Duncan Lawrence, executive vice president of Morpace, a Farmington Hills, Mich., research company. “Value has always been paramount in consumers’ minds. Some aspects of value and how it is defined may actually be changing over time.”

Most influential

Right now, cost and fuel economy are the most influential in the value equation. “If gas prices go up, [the importance of] fuel economy is going to continue to go up. When the economy gets a little bit better, maybe the saving-money portion becomes less important,” says Lawrence.

Hall agrees that fuel economy is crucial in the consumer pursuit of value, but that’s nothing new. “About 70 percent of consumers over the past three years rate fuel economy as either extremely or very important to them, and that’s been steady over the past three years,” he says. “One would expect that people would be much more interested in fuel economy, but the data show that that’s not the case.”

Citing data from a first-quarter 2009 survey of respondents who had purchased a new vehicle in the last quarter of 2008 when gas prices were at an all-time high, Hall notes that sensitivity to fuel prices didn’t change the type of vehicle that they purchased.

“Pain point”

While gas prices have declined to more reasonable levels, everyone knows they have only one place to go: up. Consumers anticipate a gallon to be well over $4 in the next five years and in the $3 range over the next year. According to Jim Mulcrone, senior research manager in the automotive research group of St. Louis-based Maritz Research, the “pain point” could be as low as $3 per gallon. At that cost, he says, research results show that fuel economy/gas mileage begins to skyrocket as the most important reason for purchase.

Higher gas prices could help the sale of hybrids and other fuel-efficient vehicles, Lawrence says. “There is and there will continue to be resistance to the [fuel-efficient] technology, such as these hybrid electrics, because of the upfront cost to purchase. People really aren’t going to buy these types of vehicles unless it makes some economic sense for them - and that’s generally as gas gets closer to $4 per gallon. Anything over $3.50, the math starts working for the hybrids,” he says.

Results from a survey of visitors to the Motor Mouth online community of Gongos Research, Auburn Hills, Mich., show the three most common roadblocks to electric vehicle acceptance include safety, speed and range (the length of time a vehicle will travel before needing to be recharged). Characteristics such as size (capacity and cargo), availability of charging stations, battery disposal/recycling, performance, climate control (excessive drain on battery) and comfort also make the list of factors that drivers are reluctant to compromise on.

If consumers were to purchase an all-electric vehicle today, they would be most likely to do so in the form of a mid-size car (42 percent) over a full-size car (8 percent) or large SUV or CUV (5 percent), according to the Gongos data.

And cost, not the desire to go green, seems to be at the heart of fuel economy. While purchasers of hybrid vehicles were more likely to rank environmental concern as a high priority, those who considered purchasing a hybrid vehicle were more concerned with economics, according to data from AutoPacific. For most, doing a good green deed wasn’t enough of a reason to pay the premium for a hybrid. When gas prices peaked near the $4 mark, the Prius boasted strong sales, but once the cost of fuel went down, incentives were offered to move them off dealers’ lots.

So don’t laud the altruism of Prius drivers just yet. According to Hall, “A lot of people who were buying hybrids were really buying them for the statement that the vehicle made, which makes a lot of sense when you consider the fact that the lion’s share of hybrid sales went to the Prius - the only vehicle of hybrids in the marketplace that has a unique body style and makes a statement from 100 yards away. You don’t have to explain to your neighbors that your car is a hybrid.”

Great value is the driving force in car-buying, but money clearly isn’t the only thing that matters. “Status still matters although many of us won’t readily admit it,” says Lawrence. “Luxury automotive brands have certainly seen a downturn in sales, but no worse than any other brands. Luxury car buyers have simply moved the value equation to factor in elements beyond price and fuel economy.”

Brand identity and reputation

The cold hard truth is that not all auto manufacturers are created equal. The financial turbulence that reared its ugly head during one of the most severe economic crises since the Great Depression was not spawned overnight. Brand identity and reputation come into being over the course of many years - decades, even - and domestic car makers in many cases had no one but themselves to blame for consumers’ dim views of their products. In contrast, companies like Toyota and Honda - both with positive brand images and established reputations in quality and fuel economy - were left in better shape relative to some of their American counterparts.

Toyota may have the Prius to thank for its green image, which persists in spite of the firm’s lineup of trucks and SUVs, says Hall. “When gas was $4 a gallon they were not getting a lot of grief for launching a pickup truck because the Prius gave them a nice halo. They have a brand image that’s green, and the Prius did that for them.

“In the auto business, the halo vehicle could be anything that excites consumers. The classic first example of the halo vehicles was the Chevrolet Corvette because it brought people to the dealership and then they left in another Chevrolet. The best halo vehicle of 2008 was the Toyota Prius.” In the latter part of 2007, Toyota sold approximately 70,000+ extra vehicles because consumers came to look at the Prius.

Toyota isn’t the only brand benefiting from halo success. Almost all makers have one halo model or vehicle with a better image than the brand itself, says Mulcrone. “It’s a representation of what that brand can do and what it stands for and you hope that some of that image permeates into the other models. But the bottom line is, the brand has to stand for something.”

Advertising can have a huge effect on a nameplate, but changing a brand identity takes time. While Toyota was riding the coattails of the Prius’ success, Chevy was also advertising pretty aggressively to point out that it has several fuel-efficient models, says Lawrence, but it really didn’t have the same impact. “In general, you need to support the brand because it has more impact on more vehicles and there are only a few models that have their own strength. Most of the time, you think about the brand and then the nameplate.”

Adapt or die

The line has been drawn in the sand: adapt or die. But does that mean that hybrids are the way of the future? Yes and no. As consumer demand for fuel efficiency, comfort and style increase, automakers are also increasing the options. A high price for fuel doesn’t mean we’ll all be in Priuses and Insights. In fact, it’s possible that the cars of the future will deliver in every way: body style, efficiency, power, even image.

Consumers may end up compromising very little. Manufacturers will be able to give consumers variety by offering smaller cars on a number of different platforms. Hatchbacks, coupes and wagons could help draw in buyers looking for more than the basic sedan. Advancing technology will also help increase both power and fuel efficiency while decreasing operating costs. Crossover SUVs with turbocharged, smaller-displacement engines embody this trend. Consumers will also have more options in the size of vehicles and type of drivetrains - from flex fuel to diesel. Volkswagen’s Jetta TDI, which runs on clean diesel and gets a reported 40+ mpg, has sold well.

Hybrid and electric cars could also be changing. The Volt, Chevy’s upcoming plug-in hybrid, reportedly gets 230 miles per gallon in city driving and has a range of over 300 miles using a lithium-ion battery pack and a small gasoline engine. The Volt is leading the way as Chevy repositions itself to regain market share and could potentially serve as Chevy’s next halo vehicle, but with a $40,000 ticket price, that remains to be seen.

Ramping up their efforts

Going forward, all three researchers we spoke with cited reasons for optimism. As the new models in development attest, automakers seem to have a finger on the pulse of the American consumer. And while some companies have cut back on their purchase-related research, others are ramping up their efforts to track what’s being said about them online. In addition to helping them spot trends, this type of listening will assist automakers in learning how various market segments define value and how it should end up manifested on the showroom floor.

Perhaps more importantly it also aids awareness of word of mouth, the positive version of which is so crucial to restoring consumer confidence. “Everything takes time; the automakers didn’t earn their reputations over a couple of years and they aren’t going to get rid of them over a couple of years,” Lawrence says. “Make sure that people believe you’ve got a quality product and that you’re every bit as good as the best in the industry. The most important thing is word of mouth. If people are saying good things about your brand then that’s going to bring people into the dealership and get them to buy your vehicle.”