Competition in the automobile industry is very tight. Auto makers are willing to spend millions in R&D trying to build hype for their brand. All of this in the hope that they can build a little brand loyalty and sell a few more cars. When we shop for a new car, we compare the quality of different brands. Some of us, when buying a Mercedes Benz or a BMW, like to think that there is no way that a Toyota or a Ford can compare. The awkward truth of it all is that the premium brands want to be more like the budget brands. “How can this be?” you ask. In short, the reason is because budget brands make more money.
Auto Brand Shopping
In todays economy there is no shortage of choice when it comes to purchasing an automobile. Even with the consolidation of brands as companies buy each other, there are a lot of choices. When there is choice, there is competition, and that means the consumer wins. The only problem for consumers, is that comparing cars isn’t simple. Since most brands reuse parts from one model to the next, there is a good chance that if you like one model you will like another from the same brand. This sort of simplification makes it less taxing on the consumer, but it also means that brand reputation is more important.
Reputations Of Auto Brands
Our perceived reputation of auto brands can come from several places. It can come from tropes or acronyms like “Fix Or Repair Daily” or “Buy More Wrenches.” There are also things that you just hear people say like “Toyota’s are reliable” or “Honda’s are cheap to fix.” You may even have a perceived reputation of an auto brand because of a particular halo car that caught your eye. If you are buying/avoiding auto brands because of a generic reputation, you are setting yourself up for failure. All auto brands have their good and bad cars or technologies. Automobile manufacturers are up against a lot of regulations and influences that can sometimes force them to make bad decisions.
Auto Brand Black Marks
Everyone makes mistakes, which is true for people just as it is for large corporations. VW Dieselgate comes to mind in recent history as a large corporate faux pas. Some of my readers may remember the Toyota uncontrolled acceleration issue of what seems like just a few years ago. For someone that doesn’t have any experience with an auto brand, this type of event can be a big deal. It can mean the difference between a potential customer checking out cars at your dealership and going somewhere else. The reality is that there is no guarantee that these problems will affect your experience with the auto brand.
The Halo Car Influence
We all like to dream about cars that are impractical or completely out of reach. For auto brands, these halo cars can get people excited about their brand. One prime example of this is the Audi R8. It is hard to deny the effect of the Audi R8 on the auto brand’s sales when you see the spike in 2007, the first year the R8 went on sale. It doesn’t matter that the A4 you are looking at may only share an indicator lever with the halo car. Just the idea of that cool halo car is often enough to get people walking around the car lot, and people eventually buy cars.
Which Auto Brands Are Making Money?
The above chart is in Billions of dollars, which is what the automobile industry is all about. When compiling this chart, I tried to adjust for separation of premium auto brands from their budget counterparts. The top 6 auto brands in this list are all what I would call budget brands. This demonstrates an idiom of mine that you don’t make a million dollars (or 100 billion for that matter) by selling 1 thing for 1 million dollars.
Make The Big Money Selling Cheap Cars
If you compare cars in a single class, you will notice, with the exception of a few outliers, the top companies in the above chart are cheaper than the bottom ones. The story doesn’t end there either. If you think of Porsche, you probably picture the classic 911. While the 911 has almost always defined Porsche as an auto brand, they actually sell more Macan SUV’s.
This effect is further demonstrated in companies like BMW. BMW sold 106,211 3/4 series cars that have a base MSRP of $34,800. In contrast to that they sold 12,918 7 series cars that have a base MSRP of $83,100. After some simple multiplication, the 3/4 series cars sold for at least $3.7B, while the 7 series only brought in about $2.1B. Then if you take a look at Honda, they sold 366,927 Civics the same year for at least $6.9B. You would never say that a Honda Civic is 3x the car as a BMW 7 series, but the profits are in the pudding.
Why Make Premium Cars At All?
At this point you may be wondering why anybody makes premium cars if they can make more money selling the cheap ones. The reason is that budget cars aren’t the same as premium cars. Even though I could buy 4 Civics for the price of a 7 series, your CEO wouldn’t buy 4 of them. That is unless, of course, he wanted to play soccer with them. If the only car to buy was a Honda Civic for $18k, then all those 7 series owners would just hold on to the extra $60k. That is at least $775 million that would go unspent on automobiles. It really is simple supply and demand.
Premium Economy Cars
The real premium cars are now and always have been in the sedan sector for auto brands. You have seen this in the Mercedes-Benz S class in all of its trim levels ( I’m looking at you Maybach ). When you think of economy cars, you probably think of the Honda Civic or Volkswagen Golf. Until recently Mercedes-Benz didn’t make 4-cylinder hatchbacks, but as you see in the above image, there it is.
Supply And Demand Makes A Mercedes Outback
Just like the CEO holding on to $60k buying a Honda Civic, let’s say you are mildly successful but still like to go mountain biking on the weekends. You could just go buy a Subaru Outback for $25k and call it good. That would leave $8-10k dollars still in your pocket and you would drive the same car as any other running/hiking/biking enthusiast. Now if Mercedes-Benz slaps their badge on a slightly nicer version of that Subaru Outback you have a carriage worthy of transporting your $2,500 premium mountain bike or $190 Nike running shoes.
Premium Auto Brands Aren’t The Only Ones
While the premium brands are trying to make economy style automobiles to take a piece of that Honda Civic money, this is definitely a 2 way street. BMW has been making sporty performance coupes since the 1930s. Honda and Ford are trying to bite into that lightweight performance pie with the Type R Civic and Focus RS. Then In the luxury car segment, Hyundai started their Genesis model a few years ago. If you have seen one of those, it is about as shameless a copy of a Mercedes-Benz S class as you could possibly make and for half the price.
At the end of the day, these auto brands are just large corporations looking to diversify their market penetration. Some of these newer cars that cross brand boundaries have been well praised. There is also something to be said for telling your wife that you are just buying a Ford Focus or Honda Civic instead of a sports car. Because of this car buying these days is more complicated than ever before.