Europe s Affection for Brands A Shield Against Asian Competition?

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1 Europe s Affection for Brands A Shield Against Asian Competition? Featuring European Consumers Reactions to High Oil Prices Nigel E. Griffiths Director International Automotive Industry Research Detroit, 6 October 2005 EVOLVING CONSUMER PREFERENCES Challenging Opportunities

2 Chinese Target European Consumers Many European consumers need "cars to simply go from point A to point B. That's exactly what the Chinese cars arriving in Europe offer," - China Business Daily -14 Sept 05 Chinese cars snatch spotlight at Frankfurt auto show USA Today 18 Sept Some German Opel dealers will sell Chinese cars- Automotive News Europe 8-Aug 2005 In times of economic recessions, many a customer will think twice if he can refuse a deal 30 to 50 percent less just because of the "Made in China Deutsche Welle Sophisticated Europeans, passionate about cars, are very much aware of the symbolism of brands. Some models may well be made in China, but consumers will not desert the names they know and trust for many decades to come, if ever. Editorial ANE 19 th Sept 2005 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 2

3 Outline Market and Production Outlook Consumers Reactions to Higher Oil Prices Importance of the Brand in European car buyers decision making Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 3

4 Car Sales (m) Trend Level of European Market More Prolonged Than in Previous Cycles Reflecting Huge Market Support 15 Late 80s Boom Time s Oil Shock Early 80s Recession Oil Price hampers sales recovery '93 Recession W.E. Car Market still below long-term trend BUT current weakness does not indicate real trend break '00 '04 '08 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 4

5 Car Sales (m) Although YTD Sales in Western Europe are Flat on 2004 Concern Comes from 5 of the Last 8 Months Below the 14 Million Unit Rate and an Increasing Dependence on the Final Month Each Quarter Seasonally Adjusted Annual Running Rate (SAAR) Stress marketing in the closing month of each quarter Big Tactical Discounts Italian Transport Strike (Sales Data to April 2005) Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 5

6 Specific Market Impacts For Balance of 2005 For 2006 Euro 3 run out Euro 4 starts, Any payback? Oil price impact Effective raw material costs still climbing Production Costs (Raw Materials) 1,200 Today 1,000 In $ Diesel filter shortages In Euro Assumes average 12m lag on spot prices before impacting effective contract prices 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 6

7 Trend Car Production has Stabilised Recently, Running at Around 14.5 Million Units, But Monthly Rates Are Volatile 16,000 Western European Car Production Trend (value in 000's) 14,000 12,000 So far this year falling output in Spain and Italy have not been compensated by good performance at German Plants Last Actual Data Point August ,000 Aug-95 Feb-96 Aug-96 Feb-97 Aug-97 Feb-98 Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 7

8 Recent Production Rates Starting to Converge on Last Year Millions Temporary distortions in May 2005 But Euro-4 changeover could be disruptive Italy Transport strike, Multiple Model Changes and VW Stamping plant down Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Seasonally Adjusted Annual Running Rate WE Car Production Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 8

9 West European 26 Markets & Local Production Prospects Under Attack From Imports 1,400 (Thousands of unit imports by source region, all light vehicles) 1,200 1, Japan Other Asia EE-NonEU N.A. S.A. Africa Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 9

10 How Oil Price Assumptions Have Changed in Just One Year $70 $60 $50 $40 $30 $20 (U.S. dollars per barrel, quarterly data) Current Base Case Forecast assumptions in 2nd quarter Forecast assumptions from first quarter $ WTI (Nominal) Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 10

11 Simulation: Average Monthly Spending to Refill a Car in Germany Exchange Rate (US$/Euro) Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $ $ Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 11

12 Simulation: Average Monthly Spending to Refill a Car in Germany Exchange Rate (US$/Euro) Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $ Hard H Base Case $ Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 12

13 Simulation: Change to Monthly Fuel Refill Bills Compared to 2003 base and $30 oil Exchange Rate (US$/Euro) Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $ Hard H Base Case $ Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 13

14 Possible Oil Price Scenarios (Brent oil in U.S. dollars per barrel) Hard Brent (Sept 05) Solid 60 Hard 80 Thristy 30 Solid 60 Base Case Thirsty 30 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 14

15 Western Europe: Theoretical New Car Sales Under Different Oil Price Trajectory Scenarios Car Sales in 000 s 15,200 15,000 14,800 14,600 14,400 14,200 14,000 13,800 13,600 13,400 Thirsty 30 Base Solid 60 Hard Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 15

16 Which Brands Will Benefit From High Oil Price Environment? (Consumers citing good fuel consumption as part of their purchase decision) Average Mazda Volvo Peugeot Hyundai Ford Renault Nissan Opel VW Citroen Skoda Toyota Honda Fiat Daihatsu Smart Source: Collection of Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 16

17 U.K. Has Had Pump Prices Above US$5 Gallon Every Year Since 1999 and Yet U.K. research indicates (private) car-buyers pay little attention to mpg in their decision making process Many car-buyers: Cannot confidently estimate their fuel costs Assume that there is little difference in mpg between cars within a vehicle-class (eg: within diesels, super-minis, etc.) Consider mpg as an aspect of car design that can only be achieved by compromising performance and safety Do not trust test-cycle results undermining confidence in reported fuel economy Consider fuel costs as part of the household budget Will endure significant price increases before considering switching to low CO 2 rated vehicles Source : Department for Transport Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 17

18 Motorists Will Endure Significant Additional Costs Before Switching to an Alternative Vehicle Survey Evidence From the U.K. Average amount of endurance for drivers Before behaviour change = 1,100 Urban consumers most likely to switch Company car drivers are most immune to cost increase As witnessed by the hybrid sales-boom in London only Total Company Cars Private Cars City Centre Edge of Town Rural Grin and bear it Switch to smaller engine Switch to different fuel system Switch to smaller car Source : Department for Transport Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 18

19 West European Diesel Market 9,000,000 Market expected to peak in 2009/2010 8,000,000 58% 7,000,000 6,000,000 5,000,000 Total Diesel Growth % 4,000, ,000,000 2,000,000 1,000,000 Euro 1 Euro 2 Euro 3 Euro 4 Euro 5 0 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 19

20 Relative Benefit from Diesel Depends on Oil Price Range and Divergent Distillate Price Trends Relative to Petrol 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% (Marginal percent change in fuel efficiency benefit of diesel) Diesel Prices increase relative to Petrol Possible Future Scenario All calculations relative to $30 oil Oil Price Bent in $ (base year mid 2003 at $30) Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 20

21 Possible Policy Reactions to High Oil Prices European governments could lower tax on motor fuels Poland did in July. NL has put off planned increases in 2006 Other governments so far resisted France has suggested imposing a new lower top speed limit But has not received much support for the Idea Accelerate the implementation of tax structure based on CO 2 Portugal planning phased introduction from mid 2007 France new scheme for Jan 2006 Fuel economy labelling Encourage BioFuel, and LPG development Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 21

22 Monthly Segment Penetration Rates in Europe Since 1998: Some Changes, But Is it Due to Higher Oil Prices? (Segment penetration rate, monthly data) 35% 30% 25% 20% 15% 10% 5% (U.S. dollars per barrel, monthly data, nominal) $70 $60 $50 $40 $30 $20 $10 0% $0 A and B C D and E SUV MPV-B/C/D WTI Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 22

23 Importance of Fuel Economy in the Purchase Decision Has Actually Been Sliding 12 (Percent of buyers citing fuel economy as one of the reasons for purchase) Source: Collection of Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 23

24 Can Brand Affinity Defend Europe? EVOLVING CONSUMER PREFERENCES Challenging Opportunities

25 Why Focus on Brand Values Now? Market fragmentation combined with product proliferation has reduced differences in brand segment footprints The search for non-price competition in consumer market Success of premium brands is intensifying the search for a near premium or aspirational upper mass market brand position Recent spate of brand management actions and brand realignment strategies The search for non-price competition in the component pitch Determines the limits to OEM outsourcing Future directions in model strategy Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 25

26 Components Makers Have to Ride the Wave as Well Market Strategy: Model Proliferation Brand Realignment Growth Pole: Organic Growth M&A Fever Brand/Innovation Cost Strategy: Platform Consolidation & Cross Platform/Modules Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 26

27 The Paradox of Brand Behaviour Branding has risen in profile...but brand loyalty in mass market has actually fallen over last decade Control of brand communications with customers may be reduced due to block exemption changes Leading to need for product to speak for itself, heightened need for differentiation to avoid commoditisation Plurality of increased individuality, but continued consumer desire to project self image Continued attempt to attract younger customer base for the brand, despite an ageing population New attempts to target post modern, progressive, trenddriven consumers despite adverse demographics Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 27

28 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 28

29 Brand Values are Multi Dimensional Key Descriptive Brand Values of European Makes Irrational Desire fresh thinking flair responsive exclusivity futuristic reliable aspirational high quality classic spirited refined safety for sensuous life creativitydaring legendary genuine contemporary performance luxury authentic insightful exceptional functionality original Multi-dynamic technological sporty passion driving pleasure tasteful versatility visionary smart warm performance orientated dependable value progressive spirit stylish adventurous art of travel alternative alternative exclusivity elegant best in sector sensitive Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 29

30 Brand Image is Consistently One of the Most Important Reasons for Purchase in Europe Brand Reputation (Percent of buyers citing brand image as reason for purchase ) Or Recommendation Source: Collection of Consumer Surveys in Key European Markets Reported Brand Loyalty Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 30

31 But for Europeans, Price Alone Is Typically Less Important and at Least as Far as Consumer are Concerned its Significance Even Seams to Have Been Falling (Percent of buyers citing price as reason for purchase ) Source: Collection of Consumer Surveys in Key European Markets 2005 Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 31

32 Importance of Price as a Selling Point by Brand Index Ranking Of Price as key purchase factor Ultra Budget Lada Daihatsu Kia Daewoo-GM Hyundai Skoda Suzuki Sales Growth Total Europe Budget Seat +9% Fiat Citroen Ford Mazda Nissan Opel Brand Image Mass Market Peugeot Renault +2% Toyota Honda VW Audi BMW Premium Mercedes +10% Collection of Recent Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 32

33 Budget Sector Is About One in Five Car Sales 22% (Percent market share in the Western Europe passenger car market ) 20% 18% 16% 14% 12% 10% Do budget brands compete for the same customers? Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 33

34 Over the Next Six Years the Pool of Low Income (First Time and Base Model) Buyers Will Fall Significantly (Change in number of people MN by income band ) Low rank brands, utility models & pure functional segments will lose customer base Premium brands, stylebased models & up-market segments should flourish 10,000 20,000 30,000 50,000 75, ,000 $100,000 (Income per person $ at end 2003 rates) + Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 34

35 Sales Dynamics Within the Budget Sector 1,200 (Thousands of unit sales in the Western Europe passenger car market ) 1, Korean Ultra Budget Skoda Fiat Citroen Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 35

36 Share Dynamics Within the Budget Sector 100% 90% (Percent of market share in the Western Europe passenger car market) Others 80% 70% 60% 50% 40% 30% 20% Fiat Citroen Skoda Korean 10% Ultra Budget 0% Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 36

37 Breaking Out of the Budget Class? Hard to achieve a bigger jump in Brand Image scores are needed than just reduced emphasis on price proposition Fiat s recent strategy is starting to show, but at the expense of a serious collapse in sales Seat has new brand strategy but could be moving too far from its traditional customer base too soon Main Japanese brands took 30 years to break into mainstream, some may not get there Korean makers working on a breakout brand strategy; Hyundai could be close by around 2010 (20 years), GM-Daewoo has clean slate with Chevy Brand Chinese makers: Could they keep up the progression and hit the spot in years? On current evidence not likely Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 37

38 But the Door Is Open in Eastern Europe 1,800 1,500 1, (Thousands of unit sales in the Eastern Europe passenger car market ) 80% 70% 60% 50% 40% 30% 0 20% Budget Ultra Budget Total Budget Share (RHS) Copyright 2005 Global Insight, Inc GLOBAL AUTOMOTIVE CONFERENCE DETROIT 38

39 Nigel E Griffiths Director International Automotive Industry Research Tel: EVOLVING CONSUMER PREFERENCES Challenging Opportunities