Opposing Strategic Shifts for 2 Titans - alg.com · 3 Chevrolet: Competitive Residual Index ALG’s Competitive Residual Index measures the relative competitiveness of each brand’s

Opposing Strategic Shifts for 2 Titans

January 2019

Diverging Roads to Success?

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General Motors and Volkswagen represent two of the biggest automotive companies in the world. Facing a time of significant change in the auto industry, both manufacturers have shifted to drastically different brand strategies. Focusing on recent consumer preferences shifting from sedans in favor of CUV’s, GM has announced that it will cull its sedan lineup, discontinuing the Chevrolet Volt, Impala, Cruze, Cadillac CT6 and XTS, and Buick LaCrosse, in hopes of better aligning with new consumer preferences. While GM has taken inspiration from the present for this shift in strategy, Volkswagen has utilized a different tack looking instead to the future. Despite the fact that adoption of electric vehicles has remained in its infancy, Volkswagen has committed to a full EV lineup by 2025, with its last traditional gasoline vehicle launching that year. While GM has been an early leader in electrification technology with the Volt and Bolt, going to an all-electric lineup in such a relatively short timespan is ambitious for VW. Despite being two of the largest automakers on the planet, GM and VW have each announced different strategies going forward, in what represents increasingly interesting times for the industry.

GM: The Last Domestic Compact Car Maker Standing Following in the footsteps of Ford and FCA, GM has recently announced that it too would largely pull out of the car market, which marks an end to the Detroit 3 presence in the compact car segment. It is no secret that consumers have been abandoning cars in droves in favor of larger CUVs and trucks. However, cars still represent a significant portion of the industry with the Chevrolet Cruze alone selling over 150,000 retail units last year. With that said, does it make sense for GM to cede one of the last remaining domestic presences in the sedan market? Utilizing ALG’s Brand Pricing Score – New (BPS-N) and Competitive Residual Index (CRI) metrics, the impact of these soon-to-be discontinued models can be measured on GM’s overall brand health.

Chevrolet: Brand Pricing Score - New

ALG’s BPS-N metric is a ranking of relative brand value. By taking an eight-quarter moving average of new market transaction prices, adjusted for measurable differences, ALG can measure the pricing power associated with a brand’s nameplate.

Using Chevrolet as an example, Chevrolet’s current BPS-N score can be compared to Chevrolet’s score with the discontinued models (Volt, Impala and Cruze) removed. The end result is a slight overall improvement to BPS-N, suggesting these models were dragging down Chevrolets score, albeit only slightly. With only a minor increase in BPS-N, it appears pulling out of the sedan market won’t have a pronounced effect on Chevrolet’s, or by extension GM’s, brand standing.

Internal Source: ALG Analytics 2018Q3

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Chevrolet: Competitive Residual Index

ALG’s Competitive Residual Index measures the relative competitiveness of each brand’s residual value only within the context of the segments in which the brand competes. CRI creates a level playing field for measuring the relative strength of a brand’s residual values.

Again using Chevrolet as the benchmark for GM, ALG’s CRI tells a similar story. From a residual value perspective, the discontinued models are less competitive relative to other vehicles in their segment suggesting that eliminating those vehicles would provide a boost to Chevrolet’s overall brand score. However, similar to BPS-N, the resulting change to CRI with the discontinued vehicles removed is negligible.

In fact, while Cruze, Volt, and Impala are less competitive relative to their segments, the remaining Chevrolet cars, Camaro, Sonic, and Malibu, are even less competitive in their respective segments. So removing Cruze and Impala actually has the effect of lowering Chevrolet’s CRI, as the brand average is slightly worse with those vehicles removed.

Interestingly, in light of all the press surrounding GM’s decision, the end result of dropping these cars is one that will have little impact on GM’s overall brand health, at least in the short term, based on ALG’s current brand metrics. While it remains to be seen how this strategic shift will affect GM in the long term, for now the impact appears to be negligible.

Internal Source: ALG Analytics ND18 Edition

VW’s All-Electric Future

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Following the crippling diesel scandal, Volkswagen has worked hard in rebuilding its reputation as "The People's Car." Volkswagen committed $7B to advancing e-mobility technology, leading the industry towards mainstream electrification. Volkswagen's push in BEV (battery electric vehicle) advancement can potentially propel the brand back into the limelight as the brand is primed for an overhaul to rid its image of the diesel scandal. Although the current environment signals that the market has yet to fully adopt BEVs as an alternative to traditional ICE (internal combustion engine) vehicles, recent improvements in range capability and infrastructure show positivity in market outlook and adoption.

Residual values by fuel type shows nearly a 20-ppt deficit between BEV and traditional ICE vehicles with a recent upward trend as range capabilities improves.

The deficit of BEVs residual values is largely driven by their higher MSRPs. Manufacturers still struggle with the cost of producing BEVs and rely heavily on federal tax incentives to drive demand. The introduction of long ranged BEVs also dwarfs the residual values of older city commuters in the used market.

The introduction of Volkswagen Group's Electrify America, which aims to invest in roughly 900 charging stations across the US by mid-2019, will likely lessen concerns surrounding infrastructure and range anxiety. The widespread availability of a charging network will also help spread awareness of BEVs and elevate theadoption rate across the industry.

In combination with an influx of 65+ all-new entrants of BEVs by 2025, adoption rates are sure to spike as consumers are inundated with a diverse selection of EV products. Volkswagen's commitment in launching its last ICE platform vehicle for the 2026MY is aggressive and hinges on how quickly the market adopts BEV technology despite its current downfalls when compared to the more familiar ICE vehicles.

36m %RV Trends by Fuel Type – Mainstream Sector

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Many barriers still stand in the way of widespread adoption of BEVs. Based on the most recent Strategic Vision Survey Data, over 50% of new car buyers report that they are not interested in BEVs. Of those who are not interested in BEVs, top barriers to consider purchasing a BEV surround the charging process and range of the vehicle on a full charge.

In order to see success in the market and achieve widespread adoption, BEVs will have to compete directly with ICE in every aspect of ownership. While both infrastructure and range will be addressed with the advancement of technology, concerns surrounding pricing, longevity, and cost of ownership still loom.

Pricing for BEVs has typically been much higher compared to ICE vehicles. With the federal tax credit program phasing out, consumers won't be willing to pay for the loss of the incentive. Action from the manufacturers will have to take place by reducing prices - whether in the form of cash incentives or lowering base MSRP.

Uncertainty of the battery longevity burdens consumers in their buying decision. Highly competitive warranty programs should exist to alleviate some of these concerns.

Cost of ownership is often debated as BEVs boast lower maintenance costs compared to ICE vehicles, while the cost of replacing a battery pack is typically high. Consumer education surrounding BEV technology and maintenance needs should be stressed to spread awareness.

Should the EV adoption rate remain stagnant, Volkswagen might face an uphill battle as their last ICE platform vehicles age without any advancement, risking obsoleteness against progressing competitors.

Source: Strategic Vision Survey Data

Conclusion

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What extraordinary times in the industry when two of the largest auto makers in the world each decide to pursue such contrasting strategic shifts. Will GM’s embrace of the present climate yield lasting success, despite the minimal impacts to its overall brand health? Is VW’s full commitment to an electric future by 2025 the right approach, even with all the questions surrounding EV infrastructure and a skeptical consumer market? For these two automotive heavy hitters, the road ahead to success is going to appear drastically different.