In 1996, we observed in these pages that the global automotive industry had reached a plateau in the developed economies.¹ By the early 1990s, sales growth had flattened in North America and Europe, and when the Japanese economy went into recession in 1991, the industry’s sole remaining island of rapid growth went with it. Yet, if anything, Wall Street was less patient than ever with the slow growth and incurable cyclicality of the business.

Stagnating wages and improved durability were causing consumers both to hold onto their automobiles longer and to buy used ones when the time finally came to replace them. Yet the already high price of new vehicles made further price increases, in the face of strong competition and sluggish sales, impossible.

We offered two ideas in response. First, we advised the automakers to broaden their almost exclusive focus on selling new vehicles and to start pursuing the 60 percent of light-vehicle revenues to be found further downstream, in service, parts, and ancillary products. Second, we urged car companies to build brands that appealed to people on a more emotional level, by creating vehicles that "surprise and delight" instead of trying to impress buyers with further innovations in technologies that were already adequate to their needs.

Only a few companies were already pursuing these strategies back in 1996. Have additional automakers done so since then? If so, we thought it would be interesting to know how they—and therefore we—had fared. So we undertook our own 30,000-mile checkup of the industry. Here is what we found.

Moving into the aftermarket

Broadly speaking, automotive managers have come to view all vehicle-related services as their domain. Almost every major original-equipment manufacturer (OEM) is now experimenting with downstream participation in one form or another—whether it is taking equity positions in dealer networks, acquiring parts-and-service companies, or offering car buyers telematics products ranging from active-navigation systems to emergency call services such as OnStar (General Motors) and Rescu (Ford).²

While the downstream experiments of most companies have been somewhat isolated, Ford’s cover a wide spectrum (Exhibit 1). Its president, Jacques Nasser, says the company’s official goal is "to become the world’s leading consumer company that provides automotive products and services" rather than just the leading seller of cars. In the past two years, Ford purchased a driving school focusing on young drivers (hence, future car buyers), as well as Kwik Fit Holdings, one of Europe’s largest independent vehicle-service chains. More recently, it announced plans to become a major force in vehicle recycling, among many other businesses. As not only the world’s second-largest automaker but also one of the industry’s leaders in total return to shareholders and profit per vehicle, Ford bears watching.

In the past, major initiatives—for example, lean production, the quality revolution, and the redesign of product development in the 1980s and ’90s—were industry-wide, allowing OEMs to benchmark themselves against an easily identified (and, typically, Japanese) "best-in-class" competitor. But because the push downstream is still experimental and proceeding on so many fronts at once, no benchmark has emerged (Exhibit 2).

Downstream rules

Despite the lack of definitive outcomes, these experiments offer certain lessons. First, OEMs should choose their targets carefully. Downstream markets offer rich rewards, but a deep profit pool by itself does not promise opportunity: OEMs must examine the level of fragmentation in each market, the barriers to entry, the possibility of future discontinuities caused by emerging technologies or a tightening of regulations, the influence of aligned industries, and so forth. In the United States, for example, the auto crash repair business is highly fragmented, with rising barriers to entry. Consolidators will have to understand the insurance industry’s growing influence to win the large profits that are potentially available.

Before a deal is completed, it is impossible to gauge the extent of the synergies it seems to promise

Often, OEMs will pay a premium for the synergies that downstream acquisitions seem to promise. But it is impossible to gauge the magnitude of synergies before a merger is completed. Therefore, an OEM’s managers must be able to make a good business case for a merger solely on the basis of conservative market forecasts and foreseeable operational improvements, such as economies of scale or leverage with suppliers. That way, it is no tragedy if the expected synergies fail to materialize. Despite all this, OEMs are in a unique position to capture more value from current customers downstream and to save them from unsatisfactory ownership experiences.

We also suggest that OEMs give serious consideration to alliances, joint ventures, and minority holdings—all of which may be perfectly effective ways for OEMs to capture value downstream without assuming the financial and administrative burdens of 100 percent ownership. (Ford has taken minority interests in several downstream companies in part for this reason.) When OEMs do move downstream by acquisition, their top priority should be retaining the management teams of the acquired businesses. That task will be most complicated when the OEM acquires a number of enterprises in the same downstream market; consolidation pains and battles for dominance could strip them of their best managers.

That might be a calamity, since large OEMs can always build their own bricks-and-mortar assets but have trouble replicating the intangible assets (such as brand equity and market-specific management skills) of totally unfamiliar downstream sectors. For this reason, a "loose-tight" approach is highly desirable in downstream markets. OEMs must be careful not to stifle the entrepreneurial zeal of the managers of a downstream entity, whether it was acquired or built from scratch. They should set broad goals to ensure accountability but let those managers decide how to achieve them.

As downstream experiments proliferate, OEMs will be tempted to confer their brands on some as a way to jump-start them. In most cases, this temptation should be resisted. Experiments, by definition, have a high probability of failure, and a failure with the OEM’s brand attached to it can do widespread harm. Co-branding should take place only after the downstream investment has clearly become a viable, long-term business that the OEM intends to keep. Downstream experiments are not occasions for "bet-the-brand" dice rolling.

The trouble with brands

During the past three years, nearly all automotive OEMs have begun working more methodically to delineate and manage their brands; many of them, for example, now have brand managers. Yet no full-line automotive company has succeeded in achieving the brand power of niche players such as BMW or Porsche.

Some OEMs have complicated the branding equation by attempting to manage a number of corporate, model, part, accessory, and service brands simultaneously. In the United States, for instance, GM must now manage its corporate brand, plus seven divisional ones: Buick, Cadillac, Chevrolet, GMC (trucks), Oldsmobile, Pontiac, and Saturn. Within each division lie a great many product-line brands, ranging from cars to pickup trucks to minivans to sport utility vehicles (SUVs). On top of it all sits GM’s financial arm, General Motors Acceptance Corporation; the dealer service brand, Mr. Goodwrench; and AC Delco, the company’s brand for aftermarket auto parts. In the past, companies with many brands could at best promote themselves as "all-American," "value-oriented," or some such thing. But these unfocused identities proved to lack the staying power of distinct brands like BMW or Porsche.

In trying to forge such an image, OEM brand managers often have the decks stacked against them. Those who were never given authority to alter the product’s pricing and content or responsibility for its overall profitability face a nearly insurmountable task. Charged with repositioning their brands, they function as little more than advertising overseers.

Another complication of the brand-building process is the breakdown of conventional automotive segment-marketing strategies. In the past, OEMs generally competed car to car, in clearly defined segments such as small, medium, and large autos; economy and luxury autos; minivans; and SUVs. Today, the introduction of large numbers of vehicles that can’t be assigned to clear-cut segments has overwhelmed many conventional brand management and marketing strategies. Consider, for instance, Volkswagen’s new Beetle, Chrysler’s Prowler and PT Cruiser, and the many hybrid offerings combining features of cars, minivans, SUVs, and pickup trucks. All defy categorization. Quirky products like these can short-circuit attempts to bring together an unmistakable product line beneath a distinctive brand.

Moreover, most OEMs now hope to sell full lines of automobiles and light trucks, from entry-level cars to top-of-the-line luxury sedans and SUVs. This aspiration makes it very hard for a full-line OEM to maintain a clear and consistent value proposition for its brand. In 1996, we may not have been sufficiently sensitive to the scope of the challenge; the last full-line company to achieve great success in this area was GM during the Alfred Sloan years (the 1920s through the 1950s), when independent divisions created distinctive product lines for "every purse and purpose." The world has changed since then.

"When a person walks into a BMW showroom, the question isn’t, ’Which model do I want?’ It’s, ’How much BMW can I afford?’"

As in 1996, the success stories in brand management remain the companies—often niche players—with very strong company-level brand identities. The best of these OEMs develop a single, clear value proposition and then fiercely defend it. BMW advertisements, for instance, avoid the standard laundry lists of attributes, focusing instead on a simple idea: BMW as the "ultimate driving machine," an image that comes through in survey after survey. As one of the company’s competitors thoughtfully put it, "When a person walks into a BMW showroom, the question isn’t, ’Which model do I want?’ It’s, ’How much BMW can I afford?’"

What to do if you are not BMW

The advice we offered the full-line OEMs in 1996 was sound, but in fairness it may have been very difficult to implement. Unlike BMW, the largest automakers won’t be able to structure their entire product lines around a single, easily summarized theme.

But a couple of hints in the market have persuaded us that full-line OEMs can tackle the problem of brand management. First, it probably makes sense for them to concentrate on building "like-segment" brands. To give one example, Ford has recently begun advertising all Ford-branded SUVs as a group in a nationwide campaign. This gives Ford a brand "critical mass" in the segment and lets consumers know that the company has an SUV for every purse and purpose. (This strategy obviously won’t work for vehicles that don’t fall into recognized segments.) Ford can then begin to organize its many brands into a manageable number of segments, each with a strong, unified, "brandlike" image.

Full-line OEMs can learn another important lesson about brands by studying the case of Saturn, probably the only recent instance in which a full-line OEM—in this case, GM—managed to build a powerful, "nichelike" brand, at least for a time. Here, the lesson seems to be that a product-line brand should be given a very long leash. In creating Saturn, GM took a big risk by utterly severing it from the corporation’s own brand identity. Just as important, Saturn adopted day-to-day business practices that were different from GM’s. By creating its own noncannibalizing dealership network organized by market area, it was able to institute no-haggling, no-pressure selling policies that competitors couldn’t easily match. In fact, the Saturn brand has been built around purchase and ownership experiences far more than around the car itself, even though it was competitive. Such an approach deserves emulation.³

To be successful, OEMs will have to learn more than ever about the issues car owners face—not just during their first year or two of ownership but throughout a vehicle’s life cycle. Doing so will require the OEMs to get closer to their customers than ever before, something most companies have initiated on at least an experimental basis. Moreover, in a world of increasingly fragmented product offerings, OEMs must learn how to translate this knowledge into product and service decisions that reinforce simple, unitary brand values. In both downstream expansion and brand management, we are likely to see a few stellar successes, a few howlers, and every possible variation in between.