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Fallacy of the niche car

The joke in the automobile industry is: "We lose money on every one, but we make it up in volume." The serious point being made is that if you have enough volume, you can earn back what it costs to design a new car and tool up for it.
/ Source: Forbes

The joke in the automobile industry is: "We lose money on every one, but we make it up in volume." The serious point being made is that if you have enough volume, you can earn back what it costs to design a new car and tool up for it. A carmaker spends billions on a factory and the machines inside that stamp, bore, grind, weld and paint. Volume says everything about whether the new model adds red or black ink to the income statement.

Henry Ford started with next to nothing and ended up with the world's greatest industrial empire. He did this by selling 15 millionModel Ts from 1908 to 1927.

In Detroit the bogey used to be 240,000, the annual output of a single plant with two shifts, running full. Now many in the industry say this is changed. The days of big volume are over, done with. There's too much variety, too many competitors for big volume. So the key is the "niche" vehicle. What's a niche? I'm not sure, except it is the opposite of "mass." It seems to be different vehicles in smaller numbers for a subdivided market.

Example: Ford's Taurus was once the best seller in America, with two plants pouring them out. But the Taurus slipped. Rather than improve the Taurus, to go for 400,000 to 500,000 in annual sales (with its sister car, the Mercury Sable) and be the best seller again, Ford will kill the Taurus. Instead it will build two new cars, one smaller than Taurus, one bigger. Ford is going for niches instead of the mass market.

Here's another example: GM will build a small sports car next year, the Pontiac Solstice. The target is 25,000 or so sales a year at $20,000. The car is on a new chassis (which GM calls "architecture") named "Kappa." GM says it will be profitable. How can GM make money on 25,000 low-price units on a new chassis?

Well, GM figures it can make three or four or five such special vehicles off that Kappa architecture, on the same assembly line. This is supposed to raise the volume into the profitable zone. Will it? I doubt it, but so what? GM needs this Solstice roadster to break its habit of building boring cars. So it's a good idea, profitable or not.

The case for niche selling is this: The manufacturer can shorten product life cycles to the point where it can keep a model going for only 18 to 30 months and still make money. If GM can make Kappa work, the optimistic talk goes, it will have a breakthrough car-building process that could stand the industry on its ear.

Let me interrupt this train of thought with the notion that mass markets are not gone. Toyota sold 413,000 Camry sedans last year. Honda sold 398,000 Accords. They didn't need $3,000 rebates to sell them, either. And the underpinnings of each car served as the base for other models. Camry's is used for the Avalon sedan and Lexus ES 330, another 120,000 units, and the Sierra minivan evolved from the Camry. The Accord is also the base of the Acura TL and the Honda minivan, and a couple crossover SUVs also evolved out of that base.

As for really big markets, GM got better than 1.8 million units last year out of its GMT 800 truck chassis. Yes, some were small niche vehicles: 35,000 Hummers, 36,000 Cadillac Escalades, 13,000 Escalade ESVs (extra long) and 11,000 Escalade EXTs with the pickup box on back. But those are high-price spinoffs. There were 880,000 big pickups on that same architecture and another 286,000 Tahoe/Yukon sport utilities, plus 206,000 Suburban types.

Mass markets still exist if the vehicle is right. The proponents of niche theory have just given up trying to whip Toyota and Honda. They have lost sight of the fact that little production runs will not produce big profits.

Mass-market vehicles were how GM created the company that dominated the auto world from the 1930s to the 1960s, developing a few base platforms that could be used for multiple products, like the mass-market Chevrolet and then smaller runs for Pontiac and Oldsmobile.

The market has splintered. The U.S. has become the target of opportunity for every automaker that can meet our safety and environmental rules. The variety of cars and trucks is enormous. But big profits still come from big production runs of vehicles for which the customers are willing to pay top dollar, not from niche marketing. Abandoning the mass market could be another serious mistake.