The Automotive Industry

Julianna Egner, Mac Bishop, John Nitti, Logan White

April 11, 2011AEM 4550 – Economics of

AdvertisingJura Liaukonyte

Agenda Industry Analysis Advertising Analysis

o For Dealershipso For Brands

Advertising Strategies Recalls & Brand Reputation Recent Advertising Innovations Investment & Advertising

Recommendations

Why the Automotive Industry? Automobile industry a staple of the U.S.

economy Americans have developed a deeply

patriotic connection to this auto manufacturing tradition

Over $100 billion in revenue in 2010 Industry expected to grow Billions of $ spent on advertising every

year Health of the industry impacts nationwide

advertising

Industry Analysis

Industry Definition Sub-divided Industry:

1. Car and Automobile Manufacturing - Companies that manufacture car and automobile chassis

2. Light Truck and Sport Utility Vehicle Mfg. – Companies that manufacture light trucks and utility vehicles, such as vans, pick up trucks, and sport-utility vehicles

Produce vehicles in assembly plants

Major Products and Services Compact and subcompact sedans Luxury Cars Mid-size and full-size sedans Sports cars

Major Products and Services CUVs (crossover vehicle) Large Pickup Trucks Small Pickup Trucks Large Vans Small Vans SUVs

Current Industry Condition Recession brings trouble for the big

three: Ford, Chrysler, GMo Bankruptcyo Restructuringo Large losses or dismal profits

Reasonso Reliance on SUVs and larger cars

Signs of Relief In 2011, industry profit margins will be

relatively healthy at 2.0% Car industry revenue to grow at an

estimated rate of 4.2% annually to $102.3 billion by 2016

o Shifting consumer preferenceso General recovery in demand

Improving consumer sentiment Credit availability is recovering

Why People Buy? Past: All about price Current: Price, running cost,

environmental effects Motor vehicle affordability on the rise Green revolution

o Consumers will continue to demand environmentally friendly cars

o Price of gas will rise in 2011

Distribution Model

Light Truck and SUV >

< Car & Automobile

International Influence Imports represent 51.0% of domestic

demand for automobiles Exports generate 19.1% of industry

revenue

Operating Conditions Technology

o Design, Innovation (hybrid, plug-in hybrid electric vehicles ) Engineering, and Production method

o Most auto manufactures are working on a hybrid or plug-in electric

Regulation and Policyo The Government compiles complaints from

consumers and will prod a manufacturer to recall a vehicle if warranted.

o Obama administration – efficiency mandate o Cars - Average 39 mpgo Light trucks - Average 30 mpg

Competitive Landscape 174 total companies as of 2007 HHI for top 50 firms=1448.8 Car CR4 = 55.6

Light Truck/SUV CR4 = 73.5

Industry Structure Market Concentration: Medium Competition in Industry: Medium Barriers to Entry: High Competitive differentiation:

o Priceo Qualityo Efficiencyo Supply-chain integrationo Industrial relationso Types of cars manufacturedo Product innovation

Industry Data - Cars

Industry Data – Light Truck & SUV

Global Competition Finding an efficient

business model to operate in this globalized industry environment is key.

Example: One Ford: streamlined design

and manufacturing platform across Ford’s global markets

GM’s joint venture with China’s Shanghai Automotive Industry Corporation

Market Concentration

Toyota17%

GM15%

Ford12%

Honda12%

Hyundai10%

Others34%

Market Share

Competitor Highlights Toyota:

o 2009 – 2010: U.S. market share fell from 19.5% to 16.8%

o Panicked and angry car buyers opted to purchase cars from other companies

o Toyota Prius first mass-produced hybrid gasoline-electric car – major success for Toyota.

o Toyota Motors is world's largest automotive manufacturer (overtaking GM in 2008)

GMo 2006 – 2011: U.S car sales fell at a troubling

10.3% annualized rateo Total U.S. car sales fell 4.3% annually

Competitor Highlights Ford

o CEO restructuring the company’s business practices since 2006 o Put Ford in a better position when the recession hit.

o “One Ford” initiative has helped Ford share designs and other efforts across global divisions

Hondao Notable for its unusually high spending on research-and-

development (R&D) o Equivalent to about 5% of revenue

o Competitive in hybrid market – Honda Insighto Did not achieve the commercial success of the rival Toyota Prius.

Hyundaio Second largest Asian automakero Sales rose 7.2% annually since 2006 while the U.S. market

decreased 4.3% annuallyo Have kept prices low while radically improving vehicle design

Brand EquityBrand Values from Interbrand’s Best Global Brands 2010

Rank Prev. Rank

Brand

Brand Value ($m)

Change Revenue

($B)

11 8 26,192 -16% 204.44

12 12 25,179 6% 69.00

15 15 23,219 3% 80.14

20 18 18,506 4% 92.55

50 49 7,195 3% 128.95

53 55 6,892 6% 168.13

63 65 5,461 9% 46.97

65 69 5,033 9% 78.46

72 74 4,404 4% 80.75

91 88 3,562 1% 2.15

Advertising-to-Sales2010: Revenues = $76,664 for cars, $94766

for light trucks = $171.43 billion $13 billion spent on advertising

= 7.6 Ad-to-sales ratioo Medium A-S-Ro Highest: Liquor (15.6%)

Organization Integrated supply chain

o Designo Engineero Manufacture many of the components

and partso Marketo Sell

Supply network: steel, raw materials, other components

Advertising Analysis

Overview Many different advertising strategies in

their ad campaignso Informativeo Combativeo Persuasive o Celebrity Endorsemento Emotional Appeal

$13 billion spent on advertising in 2010 Advertising spending is expected to

persist at 2.2% of revenue in 2011

Auto Industry Advertising 2 layers to advertising in the auto

industry1. Advertising by dealerships2. Advertising by brands Dealerships Brands

Local Nationwide

InformativeHigh QualityLower QualityPersuasive

CombativeEstablish Personalrelationship

Dealership Advertising Dealership Advertising

o Primarily informative in natureo Demand is more price elastico Ads are more focused on price than car

attributeso Ads are almost always local and usually feature

the boss of the dealership— “personal connection”

o Ads are lower in quality and much less expensive to produce

o Often loud, repetitive, and low qualityo Notable slogan: “No Hassle, No Razzle Dazzle”

from a local Ithaca dealership

Dealership Ads http://

www.youtube.com/watch?v=A82AmZ3Glmk

Dealership Advertising Trends Dealership advertisements reflect

consumer preferences in local area Consumer preferences influenced

o Climateo Incomeo Reason for purchase (car use)o Car culture of city

Data on dealership advertising 2008-2010

o Sub-sample of different markets nationwideo Associations between brands and cities, etc.

Dealership Advertising by City

Dealership City

Top Advertised

Brand

Total Amount Spent ($)

Atlanta, GA Ford F-Series 1,277,509Dallas, TX Ford F-Series 9,693,999

Denver, CO Ford F-Series 2,727,011Houston, TX Ford F-Series 7,223,330

Los Angeles, CA BMW 3-Series 8,570,245New York, NY BMW 3-Series 6,345,458

Top advertised brands by market

Normalized Dealership Adv.Highest Total Dealership Spending by City

City Population (mil) Adv. Spending Adv. Per Capita

Los Angeles 9.9 $102,669, 540 $10.37

New York 8.4 $44,609,248 $5.31

Houston 2.3 $39,159,786 $17.03

Dallas 1.3 $38,815,813 $29.86

San Francisco .9 $33,640,608 $37.38

Philadelphia 1.6 $18,582,866 $11.61

Phoenix 1.6 $16,601,331 $10.38

Ford F-SeriesTotal dealership advertising spending for the F-Series by city

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BMW 3-SeriesTotal dealership advertising spending for the 3-Series by city

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Advertising Spending by City Top Spender: Los Angeles

o Total spent by dealerships 2008-2010 = $102,669,540

Why?o 17.8 million people in metropolitan areao Extremely strong car culture – revolutionary

highway system, mediocre mass transito Cars crucial to livelihood in the city

o Highest income disparity but extreme wealth in the area

Brand Advertising Brand Advertising

o More persuasive in natureo Demand is more price inelastico Ads are more focused on car attributes

than priceo Ads are typically national or regional,

covering a much larger area than dealership ads

o Ads are higher in quality and much more expensive to produce and air

Total Ad Spending

0% 0%6% 18%

1%

18%9%12%

6%0%

11%0%0%0%

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Total Ad Spending by Parent CompanyBMW AgChrysler Group LlcDaimler AgFord Motor CoFuji Heavy Industries LtdGeneral Motors CorpHonda Motor Co LtdHyundai CorpMazda Motor CorpMITSUBISHI MOTORS CORPNissan Motor Co LtdPorsche AGSpyker Cars NVSUZUKI MOTOR CO LTDToyota Motor CorpVolkswagen Ag

Total Ad Spending Auto industry “Big Three” top spenders

on advertising:1. Ford – 18%2. GM – 18%3. Chrysler – 12%

Biggest advertising threats:1. Toyota – 12%2. Nissan – 11%3. Honda – 9%

Average Ad Spending by BrandVolkswagen highest spender = $167,510 per ad

BMW AgChrysler Group Llc

Daimler AgFord Motor Co

Fuji Heavy Industries LtdGeneral Motors CorpHonda Motor Co Ltd

Hyundai CorpMazda Motor Corp

MITSUBISHI MOTORS CORPNissan Motor Co Ltd

Porsche AGSUZUKI MOTOR CO LTD

Toyota Motor CorpVolkswagen Ag

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Average Ad Spending by Parent Brand

Average Ad Spending by Brand Highest spenders per ad:

1. Volkswagen2. Ford3. Nissan4. Honda5. Hyundai

Implicationso Primarily foreign automakerso Trying to win larger part of the market

o Buying more expensive ad spots, large audienceso Foreign brands higher reputations recently

Brand Ad Spending Trends Ford Fusion – Gas powered

or Hybrid Emphasis on Fuel Efficiency “We Speak Value. We Speak

MPG”

Ford FiestaFord FocusFord FusionFord MustangFord TaurusLincoln MKSLincoln MKZVolvo C70Volvo S80

Buick EnclaveBuick LacrosseBuick LucerneCadillac CTSChevrolet AveoChevrolet CamaroChevrolet CobaltChevrolet EquinoxChevrolet HHRChevrolet ImpalaChevrolet MalibuPontiac G5Pontiac G6Pontiac G8Pontiac Grand AmPontiac SolsticePontiac VibeSaturn AstraSaturn Aura

GM – Chevrolet Malibu Gas powered, but fuel

efficient – 33 MPG “Fuel economy that a

comparable Toyota Camry can’t match”

Brand Ad Spending Trends

Lexus ESLexus HSLexus ISLexus LSScion TCScion xBToyota CamryToyota CorollaToyota PriusToyota Yaris

AcuraAcura RLAcura TLAcura TSXHonda AccordHonda CivicHonda FitHonda Insight

Toyota Prius – Put hybrid vehicles on the map

“Harmony between man, nature and machine”

Toyota Corolla – Comparable to the Honda Accord

Honda Accord – Honda’s bestseller

Honda Insight – Honda’s hybrid

Lower starting price than Prius ($18,200 v. $23,050)

Brand Ad Spending Trends

SUN MON TUE WED THU FRI SAT$0

$20,000

$40,000

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$80,707

Average Cost /Ad by Day of Week

Brand Ad Spending Trends

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$100,000$150,000$200,000$250,000$300,000$350,000$400,000

Average Spent/Ad by Time of Day

*Sunday Early Fringe = 6pm*Prime Access 1 = 7pm (post evening news)*Late news = 11pm

Implications Sunday highest ad spending by brands –

Why?o Sporting eventso Awards showso Largest audience – home with family, etc.

Time of day with highest ad spending:1. Sunday Fringe 2 – ends of sporting events,

etc.2. Prime Access 1 – Post evening news,

entertainment television, game shows3. Late News – Post sitcoms, dramas

Advertising by Program Type

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$100,000

$200,000

$300,000

$400,000

$500,000

Average Advertising Cost/Program Type

Advertising by Program Type Program type with highest average cost:

1. Professional Football – Game2. Professional Football – Post-Game3. Award/Pageant/Parade/Celebration

Primarily air on Sundays Fits with data on time of day spending

o Highest ad spending Sunday Fringe 2 o Sundays around 6pmo Coincides with end of games and beginning

of post-games

Where Brands Advertise BMW – 79% advertising during Golf Mercedes – 15% advertising during Golf

14% during News Forum/Interview shows

GM – 45% advertising during college and professional sporting events

Toyota – 21% advertising during drama shows 15% during Professional Football Games

Conclusion: Luxury brands advertise to target educated consumers of higher socio-economic status

Advertising Strategies

Brand Informative Advertising Conveys simple search attributes to

consumers Consumers look for product specs and

special features when making purchasing decisions

Automotive Industry:o Fuel efficiencyo Technical features – engine size, horsepower,

etc.o Price pointo Available financing

Brand Informative Advertising Highlighted attributes differ between

product categorieso Luxuryo Economyo Truck/SUVo Hybridso Sporto Minivan

Informative: Luxury Target new features usually focusing on

technological and performance upgrades Primarily in TV commercials

Mercedes: http://www.youtube.com/watch?v=Ho4PI9zaZy4&feature=related

Informative: Economy Economy class brands’ informative

advertising highlights vehicleo Fuel efficiency (MPG) o Price o Performanceo Warranties

Informative: Economy

Informative: SUVs & Trucks SUV & Truck advertising focuses on

qualities such as:o Fuel efficiency (MPG) o Towing Capacityo Usability features

Informative: Hybrids Informative Advertisements in the

hybrid segment focus on o New hybrid technology and how it works, o Ecological benefits of hybridso Fuel efficiency (MPG)

Informative: Minivan Similar to economy, but also focuses on

o Kid friendly attributeso Ease of useo Storage capabilities o Long distance travel capabilities

Persuasive Advertising Goal: to portray your respective brand’s

vehicles as different from those of your competitors so as to alter consumers’ tastes and create a perceived product difference o Emotional Appealso Image Changing

Perceived product difference allows brand to charge more for their productso Decreases elasticity of demand relative to

price

Emotional Appeals Social (Status) Fear Humor Lifestyle Endorsement

Social Appeals Ads will target the idea of “fitting-in”

o Toyota - recent campaign with the Highlander

http://www.youtube.com/watch?v=80pNUxIczig

Fear Appeals Within the automotive industry, most of

the fear appeals mention safety attributeso Show the harsh realities of accidents and

their possible effectso Highlight brand’s unique safety features

Fear Appeals Acura:

o http://www.youtube.com/watch?v=6p9ZHG8Fac0

Mercedes:o http://www.youtube.com/watch?v=_jqnR2

pucm4&feature=related

Humor Appeals Humor is an element that is used in

around 30% of advertisements across industries

Benefits:o Excellent tool to catch the viewer’s attention o Can help in achieving better recall –

potential to increase sales In auto industry, sometimes parody the

use of sex appeals

Humor Appeals Volkswagen:

http://www.youtube.com/watch?v=GTqM1LLxMSg

Lifestyle Appeals Many brands strive to target the lifestyle

of their customers or the lifestyles their customers would like to haveo Sporty/outdoorsy o Family orientedo High status

Advertisements highlight activities associated with target lifestyle

Lifestyle Appeals BMW:

http://www.youtube.com/watch?v=Jt66-2ix43k

Endorsements Celebrities and well known personalities

often endorse certain products Endorsements can help drive sales Potential to increase advertisement

recall if celebrity is appealing to the consumer

Endorsements http://

www.spike.com/video-clips/bnhcqi/cadillac-tiki-barber

http://www.youtube.com/watch?v=CE2lIBQn2KM

Image Changing Automakers trying to change their brand

image in response to rising fuel prices and to appeal to a more environmentally-conscious nation.

o SUVs now made as hybrids—they are trying to change image from gas guzzling to eco-friendly haulers

Example: Mustang & Mileage Mustang’s recent commercial—who

would’ve thought 5 years ago that advertising for a model like Mustang would ever focus on MPGs?

Bloggers: “Who the hell buys a Mustang for the mileage?”

http://www.youtube.com/watch?v=ZAX550biM7c

Honda Odyssey & Dads Honda Odyssey

o Reinventing the image of the minivan. Soccer-Mom Cool Dad

Combative Advertising Method used in mature markets Goal: To shift consumers preferences

towards the advertising firmo Redistribution of consumers among brandso No expansion of the market

Differs by segment in the auto industryo Luxuryo Economyo Sports Carso Hybrids

Combative: Luxury Advertising focused in major cities,

especially Los Angeles and New York (higher income areas)

Notable Battle: Audi vs. BMWo Perhaps the most clearly visible example of

combative advertising in the entire industryo Audi puts up a billboard in the LA metro

area, BMW then responds with another right next to it

Combative: Economy Nationwide Notable Battle: Toyota Camry vs. Honda

Accord New Battle: Kia Optima vs. Toyota Camry

o Camry has been the “go-to” economy vehicle in America, often first in consumers’ minds

o Kia trying to get into the game with the Optima

o Competitive advantage: Kia focuses ono Lower priceo Features the Camry doesn’t have (aerodynamic

styling and Sirius satellite radio)

Kia Optima http://www.youtube.com/watch?v=wc9A

j7RTUlY

Combative: Sports Cars Notable Battle: Subaru vs. Audi/BMW

o Audi and BMW more prestige and better reputation for manufacturing sleek and fancy-looking sports cars

o Subaru chosen to focus on performance, specifically engine capability, as its competitive advantage

Combative: Hybrid Notable Battle: Lexus vs. Infiniti

o Lexus - originally the main player in luxury hybrids

o Infiniti now getting into the gameo Advertise how they are passing other

hybridso Producing unassuming vehicles that exceed

consumer expectations— “not what you think”

o Advertised as hybrid with performance

Infiniti Hybrid http

://www.youtube.com/watch?v=pzWyd10icS4&feature=relmfu

Mixed-Method Advertising Combining elements from various

advertising techniques and strategies Eminem for Chrysler

o http://www.youtube.com/watch?v=SKL254Y_jtc&bid=5079147&adid=233347236&pid=57249858&KWNM=super+bowl+commercial&KWID=150763308&channel=PS

Audi “Progress is Beautiful” campaigno http://www.youtube.com/watch?v=LQ6R7

c3cnEE

Recalls & Brand Reputation

Product Recalls & ReputationRecall: when a manufacturer notifies all owners of a specific vehicle of a condition or defect that could affect safety or safe operation. Impact brands’ quality reputation –

reputation based on the quality of the product provided by the brand

o Quality reputation suffers the most from product recalls

Benefits of a Good Reputation Reputation used as a solution to

uncertainty for consumers Reputation a signal of quality Benefits to brands:

o Ability to charge higher prices (inelastic)o Higher growth and saleso Higher status in the minds of consumerso Protection against new entrants to the

market Reputation of a brand creates

expectations for its products

Liability of a Good Reputation Rhee and Haunschild (2003) Explored relationship between brand

reputation and the impact of recalls on:o Market shareo Profitso Consumer perceptions/attitudes

Studied recalls between 1975 and 1999o Of the 46 automakers sampled, 1,853 recall

eventso Average of 2.26 recalls per automaker per

year

Liability of a Good Reputation Severe recalls tend to decrease brand’s

market share in following month Non-severe recalls result in no damage to

an automaker’s market shareo Why? Small recalls can be perceived as the

automaker taking initiative to fix a problem High reputation automakers more likely to

be damaged by recallso Why? 1. Consumers greater expectations for these brands 2. Media focuses on recalls of reputation firms

Toyota Recall 2009-2010Problem: ‘sudden unintended acceleration’ Claimed ill-fitting floor mats caused pedals

to stick True cause of sudden unintended accel.

faulty accelerator pedals

Recall: 22.4 million automobile owners received recall notices in 12 month period ending Summer 2010

o 8.54 million for faulty pedals and floor mats

Recalls and Advertising Combat recalls with:

Incentives Toyota offered an

average of $2,256 in incentives

Competitors also offer incentiveso GM offered up to

$1000 if traded in a Toyota

Advertising Apologetic ads

o Superbowl 2010 Stressed brands:

o Commitment to safety

o Importance of customer satisfaction

Advertising Response

<< “As you may have heard, in rare cases, sticking accelerator pedals have occurred in some of our vehicles. We believe we are close to announcing an effective remedy. And we’ve temporarily halted production at some of our N. American plants to focus on the vehicles we’ve recalled. Why? Because it’s the right thing to do for our customers.”

Toyota Recall 2009-2010Toyota Pricing Data (April 2008-April 2010) No apparent break in the relative price of

Toyota cars Recalled Toyotas lost 1% of their price

advantage over unrecalled Toyotas Never larger than 2% change in price

o Never outside the margin of error

Conclusion: If recalls matter, small, short lived effect

o Appears directly after initial media coverage of the recall event

Ford & Bridgestone/Firestone Summer 2000: Tire tread separation on

Bridgestone/Firestone tireso Number one tire for Ford Explorerso Recalled 6.5 million tires August 9, 2000

Prime example of short lived impact of recall

o Survey of consumers attitudes toward Ford on August 16, 17

o 50% polled said “less likely” to buy vehicle with tires

o 25% SUV intenders who shun Explorer blame recall

Impact of Apologetic Ads Apologetic Ads – newspaper advertising

campaigno Ford President stating “Our goal is your safety

and trust” Focus Groups August 12 & 13 to measure

effectiveness of recall ad campaigno 34% participants said impression of Ford

improvedo 5% said impression of Ford worsenedo 25% said more likely to consider a Ford next

time they buy a vehicle based on how the company handled the situation

Recent Advertising Innovations

Online Advertising Joining trend towards online advertising Now utilize all main forms of online

advertisingo Banner adso Search Engine Advertising (keywords)o Rich media – full length car ads preface

videos viewed on Youtube and Huluo Social Media – Facebook and Twitter

Social Media – Facebook Facebook creates online community for

lovers of a brand Automakers utilize Facebook to engage

consumerso Easy exchange of information between the

two partieso Dialogue that was not possible beforeo Easy word of mouth marketingo Encourage user generated content and

interaction with the brand’s offerings

Example: Toyota USA – Facebook voters determine which 100 do-gooders win Toyotas

Social Media - Facebook Corporate initiative at Ford

o CEO stated: “Social media is the future” Ford Explorer launch

o Used Facebook as integral part of the launch

o Real-time Facebook reveal with New York City launch event

Social Media – Twitter Twitter can keep followers updated

around the clock on brand news

Recommendations

Future Advertising Strategies Crucial to create a concrete identity of

brand through advertising Move towards strengthening core products

o Continuing emphasis on fuel efficiency Concrete identity that leaves old players of

auto segment in dusto Brand community like Saturno Advertising with many appeals like Audi

Creation of strong brand community makes even harder for consumers to leave

Future Advertising Strategies Move towards ads with more emotional

appeals – ads that leave the greatest impact

Mixed method advertisingo Humor appealso Social & Lifestyle appealso Image changing – new luxury, etc.o Highlighting innovation

Social media – better connection with consumers, greater reach & cheaper!

Advertising Investments Advertising goal – reach large,

interested audience with least expenditure audience

o Earn highest return on investment Advertise more on college sports, less

on professional sports o Similar audienceo Cheaper placementso Also on Sunday, most popular advertising

day

Advertising Investments Family oriented cars Children’s/Family

entertainment, daytime o Target momso Even target kids – see cool minivan, tell parents

about Luxury hybrids increase advertising

across the board to competeo Prestige + Eco-friendly, previously unavailable

Move advertising $ to similar programming that is less expensive

o Professional Football post-game pre-gameo Cheaper, but same target audience

Questions?