Cars and Car Companies Getting Smaller | The Canadian Encyclopedia


Cars and Car Companies Getting Smaller

If you think everyone in the auto sector is feeling grim these days, then you haven't talked to John Vernile. The vice-president of sales at Hyundai Auto Canada says the recent turmoil has been nothing but good news.

This article was originally published in Maclean's Magazine on August 3, 2009

Cars and Car Companies Getting Smaller

If you think everyone in the auto sector is feeling grim these days, then you haven't talked to John Vernile. The vice-president of sales at Hyundai Auto Canada says the recent turmoil has been nothing but good news. Sales for the South Korean automaker are up "in every segment," he says - amounting to an overall surge in sales of 20 per cent during the first half of this year. "When this downturn hit, it just dialled things up for us," he says. Thanks in part to the demand for Hyundai's smaller cars, the company has suddenly emerged as one of the dominant players, not just in North America but globally. It's now the fifth-largest carmaker in the world. In quality surveys, it ranks ahead of Toyota and Honda. Market share is up, sales are up, and opportunity abounds. Despite the tough economic times, "we quietly celebrate here," says Vernile.

That kind of talk should have struggling industry heavyweights such as General Motors, which just emerged from bankruptcy protection, in panic mode. It is, after all, a revolutionary shift from 20 years ago when Hyundai was best known for the Pony, a small, cheap and just plain ugly car. Today, Hyundai has one of the hottest cars on the road with the Genesis, a sleek and expensive sedan that won the North American and Canadian car of the year awards. "Who would have ever thought we'd be selling a car over $40,000?" quips Vernile. "We can't keep them in stock."

Hyundai's sudden rise is just one more sign of how quickly the auto landscape is changing. The former Big Three automakers - GM, Ford, and Chrysler - ruled North America with an iron fist for decades. But their dominion has virtually evaporated overnight, leaving a host of hungry new players messily clambering for a piece of a global market that's suddenly been thrown wide open. For the first time in decades, no one really knows who the new giants of the auto industry will be, let alone what kind of technology will be under the hoods of the cars they make. The contenders are many, from Fiat, which just took a controlling stake in Chrysler, to India's Tata Motors, which recently rolled out the world's cheapest car - to any number of German automakers, like Mercedes, that have been gobbling up market share. Then there are the fast-growing Chinese car companies, like Geely and BYD. Instead of the Big Three, now we have "seven or eight players, none of which dominate, and all of which are competitors and very motivated," says Tom Libby, a Detroit-based independent auto analyst. "It's very different than it was 20 years ago."

Keeping track of all these new players almost requires a flow chart. While GM has been desperately downsizing to stay alive, other much smaller and once unheard-of manufacturers have been anxiously snatching up its cast-offs. Hummer was bought by a Chinese company that makes tow trucks. Saab was bought by Koenigsegg, a tiny Swedish company that makes a handful of high-end supercars each year. Both are companies that previously lacked the scale to become mass-market carmakers, yet they're suddenly players in the much sought-after North American consumer market. Hummer's new owner has already said that it will set its sights on selling Americans what some are calling an oxymoron: a new, fuel-efficient Hummer. "I think that in the long term they will play a significant role in the market, just because of the amount of resources they have and the motivation they have," says Libby.

Such upstart companies will be up against some massive - but vulnerable - industry heavyweights. Toyota has lost more than $4 billion over the past year, but still holds the number one spot in the world, with close to nine million vehicles sold globally. GM is still hanging on to the number two slot, with sales of 8.4 million vehicles last year, but it's sure to fall, especially after selling off its European arm, Opel. (One of the leading bidders for that company is Canada's Magna International.) Volkswagen is now the number three carmaker, selling five million vehicles a year, while Ford has actually upped its market share in the U.S., and now ranks at number four, just ahead of Hyundai. Other smaller companies, meanwhile, have been consolidating in an effort to crack into the upper echelons of the auto world. Along with Hyundai and its fast growing Kia brand, Fiat's move to take over Chrysler has launched it up the rankings, to number six.

With the sudden surge in competition, it's anyone's guess which companies will eventually end up on top. It's not even clear what kind of technology will be driving cars in 20 years. Everyone understands the post-gasoline engine is where the action is, but nobody knows how it will play out, says James Rubenstein, an auto analyst at Miami University in Ohio. "It's like picking up all the pieces on the board and throwing them up the air and seeing where they land," he says. So while they fight for market share, carmakers are also keeping a close eye on the rear-view mirror, and the dozens of new electric car manufacturers creeping up behind them.

A few years ago, Tesla, for instance, was a novelty act, selling a niche electric roadster that costs more than $100,000 - hardly a threat to a top-10 automaker. But now it has plans to start selling a $40,000 sedan and has been opening dealerships and expanding its distribution network. Tesla was recently loaned US$465 million by the U.S. government to build its new sedan, and company owner Elon Musk said that Tesla will "cross over into profitability" this month.

Government money, like the loan that helped Tesla, is helping to muddy the game even more, by providing big bucks to high-tech start-ups and accelerating their growth. Not only are they providing research and development funding, governments are also providing incentives to lure consumers to the new technologies. The government of Ontario, for instance, upped the ante last week, with a plan to offer as much as $10,000 in incentives to buyers of electric cars by 2010 - one of the largest electric auto incentives seen yet. "In bad times, innovators will survive and come out stronger than ever," Rubenstein says.

The one thing that everyone agrees on is that the biggest winners from all this innovation will be consumers. Buyers are now being courted by a batch of desperate, hungry car-makers, who will have to put increasingly better cars on the road to win market share. Their offerings will be more energy efficient, less expensive to buy and operate - and perhaps most importantly, better looking. Libby says we can expect a renaissance in car design, and an end to the days of so many plain, mid-sized sedans clogging the roads. "Twenty years ago the consumer was at the mercy of an oligopoly," says Libby. Today "each company is scrambling to provide something over and above the competition."

Many analysts say the restructuring that's underway is not unlike what happened in the 1980s when Japanese cars first landed in North America. Much like now, gas prices were on the rise and the economy was sinking. Customers were open to new things and the established players weren't prepared for the battle they had on their hands. That fight dealt a blow to the regional auto industry, but it stumbled along for another 40 years. This latest uprising, however, seems certain to destroy the Detroit-centric auto industry once and for all. "The auto industry used to be, even in recent years, a regional industry," says Tony Faria, a professor at the University of Windsor who studies the business. "It's now a truly global industry."

Faria predicts that the future auto kings will be the companies that not only have the most innovation, but which figure out how to best market their new cars globally. With the cost of simply designing a new car already at a billion dollars, carmakers need to scale up and master new territories. China's market has already grown as large and important as the North American one. (This is one area where GM still has an advantage - its sales in China are up nearly 40 per cent this year.) In a few decades, we may be left with about 20 major global companies. And it's quite possible that at least one of today's major automakers won't be on the list, says Rubenstein.

This consolidation is one reason why few analysts put much faith in an electric start-up emerging as a major power. While they may provide much of the innovation, the ones that don't fail will likely be snapped up by global behemoths looking for a technological edge. That's what Canada's Zenn Motor is banking on. It has decided to move away from building cars to focus on the new battery technology that it has been developing with Texas company EEstor. Already, the company claims that its energy system is miles ahead of the laptop-like lithium ion batteries currently being used by most electric carmakers.

That kind of innovation is the X-factor in the race for the top. While hardly anyone expects a little start-up to come out of nowhere and take the crown, some unknown company could hit the market with a truly unique technology - like the iPod of the auto world - while some major carmakers miss the boat, sputter and fail. That uncertainty lets executives like Hyundai's Vernile dream big. "We think of ourselves as the next Big Three: Hyundai, Toyota and Honda," he says. A long shot? Maybe. But in the current environment, one thing is clear: anything is now possible.


Maclean's August 3, 2009