“Everybody seems to be expanding their product line, and you wonder if that isn’t going to lead to problems,” said Wilbur Ross, CEO of private-equity firm WL Ross, recently at the Automotive News World Congress. “It may lead to some more volatility in market share, and it may lead to, in effect, overcapacity in particular segments.”
Among the unlikely names entering the luxury segment are Ford, with its Lincoln MKZ sedan and MKC crossover; Kia, with its 2014 Cadenza premium sedan; and Volkswagen, with its CrossBlue crossover.
Factors to watch
The auto industry is finally recovering from the doom and gloom of the recession. There’s real momentum in sales and in the broader economy in general, and experts estimate that the U.S. auto market could reach 17 million units in sales by 2015. Margins, profits, and transaction prices are all up, while incentives remain low.
In that kind of environment, we have to make sure that increased competition and expanding product lines don’t lead to incentive wars or a loss of consumer trust with inaccurate statements — such as Honda’s recent overstatement of fuel-economy numbers.
With so many launches in new segments, companies also have to make sure they keep their rollouts flawless. Ford already fumbled when it didn’t get its new MKZ to dealers as promised in December, resulting in a 73% plunge in MKZ January sales as dealers ran out of 2012 models. Now Lincoln is going to offer dealers cash assistance to help keep customers who are frustrated by the delays.
As the MKZ episode illustrates, rushing into new segments — and making mistakes in the process — could be costly for automakers and investors alike, and it’s one area in particular to watch as companies exit their comfort zones and jump into this new luxury segment.
Bottom line
There’s an explosion of competition as automakers try to grow market share with these new product lines. Keep an eye on the factors I’ve discussed here, and watch incentives closely over the next few years. Investors who do will be able to spot tomorrow’s winner and realize nice portfolio gains in the process.
According to KPMG’s annual survey, 81% of auto executives polled believe VW will increase global share more than any competitor over the next five years. Which company do you think will come out on top? Let me know in the comments section below.
The article A Disturbing Trend for Automakers originally appeared on Fool.com and is written by Daniel Miller.
Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford.
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