Sunday, October 23, 2005

America into Europe: The Transformation

One of my big surprises moving to London has been the size of the cars. Instead of there being an enormous amount of micro cars with two cylinder engines running about, most cars are about the size of a VW Golf or Ford Focus, and this being in a crowded metropolitan area rather than a suburb. They're really not that much smaller than America if you take SUVs out of the equation.

The market for microcars in Europe I think isn't that large. There is a minimum threshold in terms of size for a vehicle. There comes a point where a car is so cheap and small and tinny that most individuals would rather just walk and rent a car when they have to.

That being said, cars tend to be all the same size, and in terms of engineering and mechanics, really rather similar. All that separates them out is design and aesthetics. They all get similar mileage, have similar handling, and similar cargo space. The only way for a company to differentiate itself is by aesthetics. Reliability is of less importance as well because cars take less of a beating than they do in the US where commutes are longer and people are more willing to drive their cars short distances.

As fuel prices rise ever higher, American population density will increase and you will see a willingness to dupicate European driving habits. For automakers that will mean more horizontal integration rather than vertical integration, if they want to survive in a volatile marketplace. What that means is that GM's strategy that it used in the 1950s of several overlapping models with markedly different design competing against each other is actually the way to go.

Don't believe me? Look at VW with its SEAT and Skoda brands. The differences between these three marques are negligble. Aesthetically though the differences are apparent. VW is not now making money, but in the past has been quite profitable essentially duplicating a GM model of the 1950s for Europe. Peugeot and Citroen are basically the exact same cars from an engineering standpoint, and basically have the same price points throughout their lineup. Yet the company makes a profit, and probably makes a greater profit than it would if it decided to save money and cut out on of the brands.

As SUVs fade into history, people will flock to cars. The differences between cars that are made under the constraints of complex and tough government regulations and customer requirements will be marginal in terms of engineering. But the winners of the market will have designs that draw people to them. It's something that gives a glimmer of hope to the Big 3. As people move closer to their jobs to save on gas, they will have less of a need for super reliable vehicles. The advantages of the Japanese will fade at this point.

It's also a time for European brands that have failed in the US to attempt a comeback. Peugeot, Citroen, even Renault could find a market. People will something new, and who better to give it to them than manufacturers who are masters of making fuel sipping cars and who have been dealing with fuel crises for decades.

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