Opel has performed a u-turn on its strategy to move the brand upmarket and will concentrate on affordability instead, as it struggles with an accelerated sales declines in Europe.
IHS Global Insight Perspective | |
Significance | Opel has effectively reversed a previous pledge to take the brand upmarket and will instead look to make its cars more affordable and improve the value proposition of its vehicles while continuing to commit significant resources to new model development. |
Implications | The company will adopt a policy of making its cars more affordable while actually increasing its R&D spend, a strategy that is in direct contrast to many of its mainstream rivals, according to Karl-Friedrich Stracke. |
Outlook | In an increasingly competitive European market place it makes sense for Opel to improve the value proposition of its markets while an attempt to compete with the likes of BMW, Mercedes-Benz and Audi in the European premium market would have been extremely difficult to pull off. |
Opel will make an effective u-turn on a previously stated corporate strategy to take the brand upmarket with a range of premium cars, according to an Automotive News Europe report. The new strategy was announced by Opel's CEO Karl-Friedrich Stracke at the Automotive News Europe Congress, which has been taking place in Monaco this week. He said, "We need to regain our traditional customer base. We moved Opel up too quickly. Going forward there will be adjustments to make our cars more affordable." Stracke has also committed to increasing Opel's investment in its product portfolio at a time when many of the company's main European rivals such as Fiat (see Europe: 18 June 2012: Fiat to Cut EUR500 Mil. from European Investments in Reaction to Market Slump) are looking to cut back on their investment programmes in reaction to the Eurozone financial crisis. He added, "We will make a significant investment in Opel's product portfolio. I noticed with interest that some of our key competitors have announced plans to cut product investment spending," Stracke also reiterated plans for the company to mount an ambitious programme of model renewal and brand new model lines, with 23 new or refreshed vehicles between now and 2016. This will include cars in new segments such as the new Mokka SUV-B model and the forthcoming Adam A-segment city car. There will also be 13 new powertrains, including three all-new engine designs.
Stracke had previously talked of taking the brand upmarket, in the latest of several attempts to take Opel's model offerings into the segments and price points traditionally occupied by the big three German volume premium OEMs. Originally it was speculated that the Adam would be a premium-orientated A-segment city car offering (see Germany: 16 August 2011: Opel Reiterates Intention to Make City Car an Upmarket Proposition) occupying the kind of market positioning that the Audi and BMW have used with the A1 and the Mini respectively in the B segment. However, while Opel has placed much emphasis on strong design, especially with regards to the interior of the Adam, the model's price point will be aimed very much at existing A-segment contenders. It remains to be seen if Opel's rethink of its premium strategy will account for the premium high technology luxury executive car that the company has talked about launching in 2016 with hydrogen fuel-cell technology. This project always sounded a particularly ambitious and costly undertaking for Opel with no guarantee of success.
Outlook and Implications
With Opel currently struggling with the overall decline in the European market, on which it is almost entirely reliant, with a 7.7% fall recorded in the first five months of this year, and with the unit's own sales significantly underperforming the market, with a 15.6% y/y fall to 369,558 units. The company will be coming under further pressure to radically overhaul its operations in order to cope with the new reality of the European market. Opel/Vauxhall lost USD747 million in 2011 and a further USD256 million in the first quarter of this year. The recent development of the unit's sales would indicate that it is in line for a significant combined first-half loss, which will be extremely unwelcome to the firm's US parent. In fairness to Opel/Vauxhall there is no restructuring or product strategy that could have coped with the current level of market decline in Europe, but Stracke and his management team will be under intense pressure to come up with a convincing turnaround plan. The problem with making Opels more affordable is that it seems a counterintuitive strategy at a time when profits are falling and in a European market territory where mid-market brands are fighting against each other for a diminishing share of the pie, while fighting off competition from emerging brands such as Hyundai, Kia and Skoda who were barely a factor as recently as a decade ago. As such Opel may engage itself in something of a "race to the bottom" in terms of pricing and profitability as it attempts to make its cars more affordable and improve the overall value proposition of its products. However, this is a risk it will have to take as its current product portfolio does not have enough stand-out contenders for the cars to compete on many factors other than price. One potential difficulty with this plan is the positioning of Opel/Vauxhall's sister brand in Europe, Chevrolet, which is already broadly sub-Opel in its pricing strategy. Stracke said Opel's pricing strategy will not bring the brand into competition with Chevrolet. "Customers don't see the brands as competitors," he said. However, while the "affordability" strategy is a more logical fit than the "premium" strategy (see Europe: 10 August 2011: GM Executives Confirm Plans to Shift Opel Brand Upmarket, to Invest EUR190 Mil. in Eisenach Facility) is it somewhat worrying that the company has done a 180-degree turn in terms of basic strategy in less than a year. It implies that Opel/Vauxhall is in something of a management maelstrom as a result of the pressure the unit is under to perform and as a result it is being forced to react to events rather than making calm and rationally thought out moves.