The Hindu Business Line : Perspectives from Frankfurt — Global auto industry in introspection mode

While the Frankfurt Auto Show had its share of style, glamour and concepts, the palpable feeling was one of uncertainty and soul-searching, says V. Sumantran.

THE BIENNIAL Frankfurt IAA Auto Show is regarded as a reliable barometer of the mood of the German economy and, by extension, Europe. This year proved no different. The palpable feeling was one of uncertainty and introspection.

With the backdrop of the German elections, this mood was understandable given that the nation seems uncertain about its future course.

Rising unemployment, low rates of economic growth and new competitor nations that threaten the lifestyle of German society brought a number of supporters to Angela Merkel, who promised a slightly softer version of Margaret Thatcher's unshackling of the economy, lowering of taxes and bold economic reforms.

But, equally, the nation seemed hesitant to unequivocally embrace this platform. The Katrina calamity in New Orleans and the subsequent inability of the federal government in the United States to respond effectively only confirmed the worst fears of those who predicted a drastic degradation in quality of life, if the role of the government were to be circumscribed. As the close election results revealed, Germany is in a mood for soul searching.

Even one blind to the political drama outside the auto show may have emerged with a similar assessment of the German and European auto industries. Many argue that the success of the European strategy, based on profitable exploitation of an embellished brand, with emphasis on premium features, quality and technology, was adequately validated by the financial performance of Porsche, BMW and Audi (the premium division of Volkswagen).

Flush from the initial success of its first Crossover SUV (the Cayenne), Porsche announced yet another product extension with the Cayman sportster, derived extensively from the Boxster convertible.

Audi announced the Q7, also a Crossover SUV and now the biggest and heaviest Audi starting at close to 50,000 euros, and a product that is also expected to rely heavily on the US market.

Porsche and BMW continue to record enviable operating margins and class-leading financial performance underscoring the premium segment formula of success.

However, the naysayers point to the reversal of fortunes of recently successful companies such as Volkswagen and DaimlerChrysler. The drive to more premium content and positioning (as in the case of VW) and for rapid assimilation of new technologies, usually with complex electronic systems, have led to depressed margins and a notable increase in quality issues (notably at DaimlerChrysler). Each of these companies benefits from new management teams that have taken on these topics as priority. Volkswagen's stand featured many new vehicles and concepts (Jetta sedan and EOS convertible off the Golf platform) and the new Passat has definitely evolved closer to the premium set (BMW 3-Series and Audi A4) than the more plebian Mondeo or Vectra it was previously grouped with.

However, in a significant move, the entry level Fox is now sourced from low-cost Brazil and its hard industrial plastics and functional interior departs from the filigree detailing evident in the interior of the departing Lupo. VW seems determined to temper the move up-market to higher cost and unsustainable margins.

DaimlerChrysler launched the new eighth generation S-Class and given that every S-Class launch has redefined Mercedes-Benz styling and technological reach for that decade, this one was no exception.

Borrowing from elements of the Maybach, the new car was predictably a technological tour de force. Employing radar-based collision avoidance, Presafe crash preparation (to prepare occupants for an imminent crash), and infra-red night vision screen, this car attempts to reaffirm its place at the top of the pecking order.

Yet, the new Chairman, Mr Dieter Zetsche, has spent a fair amount of time talking about the quality imperatives, an area where the company has come for criticism. In a remarkably short time, concerns at the DaimlerChrysler headquarters seem to have shifted from North America (where Chrysler is now doing relatively well) to Europe (where Mercedes is not faring too well).

The first presence of a few Chinese manufacturers (Geely, China-Brilliance, and Jiangling) in a relatively obscure hall at Frankfurt was the cause of a disproportionate number of headlines. Raising the spectre of displacing the European incumbents at the low-price segments, these exhibits engendered much debate on the long-term implications for Europe's volume manufacturers.

While one section welcomed the entry of affordable cars at a time when consumers are finding that cars are getting more expensive, others raised concerns about quality and product relevance to the discriminating European buyer.

Notably, the national German automobile club (ADAC), after a crash test of the Jiangling Landwind (a clone of an earlier Isuzu) called the results "catastrophic". But their very presence in Frankfurt seemed to usher, inevitably, a new era where a new source from Asia is to be reckoned with.

Western efforts to addressing the low-price segments were taking different forms. General Motors showed the new Chevy Aveo, sourced from GM-Daewoo in Korea, which will be positioned below the corresponding range of Opel products in price and take on these newcomers.

Peugeot had a lone version of the 206 Sedan, engineered and to be sourced from Iran. Peugeot has declared its dependence on the older out-going (depreciated cost) platform to compete with the successful Renault-Dacia Logan from Romania in select markets. The low-price segments will not be surrendered to the Chinese or anyone else without a fight.

The mainstream small car segment saw two important launches: The third generation Renault Clio and Fiat's Punto Grande. Both products are extremely critical to the respective manufacturers.

Although the Clio is based on the same platform as the previously launched Modus and was executed as a fast, efficient programme, it still is reported to have cost Renault over 900 million euros.

They will face the new second generation Yaris from Toyota as well as the Nissan Note, both of which were also introduced in Frankfurt.

The latter two represent the new genre of Japanese super-minis that have appealed well to Europe. (The first generation Yaris and the Honda Jazz are highly regarded in Europe as never before for Japanese products in this segment.)

That Japan has ratcheted its strength in Europe was evident with two other significant products. When one traces the evolution of the Honda Civic, one finds alternate generations characterised by bold changes.

The Civic was, therefore, due for some radical treatment and Honda did not disappoint with the seventh generation. Not only does the new hatchback get a dramatic and very sporty new exterior, the interior is equally avant garde.

Toyota took aim at the premium compact segment and launched the Lexus IS250 and IS220 diesel. These Lexus cars are positioned squarely against the BMW-3 series and now with requisite flair to add to the repertoire of technology and power-trains (including a Gen-3 Common Rail Diesel and emission particulate filter, with considerably more power and torque than the equivalent BMWs) Toyota is aiming for a much larger presence in Europe.

The cognescenti in Europe have long held that Japanese products lacked what it takes to battle the European establishment, particularly in the premium segments. One would hesitate to bet against these two entrants in Europe.

An added worry for Europe is the impending change in regulations and emission norms (to Euro 5) and fuel economy (to achieve a fleet average of 140 grams/km of CO{-2} emissions).

Here too, the steadfast belief in Europe that the best course ahead was with advanced "clean" diesels alone has been shaken.

Again, the trans-Atlantic images of US consumers facing gasoline prices at over $3 a gallon and the threat to uninterrupted oil supply have found new believers in the EU in hybrid-electric power-trains. Frankfurt, this year, saw new hybrid vehicles and concepts from Lexus (GS450h), Honda (Civic), Audi (Q7), Mercedes (S-class), Smart (Crosstown) and BMW (X3). European manufacturers seem less certain that the "clean" diesel solution alone will safeguard their future adequately. Any auto-show is high on styling and design. And while Frankfurt had its share of show-cars and concepts, a keen observer looking for new trends may have just perceived one. When Mercedes-Benz launched the CLS (four-door coupe) last year, it was thought to be an exclusive blend of coupe and (four-door) sedan for a luxury buyer.

Frankfurt saw the launch of the Ford Iosis (not to be confused with the VW Eos), a four-door concept by new design head Martin Smith (ex-Opel), that again seemed to blend coupe design idioms with the architecture of a four-door sedan.

This vehicle is expected to influence the future Mondeo and will offer those bored with predictable three-box sedans an attractive alternative.

In a neighbouring hall, Mitsubishi previewed the Concept Sportback, which is likewise expected to influence the new Lancer. In a crowded market space, automakers are eager to discover and ride the next new trend.

So, with new regulations expected to demand more expensive technology, and margin pressure stemming from low-cost nations focusing on Europe and high wage costs and chronic over capacity, and the prospect of a new offensive by a resurgent Japan, any European industry observer could be forgiven for appearing less cocksure about the future.

And as the mammoth show slowly drew to a close after two weeks of press announcements, interviews, launches and pageantry, one awoke to a new headline.

Porsche, the small exclusive sports-car builder, born from the products of Volkswagen (whose Beetle was incidentally designed by Ferdinand Porsche) and long used to enjoying patronage of the mother-ship, was itself announcing its interest in acquiring a 20 per cent stake in Volkswagen (the world's fifth largest automaker).

This was a friendly offer, encouraged by the State of Lower Saxony (owner of 18 per cent of VW) and aimed at protecting Volkswagen from a potential hostile bid.

That Porsche could make this offer from its reserves and continue to fund its future product programmes was a telling statement of where the industry has come.

In an age when the market capitalisation of Harley-Davidson (makers of specialty motorcycles) can be larger than that of General Motors (such was the case in March and April 2005), the mood for introspection for the global auto industry (and not in Germany alone) is understandable.

(The author was until recently Executive Director of the passenger car business at Tata Motors. Earlier he was a Director at General Motors, based in Sweden.)

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