What is to Blame for Domestics' Collapsing Market Share?

October 23, 2009

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RICHMOND, Va. — A study from Virginia Commonwealth University suggests that the domestic automakers' slumping market share since 1996 has been caused primarily by a lack of new-product launches.

The "Non-Price Determinants of Automotive Demand: Restyling Matters Most" study, which was conducted by three VCU School of Business economists, examined market-share changes in the auto and light-truck submarkets.

The study found that auto industry demand is most heavily impacted by "new product," which officials said is measured by restyling.

Such factors as price, advertising, rebranding, warranty curtailments, new safety features and changes in reliability only have a minimal impact on demand, researchers noted.

"A 10-percent reduction in relative price would yield only one-tenth the market share impact of a restyling," suggested Oleg Korenok, assistant professor of economics at VCU and lead author of the study.

"And one would have to double one's relative advertising expenditure to match the impact of a restyling," Korenok continued.

Specifically, market share for domestic automakers dropped from 72.9 percent to 47.4 percent between 1996 and 2008.

Looking at 1995-2006 model-year units, Japanese OEMs revamped vehicles styles, on average, every three years. Meanwhile, domestics only changed up styles once every four years, on average.

"This difference in styling (frequency) better explains the 25.5 percent market share loss for domestic manufacturers over this period than more often cited factors such as reliability differentials as cited by Consumer Reports," Korenok and co-authors George Hoffer, professor of economics at VCU, and Edward Millner, professor and chair of the Department of Economics at VCU, suggested in the analysis.

Hoffer, who has more than 40 years' experience researching the auto industry, added: "Japanese and Korean makes, and to a lesser extent European brands, have been much more aggressive in restyling and much more aggressive in introducing new products than the U.S. brands.

"Interestingly, the current Detroit 3 (General Motors, Ford and Chrysler) used more frequent restylings 50 years ago as a weapon to drive the post-war independent American manufacturers such as Hudson, Kaiser and Packard from the market," he continued.

So why haven't domestic automakers revamped their vehicle styles as often in recent years?

According to the VCU researchers, it is best explained by "increased fragmentation" in the market and the misallocation of styling resources.

For the Big 3 to recoup some of its lost market share, domestic OEMs would be best served by increasing the frequency of restyling, especially for high-volume models.

Additionally, researchers said domestic automakers would be wise not to discard an established vehicle-line name, as rebranding can often hurt market share.