US motor manufacturers face fierce international competition

American consumer tastes are changing – with many shying away from the gas guzzlers, the big three appear positioned at the wrong end of the market

Though overall sales in the US car market were broadly flat during 2005 (rising 0.5 per cent), sales of overseas brands were up 4.7 per cent over the course of the year, claiming a 43.1 per cent share of the market. Some of the most significant sales gains were made by Japanese Toyota and a resurgent Nissan, both increasing sales by more than nine per cent.

The Big Three (General Motors, Ford and Chrysler) have been having a more mixed time of late, however. News of shrinking market share, credit rating downgrades and pensions woes seem to have been arriving on an almost daily basis. Of the three, only the German-owned Chrysler made any visible headway on the sales front in 2005, with an increase of 4.5 per cent. During the same period, GM – a company which many predict will lose its title as the world’s largest auto company to Toyota during 2006 – saw its sales dip by 4.3 per cent, while Ford’s fell by five per cent. Ford also had to contend with a nine per cent reduction in the value of its principal brand in the 2005 Interbrand/Business Week ranking table.

What’s more, competition is only going to get tougher. The Chinese are poised to enter the US market and, this year, Geely was the first company to display a Chinese-made car in motor show history. Geely is aiming to be in the US market by 2008.

With so many international manufacturers proving that there are still gains to be made in the US car market, the problems faced by GM and Ford in particular become all the more glaring. Many of the issues confronted by the motor-city stalwarts appear to come from positioning themselves at the wrong end of the market.

American consumers’ tastes in vehicles are changing, partly influenced by higher gas prices, which broke the $3 a gallon level last summer. After years of sustained growth in the market for Pickups and sports utility vehicles (or SUVs, built on truck-based platforms), the sector is now in steep decline. SUV sales are at their lowest levels since 1998, with the market segment down 14 per cent over the past year.

In contrast to this, the car is making a comeback, seeing its first growth in market share since 1992. Last year car sales accounted for 45.1 per cent of the market, its largest share since 2003 and an increase of about one per cent on the previous 12 months. While Toyota has been the nation’s best selling car for four years in a row, many argue that this is a market segment which GM and Ford had until recently almost forgotten about, particularly at the entry level end of the spectrum.

Meanwhile, hot new trends such as cross utility vehicles, (CUVs, similar to SUVs but smaller and more economical), are taking a growing share of the market, with sales up by almost 11 per cent in 2005. In 2006 sales of CUVs are expected to exceed SUVs for the first time. For Toyota, sales of CUVs are 60 per cent greater than those of traditional SUVs. While GM and Ford are competing for a share of the CUV market, the balance for both businesses is tipped in the opposite direction, with the focus still on the larger SUVs and gas guzzlers.

Both brands have also failed to anticipate the rising demand for more environmentally friendly vehicles, in particular the new wave of hybrid gas/electric cars such as the Toyota Prius. Though Toyota sold in excess of 200,000 hybrids in 2005, GM has only just introduced its first full hybrid, while Ford’s target for hybrid sales in 2006 is just 20,000.

When it comes to promotion, all of the Big Three have a long history of offering customers incentives to buy their products, and 2005 was no different. In December the auto industry spent $3.5bn (&£1.98bn) on US incentives, of which the Big Three accounted for more than 75 per cent. Last June GM attempted to reverse its market decline with a massive incentive scheme called the “Employee Discount for Everyone Campaign”. Running in conjunction with the advertising slogan “You pay what we pay,” the promotion meant that anyone could buy a car from GM for the same price as an employee. To halt the continued slide in sales and market share, the scheme produced impressive results, raising sales by 47 per cent in the first month of its four-month tenure. Having initially denied they planned to follow suit, Ford and Chrysler did introduce similar schemes in July. Chrysler produced a $75m (&£42m) ad campaign to promote its own employee discount offer which starred former chief executive Lee Iacocca and hip hop artist Snoop Dogg.

Despite the success which some of these schemes have at stemming the loss of market share in the short term, they are likely to do little to counter any underlying issues which potential customers may have regarding the core product. For example, build quality and reliability concerns are unlikely to be answered by a price discount. What’s more a significant sales drop is almost inevitable once a campaign ends as consumers come to anticipate the next slew of rebates and stay out of the market until a new incentive is announced.

There are signs that the Detroit old-guard may be looking increasingly to other marketing methods beyond short-term promotions. They will be aware that companies such as Toyota are managing to sell Priuses to consumers without any rebates and at full sticker price, when even deep discounts fail to move many of the large SUVs. Simpler pricing initiatives, such as the new round of price cuts just announced by GM on 80 per cent of their US vehicles, mark an attempt to move away from campaigns which do no more than trumpet the latest round of rebates on offer. On January 11 GM began running ads on TV and in print pointing consumers in the direction of independent online price comparison sites so they could see the real value represented by GM’s new pricing strategy. Meanwhile, Ford senior executives have begun to talk about marketing through design for the long term, rather than looking for a marketing campaign to provide a curative for all of the company’ ills.

What has become clear in recent years in the US auto market is that perception does not always equate to reality in the eyes of the consumer. As GM marketing chief Mark LaNeve recently remarked to Business Week: “We see research that shows consumers believe that competing Japanese products are cheaper than ours when they aren’t, and that they have higher quality and fuel efficiency when they don’t.” It seems the real challenge is to focus on creating desirable brands and quality products and use marketing to win back the hearts and minds of the American public.

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