Slow to Change

Old models just don’t compete well with new ones -- it’s true in the fashion industry, and it’s true with cars.

A failure to introduce new products at the same rate as foreign manufacturers explains the dwindling market share of American auto companies, according to a new Virginia Commonwealth University study to be published in the Journal of Business Research.

The study was conducted by three VCU School of Business economists, who analyzed market share changes in the automobile and light-truck markets. Their research revealed that new products, as measured by restyling, represent the dominant determinant of demand in the auto industry. Other factors such as price, advertising, rebranding, warranty curtailments, new safety appliances and even changes in vehicle reliability had relatively minimal impact on demand.

“A 10 percent reduction in relative price would yield only one-tenth the market share impact of a restyling,” said 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.”

Domestic automotive producers saw their market share fall from 72.9 percent in 1996 to 47.4 percent in 2008. Over the 1995 to 2006 model years, Japanese manufacturers restyled on average every third year, while U.S. manufacturers restyled every four years.

Korenok and his co-authors -- George Hoffer, professor of economics at VCU, and Edward Millner, professor and chair of the department of economics at VCU -- argue that “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.

“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,” said Hoffer, who has researched the auto industry for more than 40 years. “Interestingly, the current Detroit Three (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.”

The study authors say that increased fragmentation of the domestic automobile market and management misallocation of styling resources explain the failure of U.S. manufacturers to restyle more frequently. They said that the Detroit Three's best hope of regaining market share is to increase the level of restyling activity, especially for high-volume lines. Domestic manufacturers should also be reluctant to jettison established vehicle-line names because rebranding has an adverse market share impact.