Design wins: while some manufacturers are concentrating on cutting costs, those who are--and will be--successful in the market focus on the needs of the market, and especially on design.

The rise in production of biofuels and ethanol is a factor in vehicle engineering, but perhaps it's not as dramatic as the near-term shift toward mass customization and its impact on vehicle purchases in North America. Nowhere is this mass customization trend more noticeable than among the 69 million "Echo Boomers" who demand customization in everything from the look and feel of their iPods to the "anything goes" approach in how they personalize car interiors. Make no mistake, the automaker that understands the qualitative fashion aspects of customization--from ambient lighting to reconfigurable trim to advanced electronic technologies--will emerge as the winner in not only the luxury segments but the growing Echo Boomer mini-cars and other vehicle segments going forward.

It appears that the major New Domestics automakers, particularly Toyota, have a better understanding of the American consumer than GM, Ford and Chrysler in terms of what drives our emotions and impulses and, more importantly, our car-buying psyche. Clearly, Toyota "gets" this push toward mass customization in new vehicles. With a formidable marketing staff in Torrance, California, doing consumer research, and whose job it is to predict consumer trends and build a lineup of vehicles to capitalize on those trends, Toyota has made its mark on the American automotive landscape. They have tapped into the "green revolution" better than the Detroit Three by making sound investments in and commitments to hybrids such as the Prius. Toyota has properly focused on superb program management, customer care and retention and, of course, quality, and they realize Americans will pay a premium for a trouble-free product that is designed well (if only adequately, in some cases).

Consider the drop in market share of Ford's Lincoln brand over the past 10 years: it speaks to Ford's lack of understanding of what the Baby Boomers want in a luxury passenger car. And if you don't understand the Baby Boomer, do you really have a shot at understanding the Echo Boomer? What's tragic in this is that Ford recently received well-deserved high marks in the latest industry quality performance surveys, highest among the Detroit Three. But because they have languished in the truck segments, abandoned any role in taking design risks in the luxury segment, and underwhelmed the market everywhere else, they suffer the perception that they cannot get quality right--when in fact they have, as the numbers prove.

Let's look at a few of the perceptions and realities that are impacting the design and customization situations for automakers today. Some people say, "Ford has put little or no passion in its design and what they have delivered to the U.S. market." Unfortunately, this is both perception and reality for Ford. Yet Ford has several bright spots in certain current and future designs, including the Mustang, the Fusion, and maybe the Flex. Simply stated, CEO Alan Mulally needs to get himself a Bob Lutz-type "car guy"--someone who will take on the political and financial hurdles and clear the way for aggressive and daring designs to actually reach consumers. Ford can fight or embrace future consumer expectations. "If they embrace future change in the marketplace, they will have a better opportunity to take the high ground and secure their long-term viability," says IRN's Chief of Forecasting Erich Merkle.

For Chrysler, the perception is "Chrysler has done an excellent job of innovative design with certain vehicles." Yes, this is particularly the case with its 300 sedan and the new 2008 minivans. But the reality is that Chrysler has suffered and continues to suffer significant quality setbacks across the board. How much does it matter? A lot, but not enough to slow down the success of the 300. But think how much more the Chrysler dealers would be selling if they had consistent quality to match the innovative design of some of their vehicles! Tom Gale's reappearance on the scene at Chrysler insures a spate of good design even if the direction Cerberus takes the company is uncertain.

The perception is: "Toyota gets everything right, quality most of all." True enough, but they are not invincible. Just look at their recent quality issues in the U.S., including recalls of the Tundra and a recent degradation of quality survey results. But no question that Toyota's consistent performance and keen attention to what drives the American consumers' tastes and wants provides them a "pass" in the short-run. And their cumulative success over many years in North America now provides them with the financial muscle to sustain new investments and take calculated market risks.

So what are some things that GM, Chrysler and Ford can do to counter the gains by the New Domestics in North America and at least show profitable growth if not re-capture a few share points? The Detroit Three must turn away from a manufacturing/finance-driven focus and become marketing/design-driven companies. Instead of cost dictating design decisions, manufacturing and finance must take new and daring approaches to meet future design and market requirements, particularly in the fickle and ever-demanding, consumer-oriented North American market. This will require that the Detroit Three champion a much more collaborative effort internally and with their respective supply bases.

Market-driven automakers, like Toyota, will continue to have success increasing top-line revenues and growth in market share. Automakers driven by lowest price alone, like Ford, GM and Chrysler, will continue to grapple with declining volumes and underutilized plant capacity. "The automakers are not in the transportation business as much as they are in the fashion and entertainment business. The automobile has become an extension of the suit or wristwatch that the owner wears," says Merkle. By shifting to a Design-Cost Effective Model versus a Design-Lowest Price/Ease of Manufacturing Model, the Detroit Three will increase its collective chances of winning in the market, in terms of quality and design, and thus improve the potential of re-capturing the heart of the American consumer.

The perception of quality isn't communicated to the consumer solely by the recognition of research data, as Ford recently found out in spades. It must be reinforced in the design of the vehicle as well as its emotional appeal on the street. If the car interior, where we have our greatest interaction with the vehicle, looks and feels cheap, the consumer will not perceive quality. The lowest price design isn't without a cost, real and perceived. So what's the cost of falling sales and share loss? The inability to determine and predict American tastes has caused this downward spiral for the American automakers. There is a saying by the Japanese--"genchi genbutsu"--that means "go to the scene and confirm actual happenings." Perhaps it is time for the Detroit Three to become a bigger part of the consumer scene, get out among the Echo Boomers, experience what drives them, and confirm what's actually happening out there.

Phil Biggs

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Phil Biggs, Executive Vice President, IRN, Inc.