The illusion of choice
Part 2: A short analysis of the car market
In the German Democratic Republic, people didn’t have a lot of choices when buying a car. Between 1957 and 1989, every second car in the East Germany was a Trabant. Only the upper part of the communistic regime could choose a ‘premium’ car like a Volvo.
The East German state had a monopoly. On the capitalistic side, it was all about competition. But this is getting less and less true today.
The purpose of many brands
On a small scale, traditional market competition might still be true. Think of small shops, like a bakery or a restaurant. For big corporations, these economic laws don’t apply. For example, platforms like Amazon, control supply and demand. Something I blogged about two years ago.
It seems important for companies to keep the illusion of choice. Just like the ‘democratic’ elections in Belarus or Russia (or the US for that matter) offer ‘choice’.
So there is choice, but it’s more an illusion of choice. For this purpose, multinationals keep a range of brands. Think of the food industry:
Thus, we shop with the idea of choosing from hundreds of products, while there are only a few companies behind it. In the car industry, it works the same. There are many brands, but only a few carmakers. New manufacturers are rare. The question is why?
The entry barrier
First of all, a car is a very complex product. It exists of thousands of parts coming from all over the world. It’s not something you build on your Sunday afternoon (like writing a blog).
Secondly, cars have very high safety standards nowadays. It may be possible to get a permit for a single car, but for a mass-produced car, a lot of expensive tests need to be done.
And last but not least, cars need to be mass-produced to be offered at a decent price. And this needs big factories, assembly robots and a lot of high-skilled employees. Hence, the high entry barrier of the car market.
Tesla is therefore really an exception. It was the first American carmaker to go public since the Ford Motor Company had its IPO (initial public offering) in 1956. Besides being on Wall-Street it has a lot to do with its capability in mass-manufacturing. Tesla entered the mass-market in 2017 by building the so-called “Gigafactory” for the model 3.
Besides Tesla, there are today only a handful of car manufacturers which are independent and don’t have a lot of brands. You can literally count independent carmakers on one hand:
The illusion of choice
Most car brands however are part of an auto group. It’s of course nothing wrong with a carmaker that has several brands. But it’s questionable when it seems that all their brands are independent and there is choice for consumers.
Big companies want the opposite of choice, they want to be the Trabant of the new world, where every second car is one of theirs.
It’s hard to become the next Trabant. People don’t want the same lousy model for thirty years. That’s why it's important to have a lot of brands and models.
To see where this has lead I created the following overview of the brands of the biggest auto groups, namely Volkswagen Group, Renault-Nissan, Toyota, Daimler, GM and Stellantis.
Brands of the biggest auto groups:
Besides the six independents, we have only 6 carmakers today. Together they make 66 brands! A lot of consumers are unaware of this.
One auto group name in the overview above that most people are unfamiliar with is Stellantis. This auto group is actually a merger of various auto groups. Citroën and Peugeot formed PSA in 1976. Recently they also bought Opel (also still at General Motors in the overview).
The Fiat Auto group already merged with the Chrysler auto group (formerly part of Daimler). And now they together form the Stellantis group.
Meanwhile, most carmakers are inventing new brands. Mostly splitting from existing brands. Recent examples are Polestar (Volvo), Cupra (Seat), DS (Citroën) and AMG (Mercedes).
There is more choice, while there is actually less choice.
Despite the high entry barrier and apart from Tesla, there are a few newcomers. They all come from China. Will the Chinese stir up the market and bring more competition? 10 years ago this wasn’t taken seriously, but in the last decade Chinese carmakers really became serious contenders.
Chinese carmakers bring state-controlled companies with a capitalistic smell. They mostly follow the footsteps of their Western competitors. They do this by creating auto groups.
For example Geely:
Together these auto groups already have 14 brands making already more than 5 millions cars a year. These are similar numbers to, for example, Honda. Tesla produced last year ‘only’ 500,000 cars, but is on the other hand valued higher than any of the auto groups in this blog.
This short analysis shows that cars are like most products of big companies. The world behind the product is mostly completely different from what we have in mind.
Check here for part 1: