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Reader column: Hummer - What went wrong?

2008-09-17 08:45

Gareth Goodliffe

The factors that led to the rise and fall of an iconic automotive brand

The imminent demise of the Hummer brand in response to rising fuel prices does not bode well for the future of other high-consumption niche vehicle ranges.

It has long been speculated that wealthy consumers are largely immune to rising commodity prices, but the combined effect of higher fuel prices coupled with a general economic downturn has exposed vulnerabilities in the automotive industry that may prove difficult to rectify.

The Hummer brand may well turn out to be a victim of its own success, success which was defined largely by a willing suspension of financial wisdom by a gullible and already financially-unwise American public.

While brands like Hummer, who openly flaunt excess as a selling point, are easy to vilify, as consumer products the H2 and H3 (which have defined the brand in recent years) are relatively ordinary. If anything, both of these models, which themselves were based on existing platforms, are excellent examples of automotive design and relatively competent vehicles in their respective classes.

The gargantuan H1 military spin-off, ironically the vehicle that started the Hummer craze, soon lost credibility due to its poor performance, poor efficiency, and unmanageable proportions.

The vehicle which established the brand as a utilitarian, no compromise all-terrain product became too utilitarian, too compromised, and all but useless on road. The H2 and H3 found a middle ground. Hummer never compromised their off-road abilities, but ensured that these were vehicles that the consumer could live with.

High fuel prices

It is fashionable to blame fuel prices for everything these days, and indeed, the motor industry is no different. However, while fuel prices are definitely a contributing factor, the fault must lie squarely with General Motors and its naïve approach to creating the Hummer brand.

There are many, many vehicles with worse fuel consumption than any Hummer, but bizarrely, these brands are flourishing.

Lamborghini, Ferrari, Bentley, Rolls Royce, Aston Martin and Range Rover all offer products just as frugal as Hummer and at many times the price. And herein lays a clue to the problem: luxury sports car manufacturers offer vehicles that unashamedly drink fuel, yet their owners seem blissfully ignorant of any crisis.

The total cost of ownership of any vehicle is determined by a set of fixed and variable costs. Assuming an average vehicle purchase with a functioning warranty plan, the cost of ownership of a vehicle is obtained by summing the fixed costs of vehicle purchase and servicing, and the variable costs of fuel and insurance.

At either end of the scale, that is, very cheap or very expensive vehicles, there is a positive correlation between fixed and variable costs.

A Renault Twingo is cheap to buy, insurance is affordable, maintenance and servicing prices are fixed and within reach of the first-time buyer, and being compact and lightweight and sporting modern engine technologies, consumption is frugal.

At the other end of the spectrum, a Ferrari F430 is expensive to buy, expensive to insure, expensive to maintain and very expensive to fill up.

Rising costs of a single item then, at either of these two ends of the market, should have little effect on the volume of vehicles sold compared to those whose correlations are less linear. Since the total cost of vehicle ownership for buyers at both ends of the scale is fairly predictable, any fluctuation in a single fixed or variable cost should be easily absorbed.

There will always be large numbers of people buying cheap cars and, no matter how bad the economic situation, there will always be people buying very expensive cars.

The problem with Hummer

The problem with the Hummer range is that it straddles two market segments, not in terms of vehicle cost, but in terms of total ownership cost. By rehashing existing models within the GM stable, and clothing them in new bodywork, GM were able to keep development costs of the Hummer relatively low, especially considering Hummer is essentially a very new brand.

GM tried to quickly capitalise on the popular mythology of the original AM General H1, by rolling out the H2 based on an existing, ageing, and fairly crude GM SUV – the infamous Suburban. This kept development costs low, and resulted in comparatively low vehicle selling prices with good margins for the parent company.

In the US the Hummer vehicles remain very good value for money. Unfortunately, at a time when GM should have been investing revenues in expansion, research and development, the abnormally high profits from Hummer, amongst others, were diverted to pay for the abortive relationship with Fiat and various union healthcare conflicts.

Instead of reinvesting profits to ensure future sustainability, GM used profits to pay off debts.

All Hummer models are peculiarly priced. There is no doubt that both vehicles offer value for money. Big engines, modern interiors, fashionable styling and formidable off-road abilities are incorporated into products priced only marginally above that of a conventional American full-size SUV.

A fully specced H2, while not nearly as refined, can match many a German or British rival for features and comfort at a significantly lower price.

This means that consumers that could not previously afford such a luxury product were drawn in by the lower fixed costs of ownership and a savvy marketing message. GM could not legitimately position a re-bodied family SUV as a high-priced luxury vehicle, and their already high margins meant that they didn’t need to.

The average Hummer buyer that was buying an H2 as the vehicle at the upper end of his affordability could obtain a vehicle that was as comfortable as a Range Rover and as cool as a Lamborghini LM002 and still service it on an affordable maintenance plan at his local Chevy dealer.

With a strong economy and reasonable petrol prices, the Hummer is an abstract but viable alternative to mainstream SUVs and executive sedans.

Cost of ownership

In the last year, however, fuel prices in the US, the Hummer’s biggest market, have risen steeply. As one of the variable costs of ownership, this has led to an increase in the total cost of ownership disproportionate to the relatively low initial list price.

As the whole image of the Hummer was created to characterise excess, when the excessive size and consumption of its products started to characterise the fundamental problems facing high consumption vehicles, the very core value of the brand became a liability.

The other variable cost, insurance, is no doubt severely affected by the general economic downturn and increasing inflation in the American market.

Furthermore, as the Hummer brand is almost entirely cosmetic, that is, a Hummer H2 is based on a Chevrolet Suburban with a fancy body, all of the expensive parts are on the outside. Unlike many smaller vehicles which share their components across model ranges, the Hummer range is completely standalone.

This means that a minor front-end collision in an H2 that results in replacing bumper mouldings, a grille and perhaps a front wing section, involves replacing some of the most expensive parts on the car relative to the total cost of the vehicle. It is easy to see why insurance premiums on these vehicles can escalate disproportionately to other vehicles on the road.

The average Hummer owner who bought a vehicle at the top end of his price range is now left with something he can't afford to fill up and can't afford to insure. Remember that by pricing the Hummer so competitively, GM exposed itself to consumers at a lower end of the market who would be more vulnerable to large variable cost increases.

Furthermore, the average Hummer owner who would like to downgrade to a more efficient vehicle, is faced with enormous depreciation as thousands like him try to offload vehicles into a market that can’t afford the fuel to fill them up, while the brand identity, now a symbol of the products that got the US into the energy crisis in the first place, is damaged.

This has all occurred while the Prius, in an ironic twist, has clawed its way into popular culture and green has become the new black.

A tough sell

GM is now facing a turbulent period with Hummer. It has recently announced a strategic review of the brand and has not ruled out selling the brand in its entirety. Major Indian players Mahindra & Mahindra, and Tata are said to be interested, although it is unlikely that a prospective buyer will be interested in acquiring such a risky portfolio in the current economic climate.

GM does not disclose revenues from individual brands so it is difficult to put a price on the Hummer business as a separate entity. Given the damage that the brand has already suffered, it is unlikely that any offer will match the value placed on it by GM. Any profits that GM might have raised through Hummer over the past few years will likely be offset by the enormous losses incurred through restructuring or selling off the business.

GM chose to exploit the Hummer brand for short term gain rather than long term sustainability, and completely forgot about engineering. What was needed was a new product, and instead, GM created a new image.

GM could very easily have taken the opportunity to create a range of platforms and drivetrain configurations for the Hummer brand that it could proliferate across its various subsidiaries. Had it done so, GM might still be faced with a product that simply doesn’t suit the market – it happens. But it would also have a range of technologies that could either be expanded upon to manipulate the Hummer brand, or shifted to other manufacturers in its stable to ensure their profitability in turbulent times.

From a marketing perspective, the image of the four-wheel drive is so closely related to nature and conservation that it would not have taken a lot of imagination to position Hummer as something of a green brand, given innovative new technologies developed from the start. 

Although increased research and development costs for new platforms and new, more efficient engines, for example, would have resulted in higher unit prices and reduced profitability, the technologies could also have been expanded to other GM brands to offset the costs.

There is no reason why the next generation of Chevrolet trucks, Cadillac Escalades and possibly even Opel crossovers couldn’t have shared Hummer architecture.

It is entirely possible that had GM managed the development of the Hummer brand more carefully, it might now be a brand that triumphed in the face of adversity through solid engineering coupled with a strong identity. Instead it is now a symbol of the excess that has defined Detroit for the past two decades.

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