The BUSINESS of PERFORMANCE

By Kevin Kelly

There is a segment of the U.S. auto market where nary a dollar is spent on incentives to move the metal and billions of dollars stand to be made.

Even more surprising are this segment's loyal, young, male, affluent consumers, who are willing to spend thousands of dollars on sexy wheel-tire packages, tighter suspensions and high-powered engines without batting an eye.

And auto makers, from the mass-market Big Three to the Euro-lux manufacturers, are lining up for a piece of the action. It's the business of performance, and it's heating up across the globe.

Some of these models are muscle cars with bigger engines and louder exhaust, while others almost could be classified as stand-alone products due to their extensive modifications.

U.S. auto makers are toying with various strategies for entering the performance-vehicle arena, with some copying the German brands that built the market into what it is today.

BMW AG and its German competitor DaimlerChrysler AG's Mercedes-Benz set the foundation for the business. BMW's M (for “Motorsport”) unit launched its E12 in 1979, and Mercedes' AMG marketed its first vehicle, the C36 AMG, in 1995. Since then, the two have cornered the performance market and held a tight grip on its customer base.

“To drive a car is not only to go from point A to point B. It is also to have fun, and if you offer a product which has more fun, you can get more money for it,” Ulrich Bruhnke, president of BMW's M GmbH says in explaining the formula. “The M products are not sold — the customers buy these cars. They know these cars very well in every detail.”

Like other segments where profitability is high and sales are sizzling, competitors now are looking for a piece of the action.

Chrysler Group is among the most aggressive mass-market auto makers, with its Street and Racing Technologies (SRT) unit. It is home to about 150 engineers tasked with developing performance offshoots of mainstream Chrysler products.

Chrysler is so dedicated to keeping SRT focused on its core business that the team is housed away from the auto maker's Auburn Hills, MI, headquarters.

“One thing about the (engineers) on our team, they have SRT stamped on their ass,” says Dan Knott, director of Chrysler's SRT business.

SRT is flush with product. The unit was responsible for developing the Dodge Neon SRT-4, which has gained a cult following among younger buyers, as well as the Dodge Ram SRT-10 pickup truck. Total SRT vehicle sales reached 12,859 units in 2004.

Coming down the pipe next is the 300C SRT-8 and Dodge Magnum SRT-8, both of which will enter the market in the coming months. At the New York auto show in March, SRT added the Dodge Charger SRT-8 and Jeep Grand Cherokee SRT-8 to its lineup.

Chrysler is moving SRT product development further up in the food chain. While previous SRT products were developed long after the standard vehicle's platform and drivetrain were decided, Knott says the SRT engineering team now is involved at the beginning of the product-development cycle.

“We're now being brought in right up front,” Knott says. The SRT team now works alongside Chrysler's product development staff in devising SRT versions of the upcoming C-segment vehicles, based on the Dodge Caliber concept that will replace the Neon small car.

Wes Brown, analyst with Iceology in Los Angeles, gives Chrysler kudos for its strategy. “Right now Chrysler is, by way of the domestics, the strongest in terms of executing an effective performance-business model,” he says.

Brown says the typical buyer is difficult to pinpoint, but that those shopping in the segment will spend between $20,000 at the low end, up to more than $120,000 for their juiced-up vehicles.

There may be little coincidence that Chrysler's strategy is taking root quickly, because former Chrysler Chief Operating Officer Wolfgang Bernhard once was the head of AMG and while at Chrysler led the push to establish SRT.

Knott says he and his team have been working closely with AMG to develop powertrain and chassis strategies that appeal to the performance customer. The Hemi 6.1L V-8 used in the Charger, 300C, Magnum and Grand Cherokee SRT models was developed with the assistance of AMG engineers. The two divisions also work jointly to identify mutual purchasing opportunities, such as contracting with Brembo SpA for brake systems across AMG and SRT product ranges.

“We're kind of kindred spirits,” Knott says of the relationship between SRT and AMG.

Chrysler also established an SRT oversight board, made up of the auto maker's top three product and marketing executives (CEO Dieter Zetsche, product development chief Eric Ridenour and marketing head Joe Eberhardt). Its goal is to assure SRT models remain exclusive (annual production will remain less than 10,000 units for each SRT vehicle) and relevant.

Knott says the board helped define the Grand Cherokee SRT product plan because there was some “debate” inside Chrysler over whether Jeep should have performance derivatives. The board eventually gave Knott and his team the green light.

General Motors Corp.'s Performance Div. unit is headed up by Mark Reuss, who supervises a team of 200 dedicated engineers whose sole task is to put some performance pizzazz into GM's more pedestrian products.

The group worked on the Chevrolet SSR and the Cadillac V-Series line of vehicles, as well as the Chevrolet Cobalt SS and Silverado SS. Saturn's Red Line models (Ion and Vue) were also done under Reuss' direction.

Reuss says his group's main task isn't to cram massive engines under the hood of every vehicle; the goal is to make the core products better.

“Horsepower is important, but it's definitely not the only game in town,” he says. “We're going to have a lot of sophisticated equipment (on our performance products.)”

While power may be the draw for the consumer, it's cash that is driving the auto makers to the performance market.

Reuss says his division produced 225,000 vehicles in 2004, with gross income reaching about $1 billion annually.

“Our financial progress has been nothing short of excellent, and it (establishing an image for GM's performance brands) hasn't taken longer than I thought,” he says.

The GM business model is slightly different from Chrysler's in that the decision to greenlight any performance derivatives rests solely with the influential Automotive Strategy Board, responsible for all product decisions within GM.

So far, there has been one noticeable flop among GM's performance-vehicle stable. That's the SSR, which achieved only 9,648 sales in 2004 and is beginning to pile up like cord wood on dealer lots, with a 200 days' supply at the end of January, according to Ward's data.

Additionally, Ruess' team lacks the single brand identity of BMW's M or Chrysler's SRT.

“We don't have our name (GM Performance Div.) on the exterior of the car. We're the only ones who don't do that,” he admits.

The lack of a consistent branding message could be GM's Achilles' heel, says Iceology's Brown. He thinks the auto maker needs to better define its brand message to consumers.

Meanwhile, Ford Motor Co. has been retooling its Special Vehicle Team (SVT) unit, which was launched in 1992 with the Mustang Cobra and F-150 Lightning pickup truck. The reach eventually expanded to the Ford Contour and the Focus.

But the product rollout came to a dead stop in 2002 as the SVT unit was taxed with building the Ford GT super car in less than two years. The program required the immediate attention of all SVT team members while upper management thought hard about what a more mainstream SVT needed to look like.

The SVT Focus and Mustang Cobra, the last remaining SVT-specific products, dropped off the radar screen in 2004 as a result.

Now Ford is trying to regroup SVT to regain its footing with the near-500-hp Shelby Cobra GT500, which is based on the wildly popular '05 Mustang. The GT500 is in line for a $40,000 price tag and will hit the streets in 2006 with the heaviest investment of any SVT product ever, outside the $140,000 GT.

Phil Martens, Ford group vice president-product creation, tells Ward's the SVT brand is completely refocused for the future, with a particular eye on benchmarking BMW's consistent, in-house approach.

“I always look to the BMW M division (because) there's a lot of attributes they've done extremely well,” he says.

Martens says he likes BMW's model because M products are assembled in the mainstream production facilities, usually lagging the base model by a year or two. “They've been very consistent over a long period of time,” he says, “and they've built some core competencies in chassis and vehicle development.”

Martens says the market has redefined the performance genre. In addition to rear-wheel-drive muscle cars, it now includes turbocharged I-4 products and an emerging all-wheel-drive performance sector. “And we want to play in all three of those camps,” Martens says.

He says SVT will target the $20,000-$40,000 price range. The unit could add as many as five models, including an F-150 Lightning (which is shelved indefinitely) and possibly a midsize sedan based on the upcoming Fusion. Volume expectations for each vehicle are not likely to exceed 10,000 units.

With a recent addition of about 80 new employees (headcount now equals 200) and increased investment, SVT will be expected to develop performance-oriented vehicles for non-Blue Oval brands.

“So the SVT team — which we've significantly strengthened — is in charge of actually engineering products that are performance oriented but may not be badged ‘SVT,'” Martens says. He assures, however, at least an insignia will appear on all the team's products.

Although SVT has a rich history and strong brand, some criticize the perceived half-heartedness of Ford's approach in recent years and wonder if Ford's base product lineup lends itself to BMW-like performance cache.

George Peterson, president of AutoPacific Inc., says Ford's base products lack robust engines, and the lack of adequate powertrains has a crippling effect on any performance product.

“Ford's mainstream products seem to have deficient powertrains, like the 3L V-6 in the Five Hundred. So, Ford may be struggling not only on the high-performance powertrain side, but the mainstream side as well,” he says.

Newly anointed SVT Chief Hau Thai Tang, former Mustang chief engineer, takes serious issue with this analysis, pointing to the GT's 5.4L V-8, the Mustang's 300-hp V-8 and industry-leading truck engines as proof Ford's powertrain house is in order.

As for why Ford is re-entering the performance business, Martens says, “Frankly, it's why we got into this business. Sometimes you have to do something for yourself” — not to mention the company's bottom line.

BMW's Bruhnke is proud to proclaim that BMW was “the founder of these kind of cars,” adding the newcomers are just trying to copy the M concept.

The Bavarian auto maker's approach to the performance business is a bit more buttoned-down. M has its own profit-and-loss statement and bears most of its own product-development costs.

The latest addition to the M line is the M6, which features an M-specific engine, transmission, appearance package, braking and steering system, while several of the car's parts are manufactured from carbon fiber.

“Most of our competitors would say it's a new car,” Bruhnke says. “We are not a tuner. We are a car manufacturer and a sub-brand of BMW, but we are not a tuner.”

BMW sells an average of 15,000-25,000 M vehicles per year, with 50% of M volumes sold in the U.S., another 30% delivered in Europe and the remaining 20% marketed in the rest of the world.

Audi AG is beginning to challenge its BMW M and Mercedes AMG rivals with its RS vehicle line. The auto maker debuted the newest RS vehicle, the A4-based RS4, at the Geneva auto show in March.

Martin Winterkorn, head of the Audi brand, says there was positive feedback from customers when the RS6, derived from the conventional A6 lineup, hit the market and provided a natural opportunity to expand the brand. Of course, it doesn't hurt that the RS6 has improved Audi's image while boosting the bottom line.

“It's (the RS4) an exciting car for our customers and it makes our brand go up, while making money,” he says.

Noticeably absent from the stampede to take advantage of the performance craze are the majority of the Japanese manufacturers. The exceptions are Mazda Motor Corp., which has its MazdaSpeed product range, and Subaru of America Inc., which has carved a cozy niche among rally and street racing enthusiasts with its turbocharged STi vehicles.

Toyota Motor Corp.'s Lexus Div. has been talking publicly about dipping into the performance market. The luxury Japanese brand showed its performance vision with its LF-A concept super car, which debuted at the North American International Auto Show in Detroit earlier this year.

Mark Templin, vice president-sales and marketing for Lexus, admits the auto maker is closely studying the performance sector, although parent Toyota Motor Corp. has a history of being conservative.

“It's definitely on the radar screen, something that we have to consider,” he says. “We'll judge what our customers want (and) if they want it, eventually we'll get there.”

Templin says he expects Lexus to make a final decision on whether to move into the performance arena before the end of the decade.

That could be too little, too late. As with just about any trend that seems to be full of profit, many auto makers are planning to milk every single dollar out of the performance market.

This includes the addition of performance “appearance packages,” which provide all the looks of the brute variants, but none of the muscle. Both Mercedes and BMW already offer sport packages on their various model lines that give the appearance of their performance-tuned siblings.

The dynamic leaves some industry watchers worried these faux performance packages could hurt the real profit and image drivers.

“This is where sometimes management becomes a little bit greedy,” says Iceology's Brown. “They can get the person in the middle and have them add on these appearance items and increase profits, but the downside is the person who spent the extra $20,000 for the real performance model feels a little bit cheated.”

There may be nothing worse than the owner of a BMW M3 sitting at a traffic light noticing what looks like another M3 across the intersection only to realize it is just a 3-Series, with the same rims and ground-effects bodywork.

“We call them ‘paint and tape jobs’ and it can cut both ways,” says AutoPacific's Peterson. “The purists will tell you ‘just make the hot-looking ones the ones with the real performance.’”

But BMW's Bruhnke disagrees.

“A 5-Series sport package is different from the M5. There are a few (exterior) elements that are the same, but it's a different behavior in driving the car,” he says. “The buyer knows the difference.”

BMW sold nearly 80,000 vehicles with sport appearance packages last year.

Chrysler also offers SRT visual tweaks on some of its models, including the Neon. SRT leader Knott says it is important for Chrysler to offer customers a more sporty look for their vehicles, without trampling on the true SRT variants.

He says only certain add-ons will be offered on non-SRT models, such as the spoiler on the Neon or the hood scoop on the Charger.

“I cannot be too parochial. What I don't want to give up are those elements that give SRT street credibility,” he says.

Still, if auto makers flood the market with too many look-a-like vehicles, it could cannibalize the higher priced performance models and even tarnish the performance branding exercises altogether. These brand-building programs could lose their value if the industry focuses solely on the dollar signs.

Additionally, auto makers must guard against taking too much focus off their mainstream, high-volume models. If consumers feel the base vehicles did not get enough attention, overall sales could suffer.

It is a delicate balance, where the influx of cash can dry up just as fast if the market becomes over saturated. And overdoing it is a very real danger in an industry where players are duking it out for every last dollar.