TIME: Almanac 1993/TIME Almanac 1993.iso/time/112089/11208900.034

Text File | 1992-09-23 | 9KB | 161 lines

                æ                                                            BUSINESS, Page 70

Running Low On Gas


Slow car sales and new Japanese "transplants" bring harder
times for Detroit's automakers

By S.C. Gwynne


    When Chrysler announced early this month that it will close
the aging Detroit plant where workers assemble the last of the
Dodge Omni and Plymouth Horizon models, the situation had
ominous parallels to the calamitous early 1980s. Only six years
after its fabled turnaround, here was Chrysler embattled again,
posting losses on its North American operations for the first
time since 1982. Amid persistent auto-industry speculation that
Chrysler might be forced to merge with a foreign partner, here
was Chairman Lee Iacocca declaring that for the company to
survive, it must cut at least $1 billion, or $500 a car, from
its overhead. To help meet that goal, the company will lay off
6,300 employees in the coming months.

    As the alarm spread through Chrysler, executives at other
automakers -- American, Japanese and European -- were coming to
the same conclusion: the next 15 months will bring a bloody
battle for sales in a slumping U.S. auto market. With 30 car
companies and an unprecedented 600 models on the scene, and with
ten Japanese "transplant" factories in North America expected
to help create an excess carmaking capacity of 2.7 million autos
by 1991, the marketplace is certain to be littered with
casualties. A leading indicator of the struggle was the dismal
performance of Detroit's Big Three during the July-September
quarter, in which they all lost money on their North American
operations and posted a 27.5% decline in total earnings.

    At the same stressful time, Detroit's automakers will be
going through a major changing of the guard: all three companies
are expected to get new chief executives in the space of two
years. Late last week Ford Chairman Donald Petersen, 63, who
helped engineer that company's heroic comeback, said he will
turn over the posts of chairman and CEO on March 1 to Harold
Poling, 64, a vice chairman.

    Lately the Big Three have been sideswiped from two
directions. As the transplants tool up for greater output, total
U.S. auto sales are declining, in part because of a slowing
economy. Sales of imported and domestic autos in the U.S. fell
3.8% during the first nine months of this year, to 7.8 million
cars. This year the Big Three kept sales artificially stimulated
by such incentives as interest-free financing and rebates of as
much as $4,000.

    While Chrysler's predicament has some surface similarities
to the recessionary days of 1981-82, the current U.S. auto
market is an utterly different place. American carmakers have
made huge strides in improving production, quality and design.
But they face a competitive threat that would have been
unimaginable back then. The Japanese transplants account for
14.7% of all passenger cars sold in America, up from 8.9% two
years ago. Detroit, which has seen its U.S. market share plunge
from 84% in 1978 to 68% this year, is likely to lose another 8
percentage points by 1994, according to a study by the research
firms J.D. Power & Associates and Data Resources.

    The transplants pose a challenge to the domestic U.S.
industry on several levels. "Look at the advantages they have:
new equipment, new management systems, a well-trained and
well-screened work force," says David Cole, director of the
University of Michigan's office for the study of automotive
transportation. Because the transplants are primarily nonunion,
notes Cole, the factories save an estimated $500 a car in
benefits alone, compared with American companies.

    Even so, the Japanese assembly plants have been a boon to
the U.S. regions in which they are situated, bringing thousands
of jobs and huge infusions of investment capital as the
carmakers build new factories. While the Big Three are cutting
production 18% during the October-December quarter, the
transplants are boosting theirs 41%. The American-made Japanese
models have benefited many U.S. consumers as well, bringing them
wider choices and competitive prices.

    The transplants have made their largest inroads in the
small-car market segment. But now they are aiming at midsize
models, which represent one of the Big Three's most profitable
market categories. "The Toyota Camry is a major threat. That's
going to cause some real suffering, especially at GM," says Jim
Wangers, senior managing partner of Automotive Marketing
Consultants in Warren, Mich. Toyota makes the Camry (base
price: $11,588) at its Georgetown, Ky., factory. Honda's new,
larger Accord ($12,145), made in Marysville, Ohio, is aiming at
the same market.

    Chrysler has considerable company in its cost-cutting
efforts. General Motors, which has already undergone a 25%
downsizing, probably faces another major contraction in the
early 1990s. GM has already announced plans to close plants in
Lordstown, Ohio, and Scarborough, Ontario. While Ford has
managed to increase market share this year and is operating at
nearly full capacity, the company has had to close some plants
temporarily because of excess inventory.

    The burgeoning output from the transplants is hitting the
market at the same time as several pricey new imports. Toyota's
Lexus models, the ES250 ($21,050) and the LS400 ($35,000),
debuted last August to rave reviews in the car-buff magazines
and proceeded to outsell rival BMW in September. The Infiniti
M30 ($23,500) and Q45 ($38,400), Nissan's entries in the luxury
market, hit dealer showrooms last week on the heels of a
multimillion-dollar new-age advertising campaign.

    The demolition derby in the U.S. market has been especially
tough on the European automakers. BMW sales have fallen 22.8%
over the past two years, Mercedes-Benz has dropped 17.6%, and
Saab is down 25.6%. One reason for the decline is that a
relatively weak dollar has made imports more expensive, but
another explanation is that such U.S. luxury lines as Lincoln
and Cadillac have staged impressive comebacks, thanks to
improved quality and design. "There's a degree of
self-congratulation and complacency among the Europeans," says
Robert Lutz, president of Chrysler's automaking division.
"Collectively they still look down on the Americans even though
there is no reason to do so." Last week Chrysler reintroduced
its posh Chrysler Imperial ($25,495) after a six-year hiatus.

    In some cases the transplants have helped U.S. automakers
become more sophisticated competitors. Manufacturing
partnerships, including GM-Toyota in Fremont, Calif., and
Chrysler-Mitsubishi in Normal, Ill., have enabled American
companies to benefit from experience with Japanese management
and production techniques. "There was a time when it was so easy
to sell our cars in the U.S.," says Yoshikazu Hanawa, managing
director of Nissan and head of the firm's U.S. operations. "Our
cars were better in quality, cost and fuel efficiency than their
American counterparts. Not anymore."

    Yet the crowded U.S. market is increasingly unforgiving to
any automaker, foreign or domestic, that loses its way. After
a fast start, sales of the South Korean-made Hyundai Excel have
plunged. While Nissan has performed well in 1989 on the strength
of higher-priced models like the Maxima, it suffered from poor
sales between 1985 and 1988 because of weak marketing and a
stodgy product line. Says Laurel Cutler, Chrysler's vice
president of consumer affairs: "There's no market for products
that everybody likes just a little. Anything that's boring is
vulnerable. I would say that the midsize market is rife with
vulnerability."

    Cutler's boss is trying to get the message out that hard
times are on the way. Lee Iacocca, who visited Washington last
week to lobby Congress for a tougher, more focused U.S. trade
and industrial policy toward Japan, said in a recent interview
with the trade publication Automotive News, "They don't know
there is a war on. They don't have the foggiest idea. Am I
saying the worst is yet to come? I don't think we've bottomed
out yet. That is what I am saying." No one in Detroit would
contest his argument. The outcome is in the hands of U.S. car
buyers, who have far more choices than ever before and a lot of
anxious auto executives hanging on their decisions.