DETROIT'S BIG CHANCE
CAN IT REGAIN BUSINESS AND RESPECT IT LOST IN THE PAST 20 YEARS?
Twice in the past 10 years, Garland West walked into Minneapolis showrooms intending to buy an American car. But each time, after "some hard decisions regarding value for the money," he and his wife, Nancy, went Japanese. So the Wests were surprised when they looked again in May and found, says Garland, a Cargill Inc. executive, that suddenly "it's a very simple choice to buy American." After comparing models on price, features, and published reviews, the couple ordered a $20,500 Jeep Grand Cherokee. The only tough call was between two domestics: the Ford Explorer and the Jeep.
The Wests aren't alone. As car sales rise along with the U.S. economy, Detroit is starting to score against its Japanese competitors. In the first five months of 1992, U.S. carmakers have grabbed 72.4% of the domestic car and light-truck market, up 1.6 points from a year ago. The Japanese, meanwhile, have lost 1.4 points, to 24%. Each point of market share is worth about $2 billion in revenue. And Big Three profits are coming back, largely because GM, Ford, and Chrysler have cut back on discounted--and money-losing--sales to rental-car companies. "If market share is going to come at the cost of profitability, we're going to back away," said John F. "Jack" Smith Jr., General Motors Corp.'s new president, at the company's May 22 annual meeting. `[But] if we can run a very aggressive product program, market share will take care of itself."
PERFORM--OR ELSE. The Big Three have enjoyed other upticks over the past two decades, and every time they've blown their big chance. But there are persuasive arguments why, this time, their rebound may be longer-lasting. For one, restive corporate boards have installed new No.2 executives at GM and Chrysler, sending a neon message to entrenched management to start performing or else. Under the gun, even managers at stolid GM are finally attacking the company's ultrahigh expenses, while Ford Motor Co. and Chrysler Corp., by some estimates, have already cut theirs to near-Japanese levels.
Thrift is just part of Detroit's new edge. The Big Three now lead the Japanese in fuel economy and safety features. They're speeding up product introductions and rebounding from years of design doldrums. In fact, Detroit has more spiffy new models in showrooms than it has had in years. Motown dominates hot segments such as minivans and sport-utility vehicles like the one the Wests are buying--segments that barely existed a decade ago. And look at the battle in midsize sedans. Ford's redesigned Taurus has a good chance of becoming the top-selling U.S. model this year, unseating Honda Motor Co.'s Accord, which has held the title since 1989. Chrysler's sleek new LH line will enter the fray this fall, knocking bumpers with Taurus, Accord, and Toyota's new Camry.
Most promising of all is that just as the Big Three are starting to roll, their Japanese counterparts are beginning to suffer. Capital is costing them more, for one thing. As recently as 1985, Japanese companies paid 3.3 percentage points less for money than Detroit did. Now, says Lehman Brothers, the collapse of the Tokyo stock market, plus higher interest rates, have raised the real cost of capital in Japan to 5.6%, the same as in the U.S. And with Washington beating its chest over trade deficits, the Tokyo government has tightened quotas on exports to the U.S. and is pushing its carmakers to bring out new models less often. Partly in response, Japanese carmakers hiked sticker prices by up to 5% this spring, while Detroit merely pared dealer and customer incentives and kept its list prices steady.
These days, in fact, Japanese executives are starting to worry. "In this environment, the strength of Japan's carmakers will decline," predicts Yoshikazu Hanawa, executive vice-president of Nissan Motor Co. And Kenichi Kato, managing director of Toyota Motor Corp., adds: "Already, [Japan's auto makers] see a downward trend of sales. Our question is, how far down? We are very concerned about that."
HOLDING ITS OWN. Add it all up, and these trends amount to a golden opportunity for the Big Three to regain some of the business--and respect--they've lost over the past two decades. Chrysler President Robert A. Lutz predicts that the U.S. companies will pick up at least a point of market share annually against Japan over the next four years. Other forecasters feel that Detroit may hold on to its current share, though some aren't sure for how long. Even Nissan's Hanawa agrees that "this is a good chance for the Big Three. They seem to be using it."
If Detroit can bounce back for real, there will be more winners than the workers in Flint and dealers in Dallas. Better Big Three peformance could help cut the U.S. trade deficit and ease U.S.-Japanese tensions. Reviving U.S. auto sales could add zest to the sluggish recovery. Over the long haul, a resurgent Detroit might help revitalize U.S. manufacturing. After all, one in seven jobs is tied to the auto industry, whose employees pay one in eight tax dollars.
Detroit's challenge is to go far fast, before the Japanese regroup. Anti-Japan rhetoric should ease after the U.S. election, lessening pressure against imports. So protectionist measures that help Detroit now--such as a 25% tariff on imported pickups--aren't likely to last forever. Meanwhile, Japanese carmakers are still spending heavily on R&D and capital improvements, many of which are going into their U.S. factories to help end-run import quotas. That leaves more room under the limits to bring in higher-margin luxury cars that compete with Detroit's last profit strongholds.
Detroit can do a lot to stay in the passing lane. In previous recoveries, the Big Three tended to hawk too many subpar cars and forget the recession's hard lessons. The urgency of their cost-cutting disappeared. To maximize profits, they raised prices to Japanese levels. Then they frittered the money away on stock repurchases, fat salaries, and ill-advised diversifications outside the car business. All the while, they neglected crucial investments in manufacturing. Chrysler Chairman Lee Iacocca concedes the lurking danger of Detroit's "dirty habits: get a little fat, take a few shortcuts, or hire too many people." The Big Three swear not to slack off this time. "We don't dare take our eye off the ball," says GM Chairman Robert C. Stempel. "If we back off on this drive for cost and quality competitiveness, we're going to be losers."
But can Detroit really put last year's $7.5 billion collective loss behind it, stifle its tendency to seek immediate gains, and focus on long-term strategies? That depends on stronger management--and belatedly, the industry may be getting some. In April, GM's board demoted former President Lloyd E. Reuss and replaced him with Jack Smith, a proven rejuvenator who brought lots of horsepower to GM's European unit. Just weeks before, Chrysler's board hired Robert J. Eaton, also previously of GM Europe, to take over as chairman next January when Iacocca's 14-year reign ends. At Ford, Chairman Harold A. "Red" Poling is expected to retire next spring. The top contenders for his job are an ex-RAF pilot, North American Automotive Operations chief Alexander J. Trotman, and Allan D. Gilmour, a former finance executive who heads all of Ford's auto operations.
As they operate under a microscope, the mandate for these new whiz kids is to run their core auto businesses aggressively. One strategy they're bound to pursue is to reverse the underinvestment of the late 1980s. Already, Ford plans to spend more than $3 billion over two years to develop electronic transmissions and advanced multivalve engines, technologies the Japanese have had for a while. Chrysler is spending $2.8 billion this year to introduce the Grand Cherokee plus its LH line of sedans. And with balance sheets shaky after last year's losses, the key to generating cash for each company has to be cutting costs.
CRISIS MENTALITY. Ford and Chrysler are nearing parity with Japanese costs, says Clyde V. Prestowitz Jr., president of the Washington-based Economic Strategy Institute. In a new study, Prestowitz looked at factors such as capital costs, capacity utilization, and currency variations to calculate that Toyota's production cost for a small car is $6,342. Ford is next at $6,591. Honda, Mazda, and Nissan are bunched between Ford and Chrysler, at $7,160. GM is the laggard, at $9,068.
Financially strapped Chrysler has reorganized the fastest. Since 1989, the No. 3 auto maker has remade itself by eliminating superfluous tasks and reinventing its new-product teams. Designers, manufacturing experts, and marketers all work together, breaking down the usual departmental barriers, cutting bureaucracy, and saving time. This approach let Chrysler design and engineer its LH sedans in just 40 months, a year faster than earlier models. And Chrysler claims it's now about even with Japan: Its $50,000 Dodge Viper sports car took 36 months from inception to delivery, and its new PL subcompact, due out in late 1993, is being developed just as fast.
Chrysler has also imbued itself with a crisis mentality that helped it cut overall costs by $3 billion from 1989 through 1991. Even suppliers were dragged into the effort: They've saved the company $150 million since 1989 by suggesting ways to dispense with duplication, paperwork, and nitpicky specifications. Chrysler's goal this year: to whack $1 billion more off costs. Such slashing helped the company approach breakeven in last year's fourth quarter despite big spending on new products.
Even GM now sees that it can't cut costs without fundamentally changing its organization. Until now, the No.1 auto maker has been divided into divisional fiefdoms that spawned "casts of thousands" bureaucracies, as Furman Selz Inc. analyst Maryann N. Keller puts it. Now, GM is borrowing ideas from its crosstown rivals. It has just realigned its North American auto operations into a single entity, a la Ford, while grouping new-product managers around specific models, as Chrysler does. And with Smith setting the pace, GM's executives are starting to sweat. Smith has speeded up GM's planned makeover and has named proven innovators to key posts.
Any one of the several business strategies GM's new honchos are pushing "would mark a major change," Stempel says. GM plans to adopt Japanese-style "lean" production techniques, close 10 assembly plants, and continue a wave of new-model introductions. It also wants to trim its rolls by 24,000 white-collar and 50,000 blue-collar workers by mid-decade. It claims that since December, 10,000 blue-collar jobs have been cut by attrition, early retirement, and buyouts.
OPEN BIDDING. Some of GM's biggest savings may come from its plan to scour the globe for deals on parts. Like other Smith lieutenants, J. Ignacio Lopez de Arriortua, GM's new procurement czar, won't dally. A Spaniard who earned his spurs in a similar job under Smith at GM Europe, his idea of a vacation includes "going to suppliers' factories and working on changing their production systems," says James P. Womack, co-author of The Machine That Changed the World, a 1990 study of the auto industry. "He's more Toyota than Toyota."
Lopez shocked GM's 5,700 suppliers on June 2 with news of his "global sourcing" plan. GM had already asked suppliers to cut prices by 7% according to a "3-2-2" plan--3% in 1991, 2% in 1992, and 2% in 1993. But Lopez considers that "a drop in the bucket," says one supplier. Lopez claims to have wrung price cuts of up to 68% from suppliers in Europe. In search of such numbers, he'll open all parts contracts, including those held by GM divisions, to competitive bids. The prize for efficient, top-quality suppliers: a chance to sell to GM worldwide.
That's just the start of the Big Three's new initiatives. They all plan to speed up new-product introductions, for instance. "In the last downturn" in 1980-81, recalls Robert L. Rewey, Ford's vice-president for sales, "the domestics tended to stretch things out in anticipation that the Japanese would ease off." But now, instead of just riding the success of its two-year-old Explorer, Ford has a major redesign in the works for next year. "We have no intention of relaxing anywhere this time," says Rewey.
Given such speedy redesigns, Christopher W. Cedergren, an analyst with researcher AutoPacific Group Inc. in Santa Ana, Calif., figures that by the late 1990s, Detroit will be making model changeovers every six years, on average. That compares with every 7.6 years now, three years longer than for Japanese cars. Meanwhile, Japanese producers will be slowed by political pressure and financial strains on companies such as Nissan and Isuzu, which went on capital spending binges only to be hit hard by Japan's deep auto sales slump. The upshot: By the late 1990s, U.S. companies will be just a year slower than their Japanese rivals.
STANDARD OPTIONS. To make sure their new metal moves, Detroit is jazzing up marketing, too. For instance, it's culling lame models to give its lineups better focus. Chrysler recently stopped building its Jeep Comanche pickup, of which it sold only 6,663 last year, so corporate marketers can devote more resources to the Cherokee and the new Grand Cherokee. GM also may get rid of such slow-sellers as the Oldsmobile Bravada and the boat-shaped Chevrolet Caprice.
Ford is juicing up sales by taking a concept called one-price marketing a step further than the Japanese do. The idea is to repackage former options into standard equipment as a way to make prices less complex--and make them stick. Ford's Escort can be bought as a hatchback, two-door, four-door, or station wagon--all with the same options at an identical $10,899 price. After trying the idea on both coasts, Ford went national with it in March--and sales of the subcompact Escort are up 16% since then. Ford also is trying the strategy in California to goose sales of the Thunderbird. Saturn, GM's import killer, also has been successful with a simplified pricing structure, and other carmakers are toying with similar moves.
Meanwhile, Detroit is trying to surpass Japan's best styling. In the frenzy to come up with fuel-efficient autos in the 1970s and 1980s, the Big Three lost the flair for innovative design that produced such classics as the 1964 Mustang. But starting with Ford's aerodynamic Taurus in the mid-1980s, Detroit has been pioneering designs again, with Chrysler and GM now making their mark.
Chrysler's new LH and PL cars, for example, have sleek good looks and a "cab-forward" design that adds extra interior space. GM's neatest new models include the cat-eyed Pontiac Bonneville, the Cadillac Seville, and an elegant Buick Park Avenue. A Chevy Cavalier due out in 1994 has the rounded look of BMW's 3 Series. The revamped Buick Riviera, due out in late 1993, is a knockout, too.
Japan, of course, isn't hurting that much. Some design experts argue that its cars are starting to display a bland sameness. "There is a new generic Japanese design," contends Carl L. Olsen, head of transportation design at the Detroit-based Center for Creative Studies, one of the world's premier auto-design schools. "They're soft, melted butter." But for every stunner Detroit comes out with, Japanese carmakers seem to have one, too. Mazda's Miata roadster is a good example, and there are plenty of others: Infiniti's new J30 coupe, Mazda's sleek, Euro-styled 929, and Nissan's Altima, due out soon. For GM to even vie with such cars is impressive, given how severely it was criticized in the 1980s for having so many lookalike models.
FLEXTIME. To be sure, Motown still has to overcome some powerful negatives. Perhaps the biggest is in manufacturing. Detroit has made giant strides over the past decade. Manufacturing consultant James E. Harbour says Ford's Atlanta assembly plant is the most efficient in the U.S. And in quality, a GM factory in Oklahoma City was No.1 in J.D. Power & Associates Inc.'s 1992 ranking of North American plants that make cars with the fewest defects. The Buick Centuries and Oldsmobile Cutlass Cierras made there average just 0.71 defects per car. A Toyota plant in Ontario was No. 2, with 0.72 defects per car.
But Detroit's manufacturing techniques haven't kept up as U.S. auto demand has shifted to more niche markets and shorter production runs. Dealing with those trends requires Japanese-style flexible manufacturing, a technique that allows the production of several very different models on the same line. The Big Three have thrown money at the challenge without making much headway. In the 1980s, GM lavished $50 billion on assembly-plant modernization, supposedly including the installation of flexible manufacturing machinery. But since then, it, Ford, and Chrysler have stuck mainly to plants dedicated to versions of the same model.
The Big Three are only just beginning to change this. For instance, they have recently started prodding their development teams to coordinate among themselves and with manufacturing specialists to build more vehicles from common components--a crucial first step in flexible production. And only GM is now pushing toward Japan-style flexibility--in selected plants. Its Lansing (Mich.) factory already builds three small-car models on two production lines. The goal is to give all of the company's small-car plants--at Lansing, Lordstown, Ohio, and Linden, N.J.--the ability to build at least three models per line by the mid-1990s. Largely to avoid the added complexity, which can hurt productivity, Ford and Chrysler have shied away from such efforts.
That leaves the Big Three at a huge disadvantage. Flexible manufacturing avoids having to keep separate factories for low-volume models and allows a plant to run full tilt even if one model's sales slump. Without it, Ford is condemned to inefficiencies such as making its low-volume T-bird at an underutilized Lorain (Ohio) factory, while plants in Atlanta and Chicago pay overtime to meet Taurus demand. Similar manufacturing snafus are keeping GM from building enough of some hit models: Saturn, the Chevy Suburban sport-utility wagon, and the Cadillac Seville (page 88 40 ).
The Big Three can't afford such dithering much longer. Indeed, if they let down their guards this time, they could get caught in a downward spiral. It now costs at least $1 billion to develop an all-new car model--a tab that has already driven many small European producers into the arms of larger partners. With their existing cost structures and high-volume production approach, the Big Three may not all survive if their market share erodes by six points in the 1990s as it did in the 1980s.
`COUPLE OF BOOMERS.' Moreover, consumers won't keep giving Detroit second, third, and fourth chances. The "Buy America" sentiment is pulling some customers into showrooms, but improved quality and low prices are selling the wheels. For example, Paul McMahon of Mishawaka, Ind., a vice-president at a metal-stamping company, traded his 1988 Honda Prelude for a new Taurus recently--in part because five of his friends are happy with their recent Ford purchases. "The quality is as good, if not better than a Honda's," says McMahon. "If it weren't, I'd have bought another Japanese car." Detroit knows that buyers will defect once again if domestic models disappoint them. Iaccoca, for one, gets a stream of letters from customers who issue a warning: "I'll give you one last chance."
For the moment, Detroit is cashing in on that sentiment. U.S. carmakers' modest 0.9% gain in car sales during the first five months of 1992 drastically understates the comeback so far, says analyst Joseph G. Paul of Sanford C. Bernstein & Co. He estimates that by cutting their collective sales to rental-car fleets by 20%, the Big Three masked a 15% surge in their more lucrative retail sales. Although the recovery from the auto sales slump has been slow, when pent-up consumer demand finally kicks in, says Iacocca, "we're going to have a couple of boomers here--fantastic years." He adds: "We're going to look like geniuses for a while." Maybe so, if the Big Three can avoid repeating the mistakes of their past. But Iacocca and his peers are learning that temporary victories aren't enough anymore. With Japan on the move, what counts is staying power.Kathleen Kerwin and James B. Treece in Detroit, with Thane Peterson in New York, Larry Armstrong in Los Angeles, Karen Lowry Miller in Tokyo, and Bureau ReportsReturn to top