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Detroit: Don't Race The Engine

News: Analysis & Commentary: TRADE


Motown honchos such as Chrysler CEO Robert J. Eaton were giddy when Japan and the U.S. struck a new auto trade pact in late June. No sooner had the new accord been announced on June 28 than Eaton declared that the deal will have "a tremendous effect on the global competitiveness of this industry."

Brave talk, but probably overblown. U.S. auto-parts manufacturers can expect a rush of new business from Japan from the pact. But the carmakers--which have portrayed the deal as a tool for pressuring Japanese rivals in their protected home markets--face formidable obstacles in cracking Japan. And if Japanese car companies honor their pledge to add production capacity in the U.S., they will lower their costs on key models--enhancing their own competitiveness. U.S. auto makers are being "foolishly optimistic," says Gene Williams, president of Cleveland's Auto Strategies International Inc.

To be sure, the Big Three were revving up sales efforts in Japan even before the accord. Taking advantage of the weak dollar, they have cut prices on many models. For the first time, they'll offer right-hand-drive versions of top models such as Chrysler's Neon and Jeep Grand Cherokee, Ford's Taurus, and GM's Saturn. They're expanding distribution networks, too. Chrysler Corp., for instance, just paid $100 million for a controlling interest in Chrysler Japan Sales Ltd., a distribution company. Ford hopes to add up to 700 dealers to its current network of 300.

Don't expect big sales, though. The trade deal notwithstanding, DRI/McGraw-Hill projects Big Three sales in Japan, including Made-In-Europe models, will only rise from 80,255 last year to about 200,000 by the year 2000 (chart). Leader Ford may hit 100,000 vehicles. "That's peanuts in a market that does seven million in sales annually," concedes Alexander J. Trotman, Ford's chairman.

Distribution remains a major concern. The Clintonites hope the trade pact will lead to 1,000 additional foreign dealers by 2000. But a recent Japan Automobile Dealers Assn. survey identified only 24 dealers as interested in handling U.S. autos. In part, that's because existing Big Three outlets are struggling. In the past seven months, Ford's Japanese dealers have sold an average of 13 cars a month, far fewer than the 30 average at Toyota Motor Corp. Big bucks will be needed to turn things around, too: German carmakers have spent $300 million each on their networks in Japan, vs. about $100 million each for Ford and Chrysler.

Another concern: Detroit's prices in Japan may still be too high. For instance, Chrysler's Neon, which goes on sale there later this year, likely will sell for $18,000 to $24,000. That's $9,000 more than the model sells for stateside and well above the $11,000 to $19,500 that well-established rivals such as the Toyota Corolla go for in Japan.

SIMPLER CARS. In Detroit's own backyard, the trade pact will change little. Japanese carmakers pledged to add 500,000 cars per year in additional production capacity in North America. And while the new capacity has long been planned, in a few years Japanese carmakers are expected to be able to trim prices by making manufacturing more efficient and by reengineering their cars to reduce complexity. Now, Japanese cars that are made in the U.S., such as Honda's Accord and Toyota's Camry, cost at least $2,000 more than U.S. competitors' models.

The bottom line on this trade deal: The Big Three's best bet is to cork the champagne and get back to work.By David Woodruff, with Keith Naughton in Detroit and Edith Hill Updike in Tokyo

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