Strolling around auto shows is one way car company execs size up the competition. Take Detroit's big annual show. On Jan. 10, General Motors Corp.'s board was out kicking the tires, as a group. There they were in their boxy gray business suits -- heavyweights such as Bill Marriott, GM Chairman Jack Smith, and CEO Rick Wagoner -- climbing in and out of Toyota's new sport-utility vehicles, checking out dashboard treatments and exterior fit and finish.
I, too, had a look (the show opens to the public beginning on Jan. 13). And I can tell you: It must have been a pretty sobering moment for the men in the gray suits.
The overwhelming impression I got at this year's show is that the U.S. auto
market is bifurcating. Detroit's Big Three all seem to be faltering, with
Chrysler planning major restructuring under German parent DaimlerChrysler.
But the foreign companies -- from Japan's Toyota and Honda to Germany's VW,
Audi, BMW, and Mercedes -- all did well last year and once again are expecting
to have excellent years in 2001.
CHILLING. On the other hand, Detroit, with about 63% of the U.S. car and truck market, seems pretty certain to lose more share. Japan, with about one-third of the market, is poised to gain. So are the Europeans, who have most of the rest.
Detroit's is still obsessed with trucks, minivans, and sport-utility vehicles. It's chilling to hear Ron Zarrella, chief of GM's U.S. operation (see BW Online, 1/11/00, "GM's Ronald Zarella: Don't Look for More Brand Cuts"), talk about how, three years ago, GM decided that its big weakness is that it didn't get most of its sales from these different varieties of trucks. "One of the sources of our lack of profitability relative to our competitors was that we were at 45% [of sales
from] trucks and truck derivatives," he says. "Ford is approaching 70%, Chrysler is over 70%."
Now, that strategy is coming to fruition, and GM's exhibit at the auto show is dominated by trucks and vans. Meanwhile, it's shutting down its Oldsmobile division, which mainly sells cars, and is expanding its beefy GMC truck unit.
LESS EXCESS. The obvious danger with this is that Detroit is hugely vulnerable to rising energy prices and a slowing economy. The new models and show cars at Detroit this year are noticeably smaller than the behemoths on display last year. But even the smaller SUVs that Detroit is bringing out cost a lot and guzzle gas. Their mileage numbers and $30,000 price tags (options included) seem moderate only in the context of the wretched excess the auto companies have indulged in over the last few years. If energy prices really shoot up, even these vehicles are going to be about as appropriate as ham hocks at a Weight Watcher's convention.
Detroit is doubly vulnerable because it has let its car lineups atrophy as it
has poured most of its creativity and development dollars into trucks. Just take a look at the car offerings from GM and Ford, and then take a stroll around the Volkswagen exhibit. You see right away what a little imagination can do for a company's lineup when you check out the Passat and the VW Beetle.
But what should give Detroit pause is the updated version of the old VW Microbus. It's a retro-vehicle that harks back to the 1960s and '70s. It's only a show car at this point, but auto experts expect VW eventually to build the model commercially. It could end up being just as successful in the U.S. minivan market as the new Beetle was in small cars when it was reintroduced a few years back.
CHASMS IN QUALITY. Detroit has also gotten sloppy again. It's not just the numerous recalls that have plagued vehicles such as the Ford Escape. Japanese and European executives also are openly contemptuous of the fit and finish of nearly all of Detroit's products. One veteran auto exec I talked to at the show notes that the gaps allowed between body panels on VW's Audi models are now down to just 1 millimeter. At GM's Saturn division it's more like 8 millimeters, he says.
Look closely at the preproduction version of the new Rendezvous on the Buick stand and you find huge gaps -- close to an inch in one case -- between some of the body parts. GM promises that things will be better by the time the model goes into production this spring, but no Japanese or European rival would allow such a roughly put-together vehicle to be shown in public.
It all makes me think that the sloppiness on the outside may indicate sloppiness in less visible aspects of Detroit's business. For instance, have the companies
been investing as heavily as they should in their factories? Being exposed to
gas-guzzlers isn't nearly as grave if a company can shift on a dime and start
producing more small vehicles when the market turns. You can bet Toyota and
Honda are ready to do that. But one of the things Daimler discovered after
buying Chrysler in 1998, execs keep saying, is that its internal systems weren't up to snuff.
TWO-FERS. Chrysler's factories also have shortcomings. "This organization...has very little flexibility in its manufacturing structure," Chrysler's new chief Dieter Zetsche told Business Week editors at the show (see BW Online, 1/10/00, "Chrysler's New Boss: 'The Clear Task Is to Stop the Bleeding'"). "There is a very strong link between a product and a plant."
By contrast, Japanese and German plants tend to be set up so that two or more often quite different vehicles can be produced on the same production line. Their protestations to the contrary, do Ford and GM have the same capability? It makes one wonder.
Toyota remains the most dangerous competitor for Detroit. It has long been the world leader in quality and manufacturing efficiency. And it has a "rich company" strategy of being present in every market niche, from luxury cars (Lexus), to middle-of-the-road sedans (Camry) to niche hybrid cars that run on gas and electricity. It's also so well integrated into the U.S. market that you can hardly tell anymore that it's a Japanese company. On its stand at Detroit, Toyota even has a little staged Western scene where customers can get their pictures taken with actors who are Clint Eastwood and John Wayne lookalikes. Can't get more hokey than that.
PICKUP WITH POTENTIAL. More vexing for Detroit are all the trucks in Toyota's lineup. It's not just the nifty SUVs that GM's board was going over with a fine-tooth comb. A presence at the exhibit is the Tundra, Toyota's full-size pickup. The model is a minor irritant to Detroit at this point: Toyota only sold about 100,000 Tundras last year, about one-eighth the number of F Series pickups Ford sold.
But Toyota is likely to try to do to Detroit in pickups and SUVs exactly what its Lexus division is doing to Mercedes in luxury cars. It will offer a similarly styled model that arguably has better quality than that of its rivals. Everyone says pickup buyers, in particular, are too traditional to buy Japanese. Don't bet on it. Luxury car buyers were traditional, too, and they're gobbling up Lexuses.
And if sales turn down, Detroit is going to be forced to compete by cutting prices. What's that going to do to its vaunted profit margins from truck sales?
Toyota may be the big direct threat, but Detroit also is going to be nibbled to death. An extraordinary variety of cars and trucks are coming on the market, from the VW Microbus, to hybrid-engine cars from Honda and Toyota, to a new SUV from Porsche, to a new U.S. version of the tiny Mini from BMW, to boxy new small cars from Honda. Most of these vehicles won't sell in huge quantities. But each will take a tiny piece of the market. Ford, which is the strongest of Detroit's Big Three, may weather the storm reasonably well. But GM and Chrysler could be in for a very rough ride. Peterson is contributing editor for BW Online. Christine Tierney of Business Week's Frankfurt bureau also contributed to this article