Trying To Rev Up

Talk about role reversal. After years of taking it on the chin, Detroit's Big Three auto makers are continuing to surge against their Japanese rivals. And the Japanese? In 1993, for the second straight year, their share of the U.S. market for cars and light trucks fell--this time to 23.2%, off 2.6 points since 1991. Now, Wall Street is betting that Detroit will continue to boom. Even a strike at a GM truck plant in Louisiana that started on Jan. 11 couldn't dampen GM's stock price. The next day, GM closed at 59 1/4, up 8% since Dec. 31. Chrysler has soared 10.8%, to 59, and Ford is up 4.7%, to 67 1/2, in the same period.

Why the rampant optimism among such practiced pessimists? There's one big reason: It looks as if Detroit could win even more U.S. sales from its weakened rivals. Beleaguered by the strong yen and deep slumps in the Japanese and European auto markets, Japan's car companies are sounding ever more content to back off the market-share race. Executives admit they could well be forced to keep raising U.S. prices to bolster profits--allowing Detroit to widen its gaping price lead (chart). "We'll still have to increase our prices again if the exchange rate stays where it is," says Motosuke Tominaga, a Toyota director in Tokyo, even though "we may lose market share" by doing so. At Honda these days, adds Executive Vice-President Yoshihide Munekuni: "Gaining market share is not important."

LEASING'S EDGE. Indeed, only one Japanese auto maker--Nissan--gained market share last year. By contrast, Honda's U.S. sales fell 6.8%, and its share dropped 0.8 points, to 5.2%. Toyota's share dropped a half-point, to 7.5%. This year and next, researcher AutoPacific Inc. predicts, Japanese carmakers' collective share will continue to hover around 23%.

Still, no one is counting the Japanese out. Last year, they began aggressively pushing attractive leases on top-selling models, such as the Honda Accord and Toyota Camry, pushing monthly payments down to not much more than $200 in some cases. On top of that, all the companies are furiously paring back costs and shifting more production from high-cost Japan to the U.S. And most of them are planning moves--albeit gingerly--into the market where they are weakest: hot-selling trucks such as minivans, sport-utility vehicles, and pickups.

For 1994, the major question is whether leases by themselves will be enough to jump-start Japan's performance. Using a sales-weighted average, Detroit's cars typically will cost $1,700 less than Japan's this year, figures AutoPacific. Comparing base prices, others put the gap as high as $3,100. But leasing "almost completely erases the price advantage of the Big Three," says AutoPacific Senior Vice-President Christopher W. Cedergren. That's because Japanese cars hold their value better than Detroit's. Knowing their cars will be worth more on resale, Japanese manufacturers can pass along that advantage in the form of lower monthly lease payments.

Honda is an example of just how aggressive Japanese carmakers are getting. When it launched its all-new 1994 Accord last fall, the company priced it at a relatively low $14,330--the same price as its predecessor. Then, Honda launched a lease program for the Accord at the same time: Payments on a midline, $18,300 model are $239 a month--lower than those for a compar-ably equipped Pontiac Grand Am SE, which lists for $15,769. Leasing also eases the sticker shock of price hikes, because resale prices jump right along with new-car prices. "It's obvious that many Americans buy cars based on the monthly payments they can afford," says Thomas G. Elliott, executive vice-president of American Honda Motor Co.

MORE OOMPH. The lease deals will buy time until Japan can achieve its longer-term goal: cost-slashing. Nearly all of the Japanese auto companies are in the midst of wrenching restructurings, including unprecedented plant closings in Japan and staff cutbacks in the U.S. operations of such companies as Nissan Motor Co. and Mazda Motor Corp. Analysts say such efforts could reduce costs by up to 20%.

Over the past year, Toyota has stripped $1.5 billion from its overhead, cutting the number of models it makes by 20% and component variations by 30%. Nissan, which posted a $263 million loss in the first half of 1993, slashed even further, going from 2,200 model specifications around the world a year ago to 1,400 today. The company is even quietly eliminating features, such as infinitely variable speeds on intermittent windshield wipers. "It's pennies, but if Toyota's looking at pennies, then we have to, too," says Earl J. Hesterberg, vice-president and general manager of Nissan's U.S. sales arm.

For each step Japan takes, though, Detroit redoubles its efforts. Indeed, the U.S. industry has more oomph going into 1994 than it has had in years. Japan still trails badly in leasing, which now accounts for nearly 25% of all auto sales. And in conventional sales, Detroit is pushing its price advantage with "value" pricing schemes that get sales perking even on aging models. Take the 12-year-old Chevrolet Cavalier. Its sales grew nearly 29% in 1993. The main reason: GM cut its base price to $8,520, including such extras as antilock brakes.

STRAINED FINANCES. Detroit's greatest advantage, however, is its lock on the booming light-truck market. Last year, truck sales zoomed 15.5%, with Detroit accounting for about 86% of the total--and Japan isn't likely to grab much more share. Why? The U.S. pickup market is protected by a 25% tariff, for one thing. And for Made-In-Japan trucks, Japan's price disadvantage is even wider than it is in cars--as much as $4,000 by some estimates. Yet with its finances already badly strained, most Japanese companies can ill afford to develop new minivan and sport-utility models and put up new U.S. plants.

Japan's solution to this conundrum will actually boost Detroit's sales--at least in the short run. Although a few companies, such as Honda, are producing new models of their own, others are turning to Detroit for new trucks, which they then sell under their own names. Last year, Mazda stopped exporting pickups from Japan to the U.S. and started selling rebadged Fords. Nissan's Quest minivan is also made by Ford.

To be sure, any number of factors could give Japanese carmakers an unexpected boost. There's labor unrest at GM, for one. More than 2,000 United Auto Workers at the Shreveport (La.) truck-assembly plant have walked off the job, after bargaining over the local agreement broke down. The strike stalled production of GM's popular new Chevy S10 and GMC Sonoma pickups. Another potential hitch for Detroit: Production of such models as GM's Cavalier and Ford's Tempo and Mercury Topaz will have to be shut down for several months during retooling for model changeovers.

Still, Detroit is looking tough. It has a slew of new models coming out, including Chrysler's Neon and Ford's Contour. And for once, Big Three executives don't seem complacent. "I dmn't feel any relief or relaxation," says Ford Motor Co. Chairman Alexander J. Trotman. Even coming from Detroit's chief worrywort, that's a refreshingly realistic assessment.

Before it's here, it's on the Bloomberg Terminal.