New Worlds To Conquer

Driving the 12.5-mile stretch of two-lane road from Shanghai to Volkswagen's sprawling auto plant on the city's outskirts is a nightmare. When they can move at all, trucks, cars, and vans maneuver around peasants lugging chickens and vegetables. But Bernd Farny, technical director of Shanghai Volkswagen, can't complain. Many of the gridlocked cars are VW Santanas, China's hottest-selling model. VW's profitable, nine-year-old Shanghai factory churns out 100,000 of the $19,200 Santanas a year and is now gearing up to build a more sophisticated car in 1995. Within 10 years, VW expects China to be its largest operation outside of Germany, with annual sales topping 400,000 vehicles--about the number of Tauruses that Ford sells in the U.S. "It's sell cars as fast as you can," marvels Farny.

Visions of hundreds of millions of potential Chinese drivers have auto executives around the world drooling. "My No.1 priority in 1994 is China," says W. Wayne Booker, Ford Motor Co.'s executive vice-president for international automotive operations. Chrysler Corp. is building nearly 20,000 Jeep Cherokees a year in Beijing. General Motors Corp. is assembling S-10 pickups in Shenyang, and Japanese carmakers are scouting the country for new opportunities.

STARK CONTRAST. And China is just the start. A high-octane mix of booming economies, fledgling free-market policies, and pent-up demand is shifting car sales throughout the developing world into warp drive. Already, more Czechs buy new cars than Swedes do, and Brazil and Argentina together outrank Spain. By 1998, predicts DRI/McGraw-Hill in a new Asia study, auto markets in South Korea, Taiwan, and Thailand combined will rival Britain or France.

The contrast with the industrial world is stark. Western Europe's car market slumped 15% last year, while Japan's sank 6%. Even the rebounding U.S. market grew only 8%, vs. 12% in the developing world. Auto sales in those 167 countries will grow 44%, to 11.3 million by 1998, predicts DRI/McGraw-Hill, nearly doubling the growth rate in the markets of the industrial world, which are 2.5 times as large but saturated. "Future growth in the industrial markets will be limited," says Heinrich Reidelbach, senior vice-president for corporate strategic planning at Mercedes-Benz, which is scouring the globe for production sites and may settle on India soon.

What's happening is nothing less than a redrawing of the competitive map for the world auto industry. For years, the top carmakers have squared off mainly in each other's markets. But from now on, the battle to thrive, maybe even to survive, will be fought in developing countries: The Americans, Europeans, and Japanese will have to venture beyond their regional strongholds into Latin America, Central and Eastern Europe, or Southeast Asia.

Japan's auto makers are opening factories in Central Europe and Turkey, even as U.S. and European producers try to carve out niches in Asia. Booker believes Ford's future hinges not just on exploiting the North American Free Trade Agreement to sell more in Mexico but also on aggressively expanding in the Asian-Pacific market. Otherwise, "there's no way Ford can remain the No.2 auto maker in the world," says the executive, who wants to boost the carmaker's 2.5% market share in the Asian-Pacific region to 10% to 12% soon after the year 2000. That would raise Ford's non-European overseas sales from 11% of its total to 18%, says Stephen J. Girsky, auto analyst at PaineWebber Inc.

These efforts to expand internationally will vastly complicate business at most major auto makers. Quality at far-flung plants can be iffy, and production can be disrupted by everything from labor disputes to war. And real competition is more costly than what has passed for that until now. "Developing countries were once relegated to production of out-of-date models," says Rocco Cane, Fiat's vice-president for planning. "Today we are investing in high-tech, innovative production in these countries."

DEFT TOUCH. Beyond that, a no-holds-barred global commitment requires producers to rethink nearly every decision. To gain advantages of scale, the carmakers are trying to build key models in just a handful of foreign plants, which have to customize cars for the variety of markets they'll supply. Sometimes that's easy: Cars headed for Indonesia's rough roads get heavier suspensions, those sent to Brazil and China or East Africa get engines that run on gasohol and leaded gas.

In other cases, the modifications are more extensive. Carmakers are starting to insist that their development teams consider foreign-market demands early in the design process. Finding the appropriate balance takes a deft touch. High-tech extras can push prices out of reach: Less than 15% of Mexican consumers can afford any kind of car. Nevertheless, increasingly sophisticated buyers in the developing world don't want outdated models. For example, one of every five Ford cars sold in Mexico is equipped with air bags. "If we sell the same car that we offer in the U.S., we'll do very well here," says Masao Horie, general director of Nissan Mexicana.

Companies must also tailor their cars to tightening environmental regulations. Choked by some of the world's worst pollution, Thailand, Malaysia, and Taiwan are introducing unleaded fuels, and new cars sold in Mexico City must meet stringent antipollution guidelines. That makes the vehicles more complex. "The days of fixing engines with screwdrivers and pliers are gone," says Ford's Mexico director, Victor M. Barreiro.

Marketing in the developing countries is different, too. Andrej Barc ak, GM's Prague-based sales director for Central Europe, aims Opel Corsa advertising at those in their 30s, instead of 18- to 25-year-olds as in the West. "Here, [younger buyers] can't even afford bicycles," he says. Toyota builds brand awareness in Beijing by running a driving school. Yet as Mazda Motor Corp. found in the Czech Republic, sometimes all it takes to woo buyers is modern showrooms and three-year warranties. "I felt like a real customer," says electronic-goods importer Eduard Snek, 33, showing off his $28,000 Mazda 626.

DESERT STIFFED. So far, the Japanese have been especially aggressive in adapting vehicles to other markets: Nissan Motor Co. has just introduced a station wagon designed for Thailand, where consumers are increasingly switching from pickups to cars. By contrast, U.S. carmakers have been laggards. Despite the pro-Americanism after Operation Desert Storm, for instance, Japanese carmakers took 61% of Kuwait's car and truck sales in 1992, compared with 30% for GM, Ford, and Chrysler. "Most U.S. manufacturers only pay lip service to the export market, with the exception of their European subsidiaries," says Amin Kadrie, chief operating officer of Alghanim Industries, GM's distributor in Kuwait.

Although each of the Big Three has a redesigned small or full-size pickup, none brought out the version Kadrie says represents 80% of the developing world market: a small, crew-cab truck with a one-ton payload. Indeed, sales of GM's $17,200 S-10 compact pickup assembled in China have been slow. The cab seats only two people comfortably, and since most cars in China are driven by chauffeurs, the S-10 is basically a one-person vehicle. GM says the S-10 will be replaced in 1995 by a new Sonoma pickup and a Blazer utility vehicle better suited to China's needs. Some will be four-door models.

Changes at the top may finally be breaking down Detroit's parochialism. For the first time, each of the Big Three is headed by a chairman who has worked overseas. "It's a slow process," says Richard C. Nerod, a GM vice-president, "but there are more people paying attention." Take Chrysler, which gets 1.5% of its unit sales from the developing world. Except for its Jeeps, Chrysler's cars have been too large or uncompetitive to sell in such markets. But the new subcompact Neon and Cirrus and Stratus compacts are the right size. Chrysler has just begun shipping Neons to Taiwan. GM, which gets only 4% of its auto revenues from outside North America and Europe, is changing, too. Instead of relying on U.S. staff, GM is having its Brazilian unit design and build a small pickup for the Mideast, Asia, and Latin America.

GM's rivals are following a similar strategy. The VW division of Autolatina, a Brazilian venture owned 51% by VW and 49% by Ford, has been working with VW's Shanghai group to engineer and develop a new version of the VW Santana for China. Chinese engineers flew to Brazil, and Autolatina engineers to China, as part of the $10 million design project. In Eastern Europe, Fiat has built a new export base by purchasing the majority of Poland's state-owned FSM. The company makes Poland's biggest seller, the 126, a $3,000 subcompact. It is also the sole source for Fiat's $8,000 to $9,000 Nuova Cinquecento city car, 80% of which are exported to the rest of Europe.

RAPID VICTORIES. Toyota is being even more adventurous. It has plans for a sports-utility vehicle made of parts from Toyota affiliates and suppliers across Southeast Asia--transmissions from the Philippines, engines and stamped parts from Indonesia, and electrical parts from Malaysia. The plans are driven partly by local-content rules--though a scarcity of top-notch suppliers causes problems. VW's Shanghai plant has sought more Chinese-made components to meet government directives to maximize local production, but it often has been able to find only one qualified supplier per part, says Farny. So that supplier feels little incentive to meet quality standards or hold down prices. The factory has to test all switches for dome lights, for instance, because 20% of them fail.

Despite such headaches, carmakers can score rapid victories if they stay in harmony with government policy. During the 1980s, when hyperinflation, stiff barriers to imports, and a moribund economy plagued Brazil, most auto makers were content to churn out aging models: Even today, Brazil's top-seller is the dated Volkswagen Gol, a hatchback that is no longer produced anywhere else in the world. Then Brazil lowered taxes on cars and instituted economic reforms, triggering a boom. Car and truck production in 1993 totaled 1.4 million, up 30%.

While VW is now modernizing its model lineup, rival Fiat do Brasil was quicker to add new models, such as the Uno Mille and the Tempra subcompact. Fiat's market share shot from 12% in 1989 to about 24% in 1993. Now, GM do Brasil, which has 26% of the market, is ready to follow Fiat--and challenge leader Autolatina--by launching new models and building a factory in Argentina that will ship pickups to Brazil. In the next five years, the giant auto maker will invest $2 billion in its Latin American operations, funded from profits generated there. "Our plans are to be No.1," says GM do Brasil President Mark Hogan.

Sweeping changes in tariffs and regulations spurred by the North American Free Trade Agreement will reshape competition in Mexico, too. Market leader VW was already being challenged by Nissan, which spent $1 billion to add a factory that will produce new models for the domestic market and for export. Now, both companies will face stiffer competition from U.S. rivals. Last month, GM began importing the Opel Corsa, renamed the Chevy, from its plant in Zaragoza, Spain. Even with a 20% tariff, the Chevy sells for $10,600, making it the second-cheapest model in Mexico, after VW's $8,500 Beetle--and still cheaper than Nissan's $11,600 top-selling Tsuru, known as the

Sentra in the U.S. GM will manufacture the Chevy in Mexico starting next year. "We're expecting phenomenal growth in Mexico," says Gary Henson, director of GM's Mexican operations.

In Eastern Europe, auto makers face a tougher call. Sales should spike up 11% this year in Poland, Hungary, and the Czech Republic, after sliding 2.8% last year. But tariff policies and overcapacity have left most carmakers reluctant to make big investments. These countries are slowly dismantling import restrictions. So BMW and Mercedes argue that the smart play is tm ride out current tariffs of 15% to 43% by shipping from Western factories. But GM thinks the high profile of its assembly plant in Hungary helped catapult its Opel models to No.1 in that market--though nearly half its sales there are imports. GM hopes for similar results from a joint venture with Poland's state-owned car company, FSO.

Nowhere are government policies more in flux, and the jockeying among carmakers more intense, than in China. Beijing has picked several foreign manufacturers as its favorites to produce locally--including VW, Audi, Citr en, Peugeot, Chrysler, and Daihatsu. But other carmakers don't believe that list is final. Indeed, the government is seeking yet another partner, for a minivan project. "It's quite clear the Chinese government is keen to encourage further investment," says London-based DRI/McGraw-Hill analyst David Leggett.

With so much at stake, every carmaker is under pressure to gain a foothold somewhere. Isao Iwaguchi was named Mitsubishi Motors' deputy general manager for Taiwan and China 18 months ago. Since then, every time Mitsubishi President Hirokazu Nakamura sees him in the hallways or cafeteria, he begins pointing at Iwaguchi, telling him in a loud voice: "Get going on Asia. Get going. Get going." That order, in different languages and variants, is echoing through the halls of the world's auto industry.

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