Detroit, Check Your Rearview MirrorLarry Armstrong
The exhilaration is palpable around Detroit these days. The auto makers are hiring again, adding shifts, and speeding up production lines to churn out cars that can nearly match Japanese rivals in quality--yet sell for thousands of dollars less. First-quarter profits for the Big Three totaled $2.7 billion, and Chrysler Corp. on May 19 voted a 25% hike in its dividend. With factories running flat out, workers are clocking overtime and executives are counting on fat bonus checks.
But Detroit's much-ballyhooed comeback is masking a little-noticed threat. The Japanese are staging a comeback of their own. In the first four months of the year, sales of Japanese cars and light trucks climbed 16%, enough to reverse a two-year slide in their U.S. market share. So far, Japan has regained more than a point of market share in passenger cars--while General Motors Corp. and Ford Motor Co. shares are off. If their breakneck pace holds up, Japan's carmakers are headed for record sales in the U.S. of more than 3.5 million vehicles this year, says researcher Autofacts Inc.--a quarter-million more than their 1990 peak. "[The Japanese] have been coming back strongly," says Ford Chairman Alexander J. Trotman. "They're not going to change in the foreseeable future except to get tougher and more efficient."
The real showdown looms this fall. Japan's current gains may prove to be only temporary if key new 1995 models from Detroit--which has been hampered by model changeovers--take off: Ford will replace its aging Tempo and Mercury Topaz with the new Ford Contour and Mercury Mystique. Chrysler will roll out its new Cirrus and Dodge Stratus. And Chevrolet will ramp up production of the new Lumina and redesigned Cavalier. Meanwhile, Japanese carmakers plan to expand into Detroit's high-profit stronghold--the booming market for minivans, pickups, and sport-utility vehicles.
To boost sales, the Japanese are lifting marketing gimmicks from Detroit's playbook. Although they've raised prices 6% on average, they are increasing cash incentives, selling more cars at low margins into daily rental fleets, adding extra-value packages, and fielding stripped-down models in order to advertise attractive sticker prices. With a base price of $19,999, the new 1995 Nissan Maxima undercuts its predecessor by more than 10%. Cut-rate leases--such as the $179 per month deal Mitsubishi Motors Corp. had on its Galant earlier this year--aren't hurting, either. "The Japanese are gaining market share because they're buying it," says auto analyst Maryann Keller of Furman, Selz Inc.
Japan's new emphasis on competitive prices is helping reawaken talk in Detroit that the Japanese are dumping cars in the U.S. Japan watchers cite data showing the yen has appreciated far faster than the price of Japanese-made cars (chart). "We think they're dumping up to 50% on some luxury models," says Ford's Trotman. Yet such charges are notoriously difficult to make stick, since the U.S. government is unlikely to find that the newly profitable U.S. industry has been damaged--a necessary step in order to levy antidumping tariffs.
Instead, Detroit wants to step up the pressure in the newly resumed trade talks between Washington and Tokyo. It wants U.S. negotiators to get the Japanese to commit to using the number of dealerships selling U.S. cars in Japan as a "numerical indicator" of the Japanese market's openness.
Still, the key battleground is in the U.S. After a decade of relentlessly raising prices and moving its models upmarket, the Japanese are altering that strategy. "It's a real role reversal," says Robert J. Thomas, president of Nissan Motor Corp. USA in Carson, Calif. "We've had [feature-loaded] profitable cars, and now we're doing some of the same things the domestics did, like creating entry-level vehicles. At the same time, the domestics are making their own marketing adjustments" that have boosted profits. Detroit is paring low-profit sales to rental companies and has raised prices on such hot sellers as the Ford Mustang and Jeep Grand Cherokee.
Japan's marketing ploys appear to be an interim gambit. With the yen already bobbing around 104, the manufacturers are counting on a massive restructuring to lower costs to the point where they can compete at 100 yen to the dollar. And last year, for the first time, more than half the cars Japanese companies sold in the U.S. were built in North America, further insulating them from any appreciation of the yen.
EYE-CATCHER. That means Japanese prices will continue to fall. "The run-up in Japanese prices is essentially over," says Jesse Snyder of Autofacts. Adds Christopher W. Cedergren, senior vice-president at AutoPacific Group Inc. "By passing along savings gained through cost reductions, new Japanese cars over the next four or five years will come out at lower prices." Cedergren believes that, by the end of 1996, Toyota Motor Corp.'s Camry and Corolla models could be priced 20% lower than today's versions.
Early signs of the trend are already here. To achieve the eye-catching price of its new $19,999 Maxima, Nissan added a stripped-down five-speed model, one it admits will make up no more than 5% of its volume but will entice buyers to visit its dealers. And Honda Motor Co. launched the latest version of its popular Accord sedan last fall with the same $14,330 sticker as the 1993 model. "We plan to use that approach with all our new cars," says Thomas G. Elliott, executive vice-president at American Honda Motor Co. in Torrance, Calif. Previously, Honda made each generation of Accord bigger and more expensive.
The sole holdout in the price-cutting game is Toyota--and its market share has dropped more than 0.7 points this year, to 6.7%, as a result. Yet analysts say Toyota has stripped more than $1,000 in production costs out of its luxury Lexus LS400 sedan--and that the new 1995 replacement will come in under this year's $51,200 sticker.
Japan's long-held edge in quality remains a powerful weapon, too, despite Detroit's substantial gains in recent years. "There's no question, when you look at price and quality, consumers will pay more for Japanese cars," says John J. Ferron, a partner at auto quality consultant J.D. Power & Associates in Agoura Hills, Calif. And the cars' higher resale values translate into a pricing edge through leasing. Monthly lease payments on a fully-equipped LS400 are $599--less than the average $728 per month when the car was introduced at $35,000 nearly five years ago. Contends analyst Snyder: "With leasing, the Japanese have eliminated the price advantage of the Big Three."
With its course in the U.S. market for passenger cars firmly established, Japan is hoping to start nibbling away at Detroit's lucrative markets for trucks. Earlier this year, Honda entered the sport-utility business with the Passport, an Isuzu Rodeo sporting a Honda nameplate. Late this year, it will introduce its own minivan. Toyota is readying a new Previa minivan. And all the Japanese companies have new sport-utility vehicles on the way.
"The Japanese are aggressively investing in new products," says analyst Cedergren. Still, he thinks Detroit's spate of new products will make it tough for Japan to gain much market share this year or next--though he predicts Japan's share will jump dramatically later in the decade. This time, Detroit isn't underestimating the Japanese. "They're going to come at us hard in sport-utilities. They're going to come at us hard in trucks," says Trotman. It all makes for a heck of a dust-up coming in the world's most competitive auto market.