Attack of the Killer Crossover Cars

New models from Europe and Japan are bruising Detroit

For the thousands of consumers strolling around the Detroit auto show in mid-January, the array of new vehicles and concept cars has been dazzling. The lion's share fall into the category known as "crossover vehicles," hybrids that combine the rugged looks and all-wheel-drive of sport-utility vehicles with the seating capacity of minivans and the smooth ride and handling of sporty sedans. Car buyers ogled Toyota Motor's extra tall Matrix wagon, Chrysler's Pacifica--one part minivan and one part SUV--and Mercedes' sleek GST luxury concept vehicle.

This something-for-everyone trend may be exciting for consumers, but it's bad news for U.S. auto makers. The profit-starved businesses of Ford (F ), DaimlerChrysler's Chrysler Group (DCX ), and General Motors (GM ) are about to see much tougher times, thanks to the splintering of the lucrative truck market, which they have dominated for decades. Drawn by fat truck profits, new competitors from Honda Motor Co. (HMC ) to Kia Motors Co. continue to stream into the field. The number of SUV and crossover models has zoomed to 60 from 37 five years ago, even as Detroit's total share of those segments has slipped three percentage points, to 72%. "We're witnessing the fragmentation of the marketplace," says Robert A. Lutz, GM's product-development chief. "Pretty soon, we'll have as many vehicle categories as we have vehicles."

Not quite. But fragmentation does threaten to rip U.S. auto makers' profits to shreds. To keep up with the competition, all carmakers will have to expand their truck lineups to include more SUVs and crossovers--a costly proposition. Developing a new model takes two to three years at a cost of at least $500 million. Ford, Chrysler, and GM stand to lose the most. They have devoted the most capital to producing high volumes of traditional trucks and have the greatest difficulty switching gears.

Indeed, the proliferation of models will reward the nimble. Companies that can most quickly develop innovative new autos on a shoestring will be able to sell profitably at lower volumes. Toyota Motor Corp. (TM ) and Volkswagen (VLKAY ), for example, could be big winners, since both are skilled at incorporating shared components among different models to save money. Toyota, Honda, and, increasingly, GM have flexible factories that can build several different vehicles on the same assembly line at one time, enabling them to switch output as demand shifts. "The key is flexibility, low costs, and being fast to market," says GM Chief Executive G. Richard Wagoner Jr.

Those are qualities Detroit is short on. For most of the 1990s, limited competition from foreign auto makers contributed to the Big Three's huge truck profits. By selling high volumes of a few basic models of pickups, SUVs, and minivans, and running factories full tilt, Detroit raked in a combined $14 billion from 1997 to 2000, the peak of truck profitability. Those models accounted for virtually all their profits in those years.

But in recent years, Mercedes, Toyota, and Honda have been building new U.S. truck factories, even as BMW and Nissan Motor Co. (NSANY ) retooled plants to add SUV and crossover capacity. Already, truck profits at the Big Three are being badly squeezed and will continue to shrink as capacity and competition rise. "There's going to be a convergence between truck and car profits," in Detroit, warns Standard & Poor's analyst Scott Sprinzen.

Detroit is already behind the pack in crossovers, a category invented by foreign manufacturers. European and Asian auto makers turned their biggest disadvantage--a lack of truck chassis for making SUVs--into an advantage. Toyota rolled out its RAV-4 in the U.S. in late 1995, followed by Honda's CR-V in 1997 and both were instant hits. As car buyers took a liking to their smoother rides and better gas mileage, auto makers have hustled out a wide array of new models. Latest count: 18 crossovers, with collective sales topping 1 million. Eleven of those 18 are foreign nameplates not affiliated with GM, Ford, or DaimlerChrysler, and they've grabbed 57% of crossover sales.

Moreover, domestic brands are losing their one solid chance of winning back business from foreign-brand cars. Chrysler, Ford, and GM won a steady stream of converts from the mid-'80s until recently, as baby boomers in need of space traded their Toyota Camrys and Honda Accords for American-brand minivans and SUVs. Now loyal import owners need never leave their trusted marques.

That scares the daylights out of Detroit execs. Of all the new vehicles at the auto show, the one that worries them most may be the Honda Pilot, a less expensive, eight-seat version of Acura's upscale MDX crossover SUV. Honda's initial plans to build a mere 75,000 Pilots hardly sounds threatening. But that's where Honda's wizardry with flexible manufacturing comes in. Together, the company's two plants in Alliston, Ont., and Lincoln, Ala., can churn out any combination of 300,000 Pilot and MDX SUVs and Odyssey minivans. That allows Honda to concentrate on whichever model happens to be in greatest demand.

Such flexibility eludes old-style mass manufacturers like Ford. The No. 2 auto maker is geared to cranking out hundreds of thousands of Tauruses, Explorers, and F-150 pickups, with as many as three factories dedicated to each vehicle. But in a fragmented market, "it's hard for any manufacturer to sell two plants-full of one product--or even to sell out one plant," says James J. Padilla, head of Ford North America. When demand for any vehicle drops, Ford is stuck with extra capacity that its union contract won't let it shed.

That's why converting the body shops at as many as one-third of its 21 North American assembly plants is a top priority of Ford's Jan. 11 restructuring plan. Unlike Ford's European operations, which recently retooled three body shops to allow those plants to make two or three completely different models simultaneously, none of Ford's North American body shops is flexible. They are severely limited in their ability to build more than one model on an assembly line. So, for instance, as demand for Taurus drops, the auto maker can't put those facilities or employees to work making something more popular, without spending millions and shutting a plant for months.

DaimlerChrysler is in the same boat. Its plants are so inflexible it's unable to expand output of one of its few hits, the PT Cruiser. Although Chrysler designed the Cruiser on the same chassis as the slow-selling Neon subcompact, it can't build more of the popular Cruiser at its Belvidere (Ill.) Neon plant without costly renovations. Instead, Chrysler has slashed Neon production at Belvidere to one shift--and may close the plant--while spending some $400 million to expand Cruiser output in Mexico.

GM is in better shape. Woefully behind other carmakers in the '90s, the company began fighting back some five years ago. It invested heavily in new technology and equipment to make its truck factories more adaptable and to retool car factories to allow them to make trucks and crossover SUVs. The standout is its brand-new $560 million Lansing (Mich.) plant that will soon build the Cadillac STS and CTS sedans in the same body shop as the SRX crossover sport-utility and a Saab.

Pressured by dire necessity, GM vaulted from worst to first among the Big Three in manufacturing agility. Now that only puts more pressure on Ford and Chrysler, if they are going to hang on to crucial truck profits.

By Kathleen Kerwin and David Welch in Detroit

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