Autos: A New Industry

Yes, Detroit is losing market share. But America is a big winner as foreign companies turn the U.S. into the center of a global industry

If any industry represented America's industrial might in the 20th century, surely it was auto makers. The handful of companies clustered around Detroit produced the assembly line in 1913, tanks and aircraft engines during World War II, and thousands of high-paying factory jobs when peace came. The industry became the backbone of the U.S. economy and its companies America's bellwethers. As cars went, so went the nation.

That's truer than ever, but it's no longer because of Motown's might. Today, it is foreign players that are reinvigorating America's car business--and turing the U.S. into the center of a global industry. An intense new wave of competition from Europe and Asia is forcing a fundamental transformation that is profoundly changing the way cars and trucks are designed and built. Of course, it's not the first time Detroit has been under assault by foreign auto makers, but this time, there's a difference. Instead of arriving by container ship or being assembled from imported parts in a handful of U.S. factories, this onslaught of cars, trucks, and sport-utility vehicles is born and bred in America. The revolution is taking place in a second generation of hyperefficient foreign-owned factories that are popping up across America's rural South, far from northern union halls, in places such as Lincoln, Ala.; Canton, Miss.; and Buffalo, W.Va.

The first Japanese transplant factory appeared 20 years ago when Honda Motor Co. (HMC ) began making cars in Marysville, Ohio. More followed, slowly at first. But now, they've reached a critical mass. The vehicles they make are increasingly being designed and engineered in this country. And with foreign-based manufacturers planning to boost their North American production capacity 40% by 2006, they will force a fundamental shift of investment dollars, jobs, and supplier assets from the North to the South and from American-owned companies to companies with overseas ownership. As the transplants crank out hot-selling vehicles such as Toyota Tundra pickups, Honda Odyssey minivans, and Mercedes M-Class SUVs, they're challenging notions of what constitutes a domestic industry. This shadow sector is more than just an encroachment: Today, more than half the passenger sedans sold in America are import brands--and more than half the vehicles sporting foreign nameplates are made in the U.S.

The new factories are woven deeply into the fabric of the U.S. economy. They spawn their own mini-galaxies of parts suppliers, subassemblers, and service businesses wherever they appear. And they're putting intense pressure on traditional American carmakers. Most important, they're forcing Detroit's Big Three to resume a painful restructuring that began two decades ago but was sidetracked by the '90s economic boom. "By putting it off, we may have amplified the consequences," says David E. Cole, executive director of the Center for Automotive Research (CAR) in Ann Arbor, Mich.

That may be bad news for Motown, but as globalization takes root at home, the U.S. is enjoying a massive infusion of talent and investment. Indeed, looked at more broadly, the U.S. auto market has never been healthier--or better served. Here's why:

-- Better and cheaper cars. Foreign auto makers have used their toehold in the U.S. and favorable currency rates to greatly heighten competition. That has given consumers higher quality, more choice, and lower prices from U.S. as well as foreign carmakers. The pressure has sparked a creative, more disciplined approach to product development that prizes quality and efficiency.

-- Factory innovation. When Honda built its first Accord in Marysville in 1982, the point was to dodge import quotas and political pressure. But the transplant factories opening now represent a huge advance in flexibility and efficiency. U.S. companies are beginning to follow, but with little hope of beating foreign-owned factories on costs, they must innovate or die a slow death.

-- Job redistribution. The new car factories now employ about 50,000 people, replacing thousands of jobs lost in textiles, steel, and other dying industries in the South. The billions of dollars invested by Honda, Toyota (TM ), Mercedes (DCX ), BMW, Hyundai, and others is raising wage and skill levels and pressuring states to improve educational standards.

On the losing side of the ledger, of course, are the Big Three's old-style factories and their unionized workers. For years, the U.S. industry has been suffering a steady drip of lost market share to overseas rivals. But today, it is under attack on all sides: European luxury brands have roared past once mighty Cadillac and Lincoln, and Japanese carmakers are plowing into the lucrative truck market. Even those once-flimsy Korean cars have moved up the value chain and are winning first-time customers. The result has been a dizzying drop in U.S. market share for Detroit auto makers. Since 1995, they've lost a full 10 points to foreign-based rivals.

If this feels like déjà vu, that's because 20 years ago, Motown was pushed to the brink by an earlier wave of Japanese and European imports. The ultimate victory by Toyota, Honda, Nissan (NSANY ), BMW, and Mercedes was so complete that an entire generation of car buyers stopped considering American cars. GM (GM ), Ford (F ), and Chrysler fought back, attacking their bloated costs and embracing many of the lean manufacturing principles that made the transplants so efficient. It was a painful reckoning, resulting in 150,000 jobs lost from 1979 to 1991. But by the mid-'90s, profits were up, and the cloud over Motown seemed to lift.

It has become clear, though, that what bailed out Detroit was not a profound new appreciation for global competition. Instead, it was a roaring U.S. economy and shifting consumer tastes. Americans had fallen in love with bulky minivans, SUVs, and pickups, all uniquely American concepts. With scant foreign competition, the Big Three feasted on those fat truck profits through most of the '90s, barely noticing that they had surrendered the car market to import brands. Detroit's swagger returned, and with it, bad old habits. Rather than conducting a housecleaning, Detroit shoved its problems to the back of the garage for a decade. "We have absolute collective amnesia in this business," says Ford Motor Co. Chairman William C. Ford Jr. "We can't handle success. We do our best as a company when our back is to the wall."

He'd better hope so: Foreign auto makers are unveiling a slew of impressive products aimed squarely at Detroit's profit base. Having long since ceded the car market, Detroit is in danger of losing a big chunk of the lucrative SUV and minivan markets. Japanese, European, and South Korean companies have already grabbed more than seven points of share in trucks just in the past five years, cutting Detroit's dominance from 83.6% to 76.3%.

There's a lot at stake. The U.S. auto market is by far the most vibrant in the world. Every lost point of U.S. market share represents a shift of $4 billion in sales. Indeed, nearly all of the record $8.8 billion in annual operating profit Toyota Motor Corp. reported in May came from the U.S. And that makes it increasingly important to base other operations here, too. Nissan Motor Co. will build as many as 400,000 minivans, pickups, SUVs, and sedans at a new Mississippi plant starting next summer. It already has a large engineering unit in Farmington Hills, Mich., which is in the midst of a $39 million expansion that will add 260 engineers and other technical workers. And, like all the carmakers, it has a design center in California. Says Nissan CEO Carlos Ghosn: "North America is the most profitable market in the world. The mix of vehicles is rich, and the richer the mix, the more your profits."

There's a danger that Detroit will keep slipping--right off the edge. The result: In a decade or so, the U.S. auto industry may no longer be dominated by domestic players. That's remarkable considering that 40 years ago, General Motors Corp. alone had a 50.7% market share and looked like a prime target for a government-ordered breakup. There's no chance of that happening now--America's biggest carmaker slipped to just a 28.1% share through May. What's more likely is that the U.S. could end up looking like Europe, with five or six players splitting roughly equal shares. "It's no longer the Big Three; it's the Big Five," says George Peterson, president of AutoPacific Group Inc., a Tustin (Calif.) consulting firm.

The transplant invasion is a sensitive topic in Detroit these days. G.Richard Wagoner Jr., GM's CEO, points out that the Japanese and Koreans can invest so heavily here because they dominate their home markets with virtually no outside competition. In a May speech in New York, Wagoner said, "Once these manufacturers establish a foothold in the U.S., they begin to mimic our broad product lines, eventually become accepted by the public as a `domestic' brand, and suddenly, we lose our home-field advantage."

But globalization began blurring national auto identities years ago. Today, the concept of a purely American carmaker seems quaint. Even the term Big Three no longer seems appropriate, since Chrysler Corp. was acquired in 1998 by Daimler Benz, which has its own transplant factory building Mercedes SUVs in Vance, Ala. Japan, which had five major independently owned auto companies in 1998, now has only two: Toyota and Honda Motor Co. And just as Asian and European carmakers have been expanding in North America, U.S. companies have been looking for growth overseas. GM owns Saab and has stakes in Isuzu, Suzuki, Subaru, Fiat (FIA ), and Daewoo. Ford owns Mazda, Volvo, Jaguar, Land Rover, and Aston Martin. DaimlerChrysler owns a controlling stake in Mitsubishi Motors and 10% of Hyundai Motor.

As the world's largest manufacturing companies jockey for power in the U.S., the tectonic shifts are only starting to rumble through the industry. Here are some of the ways the new auto industry is rewriting the rules of the road:

THE PULL OF THE SOUTH. The influx of auto factories in the South has been a bonanza for a region ravaged by factory closings and layoffs. Alabama alone has lost 40,000 textile and apparel jobs since NAFTA was enacted in 1994. When Mercedes opened its factory in Vance in 1997, 63,000 people requested applications for just 1,500 jobs. Alabama's Daniel Mendez, a 46-year-old Mexican immigrant, spent most of his life in a series of menial jobs and then a long stint in a hellish foundry making steel pipes. Now, his voice chokes with tears as he talks about his good fortune in landing a $25-an-hour job at Mercedes. "In the foundry, I felt my mind was shrinking," Mendez says. "I never thought I'd find a place where I could retire."

It's a story being replayed across the South as farmland gives way to sprawling auto factories and related development. Today, there are 17 foreign-owned assembly, engine, and transmission factories in the U.S., not including American and Japanese joint ventures--an investment of more than $18 billion. And that number is growing. BMW joined the boom in 1993 with its first assembly plant outside Germany. Its Spartanburg (S.C.) plant, which builds X5 SUVs and the brand-new Z4 roadster, keeps expanding its output. Toyota, Hyundai, and Nissan plan to open factories in Alabama and Mississippi in the next few years, and many existing plants are expanding, some for the second or third time. Hyundai's $1 billion plant in Montgomery, Ala., will start out building Santa Fe SUVs and Sonata sedans, employing 2,000 workers when it opens in 2005. By then, Alabama plants will be making 600,000 vehicles a year, or 3.5% of the U.S. market.

The economic benefits extend far beyond the jobs in those assembly plants. For each auto job created by the transplants, 5.5 additional jobs are created in supplier factories or elsewhere in the community, according to a study by CAR. That's because those highly paid factory workers spend more at restaurants and stores and on other local services. That multiplier effect is increasing as companies such as Toyota and Honda expand their operations here and use more U.S.-built components. A decade ago, the transplants created only 4.5 spin-off jobs for every assembly job. Farther north, globalization is working the other way: As Big Three factories use more imported parts from Mexico and other countries, their contribution to the U.S. economy is shrinking. Each U.S.-based auto-assembly job creates 6.9 additional jobs, down from 7.8 in 1990.

Still, a job created by a transplant factory in the South is not equivalent to a job at a Big Three factory. Foreign-based manufacturers, which aren't unionized, pay workers less than their Detroit rivals. Under their labor pacts with the United Auto Workers, for instance, GM, Ford, and Chrysler pay hourly workers about $25 an hour. At Honda's new Alabama plant, workers start at $14 an hour and work up to about $21 in two years. Suppliers to the transplants tend to be nonunionized and pay less, too.

At factories such as Mercedes in Vance, where the UAW has attempted organizing drives, management quickly ratchets up the pay scale in an attempt to keep the union out. Mercedes, for instance, now pays its workers 7 cents an hour more than UAW workers at its sister company, Chrysler Corp. "Would Mercedes be paying $25 an hour in wages in Alabama if the UAW wasn't standing outside the gate?" asks Sean P. McAlinden, director of CAR's Economics & Business Group. "Absolutely not. They wouldn't even pay $12 to $13 an hour."

That clout is likely to diminish if the UAW can't attract new members. Union leaders have failed in many attempts over the past decade to organize workers at foreign-owned factories. Meanwhile, the union is apt to continue losing jobs at the Big Three. The U.S. auto market can't possibly grow fast enough to absorb all the new production capacity. With each new transplant factory that opens, other, less efficient ones will have to close. Struggling Ford plans to shutter at least five factories in the U.S. and Canada and downsize an additional 20 by mid-decade. Chrysler has already cut production 15% by eliminating shifts at most of its North American plants. Even a recently resurgent GM will have to close underutilized factories, analysts say.

The UAW already has seen its Big Three membership fall by 60%, or 420,000 jobs, since 1979. As the number of nonunion workers in the industry grows, the UAW's power to set industry wages, if not its very survival, is in jeopardy. "The union is at a critical point," says UAW organizing Vice-President Bob King. "We really have to greatly expand our organizing successes."

It's likely to be an uphill battle for King and the UAW's new president, Ronald Gettelfinger. One of the primary requirements listed by foreign auto makers when choosing a U.S. factory site is the absence of union influence, says Claude "Buzz" Canup, president of Canup & Associates in Jackson, Miss., a site-selection consultant that has worked with many auto makers. "They might say, `We don't want to be within 60 miles of an existing unionized plant,"' says Canup. "You don't want to walk into the hornet's nest if you're looking not to get stung."

NOT YOUR FATHER'S FACTORY. By forcing foreign-based manufacturers to hike their nonunion wages, the UAW helps to level the playing field for GM, Ford, and Chrysler. Not completely, though: Detroit auto makers still have an estimated $1,600-per-vehicle cost disadvantage vs. the Japanese, according to a Deutsche Banc Alex. Brown Inc. analysis. But it's flexibility, not wages, that gives nonunion transplants a productivity edge, most experts agree. "Even if they paid union scale and even if their benefits came up, I think they would still be more efficient," says Van Bussmann, Chrysler's former chief economist and now senior vice-president of global forecasting for J.D. Power & Associates Inc.

For one thing, Japanese-owned factories typically build two or more models on a single assembly line. That's especially helpful as auto makers turn out more low-volume niche models. If sales of one model start to wane, they can quickly crank up production of another. But Big Three factories were designed to build large volumes of a single model. All the Detroit companies are racing to make their plants more flexible.

To be sure, U.S. auto makers already have taken big steps to improve productivity. In 1979, it took GM an average of 41 hours to assemble a vehicle; by 2001, that was down to 26.1 hours. In fact, GM's Oshawa (Ont.) factory, which makes Chevrolet Impalas and Monte Carlos, was North America's most efficient last year, says manufacturing consultant Harbour & Associates Inc. in Troy, Mich. But overall, U.S. carmakers still lag behind Toyota, Honda, and Nissan in productivity.

Strict labor pacts have sometimes been a hindrance. In 1999, GM was stymied by UAW objections when it tried to open a more efficient factory near Cleveland--Project Yellowstone--that would have relied on outside suppliers for more subassembly work. Only recently did it win the UAW's cooperation to build a superefficient modular factory in Lansing, Mich. The plant has a flexible body shop where robots can be reprogrammed quickly to weld together vehicles ranging from cars to SUVs. It can produce the new Cadillac CTS in just 17 hours--as fast as Nissan's U.S.-best plant in Smyrna, Tenn.

Such modular manufacturing techniques are commonplace in the transplant factories. And that can be a big competitive advantage. A cockpit module--the portion of the interior the driver sees and touches, including the instrument panel and steering wheel--that is pre-assembled by a nearby supplier and then installed as a single component at the assembly plant can shave as much as 25% off the cost of producing that system, according to CAR.

That pre-assembly work is providing growth opportunities for U.S.-based suppliers such as Delphi Corp. and Visteon Corp., which are trying to reduce their dependence on the Big Three. Delphi, a GM spin-off, built a factory five miles away from Mercedes' Tuscaloosa (Ala.) plant when it landed a contract to supply cockpit modules for the German auto maker's first SUV, the M-Class. Every 2 1/2 minutes, Delphi workers get an electronic signal from the Mercedes factory telling them precisely what color dashboard panel to build next and what features to include, such as a CD player or navigation system. Then the finished modules are sent in small batches to the Mercedes plant, where they can be quickly installed. The close relationship has enabled Delphi to win more work from Mercedes, both in Alabama and in Europe, which fits nicely with its strategy to capture more non-GM business.

A raft of smaller suppliers, fiercely loyal to the new factories, are also springing up. Tommie Burns, 68, who started out cleaning Toyota's Georgetown (Ky.) plant in 1988, is now a partner in a $400-million-a-year business, T&WA Inc., that supplies Honda, Toyota, Nissan, BMW, and Ford with tire-and-wheel assemblies. Given a choice, says Burn, he would work only for foreign-based manufacturers. "They squeeze you, but they're fair," he says. That's not always the case with the U.S. companies, he says. "They want to beat you to death. If somebody comes in one penny cheaper, they'll replace you in a minute." Eroding loyalty could have big consequences for Motown. A survey last year of 261 big suppliers found they were less likely to share their best technology with auto makers who grind them on price cuts.

CULTURE OF INNOVATION. Even in its darkest days, Detroit has understood the American auto buyer better than anyone: Witness the minivan and the suv. But as companies such as Toyota, Honda, and Nissan become ever more dependent on North America for their worldwide sales and profits, they are pouring more resources into developing and designing vehicles specifically for Americans. Gone are the days when a company such as Chrysler could ride a single hit product such as the minivan straight to the bank. "In this kind of industry, you have a mindset to defend your core segment," says Wolfgang Bernhard, Chrysler's chief operating officer. "But if everybody is playing offense and you're playing defense, you lose."

After watching consumers flock to striking new foreign models, U.S. auto makers have been recruiting hot designers from European rivals and paying fat salaries to design-school graduates. More important, they're giving designers and marketers a stronger voice in developing new models, and they're lifting design bosses higher in the corporate hierarchy. The result: no more sedans shaped like jelly beans. Detroit is turning out head-turners such as the retro Chrysler PT Cruiser, the Euro-styled Ford Focus, and designs that morph into a cargo hauler.

With profits practically nonexistent for domestic auto makers, the pressure to do more with less is changing the way companies develop vehicles. They've squeezed suppliers about as far as they can. Now, they're sharing more platforms and components across brands. And they're focusing on how to wring out waste and eliminate defects long before a vehicle hits manufacturing. Not only does this reduce production costs, it improves quality. That, in turn, means further savings of hundreds of dollars per vehicle because of fewer warranty claims and incentives. "We've got to be efficient while we're innovative," says Ford Chief Financial Officer Allan Gilmour. "American companies haven't done a very good job of that."

That's how Chrysler, which lost $2 billion last year, is managing to expand its lineup while chopping $12 billion, or nearly 30%, from its five-year product-development budget. Cars such as the Crossfire, a sexy two-seat roadster due next year, will add cachet yet didn't bust the budget: Nearly 40% of its components were borrowed from Mercedes.

A BIG WIN FOR CONSUMERS. Former GM Chairman Alfred P. Sloan once boasted that GM offered "a car for every purse and purpose." His words could describe the U.S. auto industry in 2002. No longer are there just familiar sedans, coupes, and minivans. Consumers can choose from an array of multipurpose vehicles. A.J. Teixeira, a 33-year-old Washington (D.C.) tech-support specialist, recently looked at seven vehicles before settling on a Subaru Legacy wagon. He and his wife checked out the compact Honda CR-V SUV, the spacious Buick Rendezvous SUV, a Kia Sedona minivan, a Honda Accord sedan, and the car-based Toyota Highlander SUV. "Do we want a minivan, a car, or an SUV? We had to narrow it down somehow," Teixeira says. "It's overwhelming."

But that's just the start. The number of new models is expected to surge from now through 2005, to an average of 50 a year, according to Merrill Lynch & Co.--far more than the 35 models launched in a typical year. Next year should see a record 65 new vehicles.

Moreover, cars keep getting cheaper. Prices have been falling since 1998, yet consumers are getting more for their money. Sophisticated safety features such as anti-lock brakes, side airbags, traction control, and stability-control systems are now more widely available. Quality is better, too. Since 1980, auto reliability has improved 77%, according to Consumer Reports magazine, with Detroit-based manufacturers making the biggest gains. In 1987, GM, for instance, had 180 problems per hundred cars in a J.D. Power quality study, vs. 127 for Toyota. By 2002, in a redesigned survey, GM's quality had improved to 130 defects per hundred cars and trucks vs. 107 for Toyota. This is great news for consumers but expensive for auto makers pressured to keep product lines fresh even as margins shrink. "Essentially, the customer is deciding who's going to thrive and who's not," says Ron Harbour, president of Harbour & Associates.

All the turmoil is a golden opportunity for Detroit, says Delphi CEO J.T. Battenberg III: "The industry is reinventing itself at a time when competition is going to get fierce. But fortunately, it's occurring in an era where there will be a lot more affluent buyers." Detroit will likely have to settle for a shrinking piece of the pie. The industry that emerges will look very different, but may well be stronger. And that will be a good thing for everybody.

By Joann Muller, with Kathleen Kerwin and David Welch, in Detroit

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