(FORTUNE Magazine) – ITS MOST CELEBRATED executive is an American (Chrysler's Lee A. Iacocca), its most prestigious brand is European (Mercedes-Benz), and its most feared competitors are the Japanese (many of them). Once as provincial as a neighborhood Chevy dealer, the world's biggest industry is increasingly global in scope and -- contrary to yesterday's conventional wisdom -- growing ever more diverse and complex. Some 175 automakers now produce more than 45 million cars, trucks, and buses a year, often shipping them to customers halfway around the globe. The sales add up to something like $384 billion a year -- 2.1% of the world's GNP. Though protectionism keeps the war from being the free-for-all it should be, success now belongs to companies that plan and execute strategies for the world. Mired in North America, where it is steadily losing ground, General Motors is struggling to develop such a strategy, while archrival Ford Motor Co. is reaping the benefits of its long years as an overseas power. Fast- rising Honda plans to use Ohio as the base for exports to other parts of the world, including its home country. The new internationalism has created a golden age for car buyers everywhere. As they shop the world, they are demanding and getting ever better design, performance, and comfort. The most successful manufacturers today build cars with Japanese quality and European-style handling that coddle their passengers in the mass-market opulence America pioneered. With the heavy slogging on fuel economy and exhaust emissions behind them, engineers are delivering advances in technology that enhance drivability, handling, performance, safety, and, yes, further fuel economy. Among them: multivalve engines, increasingly sophisticated electronic engine controls, antiskid braking, and automatic electronic suspensions. So today Japanese queue up to buy some 15,000 BMWs a year, enough to make the German luxury car the second-best-selling import in Japan after Volkswagen. Europeans cannot get enough Jeep Cherokees, produced in Toledo, Ohio (10,000 were sold to them last year). In the U.S., Pontiac's hottest- selling car is the LeMans, a version of the Opel Kadett designed in Germany and built in Korea (1988 estimated sales: 110,000). Sweden's Saab and Volvo attract a loyal core of well-heeled enthusiasts, as do other low-production makers of high-class automobiles in Britain, West Germany, and Italy. And the car that U.S. customers find most satisfying to own is a luxury Japanese brand that made its debut only 18 months ago: the Honda Acura (see table). No one was predicting this abundance a few years ago. Autophobia was ascendant, and a gloomy consensus prevailed about the future of the industry in an energy-short world. Everybody would be driving spartan econoboxes. Competing on price in a commodity market, high-volume manufacturers would enjoy indisputable cost advantages. The 20 or so leading automakers would be subsumed into a half-dozen megaproducers churning out ''world cars'' -- look- alike vehicles for customers from Ypsilanti to Yokohama. Instead the competitors have remained many, and if anything, sheer size seems less of an advantage than it used to be -- or sometimes even a hindrance. Prosperous and freed from worries about gas shortages, car buyers once again indulge their passions for style, speed, gadgetry, and panache. Fortified by this demand and prodded by new competition to get costs under control, the industry recovered quickly. Today the world's major automakers are by and large far stronger than they were only a few years ago. They will need that strength and more in years to come. For carmakers, unlike consumers, the golden age is likely to be fleeting. Last year some 488 million vehicles roamed the earth. Western Europe was the biggest producer, followed by the U.S. and Japan. But the worldwide total also includes 42,116 Otoyal & Tofas from Turkey, 22,022 cars carrying the name of Hindustan Motors in India, and 13,870 built by Yue Gyan Machinery Manufacturing Co. of Taiwan. BY THE 1990s there will be far less room for new cars than manufacturers would like. Automakers are not retiring old factories as quickly as they add modern ones. Europe can already build about two million more cars a year than it needs; so can Japan. Assuming as most experts do that demand will grow 1% to 2% a year, the globe will soon be awash in production capacity. GM Chairman Roger Smith, who pays attention to these things since GM accounts for 18% of the world's auto production, worries that overcapacity will reach six million units by 1990 and perhaps go as high as seven million. The U.S. alone will have 2.5 million units of unused production capacity. That is enough empty factory space to build as many cars as Ford does. Even those figures are low if social, economic, or ecological trends develop adversely. Researchers at Volkswagen, for instance, worry about what happens if highways collapse in paralyzing congestion -- it may be happening already in Los Angeles -- or whether thousand-year-old European cities can stand any more traffic at all. More imponderable but perhaps also more likely: What will be the effects of the next oil shortage and what will happen to gas prices? Not everyone agrees that growth will be limited. Toyota President Shoichiro Toyoda, for one, expects new technologies and sharp competition to bring prices down and stimulate more demand than expected. Interviewed recently in Toyota City, he predicted that the worldwide market will grow 2% to 3% a year. Though Toyoda's projections appear optimistic, some other experts foresee similar trends. In the U.S. particularly, says David Fubini, a McKinsey & Co. automobile strategist, ''excess capacity will bring significant price pressure to bear on all market segments except the highest end.'' The majority remain unconvinced of the falling-prices, rising-demand scenario. Their views are expressed in the Delphi IV Forecast and Analysis of the U.S. Automotive Industry Through 1995, the latest in a series published every three years by the University of Michigan's Transportation Research Institute. Looking at the U.S. market, the more than 225 auto executives, academics, and other experts polled conclude that the median retail sales price of a U.S.-made car in constant 1986 dollars will rise 19% from 1985 to 1995, to $13,800. Imports will move up to a median of $14,700 from $12,600. One factor behind the climb will be increased use of high-technology components. Another: consumer demand for large and sporty cars. Researchers such as James Womack at MIT add that manufacturing technology takes a long time to pay off in lower production costs, and that carmakers will continue to turn out cars laden with options. To be sure, at the low end of the market increased U.S. production by Japanese manufacturers will help hold down prices -- even as cars from South Korea, Mexico, and Brazil provide price discipline for the Japanese. But the Delphi group foresees nothing that would raise the growth of world demand above 2%. If the consensus view proves correct, the next decade will be difficult indeed for established manufacturers. The Delphi group, for example, figures that size alone will keep General Motors at the top of the world's automakers, though the company's output will shrink from 6.1 million cars in 1984 to six million in 1995. Ford and Chrysler will gain ground, but not as much as three Japanese companies: Toyota up 17%, Nissan up 22%, and Honda Motor up 55%. Honda, at 25 the world's youngest major car producer and the eighth-biggest, could vault past Chrysler into the ranks of the top six, close on the heels of Nissan and Volkswagen. Five years ago auto experts were waiting for less developed countries to burst into the world car market like little Japans. They are still waiting. The major producers have had some success building cars for export in Mexico and Brazil, but native automakers are struggling. With a list price of $3,990, the Yugoslavian-built Yugo meets only minimum standards in the U.S. for performance and quality, and only some 40,000 have been sold this year. As an MIT report points out, less developed countries cannot easily leap into the world arena as producers of high-technology components. And aside from low wages -- which will become increasingly unimportant as automakers automate -- they have no special advantage. Even Korea's Hyundai, which sold 261,392 cars in the U.S. last year, is limited. Hyundai is scrappy -- it sent 20 engineers to the Frankfurt auto show this fall to evaluate the competition -- but its executives concede that the in-house engineering and supplier network it needs to develop export models beyond its current offering is lacking. Mitsubishi supplies its car designs, and such vital components as air conditioners and tires come from overseas suppliers. The Third World may yet become an important market. Analyst Maryann Keller of the investment bank of Furman Selz Mager Dietz & Birney thinks that new producers in Asia, South America, and Eastern Europe will be making 20.4% of the world's cars by 1997, up from 12.5% in 1986. But few of the vehicles from Asia and South America will be sophisticated enough to sell in the West, and the home markets in most less developed countries are, well, hard to develop.

YESTERDAY'S received wisdom has also fallen short in its prediction that Western Europe's old-line manufacturers, doddering in the early part of the 1980s, were falling behind the rest of the world. Buoyed by a strong economy, they set a record in 1986 by making 12.8 million cars and are headed for 13 million this year, not to mention unprecedented profits. Fiat, which has worked out its problems with Italy's fractious labor unions and is now Europe's low-cost producer, is jousting for leadership with Volkswagen, the world's leader in assembly line automation. Even such chronic money losers as General Motors of Europe and Renault will show a profit this year. Penny- pinching Jacques Calvet, Peugeot's colorful boss (see box, page 86), has brought his company practically back from the dead. Peugeot is more than a million units behind Volkswagen right now, but Calvet promises that it will be Europe's leading producer in five years. He also plans to more than triple sales of its higher-priced cars in the U.S. The Europeans' success owes as much to protectionism as to industriousness and ingenuity. Japanese imports are limited to 2,500 a year in Italy and only 3% of the market (about 57,000) in France. Even so, Japanese cars now account for more than one in every ten sold in Europe. Only the Germans give the Japanese virtually free access, and the results are disconcerting even to these aristocrats of the auto industry: Japan grabbed 18% of the German market in the month of August. By 1992 the remaining trade and tax barriers between Common Market countries are to be dissolved. European automakers will be competing more vigorously than ever with each other. But the Japanese are not likely to be granted equal privileges. VW Chairman Carl Hahn said recently, ''I consider simply opening the market unnecessarily dangerous, given the excess global capacity.'' The betting is that informal barriers, similar to those that exist in the U.S., will be erected to limit Japanese imports. So the Japanese company best positioned is Nissan, which got a head start over its countrymen by building a plant in England that will turn out 100,000 Nissan Maximas by 1991. Maryann Keller, however, suspects other Japanese producers may try to use Eastern Europe as a low-cost assembly base, avoiding the barriers. She thinks the Common Market countries will be slower to restrict vehicles built in their own backyards. IN THE NORTH AMERICAN market, everybody's favorite battleground, the Japanese will have erected ten plants producing 2.5 million cars by 1990, either separately or in partnership with U.S. companies. That's the equivalent of adding another company twice the size of Chrysler. But it's GM that has the most to lose. Its market share has fallen to 37% from 42% just a year ago, and the Delphi experts figure the company will be fortunate to hold that much even if it succeeds in slashing bloated costs and making better cars. GM's main problem is that its enormous size has become a hindrance rather than a help. It alone among the world's automakers offers a full range of models in five different lines. No other company has more than two, and Toyota, GM's biggest Japanese competitor, has only one. Acknowledging that confusion among car buyers about the differences between, say, a Chevrolet and a Pontiac, has depressed sales, GM has been trying to create separate identities for its different divisions. The company's size no longer gives it the leverage of manufacturing efficiency. Relying on the assumed advantage of vertical integration, GM makes about 70% of the parts it uses in its cars, but it has found that rivals can buy from suppliers with lower costs and often higher quality. According to John Krafcik, an analyst for the international automotive program at MIT, the weaknesses became embarrassingly evident when GM began making cars two years ago with Toyota in Fremont, California. Initial shipments of wiring harnesses from GM's Packard Electric Division were unusable, and Packard had to station an engineer at the plant full time to correct the problems. Krafcik says other GM-owned parts makers were suspected of treating shipments destined for the Fremont plant with special care in segregated areas using handpicked workers. So GM may have been in the odd position of treating its own divisions worse than the joint venture. Meantime other automakers are learning how to make profits on short production runs, spinning out cars at low volumes to satisfy a variety of % tastes. Chrysler, for instance, can build four different cars at its Sterling Heights, Michigan, assembly plant, which has a capacity of 250,000: the Chrysler LeBaron GTS, the Dodge Lancer and Shadow, and the Plymouth Sundance. The key is using flexible manufacturing techniques in order to develop what are known as economies of scope -- the capacity to satisfy diverse customer wishes without adding new facilities. Automakers are finding varied ways to be flexible. Japanese manufacturers emphasize programmable robots that can do different tasks. At Honda's teeming plant in Sayama, one hour from Tokyo, for example, cars are assembled with steering gear on either the right or left side without upsetting the production flow. In Europe, France's Peugeot and GM's Opel are enthusiastic boosters of automatic guided vehicles, known as AGVs. These electrically powered devices trundle partially completed cars individually from one workstation to another, allowing plant managers to design a day's assembly schedule in units of one rather than blocks of 100. To make the most of their resources, automakers are increasingly linking up with other producers to develop new technologies, components, or even cars. Volkswagen secures such ventures with the sure-handedness of a Lothario. It now has ties to no fewer than 11 other companies, including Nissan, Volvo, Daimler-Benz, and Porsche. Its latest, 75% ownership of SEAT, the Spanish manufacturer, gives it an advantage in one of Europe's last uncrowded markets. Only Honda, among the world's major automakers, shuns alliances. It has just one, an arrangement to design cars with England's Rover Group. Honda President Tadashi Kume (see box, page 88) insists that Honda's lack of linkups is chance, not design. More likely it is an outgrowth of Honda's yen to chart its own course. Says Nobuhiko Kawamoto, president of Honda Research & Development: ''We keep destroying our organization and keep rebuilding it. We have to have flexibility and energy.'' Do such developments mean that being big is now a disadvantage? So holds the preponderance of conventional wisdom today, and GM's travails seem to offer proof. Smaller companies, the reasoning goes, are leaner, more efficient, and quicker to respond to change. Even in developing new technologies, they are perceived to be more effective. Andrew Graves, another MIT analyst, points out that GM invested $3.7 billion in R&D in 1985 and won some 300 patents. Honda spent only $670 million, but also got about 300 patents. But the problem may not be size itself as much as GM's failure to capitalize on it effectively. Toyota, considered the world's most efficient automaker, is no pygmy. It buys an estimated 80% of its parts from its own or captive suppliers. It simply manages the arrangement better. It is also quick on its feet and fast to respond to changing market conditions. And while some advanced technology can be bought off the shelf -- antilock braking systems, for example, which can bring a car to a stop on slippery surfaces without throwing it into a skid -- car buyers are more attracted than ever to the company that is the first with the newest. It will probably take an automaker with deep pockets and plenty of technical expertise to produce the next major breakthrough in engine design or body assembly. The strategies that the world's automakers adapt for the future reflect in large measure the companies' own current strengths and weaknesses. Ford, which has long thought of itself as an international company, is trying to capitalize on its European assets. Spurred by Chairman Donald Petersen (see box, page 82), who used to run Ford's overseas operations, it is using design centers in the U.S., Britain, and West Germany to develop a single worldwide replacement for two cars: one sold in the U.S. as the Ford Tempo and Mercury Topaz, and the other, the Sierra, manufactured in Britain and Belgium. Duties in the project, code-named CDW27, have been painstakingly divided. The door frame of the new car will be designed in West Germany; the moving parts for the door will be crafted in Britain. Teams of engineers in Britain regularly board a plane for the 90-minute flight to Cologne for conferences with their German counterparts, and vice versa. GM, which builds 73% of its cars in North America, traditionally has encouraged little interaction with its overseas subsidiaries. So Detroit has sole responsibility for North America, while Opel designs all GM cars sold in 15 other countries. Says Paul Bausch, an Opel engineer: ''It gives us much better efficiency to do development work under one roof.'' Divisions between the two continents are crumbling, but slowly. GM wants to import two Opel models for sale in the U.S., but Opel officials are not keen on selling them through GM's dealer network. THE JAPANESE scare everyone. Says Peter Slater, an international strategist for Ford: ''Toyota is our No. 1 competitor. It is far more dangerous than , General Motors. And if Honda keeps improving the way it has over the past ten years, we'll all be pressed to keep up with it.'' Yet the strategies of the major Japanese players are simple. Toyota, with its massive assembly complex near Nagoya, a two-hour ride by high-speed train from Tokyo, essentially builds one version of each model at home and ships it all over the world. Since Honda's production facilities in Japan are taxed to capacity, it has been far more aggressive in building U.S. plants, but it still makes the same car in both places. Soon those American-built cars will be shipped overseas to Europe and Japan as well. By the 1990s any company that survives will have to make cars that are up to the standards of the hotly competitive world market. The title of low-cost producer will shift from country to country, depending on who benefits the most from currency swings. So the future will belong to those who can master the arts of styling, marketing, and image building. They will undoubtedly be taking their cues from the West German luxury car manufacturers, the world leaders in image marketing. You pay more for a British Rolls-Royce or an Italian Lamborghini, but Mercedes-Benz is the world's standard. The 600,000 cars it builds each year are more or less constantly in demand, despite complaints about the quality of its lowest- priced line, the 190 series, and about Mercedes prices ($27,430 to $70,600 for U.S.-equipped cars). Just now, smaller BMW is giving Mercedes a stiff fight for bragging rights. Its 12-cylinder 750il, which will sell for more than $65,000 in the U.S., beat Mercedes' new big cars to market by a year or two, and auto buffs consider them the creme de la creme. Sniffs Gunter Kramer, president of BMW of North America: ''We're very small and very careful to remain unique. Mercedes is in the fleet and taxi business.'' In trying to limn the outlines of the future, it is prudent not to discard entirely the conventional wisdom of the past. Another oil shortage and price spike could create some of the same conditions in the early 1990s that produced the dire predictions of the late 1970s. Even without one, the long- run outlook of several automakers remains in doubt. Though a nimble marketer, Chrysler lacks the capital to develop new engineering. Britain's Rover Group and France's Renault are wards of the state. As Toyota, Nissan, and Honda continue to strengthen, less room is left for such Japanese bit-part players as Daihatsu, Isuzu, Subaru, and Suzuki. . AS IMMENSE as auto companies are, they can rise and fall remarkably quickly. Several that survived into the Seventies disappeared in the Eighties: France's Simca and Talbot, Britain's Rootes Group and British Leyland, and the U.S.'s AMC. Hyundai, on the other hand, vaulted from nowhere to become America's No. 6 import. Thriving BMW was a struggling maker of sporty but modest sedans just 13 years ago. Don't underestimate the potential for surprising turnarounds. In the early 1980s experts foresaw the U.S.'s Big Three becoming a Big Two -- or even a Big One. Then GM tripped over its shoelaces, while Chrysler came back from the brink and Ford scored an unexpectedly big success with the Taurus and Sable, assuring itself a major role into the Nineties. Any one of today's troubled automakers could pull off such a reversal. Even GM.

CHART: TEXT NOT AVAILABLE CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: Chart of world's top automobile makers, showing sales, world market share, price range, where cars are built, how company is doing and best-selling model with base price.