CAN AMERICAN CARS COME BACK? Not quickly or easily. Detroit's problems go well beyond slow sales. The Big Three must make huge changes -- and get some lucky breaks -- to stay competitive.
By Alex Taylor III REPORTER ASSOCIATE David J. Morrow

(FORTUNE Magazine) – AS A SWISS-BORN ex-Marine, Chrysler Motors President Robert Lutz doesn't have much tolerance for euphemism. Even so, a little-noted speech he made to Chrysler suppliers was remarkable for its bluntness. ''Folks, it's time to do or die,'' said Lutz. ''I'm turn-down-the-heat and shut-off-the-lights serious.'' For Lutz and most other auto executives, the 1990 model year has gotten off to a bad start. Higher interest rates and an oversold market have pushed car sales into a 25% decline in the first three months, after several strong years. General Motors, Ford, and Chrysler all lost money on passenger car operations in the fourth quarter of 1989 and are expected to do so again the first three months of this year. Far more worrisome: This trend may accelerate a long-term decline that could destabilize the U.S. auto industry. Despite the Big Three's efforts to build better, cheaper cars, the Japanese remain the world's high-quality low-cost automotive producer -- at home and in the U.S. -- with no sign that the gap is closing. Indeed, cars made by Toyota, Nissan, Honda, and company are so popular that by the end of this year they may account for nearly one of every three sold in America. Looks like the Broncos vs. the 49ers again, and there is no home-field advantage. Waiting on the sidelines are two new coaches: Red Poling succeeds Donald Petersen as CEO of Ford on March 1, and Roger Smith's replacement -- yet to be named -- moves in at GM on August 1. The new guys must devise a game plan to win back customers and quarterly car profits. Changing strategies will be painful and will require some triage. Detroit must focus its resources on product lines, mostly big cars and trucks, where it has an edge, and let others drift. It must also get smarter about market research, advertising, and customer relations. Otherwise, the sales slide could become a rout. Important brands -- Oldsmobile and Chrysler -- are close to a tipping point. If sales of these cars fall much further, their customer bases will be so shrunken that dealerships will start to fail, making an upturn more difficult. California has already tilted, and not because of an earthquake. In a state where about 12% of all new cars are sold -- and one that is often a harbinger of the latest trends -- Japan dominates with nearly 40% of the business (see chart). Detroit accounts for more than two-thirds of car sales across the U.S., but has just 50% of the California market. Hondas and Toyotas outsell Fords and every division of GM except Chevrolet; Nissan outsells all Chrysler brands combined. As California goes, so could Kansas, Nebraska, and South Dakota. Having saturated the East and West coasts with dealers, Japanese automakers are pushing into the Midwest. J.D. Power & Associates, the automotive market research firm, figures they will open 1,800 Midwestern outlets over the next five years. JAPANESE COMPETITION is so stiff that Detroit now sells nearly half of its cars -- subcompact and compact models -- at a loss. Ford built the new Escort from Japanese blueprints and still expects to lose money on every one of the 500,000 subcompacts it sells this year. Compacts costing up to $14,000, such as the Ford Tempo and the Chevrolet Cavalier, are no better than breakeven propositions, as top executives have begun to concede. Says Alex Trotman, 56, the fast-rising head of Ford's North American auto operations: ''Whether we are in the red on compacts varies from year to year depending on the level of sales.'' Why, then, does Detroit continue to make small cars? Because it counts on them to lure entry-level buyers, to provide dealers with a full product line, and to keep the federally mandated corporate fuel economy averages (CAFEs) high enough to compensate for fuel-thirsty luxobarges. Over the next few years the Big Three's cost structure could get much worse. The Bush Administration is poised to raise standards for fuel economy, exhaust emissions, and safety that will cost more than $6.5 billion. In addition, contracts with the battered and embittered United Auto Workers union expire in September. Since Detroit needs the autoworkers' cooperation to spur quality and productivity improvements, the union has a wedge to win expensive job security provisions. The Japanese pay less for capital, labor, and benefits, and their factories -- including those in America -- are the world's most productive. Several Japanese plants in the U.S. employ non-union workers and thus enjoy a $10 per hour edge over Big Three facilities. These cost advantages allow them to price cars aggressively to win market share. For example, the $31,000 Mitsubishi 3000GT VR-4, made in Japan and marketed by Dodge as the Stealth (see Innovation), is loaded with such features as all-wheel drive and four-wheel steering. But it will sell for $6,000 less than its prime U.S. competitor, the $37,285 Corvette. If Detroit cannot beat Japan on cost, how about quality? Gossip about Japanese quality problems circulates faster in Detroit than talk of celebrity sexual peccadilloes; word got around quickly when several of the Toyota Lexuses bought by GM developed cracked windshields. Still, Japan's cars remain the best engineered and assembled in the world. Says consultant Leonard Sherman, a Booz-Allen & Hamilton vice president: ''American auto manufacturers are way behind the worldclass standards of the Japanese in human productivity, asset utilization, and speed, as well as quality.'' The latest reminder of that unpleasant fact comes in a study by Easton Consultants, which analyzes the auto industry from offices in Boston and Stamford, Connecticut. After examining 100,000 repairs in recent cars and trucks, it found that U.S. makes required the replacement of 42% more critical parts -- water pumps, transmissions, alternators -- than imports. Need more evidence of Detroit's lack of competitiveness? Then consider that it still takes the Big Three about five years -- vs. three for Japan -- to develop, design, engineer, and manufacture new models. Compressing that time would enable American carmakers to respond more quickly to market changes. Each of the Big Three has unique abilities and vulnerabilities. GM is waist deep in money and talent but still elephantine in reaction time. Chrysler can maneuver faster than a Formula One racer but has shallow pockets; it hopes to hang on by Lee Iacocca's fingernails until its 1992 launch of a new line of radically styled ''cab-forward'' midsize cars, like the one pictured above. Ford is more competitive. Tom Wagner, head of Ford-brand cars and trucks, says his company is so strong that it should no longer be thought of as part of the Big Three. But Ford's future may be behind it because development of important new models, such as the Tempo and Taurus, has slowed. Can U.S. cars come back? Despite the differences among Detroit's automakers, all three can take a few common steps to regain momentum. Herewith, five suggestions: -- Protect and polish the crown jewels. With 33 domestic and foreign manufacturers selling 600 models, America has the world's most competitive car market. Since Japan appears to have an insurmountable lead in small cars, Detroit should concentrate on midsize and large ones, where it has always had an advantage and where it can make the most money. GM seems to agree. It is merging three lines of small cars into one. By 1994 the J body, such as the Chevy Cavalier, and the N body, of which the Pontiac Grand Am is the best-seller, will both be built on the L body chassis GM uses for the newer Chevrolet Corsica. GM is willing to give up some marginal customers to save about $1.5 billion in production costs. Chrysler aims to win customers by adding incremental value to existing models. By outfitting a $17,000 minivan with leather upholstery and plastic wood, it created the $25,000 Chrysler Town and Country. It gave birth to a $26,000 Imperial by stretching the wheelbase of the $15,000 Dodge Dynasty and dressing up its interior. Such tricks do not earn engineering awards, but they do sell cars. The highest margins in Detroit come from light trucks and sport utility vehicles: two- and four-wheel-drive Jeeps and similar models. They cost less to make than cars and have little competition. The Japanese do not make full- size pickups (their streets are too narrow), and the U.S. imposes a 25% import tax on all two-door trucks: pickups, minivans, and utility vehicles. In 1990 the Ford division may actually sell more trucks than cars, but like GM, it has been slow to upgrade them. One easy way would be to add safety features, such as automatic seat belts and high-mounted brake lamps, which are already required on passenger cars. Buyers today are safety conscious -- a fact that underlies some popular advertising campaigns -- and many drivers use trucks and cars interchangeably. The government may start requiring the safety equipment anyway, beginning in 1994. -- Get a real dialogue going with customers. One of the great puzzles of the car industry is that Detroit produces reams of consumer research but still misreads the market. GM and Ford collectively spent $7 billion developing new midsize specialty coupes such as the Oldsmobile Cutlass Supreme and the Ford Thunderbird. They discovered too late that potential buyers were simply not there, in large part because baby-boomers prefer four-door sedans with room for their kids. The Japanese make mistakes too. Their boxy ''high cube'' station wagons, so popular in Japan, flopped in the U.S. because of their unusual design. But the Japanese quickly changed lanes; Honda, for example, is about to introduce a conventional station wagon based on the popular Accord. Customers prefer steak, but Detroit continues to market sizzle. Three years ago Chevrolet unleashed the jazzy ''Heartbeat of America'' campaign to revitalize its image. The commercials are still running, but buyers have deserted Chevy because its products are lackluster and dated. Since the campaign began, Chevy's market share has skidded from 15% to 13.6%. When Detroit sticks to the facts, however, buyers pay attention. Sales of the Buick LeSabre rose 4% last year -- vs. a decline of 6.6% for the division as a whole -- after Buick began promoting the car's No. 2 position in J.D. Power's 1989 ranking of manufacturing quality. Unfortunately for Detroit, imports hold seven of the Power survey's top ten positions, including No. 1, which belongs to Nissan's Maxima.

-- Make spending count. When Ford wanted another luxury brand, it bought Britain's Jaguar for $2.5 billion. Competitors whisper that Ford may have to invest another $2.5 billion to modernize Jaguar's factories and product line. When Toyota wanted a luxury brand, it spent $700 million to develop the Lexus LS 400, added a second model at perhaps half the cost, and signed up 70 new dealers. Besides saving money, the Lexus program introduced design and production technologies that can be adapted throughout the company. The lesson: Toyota spent less and got more. Like Ford, GM is learning that more may also be less. It has lavished an estimated $3 billion on the Saturn small car, which it plans to introduce this fall. But even if Saturn runs rings around its competitors, years will pass before it generates any profits for GM. And it goes up against the world champs of small cars -- made by you know who. -- Strengthen the dealer system. Detroit should stop selling cars on price and get dealers to focus on value and service. Dickering over a new car is about as pleasant as a trip to the dentist. Instead of offering cash rebates, which fuel a fire-sale atmosphere, Detroit should cut sticker prices. That would mean less room for bargaining and thus less pressure on buyers to try to get the lowest price. If the dickering is eliminated, dealers can spend more time emphasizing the features of their cars to customers. For instance, Detroit still leads in the production of V-6 engines, which provide better | acceleration than the multivalve four-cylinder engines favored by the Japanese. -- Decentralize. Maintaining the Motor City as the center of the auto universe creates practical and philosophical problems. Detroit's car men spend so much time talking to one another that they tend to reinforce ancient prejudices rather than learning anything new. Recruiting talented engineers to southeast Michigan is also getting tougher. Since cars are full of chips and computers, why not let electronics engineers live in California? Nearly every U.S. and Japanese automaker now maintains a design studio in California to funnel new ideas back to Detroit or Tokyo. For that matter, why not move Pontiac's headquarters to Los Angeles, where all the actors in its TV commercials seem to live? Or send the Chrysler-Plymouth division to Arizona or Florida, close to its retiree customers? Sales would improve, recruitment would be easier, and morale would zoom. TRYING TO REVERSE a decade-long slide in market share is slow, slogging work. The odds do not favor Detroit. Says David Cole, son of a former GM president and director of the Office for the Study of Automotive Transportation at the University of Michigan: ''The Big Three are going to be hard pressed to manage the accelerating change in the next few years.'' Analysts believe that as the Japanese keep adding more models, and their North American plants keep making more cars, they could add up to nine extra points of market share by the mid-1990s. That would represent 900,000 more cars a year -- about as many as Chrysler sells now. A little luck would go a long way for U.S. automakers. If the dollar weakens to 120 yen from its current 146, the Big Three would gain a price edge over imports. Steady or falling gasoline prices would boost big-car sales, thus giving a lift to what the Big Three do best. Detroit could even turn around on its own. A charismatic leader like Iacocca or a breakthrough design like the Taurus could lift an entire company in a matter of months. The auto industry, after all, reports sales every ten days. But the race is to the swift, and so far the Japanese have been lapping the competition.

BOX: AS THE PLANTS GO, SO GO THE JOBS

U.S. automakers have closed 32 plants since 1987. Some workers retired or transferred to other sites. GM opened two new plants employing 7,300 people over the same period and expects to start Saturn production at a third factory this summer.

16 PLANTS: 36,345 JOBS DATE, PLANT, LOCATION, JOBS LOST 5/87 Truck & Bus, Flint, Mich.: 3,400 6/87 Central Foundry, Pontiac, Mich.: 1,200 8/87 Assembly, Norwood, Ohio: 4,000 8/87 Truck & Bus, St. Louis: 2,570 12/87 Clark Street, Detroit: 3,300 12/87 Pontiac Assembly, Pontiac, Mich.: 2,000 12/87 Hydra-matic, Constantine, Mich.: 130 12/87 Fleetwood-Clark, Detroit: 3,300 12/87 Fisher Body, Flint, Mich.: 3,000 12/87 Inland Facility, Tecumseh, Mich.: 1,075 8/88 Metal Stamping, Hamilton, Ohio: 2,500 9/88 Conner Steet Stamping, Detroit: 700 10/88 Fisher Guide, Elyria, Ohio: 2,080 12/88 Central RTS Coach, Pontiac, Mich.: 2,200 1 6/89 Metal Stamping, Willow Springs, Ill.: 2,900 6/89 Fisher Guide, Detroit: 1,990

13 PLANTS: 14,992 JOBS DATE, PLANT, LOCATION, JOBS LOST 3/88 Indianapolis Electrical, Indianapolis: 975 3/88 Milwaukee Stamping, Milwaukee: 500 9/88 Winfield Foundry, Detroit: 45 11/88 Amplex, Van Wert, Ohio: 330 12/88 Kenosha Assembly & Stamping plants, Kenosha, Wis.: 5,500 2 1/89 Detroit Forge, Detroit: 470 2/89 Coleman Products, Nogales, Ariz.: 250 3/89 Detroit Trim, Detroit: 950 6/89 Trenton Chemical, Trenton, Mich.: 172 2/90 Jefferson Assembly, Detroit: 1,700 6/90 Coleman Products, Coleman, Wis.: 400 9/90 St. Louis No. 1, St. Louis: 3,700

3 PLANTS: 1,125 JOBS DATE, PLANT, LOCATION, JOBS LOST 7/88 Romeo Tractor, Romeo, Mich.: 538 12/88 Green Island, Green Island, N.Y.: 287 12/88 Canton Forge, Canton, Ohio: 300

1 Partial closing. 2 Two plants.

CHART: NOT AVAILABLE CREDIT: SOURCE: J.D. POWER & ASSOCIATES CAPTION: BREAKING AWAY Japanese cars swamp Detroit in trend-setting California, where 12% of new autos are sold.