(FORTUNE Magazine) – NOBODY LIKES an economic recovery better than the auto industry, and it's Detroit -- not Japan -- that is reveling in one now. Recession-weary consumers who put off buying cars and trucks are returning to the market with a rush. Dealers are watching inventories shrink and profits rise. GM, Ford, and Chrysler are adding factory shifts to meet demand. Shareholders are gleeful, and Motor City executives are busily figuring the value of their stock options and bonuses. With every upturn, of course, comes a downturn, when customers vanish and showrooms stand empty. But Detroit is betting this cycle will be both stronger and longer than any before. Improved industry performance, weakened overseas competition, and a superb array of redesigned cars and trucks all point to a period of unusual prosperity in the U.S. auto industry -- in fact, a new Golden Age. Too rosy a scenario? Probably not. Over the past decade, the Big Three have completely overhauled their operations. Chrysler has become a world leader in product development, while Ford sets the pace in manufacturing productivity. Though GM remains a work-in-progress, it is still far and away the market leader. Company for company, the U.S. auto industry is the strongest in the world. Even though 1993's sales of 14.2 million cars and trucks ranked as a subpar year, American automakers reaped $9.6 billion in operating profits while their counterparts in Japan and Europe lost billions of yen and deutsche marks. Some worry, however, that Detroit will become complacent. Other eras -- the 1920s and the 1950s -- produced auto booms, but they were followed by auto busts -- the 1930s and the 1970s -- that were often prolonged by grotesque mismanagement. As recently as the mid-1980s, U.S. carmakers spent billions to diversify into savings and loans, aerospace, and rental car companies, and to acquire boutique European automakers like Jaguar and Saab, which were bought by Ford and GM, respectively. So distracted, the carmakers neglected their own operations and created a huge opening for Toyota, Nissan, and Honda. Between 1989 and 1992, CEOs at each of the Big Three departed their posts at the urging of their outside directors, while the Japanese grabbed 25.5% of the U.S. car and truck market. This turn of the wheel promises to be dramatically different. Says Ford CEO Alex Trotman: ''We live in a cyclical business, and we can be sure we are going to have another major recession sometime. I don't feel there is any conceivable justification for being relaxed in the foreseeable future.'' GM, Ford, and Chrysler have made huge leaps in productivity, quality, and customer service that they will not easily relinquish. The Big Three are determined not to repeat their past mistakes. As to the future, they are fast adapting to changes in industry dynamics -- focusing their resources and energies on better designs, smarter marketing, and beefed-up distribution. These emerging competitive battlegrounds -- not manufacturing, where Detroit has all but closed the quality gap with the Japanese -- will determine tomorrow's winners in the global auto bazaar. The Golden Age of American autos may be long-lived for yet another reason. Japan, the fearsome dragon that pushed Detroit to the wall a few years ago, has been defanged, at least temporarily, as its U.S. market share sinks for the third year in a row. Says David Cole, director of the Office for the Study of Automotive Transportation at the University of Michigan: ''The U.S. and Japanese are each going 100 miles per hour in the opposite direction.'' Usually renowned for their flexibility, the Japanese have been slow to react to the recession in their home market. By keeping plants open and refusing to lay off workers, they are forgoing significant profits. That means they have fewer resources to attack the U.S. market, where many of their manufacturing and sales operations are now losing money. Those problems are compounded by the strong yen, which has forced them to raise prices steeply. The cost difference between two functionally equivalent, V-8-powered luxury sedans -- the American-made Oldsmobile Aurora and the Lexus LS400, made in Japan -- is an incredible $18,000. At least one Japanese auto executive concedes that more price increases are coming. Still, Japanese automakers continue their strong hold on U.S. consumers. More than a fifth of American auto buyers last year paid a steep premium to own a Japanese vehicle. But that was Japan's lowest market share in four years. People are starting to buy American again for reasons of value, taste, and patriotism, and a huge pent-up demand is driving sales. On average, the U.S. industry sells about 15 million new cars and trucks a year. Chrysler economist Don Hilty estimates that over the past four years, consumers have put off buying some seven million vehicles because of the weak economy. Now that times are good again, he predicts that sales of cars and light, medium, and heavy trucks will reach 15.5 million in 1994, up 1.3 million units from 1993. And sales should keep rising until they peak in 1997 at a record 17 million and then decline only slowly through the end of the decade. Despite high car prices -- $18,497 for the average new car last year -- and rising interest rates, Hilty's estimate seems on track. U.S. auto sales hit a 15.2 million annual rate in January, a month racked by earthquakes and winter storms, and manufacturers are frantically searching for ways to increase production. Says Cole: ''The U.S. industry is going to be wildly profitable.'' THE HOTTEST products of the 1990s are minivans and sport-utility vehicles, whose sales have exploded from 200,000 or so ten years ago to 2.3 million in 1993. Along with pickups, they are classified as light trucks because of their weight and interior space. Here's how important this market is: Ford and Chrysler actually lost money on passenger cars in the U.S. last year but more than made up the difference on trucks, which return profits as high as $6,500 per unit for a Jeep Grand Cherokee. The margins are munificent because trucks are relatively cheap to make but command high prices because of their strong customer appeal. GM didn't get the same lift from trucks, since it reacted slowly and ineffectively to the new demand. The swing also almost entirely bypassed the Japanese, who sell few trucks in their home market and are hindered by a 25% tariff here. Boom times in Detroit should be grand for the U.S. economy, as befits an industry that creates 4.4% of the gross domestic product. At last count, the Big Three employed 731,000 people in the U.S. and paid them wages of $29 billion. Another 900,000 people held jobs with industry suppliers, and a further 650,000 worked at car dealerships. Shareholders have already gotten a payoff. From their lows about two years ago, Chrysler stock has risen 411%, Ford 163%, and GM 122%. Big consumers of steel, rubber, and glass, autos also use 40% of the platinum sold in the U.S. (for smog-reducing catalytic converters) and 20% of the semiconductors. A $45,300 Cadillac Seville STS % contains 1.1 miles of electric cable that weigh nearly 70 pounds and connect 25 electric motors. AS AUTO SALES ratchet up, the ripples will be felt everywhere in the economy. Kurt Brown, a senior associate at the economic forecasting firm DRI/ McGraw, estimates that the production of one million cars and trucks generates about 300,000 auto-related jobs. Don't expect to see a big surge of new hiring by the Big Three during this boom, however. Detroit will be adding overtime or calling back laid off workers instead. Due to generous union benefits that provide nearly full pay for the laid off, labor has become a fixed cost instead of a variable one, and the industry will add blue-collar employees only as a last resort. Engineers -- mechanical, electrical, and industrial -- remain in hot demand, though. GM, which lost lots of them to early retirement, wants to hire as many as 2,500 this year. Detroiters smugly observe that they are having little trouble luring electronics specialists from what remains of California's aerospace industry. Ford once again has begun recruiting engineers at a number of universities, including a dozen historically black ones, for jobs that could pay up to $42,000 a year. Although Chrysler is opening some shuttered plants and GM is renovating an abandoned facility in Pontiac, Michigan, the sales surge isn't likely to force the Big Three to build new factories. Some components, however, are already in short supply. Chrysler can't get enough antilock brakes for its minivans from AlliedSignal. Says Chrysler vice president Thomas Stallkamp: ''We call every week and ask for more.'' In February, Chrysler spent three weeks meeting with its 150 biggest suppliers to make sure they could keep up with increasing demand. Explains Stallkamp: ''The recession made suppliers cut their capacity. So now we are making sure they understand the volumes we plan for each model.'' DETROIT'S REBIRTH demonstrates that new ideas, innovative management, and high-performance results aren't the exclusive domain of a few glamorous companies in fast-growing industries. By the usual standards of industrial evolution, America's Big Three automakers should be doddering into senility. Ford is 90 years old, while GM is a wizened 86, and Chrysler a mere 69. Their recent achievements are all the more remarkable for having been wrung out of an immense $75 billion asset base of bricks, mortar, and machine tools, and a largely unionized work force that often appears less flexible than at any time in the past 20 years. In an accelerated burst of number crunching, for instance, Chrysler accountants produced financial results for 1993 only 18 days into 1994 -- twice as fast as before and nearly four weeks ahead of General Motors and Ford. That allows Chrysler to track its budgets more closely and frees accountants to do other work. Closing the year-end books is no simple task when you do business in 109 countries and must, among other things, compute actuarial assumptions about your 91,275 U.S. employees. Using Motorola's state-of-the-art methods as a benchmark, Chrysler made hundreds of tiny improvements in the process, such as electronically transferring data between computer systems so that there was no need to reenter them by hand. Turbocharged car sales and advanced management practices aren't all that's new in Detroit. The next few months could bring significant executive changes. Insiders at GM believe that international boss Louis Hughes, 45, will soon take over North American operations, and chief financial officer Richard Wagoner, 41, will move to Europe. At Chrysler, much-heralded design king Thomas Gale, 50, and parts czar Thomas Stallkamp, 47, are the leading candidates for higher office. At Ford, CEO Alex Trotman, 60, is looking over a field of candidates for the one who will become his designated successor. Here's how Detroit continues to reinvent itself:

-- TOWARD THE VIRTUAL FACTORY. Evidence that manufacturing is declining in importance as a competitive factor comes from a new study conducted by MIT's International Motor Vehicle Program, the same group that wrote the groundbreaking book, The Machine That Changed the World. Says program director Daniel Roos: ''Our data show the Big Three have really gotten better. The differences between the U.S. and Japan in productivity and quality are narrowing.'' But they haven't disappeared. John Paul MacDuffie, an assistant professor at the Wharton School who is conducting field research for MIT, notes that Toyota remains the world's most proficient automaker, and says, ''I sometimes worry that Americans think the performance gap has closed completely and is no longer a concern. '' Not yet they don't. In a year-end report to journalists, Chrysler CEO Robert Eaton declared, ''We know that many of our processes still need to be made faster and more efficient.'' In the race to catch up with Toyota, Detroit continues to tinker with new production methods. At GM's manufacturing center for North America, chief Gary Cowger is experimenting with a new technique called agile manufacturing. Says Cowger: ''Successful companies have to change from leveraging muscle power to leveraging intellectual power.'' The agile concept emphasizes ultra-flexible production facilities, constantly shifting alliances among suppliers, producers, and customers, and direct feedback of sales data into the factories.

Indeed, the next generation of manufacturing may take Detroit out of the business of auto production and into the realm of coordinating superproficient suppliers via what's becoming known as the virtual factory. Says Glenn Mercer, a senior member of McKinsey & Co.'s automotive practice: ''The assembly plant is not where the game is going to be in the 1990s. In the long run, the manufacturer's job will be managing the integration of the vehicle.'' In the virtual factory, suppliers will be involved in the very earliest stages and will help plan and design new components. As the company that buys the most from outsiders, Chrysler is moving fastest toward the virtual factory. Already it is handing over some of its traditional responsibilities to suppliers. Instead of surveying consumers about seating preferences like firmness, width, and color, the company entrusts that task to supplier Johnson Controls. Says Chrysler's Stallkamp: ''We're trying to work more closely with suppliers so that we'll all become links in the chain from raw materials to finished product.''

-- A CAR FOR EVERY CUSTOMER. Consider this lesson in auto industry economics. Today it takes about 20 worker-hours to assemble a Ford Taurus with a retail price of, say, $18,000. Since labor costs about $42 an hour, the direct- assembly expense is $840 -- about 5% of the sticker price. By comparison, the cost of marketing and distributing the car can reach 30%, says Martin Anderson, the retailing expert of MIT's International Motor Vehicle Program. The costs include advertising, promotions such as cash rebates and lease incentives, and dealer rent or mortgage payments plus inventory financing. Controlling marketing costs begins even before the car leaves the drawing board or computer screen. By ensuring that a design meets the needs and desires of its customers -- size, features, performance, and so on -- a manufacturer can sell a new automobile for a higher price and avoid expensive rebates and other marketing gimmicks. Despite predictions that Japanese manufacturers, hurt by a weak home market, will have to cut back drastically the number and variety of their designs, Michael Cusumano, a product development specialist at MIT, still ranks Toyota and Honda as the world's best -- and most efficient -- at creating new models. Says he: ''The Big Three are not behind in speed or design capability. But we do think they are still using more people than the Japanese, so engineering productivity may not be at the same level.'' GM, which sells one-third of all cars and trucks in the U.S., has the most room for improvement. In the past the company's designs were driven by engineers, not marketers, and so tended to reflect nuts-and-bolts solutions rather than customer needs. Design changes typically required the approval of a dozen vice presidents, each of whom would seek to put his personal stamp on the vehicle. Under CEO Jack Smith, GM is completely reorganizing its system for developing new cars and trucks. One big move was the creation of a Vehicle Launch Center in Warren, Michigan, outside Detroit. Unique in the industry, this new engineering department vets designs for all GM brands except Cadillac, coordinates parts purchasing, and develops a rigid schedule before the project is handed off to more specialized engineering and manufacturing functions. Says Cusumano: ''It makes sense to establish a process, centralize it, and have a place for people to come. But the jury is still out.'' The first projects won't emerge from the launch center until the 1997 model year. GM has long been burdened by fleets of all-but-identical cars that it tried to sell to all-but-identical customers under different brand names. It's hard, for instance, to tell a Buick buyer from an Oldsmobile buyer. As a GM manager admits, ''We had middle-aged white men designing cars for middle-aged white men.'' Now GM wants to aim each of its new cars and trucks at discrete market segments, as measured by age, income, and family size. So when Buick and Oldsmobile were redoing their previously identical luxury models for 1995, the Olds Aurora sprouted two more doors and got a V-8 engine, while the Buick Riviera remained a V-6-powered coupe. The goal is to develop vehicles that GM can sell at a premium without cannibalizing its other products. ''We're confident,'' said CEO Smith in a January speech, ''that each brand can be positioned for leadership in its target segments.'' You might infer that GM Chairman John Smale, former CEO of % Procter & Gamble, had a hand in this. You might also note that Pontiac has adopted P&G's practice of assigning brand managers who will direct the development and marketing of each of Pontiac's six car lines. Other divisions are expected to follow. To make sure that Pontiac ads don't collide with those of Chevrolet or some other GM division, another new department called the Marketing Assessment Center will help the brand managers coordinate the public images of all the models that GM sells. Now that GM's cars are targeted at different markets, the center makes sure they're not advertised on the same television shows or promoted at the same sports events. Says Philip Guarascio, GM's general manager of marketing: ''Automobiles are not a mass market in the traditional view. We have to sell millions of vehicles as if we were selling them one at a time.'' With only three car and truck brands vs. GM's eight, Ford has different but still knotty product development issues. Ford occasionally produces home-run cars and trucks, but more often raps out doubles and triples because it hasn't been able to institutionalize the design and engineering practices that led to its biggest successes. To make sure that each program goes by the book, Ford has created a position called the processorian. When modifications in schedule or procedure are required, this manager is the final arbiter. The goal is to standardize practices so that cars don't come in overweight or overbudget or contain too many compromises in design. Ford wants more vehicles like the popular Taurus and Explorer and fewer ones like the slow-selling Thunderbird and Escort. With Ford due to introduce 16 new cars and trucks over the next 36 months, CEO Trotman is pushing hard for improvements in product development. He wants to reduce the time it takes to get a new model into production to 36 months vs., say, 42 for the 1996 Taurus. He also aims for a 50% improvement in efficiency -- get the work of three people from two -- by 1996. By using powerful Cray computers, for example, Ford can simulate 25% of the crash tests it used to have to perform in the laboratory. Ford is in the process of handing over all its new-model work to 700-person project development teams. The big teams are made up of as many as 25 subteams, with specialists from such disciplines as body engineering and power train. Membership in the teams is fluid: When a specialist's duties for a particular program are completed, he is taken off that project and assigned to $ another one. A $150 million facility being constructed in Dearborn, Michigan, will house personnel from as many as 15 of these new teams under one roof by 1995. In the past, Ford has approached product development from an ecumenical point of view, producing vehicles in partnership with Mazda, Nissan, and Volkswagen, and creating one global car all by itself -- a seven-year, $6 billion compact sedan that will be introduced in the U.S. this fall as the Ford Contour and Mercury Mystique. In the process Ford learned volumes about coordinating international projects but produced cars only a committee could love -- blandly styled despite superb engineering. Don't look for Ford to repeat the global-car experiment anytime soon. For the next improvement in product development, Thomas Hout, a vice president of Boston Consulting Group, recommends that Detroit begin thinking in terms of systems engineering. With this approach, a car is designed as a single integrated unit rather than as an assemblage of components. Systems engineering has long been used in the aerospace industry, and Toyota and Nissan employed it in producing their superb Lexus and Infiniti cars, which first arrived in the U.S. in 1989. Hout says systems engineering could make cars more user-friendly by involving, say, sales and maintenance specialists in the total design process alongside engineers and marketing specialists. If they worked together on the car from the very start, it might no longer be necessary, for instance, to remove a dashboard to replace a light bulb in the instrument panel.

-- DEATH OF A PLAID-COATED SALESMAN. While new ideas are rapidly changing product development and marketing, one part of the auto industry remains virtually intact and unimproved from the 1950s: distribution. Says McKinsey's Mercer: ''Unfortunately, the image of the dealership is still a big glass house with guys in plaid sport coats who you don't trust, trying to push things on you.'' Though customer satisfaction ratings are rising, many dealerships remain afflicted by sloppy management, high costs, and slippery reputations. Additionally, there are just too many of them for all to be consistently profitable. Some years the average dealer barely breaks even on new car sales. The bulk of his profits come from parts, service, finance, and used-car operations. Some dealers are hurrying to duplicate the success of GM's Saturn, which wins raves because its no-dicker pricing policy takes much of the tension out of the dealer-customer relationship. Saturn broke the mold: Its dealers have exclusive territories and thus don't face competition across the street from other Saturn dealers. But now that Saturn's production has caught up with demand and competition is tightening, its no-dicker sticker is breaking down. Dealers can offer a higher trade-in on a used car, for example, without violating the no-haggling rule. One piece of Saturn that GM would like to replicate is its McDonald's-like uniformity. Customers get treated with the same thoughtful service whether they are in Burlington, Vermont, or Burlingame, California. At the same time, GM is redrawing its nationwide dealer map by encouraging mom and pop operations in low-growth regions such as the Northeast and the farm belt to merge or sell out to bigger outfits. By the year 2000, GM expects to have about 7,000 dealers, down from 8,600 this year and as many as 14,000 back in the 1970s. What's behind the downsizing? GM hopes that its remaining dealers will be stronger and that GM will have to spend less to service them. Says Edward K. Roggenkamp, executive director of dealer development: ''We want to make car buying smoother, faster, and simpler.'' Ford meanwhile is taking a much bolder step. Instead of selling a car and having the customer drive away with it, Ford wants to develop a permanent relationship that will span the ownership of several new or even used cars. ''People don't want to hassle with cars; they want them to be as simple and easy to use as an elevator,'' says James Womack, a Cambridge, Massachusetts, consultant and co-author of The Machine That Changed the World. ''The smart thinking is how to change from selling a durable good into providing a service, so that an auto manufacturer can become a lifetime mobility provider.'' If Ford succeeds in becoming exactly that, it can increase volume, profits, and customer satisfaction simultaneously. The key to this strategy is getting customers to lease cars rather than buy them. With leasing, a person makes a monthly payment that covers depreciation of the car for two, three, or four years before returning it to the manufacturer. Leaseholders don't have to worry about selling or trading in their car, and since people generally lease a new car every couple of years, they rarely have to cope with mechanical problems. And because the customer returns the car to the dealer when the lease expires, Ford has an opportunity to sign him up again. This year leasing will account for about 18% of Ford's sales. Analyst Jack Kirnan of Salomon Brothers estimates the company spent about $1,340 per Ford, Lincoln, and Mercury during last year's fourth quarter on subsidies to make the leases affordable -- about $500 per car more than it spent on such retail incentives as rebates. Steep marketing expenses like this held Ford's profits down last year. Like any daring strategy, Ford's has risks. Leased cars that have been returned might compete with new-car sales and could drive down used-car prices, costing Ford plenty. So far that hasn't happened, and to hedge further Ford announced in February it would begin leasing used cars as well. That will enable Ford to control the flow of used cars better by, say, moving them to regions where demand is high. The strategy may even yield higher profits. Used cars can be more profitable than new ones because they are harder to comparison-shop -- every one is unique. GM and Chrysler can't match Ford in leasing because their weaker credit ratings don't allow them to offer similarly attractive finance terms. Ford is pressing its advantage by experimenting with even grander leases. One being tested in Las Vegas would enable a driver to lease six Fords for two years at a stretch over 12 years. What makes it a particularly good deal: The customer gets to keep the last car. If Ford works the numbers right and handles the used cars profitably, it could make a bundle. And by staying in close contact with a customer over this extended period, it can develop a detailed understanding of his needs and desires. WHATEVER CHANGES automakers make in distribution, that fellow in the plaid sport jacket will probably not be a vital link in the process. Some of the industry's more original thinkers are trying to replace him, as well as the parking lot of new cars that surrounds him, with the virtual showroom. That's an exotic notion in Detroit, but it is being seriously explored by manufacturers like BMW. Helmut Panke, the provocative chairman of BMW's North American operations, talks about building showrooms with driving simulators, which can replace the test drive, and with computers wired into German factories. Customers could sit at a terminal, customize a new car to their own tastes -- whether by color, upholstery, or options -- and then order it directly from the plant. Says Panke: ''This is something that sounds funny today, but it may not in three or four years. The tools are here now.'' The future may also bring shifting consumer tastes. Trucks outsell cars at Chrysler, and beginning this year, they will account for more than 50% of the sales at Ford as well. Import manufacturers are hurrying to add trucks to their model lineups. But truck sales could start to flatten by the end of the century. After their families are grown, minivan owners may want to drive something more sleek, and sport-utilities may lose their current chic. Chris Cedergren of AutoPacific, a California market research firm, believes demographic trends, technological advances, and environmental considerations will eventually dim the appeal of light trucks and make small cars the vehicles of choice in the 21st century. It will be at least that long before you see the much ballyhooed 80-mile- per-gallon supercar that the Big Three are developing with funds provided partly by the U.S. government. The specifications for this supercar call for it to be highly economical, low-polluting, fuel-efficient, fully recyclable, and ultrasafe. Admirable goals all, but some are mutually exclusive. Safety equals weight, while fuel economy equals lightness. Even if a supercar can be developed, can it be sold at a sufficiently attractive price for people to buy it? The whole debate over electric cars is not whether they can be built -- they can be -- but whether their price and performance will approach those of a gasoline-powered car. As long as they can keep selling conventional cars and trucks, and can avoid a credit squeeze, economic collapse, or war, U.S. automakers should enjoy a third Golden Age lasting for the rest of the century. With the fortunes of all three companies improving, the question arises: Who will go the furthest from here? Chrysler, the most improved company, is also the smallest and still has a way to go with product quality. Ford, the steadiest, is highly competent in many areas but seems to lack the flair and daring that would make it truly exceptional. By comparison, massive layoffs, closed plants, rattling reorganizations, and changes at the top have put fear and urgency into GM. Because it has the greatest resources and the most capacity, the biggest beneficiary of the current boom may be the one that lost the most in the last bust: General Motors.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHARTS CAPTION: STRONG SALES. . . MEAN HIGHER PROFITS. . . AND SURGING STOCKS

CHART: NOT AVAILABLE CREDIT: FORTUNE CHARTS/SOURCE: AUTOPACIFIC CAPTION: TRUCKS ARE FUELING THE BOOM Small and midsize cars Vans and other light trucks Large and luxury cars Sporty cars and coupes