By ALEX TAYLOR III REPORTER ASSOCIATES Andrew Erdman, Justin Martin, and Tricia Welsh

(FORTUNE Magazine) – For the first time in a decade, the U.S. auto industry has a genuine chance to grasp the lead from its Japanese competition. Ford and Chrysler are operating at worldclass efficiency, and General Motors has taken on a new sense of urgency with seismic shakeups at the top. At the same time, Japanese automakers have been temporarily set back by an economic downturn at home, political pressures from abroad, and an ever costlier yen. Underscoring the revolutionary nature of the upheaval is mounting evidence that GM's outside directors want Chairman and CEO Robert Stempel, 59, to quit. GM's market share is still slipping, and losses keep piling up at North American operations. Among Stempel's possible replacements: President Jack Smith, installed only last spring, and outside board member John Smale, former CEO of Procter & Gamble. America's Big Three had a similar opportunity to strike in 1982 -- and mostly fumbled it. Over ten disastrous years North American employment at GM, Ford, and Chrysler fell 18%, from 717,000 to 593,000. The three companies together shuttered 54 assembly, engine, and parts plants. Last year they lost a total of $10 billion on their North American business, although in 1992, worldwide, all should bounce back strongly. Japanese automakers, which produced no cars or trucks in the U.S. ten years ago, now assemble 1.4 million of them annually on the American mainland. Toyota and Honda each sell more cars in the U.S. than Chrysler. All told, Japanese manufacturers account for nearly one out of every three cars Americans buy, up from one in five in 1982. How did everything go so terribly wrong? Based on comprehensive interviews with scores of industry executives, academics, consultants, and security analysts in the U.S. and Japan, what follows is the inside story of why the + American auto industry -- arguably the most vital to the U.S. economy -- performed so badly in the 1980s. This article reveals how close Chrysler came to abandoning the car business, and how Ford's cautious culture kept it from capitalizing on its success in the mid-1980s. It also details the shocking long-term decline of GM and the utter failure of its top executives to understand its problems, much less solve them. Finally, it illuminates the management lessons that emerge from a close reading of recent history. For Detroit, a reexamination of the past decade, however painful, is particularly timely -- and may be useful in avoiding a repetition of old mistakes. The conditions the Big Three faced ten years ago were remarkably similar to those of today. In 1982 the economy was recovering from recession, the Japanese had been detoured by trade restrictions and cheaper gasoline, and important new models were being readied for introduction. GM was changing over to front-wheel drive, Chrysler was inventing the minivan, Ford was pioneering aerodynamic design. Within a few years each of the Big Three would enjoy record profits. And yet, for the most part, Detroit stumbled through the decade. In retrospect the lessons seem clear. The automakers did well when they concentrated on their core businesses, wrung inefficiencies out of operations, and gave their employees clear direction. They faltered when they tried to diversify, neglected day-to-day activities, and sent mixed signals to managers with grandiose but botched reorganizations. Rocky as the decade has been, two of America's automakers -- Ford and Chrysler -- are in surprisingly good shape. Ford, which nearly collapsed in the early 1980s, has built itself into an automobile manufacturer better than any in Europe and virtually the peer of the best in Japan. The Economic Strategy Institute, a private research group in Washington, D.C., reports that Ford is more cost-efficient than Toyota or Honda at making small four-cylinder cars. Its share of the U.S. car market has risen from 17% to 20% since 1982, and its truck sales nearly equal GM's. Though the soggy economy still dampens Ford's profits, revenues should reach $96 billion this year -- more than twice the 1982 total. Chrysler also nearly failed at the beginning of the 1980s, so its survival represents a triumph -- albeit a mixed one. Because of rigorous cost cutting and big changes in the way it develops new models, Chrysler operates at high efficiency. But its car and truck lineup remains uneven, its financial underpinnings shaky. General Motors, Detroit's low-cost producer at the beginning of the 1980s, had become the high-cost automaker at the decade's end. The past ten years have left GM severely weakened. Since 1982 its loss of almost nine points of market share in autos has cost it the equivalent of $13 billion in retail sales in a normal car-buying year. An expensive union contract has hampered its efforts to downsize. After losing $4.5 billion in 1991 and having written off another $4.1 billion in the five preceding years, GM is delaying new-model programs to conserve cash. That's the automotive equivalent of eating your seed corn. Evaluating the performance of the industry's top executives is tougher. Former GM chairman Roger Smith liked to tell journalists, ''Come back in five years and see what I've done.'' It takes three to four years to develop a car, and several years beyond that to assess its success or failure. Doctors bury their mistakes; auto executives usually leave theirs behind when they get promoted or motor into retirement. The two most successful Detroit CEOs of the past decade -- both Ford men -- kept a firm hand on operations, cast a skeptical eye at costs, and let their results speak louder than their words. The first, Philip Caldwell, ran the company from 1979 until 1985. Caldwell never qualified as a ''car guy'' who eats and sleeps automobiles as well as earning his keep from them. But after succeeding Henry Ford II, he directed the rebuilding of the company's model lineup, the revitalization of its manufacturing processes, and the reinvention of the family sedan with the teardrop-shaped Taurus. The other top-rated CEO: Harold ''Red'' Poling, who delayed his retirement to take over in 1990, cut overhead that had built up in the late 1980s, and maintained tight discipline over operations. He says he will depart next year at 67; he will leave Ford far stronger than he found it. History will judge GM's Roger Smith much less kindly. Infatuated with technology and given a nearly bottomless checking account, Smith spent the company dry and got almost nothing to show for it. While his much-heralded Saturn is selling well and gets high grades for quality, it hasn't solved any of GM's very real problems. Smith failed to reform GM's blundering, risk- averse bureaucracy. He allowed chronic operational and marketing problems to fester. He promoted a culture in which no one acknowledged problems / publicly and bookkeepers improved results by manipulating the numbers -- for example, boosting earnings by making favorable assumptions about pension obligations. At Chrysler, violent swings of fortune have marked the 13-year tenure of Lee Iacocca as CEO. He reintroduced the convertible in 1983 and unveiled the minivan that same year. But his attachment to such dated features as vinyl roofs and chrome wire wheel covers stunted Chrysler design for a decade. He recruited a cast of renegade executives from Ford, then drove most of them out of the company. He savored his role as America's best-known CEO so much that he dragged his heels about retiring until the board hired a successor in March. (Even then his buddy, billionaire Kirk Kerkorian, stepped in to help him stay on longer.) New models are improving Chrysler's standing, but to some extent they were developed in spite of Iacocca, not because of him.

HOW DETROIT FAILED TO HOLD OFF THE JAPANESE Detroit's biggest collective failure has been its unwillingness to confront the threat from Japan. Instead, the industry has adopted a Maginot-line mentality, fighting to keep Japanese automakers out. The process began with the voluntary import restraints of 1981, and it's still going on -- most recently with this year's dispute over minivan dumping. Detroit has learned volumes from the Japanese, mostly about manufacturing and employee relations, but it still looks to the U.S. government for protection from all-out competition. A complete history of Detroit's impotent response to Japan would stretch back nearly 20 years. Beginning with the gasoline crisis of 1973, Japan opened up a substantial market in the U.S. for its fuel-efficient, trouble-free cars. A second gasoline shortage in 1979-80 added momentum, and by 1982 the Japanese had some 20% of the U.S. car market. They didn't stop there. In 1982, Honda sold 195,000 made-in-Japan Accords, making it the fourth-most-popular seller in the U.S. This year Honda will sell an estimated 390,000 Accords, most of them assembled in Ohio. The Accord has been the best-selling car in America for the past two years and held a slight lead over the Taurus with two months to go in 1992. Jim Perkins, now general manager of GM's Chevrolet division, observed the Japanese close up when he worked at Toyota as a top sales and marketing executive from 1984 through 1988. ''After 1978 or 1979 the Japanese did a better job reading the market,'' he says. ''They upgraded interior trim and engines and transmissions, and gave customers more comfort and better features. They spent the time to learn the voice of the customer.'' A top Chrysler executive adds: ''We gave the Japanese all kinds of credit for building reliable if somewhat boring automobiles. With the larger Honda Accord and the new Toyota Camry, and the whole movement up-market with Lexus and Infiniti and Acura, we underestimated how quickly the Japanese were going to get really excellent in engines and transmissions and styling.'' In 1981, rather than fight the Japanese head-on, Detroit tried to switch the rules. After months of jawboning by both the manufacturers and the United Auto Workers, Japan agreed to limit its auto shipments to the U.S. market. The first year's ceiling under this voluntary restraint agreement was 1.68 million cars. A look at what happened thereafter should be sufficient warning against import restraints. They helped Detroit pick up windfall profits -- temporarily. Between 1984 and 1988, GM, Ford, and Chrysler together earned $25.2 billion. Instead of plowing the money back into their core business, however, they sought higher returns by investing their cash elsewhere. Says Nobuyori Kodaira, a high official at Japan's Ministry of International Trade and Industry (MITI): ''American automakers did not invest to upgrade their productivity when they profited from Japan's self-imposed export restriction. That led to the long-lasting decline of the industry.'' Especially frivolous was Detroit's acquisitive romance with small European automakers; that bid up their prices like tulip bulbs in 17th-century Holland. Publicly, automakers talked about melding their strengths as mass producers with Europe's knack for artful design and exotic engineering. Though some of the investments were tiny, the distractions to management were significant. GM bought 48% of Britain's Lotus for $20 million and half of Sweden's Saab for $600 million; Chrysler picked up Italy's Lamborghini for $25 million and acquired a 16% interest in Maserati. Ford lost Alfa Romeo to Fiat but made up for it in the U.K., where it purchased 75% of tiny Aston Martin for $25 million, even tinier AC Cars for $2.2 million -- and Jaguar. Few if any of these investments have been profitable, but the beating Ford has taken on Jaguar makes the rest look minuscule. Ford paid $2.6 billion for Jaguar in 1989 and has invested $400 million in modernization; under Ford's aegis Jaguar so far has lost more than $430 million. The import restraints, still in effect, never worked as intended. In their first years they served only to limit supply, not depress demand. Dealers in Japanese cars found they could add yet another item to the sticker price: extra markup. A Mazda agency near Los Angeles reportedly got $2,500 over sticker on RX-7 sports cars, $1,500 additional for the 626 coupe, and $1,000 above sticker for the subcompact GLC. The restraint agreements led to two other, more significant developments, neither fully anticipated by Detroit. Honda was once the only Japanese manufacturer to try assembling cars in the U.S. After the first restraint agreement, to circumvent the import ceiling, six other Japanese automakers joined in. Says an American who works closely with Toyota: ''Toyota's plant in Georgetown, Kentucky, is a monument to automotive protectionists. Toyota would not have made anything like that $1-billion-plus investment without the agreements.'' The second unintended consequence was the upscale Japanese auto. Given an incentive to maximize the profit on each car shipped, the Japanese decided to export more expensive automobiles. Beginning with Honda's Acura in 1985, they have established three separate luxury divisions in the U.S.; a fourth, Mazda's Amati, will follow in 1994. Together they have skimmed gallons of cream off the U.S. market. This year the Japanese will sell 185,000 Acuras, Lexuses, and Infinitis for $20,000 or more -- well over $3.5 billion worth. Clearly, Detroit would have been much better off had it confronted the Japanese directly in 1981 rather than hidden behind import restraints. It would have been faster to adopt Japanese production methods and to rationalize its own factories. Instead Detroit effectively conceded a permanent share of the U.S. market to the Japanese, who reinvested in more American plants. By 1990 the Japanese were building 1.2 million cars and trucks in the U.S. That additional production hit the market just as the economy started to weaken. To make matters worse, GM negotiated a generous contract with the United Auto Workers that September. Stempel was eager to avoid a strike and believed that GM could improve quality faster if workers weren't worried about layoffs. Rather than cutting production, the Big Three kept their factories running. To move the merchandise, they slashed retail prices and increased their scarcely profitable wholesale deliveries to fleet customers. GM had most of the overcapacity, so it took the lead in creating a buyer's market. It offered customers incentives of up to $2,500 a car, which Ford and Chrysler were forced to match. To rental car companies, GM rebated as much as $1,400 per car up front and guaranteed to buy the autos back for resale as used cars after only three or four months. Again, Ford and Chrysler had to follow suit. By 1991 fleets accounted for nearly half the sales of such makes as Lincoln and Dodge, and about a fifth of Detroit's overall car volume. Much of this was money-losing business, but Detroit figured it was cheaper to keep the factories open than to shut them down and pay its workers for not working -- the real stinger in that 1990 contract. Even worse, sales to rental companies eroded the new car business. The Big Three were competing with themselves when they resold a three-month-old ''used'' car. Despite these artificial life supports, car sales fell from 9.3 million in 1990 to 8.2 million in 1991 -- the worst performance since 1982. The blood flowed most freely at GM. Its North American operations lost $7 billion in 1991, leading to the demotion of President Lloyd Reuss last April and his replacement by international boss Jack Smith. Ford lost $2.2 billion in North America, Chrysler $795 million. So the industry's attempt to use trade barriers to hold back the Japanese failed. Other decisions taken during the 1980s had equally striking results -- positive and negative. Among other things, those actions demonstrated that small ideas, if they are applied consistently -- such as cutting costs and monitoring operations more closely -- can produce better results than big ideas or broad strokes carried out erratically.

WHY GM HAS SPENT EIGHT YEARS SUFFERING THE EFFECTS OF ITS 1984 REORGANIZATION When Jack Smith, 54, moved in as president in April, he immediately set about undoing the massive -- and massively flawed -- reorganization that GM undertook eight years before, professedly to reduce duplication and increase efficiency. In a FORTUNE interview, his first since assuming his new job, Smith explained why: ''It is tough to operate when the structure isn't right. It just stops you cold. I guess, in hindsight, that while the '84 restructuring cleaned up some problems, it created some other ones. It really didn't work that well.'' Executives inside the company and knowledgeable outsiders blame ''the reorg'' for many of the problems that afflict GM today: high costs, ; indifferent quality, inefficient coordination, brand erosion, and loss of market share. Though GM officials have been willing to criticize the way the reorganization was implemented, no one but Jack Smith has publicly attacked the thinking behind it. Chairman Stempel, for example, continues to assert, as he did to FORTUNE, that ''those things we did back in '84 -- strengthening the marketing divisions and refocusing efforts on the products -- I feel very good about.'' The reorganization was the dream of former GM president James McDonald, but it was CEO Roger Smith who embraced and executed it. Changes in vehicle design and marketing had made obsolete Alfred P. Sloan's 1920s concept of GM as five independent auto makes loosely tied together by a central organization. Fisher Body remained an independent organization even though car bodies were no longer manufactured separately from their chassis. Design and production engineers needed to work closely together, but GM still had a separate assembly division that effectively kept them apart. Fewer and fewer features differentiated a Chevrolet from an Oldsmobile, but each division still maintained its own engineering and manufacturing facilities. To break up Fisher Body and the assembly division, Smith gathered up all those disparate pieces, along with hundreds of thousands of employees, and reconstituted them into two car groups. Chevrolet-Pontiac-Can ada would develop, manufacture, and market small cars while Buick-Oldsmobile-Ca dillac took care of the big ones. Though few recognized it at the time, the shakeup froze GM in its tracks for 18 months. Informal lines of communication, the back channels that grease the wheels of any giant organization, were obliterated when job descriptions and jobholders changed. New-product programs fell into disarray as responsibility for carrying them out shifted. To economize on manufacturing, the Chevrolet group wound up building Cadillacs and the Buick group assembled Pontiacs. The two car groups quickly blossomed into bureaucracies. Besides adding an extra layer of management, they created whole new marketing and engineering staffs that duplicated functions already performed at both corporate and division levels. In his 1988 book Call Me Roger, former GM speechwriter Albert Lee asserts that the Chevrolet-Pontiac-Can ada group added 8,000 people following the reorganization. Besides trying to do too much too quickly, GM had violated a fundamental management precept. Instead of flattening the organization and getting closer to the customer, it did just the reverse. With all of those faults baked into the bread, it's no surprise that the reorganization never came close to its most basic goal -- making it cheaper and easier for GM to develop cars. It was decentralization run amok. There wasn't enough coordination among the groups, the separate design and advanced engineering departments, and the rest of North American operations. David Cole of the University of Michigan, a longtime student of GM (and son of Edward Cole, GM's president from 1967 to 1974), points out that for years the company produced 17 ignition systems where three would have sufficed, and 40 types of catalytic converters instead of three or four. Says he: ''The engineering was 180 degrees out of phase. GM cars looked alike outside but were all different inside.'' When Jack Smith became president, he dissolved the two groups and combined all the passenger car divisions into a single North American Organization (NAO). He replaced the group executives and their separate staffs with a skeleton headquarters staff of 300. By year's end, GM's giant central office will shrink from 12,500 to 2,500. Half the excess people will be reassigned to parts of the operating divisions; the rest will leave the company. Smith says his reorganization of the reorganization is taking longer than he anticipated, and more personnel cuts will be required next year. He finds good data in short supply. A strategy board that coordinates activities and sets priorities has to meet twice as often as he expected. But he's pleased with the overall direction: ''The funny thing is that when you decide to change the structure, you get quick results. It is a significant improvement over the way we were running. For the first time, all the brands report to one guy.'' That's J. Michael Losh, head of marketing for NAO. Roger Smith conceded to FORTUNE that GM tried to do too much with the original reorganization and communicated too little with the employees involved. But he insists that Jack Smith's changes were part of the overall scheme he formulated eight years ago: ''What is happening now is part, literally, of that plan. The time frame wasn't specified, but the plan was at least a vision of what we knew we had to get to.'' It took GM a long time and a great many detours to get there. By any standard, the 1984 reorganization was ill conceived and ill executed. GM would suffer from its effects throughout the decade. The nadir was the hapless $7 billion GM-10 program, which will be explored later in this article.

IACOCCA GOES ON AN ACQUISITION BINGE Only a government-guaranteed loan of $1.5 billion in 1980 kept Chrysler from joining Studebaker, Packard, Reo, Cord, Tucker, and countless other once famous names in the graveyard of American automakers. The rescue, orchestrated by Iacocca, enabled Chrysler to survive losses totaling $3.3 billion from 1979 to 1981 and positioned it for prosperity. With costs cut to the bone, Chrysler bounced back quickly once sales picked up. The company turned profitable in 1982, and two years later huge tax-loss carry-forwards helped it generate a net profit of $2.4 billion -- the most Chrysler has ever earned. It desperately needed the money to strengthen its woebegone car line and shore up its finance subsidiary. Iacocca had other ideas. By 1982 he was the author of the best-selling nonfiction hardcover book ever in the U.S. -- his autobiography, Iacocca -- and star of Chrysler's television commercials. He was on his way to becoming the first postwar industrialist to emerge as an authentic hero -- the embodiment of America's industrial revival. All this made Iacocca restless. One former high Chrysler executive remarks: ''Lee is obsessed with share price. It used to drive him crazy that Xerox would get a price/earnings ratio of 15 or 20, while Chrysler was really swinging when it got to 3.'' The solution, as Iacocca saw it, was to make Chrysler into something more than an auto company. Says a current Chrysler executive: ''The diversification strategy that everybody embarked on in the early Eighties was widely espoused by Wall Street. It was the conventional wisdom. As far as the rating agencies were concerned, we just couldn't diversify fast enough.'' Everybody in Detroit was doing it. GM spent the most, pouring $10 billion into Hughes Aerospace and Ross Perot's EDS in the hope that their advanced technology would rub off on the auto business. Ford invested $5 billion in a savings bank, a consumer finance company, and a leasing company. Neither GM nor Ford starved its auto business as a result. But although the mini-van, introduced in 1983, was an overnight success, Chrysler was running on a shoestring. Could it survive as an automaker? A Chrysler executive close to Iacocca admits that getting out of the car business ''was certainly on our minds.''

) So instead of focusing on the industry he had worked in for 40 years, Iacocca spent the next few years buying and selling a number of disparate assets. Besides absorbing time and energy, most of his efforts were fruitless. Some haven't been revealed until now. From 1984 through the beginning of 1990, Chrysler bought back 7.7 million shares of its own stock at an average price of $22. Only recently has the stock traded that high again; last year Chrysler issued 35 million new shares at $10. Iacocca bought four rental car companies -- Dollar, General, Snappy, and Thrifty -- to keep them out of competitors' hands and to serve as captive customers for Chrysler cars. Today all are money losers. Having chafed in 1980 when the government's loan guarantee board forced him to sell Chrysler's corporate jets, Iacocca had a measure of revenge in 1985 when he bought Gulfstream Aerospace for $637 million. He expanded Chrysler's portfolio in 1987 by paying $367 million for Electrospace Systems, a small defense electronics firm. With those two acquisitions in his back pocket, Iacocca was ready to unveil his grand plan. In 1987 he reorganized Chrysler as a holding company with three subsidiaries: Chrysler Motors, Chrysler Financial, and Chrysler Technologies. To emphasize the diversification away from autos, Iacocca looked into moving the holding company headquarters from Highland Park, a decaying Detroit enclave, to Manhattan, where he liked to hang out in the corporate suite at the Waldorf Towers and socialize at ''21'' with the likes of New York Yankees owner George Steinbrenner. One ex-Chrysler executive says a corporate identity consultant even devised a name for the new conglomerate: ChryCo. But the pieces never came together and in time the grand plan died. Chrysler gave serious thought to acquiring the E.F. Hutton brokerage house of check- kiting fame, but finally passed on it. (Hutton wound up in the arms of Shearson Lehman Brothers before it was dismembered.) Eventually Iacocca became disenchanted with diversification. Says he: ''We wasted a lot of time, a lot of effort, setting up a holding company. I never was a conglomerate type of thinker anyway, like Jack Welch at GE.'' A fine strategic mind about the auto business, Iacocca had found himself over his head. The defense business proved unexpectedly stubborn. Iacocca explains: ''We found out in a hurry that if you weren't prepared to become almost a prime contractor and really pour the coal to it, you couldn't make it. I mean General Dynamics, those guys were so entrenched, there was no way we could compete. It didn't work out.'' He sold Gulfstream in 1990 for $825 million, but defense spending cutbacks made Electrospace unmarketable. Chrysler still owns it. While Iacocca was trying to raise Chrysler's stock market multiple, the car side of the business deteriorated. Every model introduced after the K-car line that started in 1980 flopped, demonstrating the complexity and difficulty of product development. Says one executive: ''Where we got betrayed, where we blew it, was on execution.'' Chrysler's vaunted engineers couldn't produce successful cars. The '86 LeBaron GTS cost too much to make, the '87 LeBaron coupe was too small, and the '89 Shadow too heavy. In 1988 the Chrysler New Yorker and Dodge Dynasty arrived on the market with high, squared-off roofs two years behind the aerodynamic Ford Taurus. Iacocca was heard to say that he thought the Taurus was ''awful looking.'' How could a car company ignore its cars? One of Iacocca's top lieutenants provides an unusually candid explanation. Says he: ''We were dealing with a government that didn't care about us, and the Japanese looked unstoppable. When we made the decision to hedge the auto business, it was out of a genuine sense of fear that we were going to lose it.'' When Chrysler finally got around to investing in its car business, it did so in a peculiarly backhanded way. At the 1987 meeting in New York City at which Chrysler's top executives turned thumbs down on E.F. Hutton, they also voted, four to three, to buy tiny, stumbling American Motors for $718 million. What Chrysler sought from AMC was the Jeep line of sport-utility vehicles, selling a steady 150,000 or so units annually. Jeep's rugged frontier image appealed to a younger, better-off class of buyers than the lower-income older folks Chrysler usually attracted. But a lot of heavy baggage came with the Jeeps, including two of the oldest and least efficient auto plants in the U.S. (at Kenosha, Wisconsin, and Toledo); unfunded pension liabilities totaling $384 million; and another $1.4 billion in legal claims from drivers injured in Jeep rollover accidents. Chrysler almost choked on AMC. Its white-collar payroll swelled from 29,500 to 35,800, and its breakeven point shot up from 1.2 million units a year to 1.6 million. Profits dropped precipitously after 1988. With car sales slipping and marketing costs soaring, Chrysler would be nearly broke again by 1990. Could it survive another recession as an independent auto company? At 64, Iacocca would have to save his company again -- or get out of the way so someone else could.

AT FORD, TRUCKS -- AND LINCOLNS -- TO THE RESCUE As the only U.S. carmaker to gain market share over the past ten years, Ford has been both lucky and smart. Lucky because it couldn't afford to downsize its cars as quickly as GM did -- so after gas prices fell again in the early 1980s it captured buyers who wanted big, traditional autos like the Lincoln Town Car. But Ford was smart to turn its attention to trucks, a backwater that is now a bonanza. Former Ford and Chrysler executive Bennett Bidwell says flatly: ''The Taurus didn't save Ford. Trucks and Lincolns did.'' Trucks, a category that includes minivans and sport-utility vehicles, produce more profit per unit than cars. GM and Ford basically control the full-size pickup market and price their vehicles as any duopoly would. The Japanese aren't strong competitors, and a 25% import duty on two-door light trucks puts them at a severe price disadvantage. Since government fuel economy standards are more lenient for trucks, companies don't have to cut prices on high-mileage ones in order to reduce average fuel consumption overall. Ford will earn about $3,000 on each of the 250,000 Tauruses it sells to a retail customer this year, but it will make about $6,000 on every one of the 300,000 or so Explorer sport-utility vehicles it moves. For years, both inside and outside the industry, trucks had been considered less glamorous than cars and got far less attention. That was true at Ford until two future CEOs, Philip Caldwell and Donald Petersen, ran its truck operations in the 1970s as they were ''going through the seats'' en route to the top of the company. Caldwell was among the first to see the potential of a business that promised not only outsize profits but also a major increase in market share. Caldwell had worked in truck product planning as early as 1960. Back then, he recalls, ''trucks meant nothing to the company. Nobody gave a hoot about them.'' Including customers: When Caldwell asked potential buyers to compare Ford and Chevy trucks, Ford won in only two of 25 categories. But with Caldwell's input, Ford developed a new pickup that outsold Chevy in 1968 for the first time since 1945. By the time Caldwell became CEO in 1979, Ford had started to give a hoot. After a setback in the gas shortage of 1979-80, Ford turned out a string of winners: the Ranger pickup in 1982, the Bronco II sport-utility in 1983, the Aerostar minivan in 1985. Ford had turned a corporate ugly duckling into a lucrative swan. At the same time, the economics of the car business were changing. The Japanese were flooding the U.S. market with subcompact and compact cars that sold for $1,500 to $2,000 less than comparable American models, owing to Japanese production efficiencies and the cheap yen. The Big Three were forced to match Japan's prices because they had to sell enough small cars to meet government fuel-economy standards for their fleets. Though Ford's subcompact Escort and compact Tempo were big sellers, they were priced so low that they lost money. Trucks looked like a good way to earn back some of that lost profit. In August 1986, members of Ford's policy and strategy committee left the company's 12-story world headquarters in Dearborn for an unusual off-site meeting at the Hilton hotel in suburban Novi, 20 miles to the northwest. Present were CEO Donald Petersen, President Red Poling, and other top managers, including Allan Gilmour, now No. 3 at Ford and head of worldwide automotive operations. ''It was not a meeting for bashful people,'' Gilmour recalls. Among those on hand was Louis Ross, now head of Ford's technical staff. The tall, gangly Ross, 60, who then ran Ford's North American operations, floated a bold proposal: ''I said, 'Look, what we've got to try to do is move our spending to trucks. We want to spend 70% more on truck programs in the next five years than we have in the last five. It's pragmatic. First, there's the 25% import tax on two-door trucks, which holds back the Japanese. Second, we have good market leadership. So why the hell don't we, as a company, redirect our resources substantially to our trucks?' '' Ford would go on to earn $13.7 billion over the next three years, but the company needed to invest more in other areas too. It lagged far behind its international competitors in engine technology. Though Toyota and Honda were already manufacturing fuel-efficient multivalve engines, Ford had none close to production. Nevertheless, the policy and strategy committee approved Ross's proposal. The committee also decided to increase spending on engines and transmissions by 50% over the next five years. Observes Gilmour: ''It was not that nobody had never thought of those things, but there was a consensus on strengths, opportunities, weaknesses -- how we needed to realign and charge full tilt.'' Ford caught the market just right. Minivan sales continue to rise; customers have adopted the Explorer as a descendant of the suburban station wagon. In 1992, Americans will buy one light truck -- pickup, sport-utility vehicle, or minivan -- for every 1.8 cars, up from one for every 2.5 cars ten years ago. Three of Ford's five best-selling vehicles are trucks. The big pickup has been the No. 1 seller in America, car or truck, for eight straight years. Expected sales this year: 475,000. The Ford Division has sold more trucks than cars since 1990 and commands 30.3% of the U.S. market. If Ford has faltered anywhere, it has been in gauging the popularity of compact minivans. Says Ford Division head Ross Roberts: ''In 1985 we thought the minivan was going to be a market of 285,000 a year. Then we thought 500,000, then 700,000, then 850,000. Then we went up to a million. Now the market's at a million three, and we don't even know where it is going.'' Ford has played aggressive catch-up to Chrysler: It introduced the boxy Aerostar in 1985 and the more carlike Mercury Villager in 1992. An as-yet-unnamed minivan based on the Taurus will follow in 1994. No business strategy is risk-free, and Ford's course has perils. Another spike in gas prices would zap sales of trucks, which get fewer miles per gallon than all but the heaviest cars. The Japanese are finally beginning to develop trucks specifically for the U.S. market. Toyota entered the full-size pickup truck segment this fall. Even the Explorer may be targeted someday. Says Edward Hagenlocker, newly appointed general manager of North American operations: ''I'm sure at some point the Toyotas and Nissans will have another go at the compact sport-utility segment.'' Ford knows what happens when it backs off the accelerator. After the envelope-stretching Taurus, it got conservative and produced several less distinguished cars that failed to capitalize on the Taurus's success. Ford coasted through the late 1980s and didn't hit the gas again until Red Poling took over in 1990.

THE JAPANESE ADAPT -- AND TRIUMPH In their ascent to a more than 30% share of the U.S. car market, Japanese automakers have cleared more hurdles than a steeplechaser. Says a top Chrysler executive: ''By the time we woke up to the fact that they were really chewing on us, they had 20% of the market. From that point on, they just chipped away.'' The Japanese fought the effects of the voluntary import restraints + imposed in 1981 by moving chunks of production -- complete with hundreds of suppliers -- to the U.S. They overcame the 65% rise in the value of the yen between 1985 and 1990 by cutting costs without visible damage to the quality of the cars, the variety of models, or the speed with which they were introduced. Part of Japan's success derives from its mastery of lean production methods, which produce higher-quality results at lower cost. Other Japanese strengths: attention to minuscule detail, relentlessness in overcoming obstacles, and good timing. When Americans wanted economical, well-built small cars, the Japanese could provide them in quantity because that's all they made. And when U.S. automakers cut back during recessions, the Japanese used their profits from the home market to expand their marketing budgets in America. Most remarkable of all has been the flexibility of Toyota, Honda, & Co. -- their ability to change with the market. U.S. manufacturers, burdened with high development costs and fixated on large production runs, moved more slowly and ignored fast-growing market niches. When gas prices stabilized, the Japanese made their cars bigger. They invented a whole new category of front- wheel-drive sporty cars and populated it with such models as the Honda Prelude, Toyota Celica, and Mitsubishi Eclipse. And when U.S. baby-boomers reached middle age and prospered in the mid- 1980s, the Japanese moved up with them by plunging into the niche known as ''functional luxury cars,'' once dominated by Germany's BMW. Smaller and less opulent than similarly priced American cars, these autos deliver enhanced value through crisper handling and livelier performance. The Lexus LS400 has the proportions of a Mercedes-Benz 300E but more up-to-date details; the Infiniti Q45 and J30 evoke a classic Jaguar sedan. The first Japanese luxury cars off the boat in 1986 weren't built by one of the established producers but by upstart Honda. Never a major force in Japan, where it got a late start, Honda found success abroad. The company, smaller and nimbler than its more conservative competitors, achieved a number of remarkable firsts: first Japanese company to manufacture cars in the U.S. (1982); first to top the best-seller lists (1989); first to export U.S.-built cars to Japan (1990). It also wrote the book on marketing luxury cars in the U.S. that became the bible for those who followed: Create a separate brand name; set up an entirely new distribution system with handpicked dealers in stand-alone showrooms; lavish attention on the customers; and deliver a superior product. But would Americans pay $20,000 for a Japanese car? The first Acura Legends were four-passenger, midsize autos powered by V-6 engines and styled like a well-tailored suit. After a slow start, Acura developed a reputation for superior smoothness, refinement, and reliability -- especially compared with the European cars that were its direct competitors. Less bound by tradition, the Japanese were compulsive about continuous improvement and bent on producing cars that could compete with any in the world. In its third full year, Acura sold 70,770 Legends in the U.S. (as well as 57,468 less expensive Integras) -- more than Alfa Romeo, Audi, and Saab combined, and nearly as many as BMW. That answered the $20,000 question. In 1989 giant Toyota drove into the market. Its Lexus line became the benchmark against which other luxury auto marketers -- Japanese, American, and German -- would be measured. In some ways Lexus was a bigger risk for Toyota than Acura was for Honda. Toyota was a mass-marketer known for inexpensive, durable cars, not high-end models. Moreover, while the V-6 powered Legend was really only a step up from a Honda Accord, the Lexus LS400, with a V-8 engine and a $35,000 pricetag, amounted to a giant leap beyond other Toyotas in the U.S. market. Toyota had thoroughly scrutinized the potential Lexus customer base. It anticipated nearly everything buyers would want and incorporated those features into the car. It executed a thoughtful sales and marketing strategy without a misstep. It shrewdly positioned Lexus against the best of the Europeans -- top-of-the-line Mercedes, BMWs, and Jaguars -- and then lured performance-minded buyers of Cadillacs and Lincolns as well. Toyota guaranteed Lexus dealers hefty gross profits -- as much as $7,000 per car in some cases -- so customers got exquisite attention. When the LS400 was recalled for a minor repair, dealers returned the cars to their owners freshly washed and with a full tank of gas. Within months Lexus had established itself as the thinking man's luxury car: performance and panache without hassle or worries about maintenance.

Acura, Lexus, and Nissan's Infiniti division have created a rich source of profits for themselves -- and denied them to American automakers. While competition and fleet fuel-economy rules make small cars a breakeven business or worse, luxury autos can return up to $11,000 each in gross profit. Japan had learned Willie Sutton's lesson: Go where the money is.

CHRYSLER SLIPS BACK TO THE BRINK Even though it abandoned its ill-advised sortie into diversification, by 1988 Chrysler was hurting again. Its lineup of modified K-cars was aging fast, making cash rebates of up to $2,500 necessary to entice buyers. Chrysler's trucks also showed the effects of capital deprivation. The full-size pickup and van, the Dodge Ram, hadn't been changed since 1962. Chrysler had clearly been starving its core business. The company camouflaged some of its shortcomings behind a bewildering array of nameplates. Thad Malesh, a forecaster for J.D. Power & Associates, counts 66 separate models marketed by Chrysler during the 1980s, nearly twice as many as Ford -- which was twice as big. Iacocca used some names over and over again; no fewer than five different models bore the name LeBaron. In a marketplace with 500 nameplates, it's arguably more efficient to reuse those that already have some public awareness. But customers were confused, and Chrysler was too poor to support all the models with adequate marketing. Preoccupied with digesting American Motors, Chrysler still hadn't figured out what it wanted to be when it grew up. Every car in its lineup, as well as the minivan, used the engine, suspension, and underbody parts -- the ''platform,'' in industry jargon -- developed for the K-car in 1980. Says a top Chrysler executive: ''In retrospect, we obviously should have done a new car platform in '88 or '89. While doing everything on the K platform was very efficient, you had the advent of the massive array of Japanese products, all on different platforms. It probably was asking too much for a platform to go from a $10,000 Shadow or Sundance to a $28,000 Chrysler Imperial. Once the press started picking up on that, it became a liability.'' Always proud of its engineering, Chrysler was getting a name for cobbling up new cars out of a parts bin. Time was running out elsewhere in Detroit as well. Though car sales would exceed ten million for the fifth consecutive year in 1988, the long Eighties boom was waning. More and more, U.S. manufacturers were using incentives and fleet sales to keep factories running. As additional transplanted Japanese factories started production -- there would be eight by 1990 -- auto production in the U.S. was being transferred ever so gradually from American to foreign ownership. Slowing sales amplified the problems Chrysler faced trying to integrate AMC. Payrolls ballooned and AMC's retired workers swelled Chrysler's pension rolls. Taking on AMC's Kenosha and Toledo assembly plants depressed Chrysler's overall efficiency. ''Chrysler was at Ford quality levels before it swallowed AMC,'' says Michael Flynn, a University of Michigan researcher. As Iacocca memorably expressed it to FORTUNE: ''The fat really dropped right on our heads, and then we were in a two-year bailout getting the costs out.'' Though he is often accused of loafing when times are good, Iacocca's juices start to run when things turn sour. No longer distracted by his vision of a holding company, he was ready to focus on the car business again. And just in time. A crisis was brewing at Chrysler. Company executives began meeting in the spring of 1988 to develop a schedule and a budget for new models. They decided that Chrysler needed to concentrate its resources on four high-visibility -- and high-profit -- cars and trucks to reestablish itself as a serious automotive manufacturer. They agreed that no matter what the economic climate was, over the next five years those ''crown jewels'' had to be brought to market on schedule: the 1991 minivan, the 1993 Jeep Grand Cherokee, the 1993 LH sedans, and the 1994 T300 full-size pickup. Despite the ensuing recession and cash crunch, the first three arrived as promised and the fourth is ready for launch next fall. The longest gestation period belonged to the LH. Development had begun even before the 1988 meeting, but in an effort to make the car all things to all people, engineers had loaded it up with expensive and weighty features like active suspension and four-wheel steering. Says a top Chrysler executive: ''It had so much stuff that when we looked at the cost and investment, we saw they were at levels where it wouldn't be a commercial proposition.'' Chrysler stopped the project and didn't restart it until the spring of 1989. New models wouldn't do Chrysler any good if they had the same stodgy styling as before. Though Iacocca was now a good 20 years older than most of the stylists who worked for him, he still liked to make imperial tours of the design department to approve paint strips and wheel-cover design. He remained inordinately fond of the squared-off roofs topped with thick vinyl padding that had festooned Fords a decade earlier. He wanted them on Chrysler's products. Grumbles one former company executive: ''People over 60 shouldn't be allowed to design cars.'' With the arrival from Ford in 1986 of Robert Lutz, now president of Chrysler Corp., design had begun to get more contemporary. Lutz, a hard-core car enthusiast, wasn't afraid to confront Iacocca on styling issues. Says Tom Gale, Chrysler's gifted design boss: ''The design organization changed in the mid-1980s. Lee has let it happen, even though he's been uncomfortable.'' To build the new cars, Chrysler decided to reorganize its entire engineering department. The company stole from the best: It dispatched 12 of its most promising managers under 35 to study Honda. They discovered that the Japanese automaker had eliminated strong functional engineering groups organized around electronics, suspensions, and the like, in favor of teams that included marketers, suppliers, designers, and production specialists. The AMC acquisition forced Chrysler's hand. Rather than blending AMC's 700 engineers into its 6,000-person engineering department, which was broken down by function, Chrysler kept them apart and gave them sole responsibility for developing the Grand Cherokee. Says Lutz: ''We quickly noticed that they operated better. They were more cohesive, less bureaucratic.'' So Lutz plucked about 1,000 engineers out of specialized departments and put them on the LH platform team.

The reorganization was directed by chief engineer Francois Castaing, an alumnus of Renault and AMC. Chrysler's engineers, strong on tradition and hierarchy, disliked taking direction from the intense Castaing, who speaks with a heavy French accent. Joseph Cappy, former AMC boss and now head of Chrysler's international operations, says Castaing got poison-pen letters accusing him of ruining the organization. As the platform team reorganization was taking hold, Chrysler began to tighten up elsewhere. Iacocca, who is something of a pessimist despite his supersalesman persona, determined early in 1989 that a recession was coming and that Chrysler would have no chance of surviving in its bloated condition. He ordered up a $1 billion cost-cutting program and quickly sprang it on the board of directors.

So pleased was Iacocca with the reception the cost cutting got from investors that he kept raising the bar. By the end of 1992, Iacocca declared, Chrysler would have reduced its overhead by a total of $3 billion. Vice chairman Robert Eaton, the former GM man anointed by the board as Iacocca's successor, has said he wants to take another $750 million to $1 billion out in 1993. One former executive says that since the first $1 billion, the cuts have been mostly smoke and mirrors. But they were enough to let Chrysler survive a $795 million loss last year and launch its new models on schedule in 1992. Once again Iacocca had steered the company out of the ditch. This time, though, he was the one who had driven the company into it.

GM-10: ''THE BIGGEST CATASTROPHE IN AMERICAN INDUSTRIAL HISTORY'' After the reorganization of 1984, nothing went right for GM. Car market share continued its inexorable decline -- from 44.6% in 1984 to 42.7% in 1985 to 41.2% in 1986. Still, GM could assert in its annual report: ''The challenges we have experienced in 1986 are exactly what would be expected in a huge organization literally rebuilding itself from the inside out.'' Then came the Big One. In 1987, GM's share of car sales skidded all the way down to 36.6%, a drop of nearly five points in a single year. Buick alone lost 1.3 of those points, falling from 769,434 cars to 557,411. Chevrolet tumbled from 1.7 million to 1.5 million. The biggest loser was Oldsmobile, which plunged from 1.1 million to 714,394. With masterly understatement, the annual report described the horrific results as ''a transitional period of lower volume.'' Unlike Chrysler and Ford, wealthy GM had redesigned almost its entire car line in the early 1980s. It had changed from rear-wheel drive to front-wheel drive to reduce weight and improve fuel economy. Alas, no good deed goes unpunished. Gas prices started heading lower, reviving demand for larger cars even before the last of GM's downsized models reached showrooms in 1985. And in the rush to get the redesigned cars to market, GM neglected to remove all the bugs. The new models weren't nearly as good as those they replaced. Today Roger Smith, who still sits on GM's board, says he could see the losses coming: ''We knew we were at a percent of the market that was unsustainable over a long period. In the early 1980s you had Chrysler in semi- bankruptcy and Ford with product problems. So what do you do? Do you say to yourself, 'The best I can do is a 38% market share, so I'm not going to build any more after that?' Hell, no. You go out there and build every car you can. And we did.'' Robert Stempel believes the loss of market share reflected GM's manufacturing problems. He told FORTUNE: ''The market was reacting to the sins of the early Eighties. We changed from a lot of well-known rear-drive cars to new front-drive cars. We disappointed a lot of people in the process. In 1987 the guy who bought in '82 or '83 was back and really mad at us and said, 'No, I'm not going to do it this time.' '' As it did in the reorganization, GM had taken on too much -- and done it badly. Switching the drive wheels of a car from the rear to the front requires entirely new mechanical systems and changes the dynamics of the car. Once the project got under way, corporate momentum demanded that it be completed on time. Nowadays, with buyers intent on quality, automakers are far more willing to delay introducing a car if they think it isn't screwed together right. Compounding the engineering problems were two fundamental design errors. First, to create a corporate ''look,'' GM's new cars were designed to resemble one another. Buyers not only couldn't distinguish an Oldsmobile from a Buick but also had a hard time telling a $9,000 Pontiac Grand Am from a $25,000 Cadillac Eldorado. Worse, the Eldorado and other luxury models wound up little bigger than the compact Grand Am. Fine for Pontiac, catastrophic for Cadillac. Stempel is still smarting. Says he: ''The customer looked at it and said, 'That's too small. I don't like that car.' All of a sudden a nice volume car selling 60,000 went to 25,000.'' John Casesa, a security analyst for Wertheim Schroder and an ex-Big Three product planner, estimates that this luxury car fiasco cost GM $1 billion in lost profits in 1986 alone. These accumulating disasters meant that GM had lots riding on what became known as the GM-10 program. It originally called for replacing all of GM's midsize cars -- Chevrolet Celebrity, Pontiac 6000, Oldsmobile Cutlass Supreme, and Buick Century. Each of the four divisions would get a coupe, a sedan, and a station wagon. Seven plants would be outfitted to produce 250,000 cars a year apiece, for a total of 21% of the U.S. car market -- more than Ford's entire share. It would be the largest new-model program ever, the ultimate expression of GM's ability to capitalize on its enormous economies of scale. But GM couldn't pull it off. The world's largest corporation choked. In a 1983 economy drive, the station wagon was dropped and the program was cut back to four plants. Then came the 1984 reorganization. The car divisions dragged their feet on lending engineers to the project, which had no resources of its own. Says Stempel: ''GM-10 was a victim of change. Responsibilities moved. People who were on it were not on it anymore. It was a rough time.''

A new program manager was installed, then yet another one. GM-10 was moved to the Chevrolet-Pontiac-Canada group and restarted. When Ford introduced the Taurus in 1986, GM was forced to rejigger its designs so the cars wouldn't look like copycats. Then came another corporate cash squeeze. GM couldn't afford to produce all eight remaining GM-10 versions simultaneously, so they would have to be rolled out separately over two years -- two-door versions before four-doors. Eight years after the project began, the final GM-10 car came to market in 1990 -- but the market had moved. Coupes were declining in favor because baby- boomers with growing families wanted sedans. Ford foresaw the eclipse of the coupe and never developed a two-door Taurus, but here was GM in 1988 introducing four new coupes. Who goofed? Says Roger Smith: ''I don't know. It's a mysterious thing. I've said I'll take my share of the blame on all those things. I was part of the team.'' The mess exposed a crucial defect in GM's management by committee. As decisions were passed up through various committees for approval, they developed a momentum of their own. By the time they reached the top, they had an inevitability about them, even if they no longer made sense. GM's top committees were notorious for ratifying, not deliberating. Sales of the GM-10 cars started slowly and never got up to speed. In 1989, GM lost more than $2,000 on every GM-10 car it built. The next year GM managed to sell 537,080 of the cars with all the marketing resources of four divisions behind them, while Ford pushed 410,077 Tauruses and sibling Mercury Sables through just two divisions. Last year Oldsmobile sold 87,540 GM-10 versions of the Cutlass Supreme. In 1979 it had sold 518,160 of the models the GM-10 car replaced. GM-10 exposed critical inefficiencies in GM's plant system. The cars used less than 50% of the manufacturing capacity in the four plants allotted to them. But GM couldn't fill those plants with other models because none of the factories were sufficiently flexible to build anything else. Even worse, the assembly process was roughly half as efficient as Ford's. According to GM's own calculations, its workers spent about 35 hours assembling each GM-10 car while Ford built a Taurus in 18 hours. General Motors' deficiencies on the factory floor remain acute. GM treats manufacturing as a stepchild and seldom puts top executives in charge. Its cars are difficult to assemble because ease of manufacture has ranked low in design priorities; plans for a new model simply get passed over the transom, in Detroit parlance, to the factories to build as best they can. Instead of retraining or redeploying workers, GM has relied on technology and automation to increase productivity -- with indifferent results. Relations with the United Auto Workers range from poor to dreadful. James Womack, an MIT researcher and co-author of a landmark industry study, The Machine That Changed the World, calls GM-10 ''the biggest catastrophe in American industrial history.'' It will bedevil GM through the 1990s. Should the company invest the money required to remodel the GM-10 cars for the rest of the decade? Or should it merely update the aging Buick Century and Oldsmobile Cutlass Ciera, the highly profitable competing models in production since 1982? The answer will almost surely depend on which costs less. After years of boasting about its financial strength, GM is short of cash and will lose money for the third year in a row in 1992. With its market share shrunk, it will never again attempt anything as grandiose as GM-10. No longer can Chevrolet, Pontiac, Oldsmobile, and Buick expect to sell differently badged versions of the same car. Today's buyers want more individuality, not less of it.

WHY SUCCESS CAUSED TROUBLE FOR FORD IN THE LATE '80s What happened at Ford after 1986 is a reminder of how tough it is to stay lean in fat times. It also epitomizes the difficulties of running a business when the effects of decisions -- the styling of a new car, say -- aren't known until four or five years later. For several years after it introduced the Taurus in 1986, Ford tried to live up to the car's success -- and mostly failed. Product development faltered because the Taurus approach had not been institutionalized. Design reverted to conservatism. Costs escalated. After going two steps forward, the company took nearly two steps back. Says MIT's Womack: ''Ford would have been better off if the Taurus hadn't been so successful.'' Intentionally or not, Ford slacked off. Discipline did not return until the board of directors forced the early retirement of CEO Petersen in 1989 and replaced him with tough-minded Red Poling. Taurus took Ford by surprise. Other new models still in development weren't designed to build on its success. Says Allan Gilmour, head of worldwide auto operations: ''The cars that were on the drawing board when the Taurus and Sable were introduced did not take the big step forward that those did.'' Ford couldn't top itself, even if it wanted to. As things turned out, it didn't want to. After years of letting GM lead in design, Ford was uncomfortable in the role of front-runner. Says Kenneth Kohrs, 51, the boyish-looking head of car product development: ''I think Ford management got a little bit scared that we may have pushed the envelope too far on style. We kind of went through a lull after 1986.'' President Philip Benton agrees. Says he: ''When the Taurus was launched in 1985, Roger Smith called it a jellybean. Every newspaper and magazine writer in the country picked that up. I was there at the design committee in 1987 and 1988, and I think we said, 'Hey, we bit off a lot. Now let's capitalize on what we've got.' '' Ford seemed to lack the courage of its convictions. A quirk in the product development schedule compounded the effect of Ford's ambivalence about car design. To save money, many of the cars introduced after Taurus were based on old layouts of engine, transmission, and suspension, which limited the designers' flexibility. Certain key dimensions called hardpoints couldn't change without totally reengineering the cars. Maintaining, say, the height of the engine compartment or the width of the rear wheels meant that stylists couldn't stray far from previous designs. More fundamental problems also afflicted Ford's product development. Once the bet-the-company, everybody-pull-together Taurus was out the door, Ford reverted to more traditional, less efficient ways of getting cars from concept to assembly line. Observes Daniel Roos, head of the international motor vehicle program at MIT and another co-author of The Machine That Changed the World: ''The Taurus was a superior product, but it wasn't clear that Ford had the process figured out.'' Costs got out of hand. Benton confesses: ''The thing that caught us by surprise was the investment required to bring out a new product. One paint system in a new plant now costs almost $400 million.'' The most prominent victim of Ford's relapse was the 1988 Ford Thunderbird. It and its near-twin Mercury Cougar zoomed past their original price and weight targets, so they arrived on the market costing Ford $1,000 more per vehicle than planned. Says technical chief Louis Ross: ''That's a lot of money. If you sell 300,000 cars a year, that's $300 million.'' Astoundingly, Ross says Ford didn't even discover the true extent of the cost overrun until 15 months after the car was introduced. He blames a lack of controllers and cost estimators on the project. The success of the Taurus continued to cast a rosy glow over the rest of the product line. Ford reported record profits in 1987, 1988, and 1989. As GM's sales sank, Ford's rose. From 1986 to 1989, Ford gained 4.1 percentage points of car market share while GM lost six. Ford was enjoying what Ford Division chief Ross Roberts called ''ostentatious prosperity.'' Once Ford's outside directors saw that costs were getting out of hand, they acted. In the spring of 1989 they discovered that a confluence of retirement dates threatened to deprive them of several top executives just when a recession-induced sales decline seemed imminent. Younger managers weren't deemed ready to be moved up. Petersen appeared to be spending less time running the business and more time aboard the corporate jet. His ties to the Ford family -- at one time an asset -- had become a liability. Petersen's wife, Jo Anne, had been close to Henry II's third wife, Kathleen. But now Henry was dead and Kathleen was fighting over his estate with Edsel II, Henry's son, a board member. Faced with a choice of seeing Petersen serve out his term or ensuring that Poling would stay on past normal retirement to guide the company through the recession, the board decided to let Petersen go. He made the public announcement, declaring that it was time to ''repot himself.'' Within four months he had left the company for good, forgoing the usual post-retirement stint on the board of directors. Though it was handled deftly, the board- directed management change generated a shock wave that was echoed two years later at Chrysler and GM. Quiet and disciplined, Poling may never get the credit outside Ford that he deserves. He is better known as a first-rate golfer than as an auto enthusiast; he doesn't fit the mold of a ''car guy.'' He is known as a cost cutter -- a bean counter, not a builder -- but that's part of his management credo: ''My philosophy has always been to be the low-cost producer. When you're the low-cost producer, you're in charge.'' He won't admit that Ford coasted in the late 1980s but concedes it should have paid more attention to expenses. Says he: ''It's much more difficult to keep attention focused on costs when you're turning a good profit. It was a mistake not to push for additional cost reductions.'' Just as Poling arrived as CEO in March 1990, the roof fell in. Ford lost 1.5 points of car market share during his first year and went $2.4 billion in the red a year later. But help was on the way. North American head Alex Trotman pushed through a plan to lop 20% from salary costs through layoffs and productivity improvements and to increase the return on capital spending 20% by 1995. A one-price program that eliminates showroom dickering has spurred sales of some inexpensive Escort models. The Taurus is challenging the Honda Accord for sales leadership with aggressive marketing, a successful redesign last year, and a V-6 engine that the Accord doesn't offer. In the first nine months of 1992, Ford sold 1,963,096 cars and trucks -- 209,000 more than during the same period last year despite an all-but-flat U.S. market. Its new trucks are popular, and it cut prices on older models, such as the Tempo and the Thunderbird. There's nothing flashy about being the low-cost producer or the leader in trucks. Even the strong-selling Taurus is only a warmed-over redo of the 1986 original. But Ford is proving itself consistent, dependable, and predictable -- which happen to be Poling's three favorite adjectives to describe himself. SOME of the epochal events of the past ten years in the U.S. auto industry took place not in a factory or design studio but the privacy of boardrooms. Directors at each of the Big Three have ousted or severely shaken up incumbent management. Following Petersen's repotting by the Ford board in 1989, Chrysler's directors punched Iacocca's retirement ticket in March 1992 and turned aside Kerkorian's attempt to postpone his exile in August. The shocks from GM's board coup in April continue to reverberate. Speculation now focuses on how long Stempel and his sidekick, former president Lloyd Reuss, will retain active roles. Continued losses discredited Stempel's go-slow strategy; frequent strikes by the UAW have undermined his attempts at conciliation. His hospitalization in mid-October for high blood pressure may give him a graceful way to ease out of the chairman's job. Those dramatic board interventions provide convincing evidence that all three automakers performed below their potential in the 1980s. But they also signal that the 1990s are an era of change, symbolized by the new model of key executive -- GM's Jack Smith, Ford's Alex Trotman, and Chrysler's Bob Eaton, all of whom have lived and worked abroad in major jobs. With luck, the U.S. economy will cooperate. This most cyclical of industries has been scraping bottom. Buying a new automobile is postponable, but not indefinitely. Once sales pick up, four or five years of relative prosperity could lie ahead. The automakers that share in it will have several characteristics in common. They will have costs under control. Their products will be strong in the growth areas of the market, such as sport-utility vehicles and minivans. And their managers will be flexible enough to adapt to changing conditions and unexpected events. On this side of the Pacific, Ford and perhaps Chrysler hold the best positions. On the other side, the good seats belong to Toyota and possibly Honda. The rest of the decade looks less rewarding for Japanese automakers than the immediate past. Says Honda North America President Koichi Amemiya: ''The Nineties will be as challenging for Japan as the Eighties were for Detroit.'' Increasing production in post-1992 Europe will absorb most of the excess capital that Japanese automakers can generate this decade. In the U.S., Japan's market share will be restricted by supply. No new transplants are planned, which means that production of cars and trucks will level off at around 2.5 million in the mid-1990s. Currently imports of Japanese cars are running slightly below the present limit of 1.65 million. Even if the Honda Accord falls out of the No. 1 sales position this year, or Japan's share of the U.S. market fails to rise in 1993, the Japanese won't be down for long. Overall, Wertheim Schroder's Casesa figures, the Japanese will introduce as many new cars and trucks over the next four years as GM, Ford, and Chrysler combined. They remain leaders in productivity, flexibility, design, and niche marketing. They are masters at probing the customer base and quickly developing appealing products. Says Martin Anderson, formerly an MIT auto researcher and now with Gemini Consulting: ''The Japanese have taken the lead in sex appeal -- and they can make money in segments as small as 25,000.'' When they misfire, they retreat quickly and reload. Over the rest of the decade, the fortunes of Japanese manufacturers will diverge. Toyota grinds out winners the way the New York Yankees used to win the World Series. Apart from Mazda it is the only major Japanese automaker to gain car market share in the U.S. this year. Says Toyota Motor Sales vice chairman Robert McCurry: ''My personal feeling is that Toyota can grow as fast as it wants to grow.'' ! Honda's Japanese management has undergone two shakeups in the past year. U.S. sales have dipped because new models appear stodgy. But Honda is quick to identify and solve problems, and it plans to add several models to its lineup. Honda is also using its Ohio manufacturing complex as a worldwide supply source and will get extra profits from it by building 50,000 cars there this year for export to Japan and Europe. Three other Japanese automakers will likely make up a second tier going forward. Nissan is trying to rebuild its franchise with the new Tennessee-made Altima, while it struggles to establish the Infiniti luxury line. Mazda, having introduced five new models in the past 12 months, will be busy marketing the dickens out of them for the next three years; acute financial problems at its corporate parent in Japan won't help. Mitsubishi, much like Brazil, always seems to have a future much brighter than the present. Its U.S. performance doesn't reflect the quality of its cars, its success in Japan, or the financial muscle of its owner. Of the remaining four Japanese automakers in the U.S. -- Subaru, Isuzu, Suzuki, and Daihatsu -- Michigan's David Cole says, ''a couple of them will be in trouble in a few years.'' Daihatsu has already announced its withdrawal from the U.S. market, Isuzu may stop selling cars (but not trucks) here shortly, and Subaru is suffering losses. Detroit leads Japan in several important respects. American cars are price and value leaders. The Big Three continue to monopolize production in two uniquely American categories: six-passenger cars and full-size pickups with V- 8 engines. They also have a big lead in the two fastest-growing market segments, sport-utility vehicles and minivans. Progressive management thinking is making advances in the U.S., thanks to the Japanese competition. Ford lifts the quality of its cars by benchmarking individual components and processes. Chrysler is reorganizing itself around information flows rather than functions. By putting together people who need to talk to each other -- a designer and a marketing specialist, for example -- it can get things done faster, cheaper, and with fewer mistakes. GM's Saturn is pioneering improvements in relations with dealers, suppliers, and workers. All of the Big Three have to figure out how to develop electric cars that meet the government's demand for pollution-free autos by the end of the decade -- and get customers to buy the expensive, short-range vehicles. They must < cope with pressures for progress in safety, highway congestion, and recycling. They need a treaty with the UAW that allows the union to ease the hardship on its workers as the automakers cut payrolls. And they have to rein in spiraling health care costs that have reached an average of $600 per car, vs. $252 for Toyota in Japan. As they have for the past ten years, the U.S. automakers are also following diverging paths. Overall, Ford looks stronger than it has since the Model T went out of production in 1928. But a new team of top managers will take over next year, holes in the product line need to be filled -- notably with a $30,000 sedan to compete with Buick, Oldsmobile, and the Japanese -- and the company must learn to be a leader. It may get an unwelcome opportunity to do just that next summer, when the UAW is almost certain to pick it as the chief target among the Big Three for contract talks. Chrysler has to ease Iacocca off the stage with a minimum of disruption, carry out its new model program, and avoid expensive mistakes. Then it must restructure its marketing and distribution system, shore up its finance subsidiary, fund its pension plan, and repair its credit rating. Vice chairman Bob Eaton is untested as a top executive, but Chrysler possesses some of the best 45-year-old managers in the industry. With luck Eaton will bequeath them a financially healthy company to run ten years out. The slow-motion catastrophe that has befallen General Motors is still unfolding. Despite a burst of new models, its market share sank to a meager 33% in September, vs. 35% a year ago. Rationalizing the product line, strengthening the supply network, closing plants, and laying off workers will require another three or four years of painful but needed cuts. Jack Smith has already found the going harder than he expected. The boxes are in the right place on the organizational charts, but the lines of communication and the financial data required to make the restructuring work aren't yet fully functional. Says he: ''It has taken a little longer to get everything focused the way we want to look at things, and we've got a lot of cost challenges. We're far from home.'' Smith faces enormous marketing and product problems that are GM's alone. Its buyers are aging: The average Buick owner is about 60, while Cadillac owners average 65. The company is weak in the growth segments: sport-utility vehicles, compact vans, midsize cars. Chevrolet and Oldsmobile need big help to revive franchises. While Saturn is a hit, it isn't profitable because it is priced cheaply and requires twice as many worker-hours to assemble as a Ford Escort. Saturn also lacks a future product plan. Smith wants it to raise prices and bring out smaller cars. Author and security analyst Maryann N. Keller has been a persistent, prescient critic of GM. In a case study presented at Indiana University's graduate business school this fall, she wrote: ''GM lost an entire decade, during which it not only failed to address its competitive problems but also added to its list of problems. Whether the new management has the capital and time to solve them to restore product and cost competitiveness is an open question.'' In the short run, Ford and Chrysler stand to benefit from GM's slump because their cars offer natural places for GM's customers to go. But a longer or sharper decline at General Motors would destabilize the industry. Ford and Chrysler wouldn't have enough production capacity to absorb all of the extra business. And a loss of confidence in the biggest of the Big Three could undermine the other two as well. GM needs to strengthen its hold on its core customers, adapt to its weakened financial position, and try to rebuild from there. The future of Detroit hangs largely on GM's ability to do in the Nineties what Ford and Chrysler did in the Eighties: turn itself around.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: JOHN CASESA, WERTHEIM SCHRODER CAPTION: As the slowdown of the 1990s took hold, U.S. automakers quickly felt its effects: Revenues declined; profits disappeared, although 1992 should show a turnaround. Japan is just getting pinched, but Nissan and Honda already find the going rougher than mighty Toyota. WORLDWIDE REVENUES PROFITS

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: MVMA; JAMA; AUTOMOTIVE NEWS; WARD'S CAPTION: DOMESTIC PRODUCTION Sharp swings in the number of vehicles produced raised costs for U.S. producers because stops and starts are costly. Japan has enjoyed almost uninterrupted increases for the past 40 years.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: ECONOMIC STRATEGY INSTITUTE CAPTION: MANUFACTURING COSTS Detroit's showing has been aided by the Japanese yen, which has become 65% more valuable than it was in 1982.

CHART: NOT AVAILABLE % CREDIT: FORTUNE CHART/SOURCE: J.D. POWER & ASSOCIATES; AUTOMOTIVE NEWS CAPTION: SHARE OF U.S. CAR MARKET Limited U.S. capacity plus import restraints will dampen Japan's share growth. High prices push most European cars into the luxury category now.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: TOTAL RETURN TO INVESTORS Since the early 1980s, in total return, Ford and Chrysler -- but not GM -- have outperformed Standard & Poor's 500-stock index.