Special Report on the Auto Industry the Big Three Get in Gear Detroit Battles Imports Amid a Growing Car Glut

By George Russell

From Flint, Mich., to Fremont, Calif., from West Germany and Yugoslavia to Japan and South Korea, they roll off the assembly lines with daunting speed. Cars, cars and still more cars. Suddenly they are being turned out by more manufacturers in more locations than at any time in decades. In myriad shapes, sizes and colors, price tagged for all pocketbooks, in a glittering, growing, chromium-plated cavalcade seemingly without end, they continue to cruise into U.S. showrooms and, with slightly less frequency, back onto the streets of America. Under the impact of that four-wheeled flood, the $230 billion-a-year U.S. auto marketplace is being pushed, pulled and pummeled into new forms and shapes as one of the most diverse, sophisticated and, above all, brutally competitive selling arenas in the world.

Why the frenzy? And why now? The main reason is a hike in global automaking capacity that has already dramatically increased output around the world and will do so for several more years. South Korea is showing that a developing country can build an auto industry almost overnight and quickly crack the American market. Japan, the premier auto exporter of the '80s, is still fighting hard for U.S. market share and is rapidly building up its own American manufacturing capacity, largely in so-called transplant factories that depend heavily on imported Japanese parts. Meanwhile, American auto companies have entered into new and exotic relationships with foreign producers, both in the U.S. and abroad, that can only further add to the potential auto glut. By 1990 the excess production capacity in the U.S. could reach 1 million to 2 million cars annually, or roughly 10% to 20% of projected domestic sales.

Lloyd Reuss, an executive vice president at General Motors, has a clear view of the prospect. Says he: "The good news is that North America is the only automotive market in the world where there's a good shot at a profit. The bad news is that everyone knows it." Agrees Donald Ephlin, a vice president of the United Auto Workers: "We are talking about fundamental changes in the world where we live and the market where we compete."

Change -- painful and profound -- is something that U.S. auto companies, especially Detroit's Big Three, have been struggling with for years. Battered in the early '80s by recession and imports, GM, Ford and Chrysler were bolstered by short-term protectionist measures, chiefly the imposition of "voluntary" export restraints on the Japanese. By 1984 the Big Three had rallied to their highest profit level ever: $9.8 billion in all.

But protectionism has since begun unwinding: the Reagan Administration stopped forcing quotas on Japan in 1985. Even though the Japanese unilaterally imposed their own ceiling on the number of cars exported to the U.S. that year, the quota was a full 24% higher than the one for the year before. In 1985 Detroit's collective profits shrank a bit to $8.1 billion, and this year are expected to decline again, to $7.1 billion.

In line with the increasingly competitive climate, some Wall Street analysts expect Detroit's share of the American auto pie to shrink from its current 68% to as little as 55% by 1990. Indeed, tiny American Motors (1985 sales: $4 billion) has already virtually become a marketing arm of France's Renault, which owns 46% of AMC's stock. The American company lost $125 million last year, and its future may depend on the success of two new Renault models, the Premier and the Medallion, that AMC will introduce in the fall.

GM, Ford and Chrysler, however, are battling back in many ways. In the past two years, they have sunk an estimated $20 billion into new, high-tech plants and other forms of modernization to cut costs and raise efficiency. They have also fashioned new agreements with labor unions to boost productivity and taken critical aim at inefficient white-collar bureaucracies. By sending increasing numbers of parts orders abroad, they have drastically reshaped their traditional supply networks. The big U.S. automakers have redesigned many of their offerings, sometimes radically and often with the help of new < foreign partners, and have marketed them with new aggression and esprit. With varying degrees of success, the U.S. firms have tried to show some of the same flexibility, nimbleness and innovation that critics have long praised in their foreign competitors (see following stories).

If the tough, new competitive climate holds good news for anyone, it is the American consumer. Never before have the automotive choices been so diverse or so neatly divided into clear market segments. Companies are offering up a host of new innovative products, including minivans, four-wheel-drive utility vehicles, new subcompacts and novel aerodynamic sports cars.

For all the concerns about the future, 1986 may end up as one of the auto industry's better years; a projected 11 million cars will be sold in the U.S., 7.5 million of them American made. That is not quite as good as 1985, when U.S. manufacturers put out 8.2 million of the 11 million units sold. But it is still far better than 1982, the worst year in recent automotive history, when only 5.8 million American cars were among the 8 million sold.

U.S. auto-sales projections for 1987, though, are clouded by imponderables. Because many people have been rushing to buy cars before the end of the year, when tax reform will reduce deductions for sales taxes and consumer-loan interest, auto sales may sag early in 1987. Yet another unknown arises from the wave of bargain financing deals that helped boost 1986's auto-sales gains and in the third quarter cost Detroit's Big Three, plus AMC, an estimated $550 million. Did those inducements merely "borrow" sales from 1987, and will similar gimmicks be required next year? Many analysts and automakers fear that the answer to both questions is yes.

Meanwhile, the tide of imports keeps swelling. West German luxury carmakers BMW and Mercedes-Benz expect to enjoy banner years in 1986, selling a projected 92,000 and 90,000 cars, respectively, in the U.S. Although the totals are small, the exports are in the highly profitable $20,000-to-$60,000 price range and skim off a nice portion of the cream of the American market. Sweden's Saab and Volvo and Britain's Jaguar enjoyed record export sales in the U.S. last year and hope to do the same this year and in 1987.

At the opposite end of the price scale, South Korea's Hyundai Excel has made a dazzling debut. The $4,995 subcompact has sold more than 130,000 units so far in 1986, a record for an imported auto's first year. Much less ; successful was the invasion of Yugoslavia's Yugo, a remodeled Fiat that sells for $3,990 and is billed as the cheapest new car in the U.S. The monthly Consumer Reports urged its readers to buy a good used car instead. So far in 1986, fewer than 28,000 Yugos have been sold.

While the newcomers multiply, Japan's automakers continue their relentless march. They are expected to export to the U.S. all 2.3 million vehicles permitted under their self-imposed quota this year, exceeding last year's 2.2 million -- a formidable achievement, considering that the value of the Japanese yen is more than 20% higher in relation to the U.S. dollar than it was a year ago. The currency hike, experts believe, has added about $1,300 to the average production cost of an imported Japanese car. Even so, industry executives estimate that Japanese compacts and midsize cars still cost roughly $700 less to produce than their American equivalents.

The currency change and past protectionism have spurred the explosive growth of Japanese manufacturing facilities on U.S. soil. Honda and Nissan operate plants in Ohio and Tennessee, respectively, that together produce 560,000 vehicles annually. They will soon be followed by Mazda (Michigan), Toyota (Kentucky) and a joint venture, location to be announced, between Fuji Heavy Industries (Subaru) and Isuzu.

One sign of the changing automotive times is that U.S. companies are collaborating with the Japanese in their new enterprises. This fall, as Toyota starts annual production of 50,000 of its peppy Corolla FX-16 at a joint- venture plant in Fremont, Calif., it is also assembling 200,000 Chevy Novas for GM. Ford, which since 1979 has owned 25% of Mazda, has agreed to buy up to 50% of the output of that company's Michigan plant, to be sold as part of the Mustang series. Chrysler and Mitsubishi have a joint project known as Diamond Star, which will begin building cars in Bloomington, Ill., by late 1988.

No country better illustrates the increasingly intimate relations between U.S. and foreign carmakers than South Korea, where autoworkers earning $2.50 an hour (vs. about $15 in Japan and $25 in the U.S.) benefit from a production boom largely of foreign inspiration. Daewoo, the nation's second largest automaker after Hyundai, is preparing to ship next year as many as 100,000 units annually of a new GM subcompact known as LeMans, to be sold through Pontiac. Daewoo is 50% owned by GM. Ford owns 10% of Kia, South Korea's third largest auto manufacturer.

Amid the frenetic activity, says Ford Chairman Donald Petersen, "the real battle will be won by whoever is best able to utilize capacity." Above all, that is a call for more automaking efficiency, meaning greater use of low-cost suppliers, more highly automated and productive plants -- and, in all likelihood, fewer workers, who will receive lower wages in return for better guarantees of job security. The reality is that the future for the major U.S. auto companies is already here. The heartening fact is that not one of them is trying to avoid it.

With reporting by Thomas McCarroll/ New York and William J. Mitchell/Detroit