Detroit Hits a Roadblock

Automen and consumers share the onus for a lack of small cars

From the Toyota Tercel driver on the Santa Ana Freeway in Los Angeles to the Volkswagen Rabbit owner dodging potholes on the F.D.R. Drive on Manhattan's East Side, the American-built car has become an object of derision and jokes. All too many American drivers now consider the cars they once fawned over to be simply too big, too heavy and too expensive. As car sales continue a yearlong slump and the auto industry faces its gravest crisis ever, an increasingly anxious public is asking: Why can't Detroit build more and better small cars? Why is it so out of step with what consumers need today?

The answer involves a complex series of market misjudgments by Detroit automakers, heavyhanded Washington regulations that distorted the real price of gasoline and fickle consumer tastes that flipped almost overnight from Big is Beautiful to Small is Super.

The industry's problems are staggering. Sales of U.S.-made cars for the middle ten days of May declined 30%; worker layoffs passed the 300,000 mark for the first time last week; and imported cars now command an unprecedented 27% of the domestic auto market. In Detroit, a town once noted for a cocky, can-do attitude, the mood is somber. Says Ford Chairman Philip Caldwell: "There's more at risk in the auto business now than there has been for a long time. Maybe ever."

The country meanwhile continues to struggle with an economic slump that is sure to drive Detroit's depression still deeper. Durable goods orders dropped a steep 4.2% in April, and retail sales declined 1.2%. Spokesman Jody Powell said President Carter now believes that Americans no longer need to heed his imprecation against credit card use and urged them to begin spending more freely again.

The Federal Reserve responded last week to the economic storm clouds by beginning to dismantle the credit restrictions it had imposed only two months ago. This led to expectations that interest rates will continue dropping in the coming weeks. One encouraging omen was that inflation is perhaps beginning to abate at last. Consumer prices during the month of April rose at an annual rate of only 11.4%, down from the first quarter's horrifying 18.1% yearly level.

Today's moody Motown sound is in sharp discord with the tune played two years ago. Then the auto industry enjoyed its third-best year in history as buyers snatched up the biggest and most expensive cars it made. Today those same high-powered, six-passenger American cars are an anachronism.

With Detroit-built small cars in short supply and considered by many to be of poor quality, Japan has happily filled the void. This year it will sell 2.2 million cars to U.S. drivers. The Japanese auto industry, which was only growing up a decade ago, will produce more automobiles this year than its American counterpart.

Ever since 1913, when Henry Ford fired up the world's first moving assembly line in Highland Park, Mich., to build Model Ts and began paying workers the then unthinkable salary of $5 a day, Detroit has been the center of the American automobile business. All five of the country's automakers (including Volkswagen of America) have their headquarters in Detroit or one of its suburbs.

The industry has become remarkably homogeneous. It likes to hire its future leaders young; both General Motors and Chrysler operate degree-granting institutes. Competitive pressures push ambitious employees to put in eleven-hour days and six-day weeks if they aspire to the top. Men who make it (and there are virtually no women in top management posts) have spent 25 years or more within their companies.

Dedicated Detroit automen have learned a single purpose in life: to design, build and sell cars that will reap the highest return on the company's investment. Profits traditionally have come from volume and from trading customers up to larger, more expensive "prestige" models. Traditionally a Cadillac cost several hundred dollars more to make than a Chevrolet, but it returned GM a profit of several thousand dollars more. Detroit denies that it rejects new ideas because they are "not invented here," but the industry has been slow to adopt such innovations as disc brakes and radial tires, both extensively used in Europe for a decade. Detroit was equally slow to react to the growing energy shortage.

For reasons of profit and tradition, GM, Ford and Chrysler for years could see little incentive to build small cars. In failing to do so, they ignored a market niche that was first taken advantage of by tiny American Motors Corp. (which commands only 1.5% of the auto market vs. GM's 48%) and increasingly exploited by aggressive foreign manufacturers. First the Germans and then the Japanese found it relatively easy to divert to the U.S. autos built for smaller roads and with more expensive energy markets in mind.

In both 1959 and 1970, the Big Three introduced new small cars to fight the imports. But successful small models such as the Ford Falcon grew heavier and weighted down with options. Others, such as GM's Corvair and Vega, which were widely criticized for poor engineering, sold badly. The imports rebounded unharmed from both assaults. Sales of imported cars, just 498,785 in 1960, had more than tripled by 1973.

When oil was first shut off in the 1973-74 Arab oil embargo, Detroit found itself in serious trouble. Because American automen had few small cars to sell, customers flocked to imported models. By then foreign-built cars had won a reputation for fuel efficiency that most U.S. cars could not approach.

The Big Three were further stung when Congress imposed stringent fuel economy standards. These dictated that each manufacturer's fleet of cars would achieve 18 m.p.g. by 1978, increasing each year, to 27.5 m.p.g. by 1985. Already burdened by costly safety and emission standards, Detroit screamed that the mileage standards were ruinous. With the lead time for all-new cars a minimum of five years, the industry felt it scarcely had time to comply.

In fact, each company already had begun to wrestle with the problem of getting more miles per gallon of gas out of its cars. GM, which stood to lose the most since it had the strongest lineup of big cars, attacked the problem forthrightly. In July 1972, well before any shortages of oil, the company had set up an energy task force. Less than a year later it decided to shrink its car line, beginning with full-size models in the 1977 model-year, and to build new compacts like the Chevrolet Citation that would be introduced starting in 1979.

In 1974 Ford seemed in the best position to ride out the fuel crisis. In addition to the Pinto subcompact, the company was producing the compact Maverick, a successfully promoted economy car. But Ford lacked GM's financial strength and was ruled autocratically by Henry Ford II. The company had decided to introduce a restyled Maverick as the Ford Fairmont and Mercury Zephyr in 1978. But Henry Ford vetoed a decision to spend some $2 billion on a domestically built front-wheel-drive subcompact. Instead he opted to proceed with the less expensive downsizing of the Ford LTD and others.

The decision was disastrous. When LTD reruns arrived on the market in the fall of 1978, they sold poorly. Ford had no modern U.S.-built subcompacts for a market that would soon demand fuel-sipping models. Confessed Henry Ford: "We misread where the market is today. We're not as well prepared for it as we should be, and we're late. It's a big mistake."

Chrysler, with its Plymouth Valiant and Dodge Dart, was surprisingly strong in small cars in the early 1970s. It also judged trends correctly by beginning development of the Dodge Omni and Plymouth Horizon in 1975. However the cash-poor company could not afford to build its own four-cylinder engines for the cars and had to make a contract with Volkswagen for the German company to provide 300,000 a year. Last year Chrysler could have sold more than 300,000 of these cars, but it was unable to get enough engines to meet demand.

This was not the least of Chrysler's problems. Through the '70s the company was hampered by poor new model launches and heavy debt load. Last year's sales slump sent the company to Washington looking for federal aid.

Ironically, just as Detroit was taking its first tentative steps toward adapting to a fuel-short world, American consumers reversed themselves. When gas lines disappeared in the spring of 1974, so did the public's interest in small cars. Or at least so it seemed. Detroit introduced cash rebates for the first time in 1975--to move small cars off the lots. By 1976 the hottest sellers were small pickup trucks, vans and four-wheel drive Jeeps. Says American Motor Corp. President Paul Tippett ruefully: "Consumers buy what they want."

The auto-buying public's splurge on big cars was encouraged by the Federal Government's ill-conceived energy policy. Because of a complicated pricing system in which cheaper domestic oil holds down the cost of imported crude, the U.S. driver was enjoying Government-subsidized fuel. Between 1974 and 1978, gasoline prices actually declined 5% in real terms. With no lines at the pump and relatively inexpensive gas, people had no real incentive to buy small cars. Says Transportation Secretary Neil Goldschmidt: "There was an opportunity that was missed in 1973-74 at the time of the embargo to send a message about fuel economy and energy." The renewed interest in big cars peaked in the fall of 1978, just as the Shah of Iran was toppling and the world was heading for another energy crunch. There were waiting lists for big Ford Lips and Dodge St. Regises. GM was considering converting a Chevette plant to the production of full-size models, and Ford was rationing V-8 engines. But when gas lines developed in the spring of 1979, history repeated itself as farce. Consumers again demanded small cars, which the American industry could not provide. This time the Japanese were ready to step in and seize the market.

Detroit argues with validity that not even the best intelligence in the world could have predicted the oil supply cutoffs and staggering price increases of the past seven years. But there is now no longer any doubt that big cars are dead. "The large cars that we've known really belong in a museum," says Ford's Caldwell. By 1985 Detroit will be ready with a complete line of autos no larger than the compact Ford Fairmont. But the enormous complexities of the industry prevent it from modernizing any faster than that. New small cars with totally redesigned engines and transmissions require new plants and facilities to build them. The time from drawing board to showroom floor can take up to seven years.

The industry's task is made still more difficult because it is caught in a massive cash squeeze to pay for building the new cars. That is a burdensome task for mighty GM, whose first quarter profits were off 88%. And it is an extraordinarily difficult one for Ford, which lost $164 million during 1980's first three months. In effect, the auto companies must sell off their fleets of outdated autos in order to earn the money to produce the next generation of vehicles. Detroit every year is spending $13 billion on the needed plants and machinery. That is more than it cost the oil companies to build the Alaska pipeline.

Perhaps the greatest challenge to the Big Three will be winning back customers who have defected to the Japanese or Europeans. Says United Auto Workers President Douglas Fraser: "Once a consumer purchases a car that is well engineered, has good durability, is well serviced by dealers, logic dictates they're going back to where they've had good experience." Though GM has been able to maintain nearly all its market share during the past six months at 47%, Chrysler's has fallen from 7.7% to 6.4%, and Ford's has slumped from 20.1% to 15.3%.

But the industry is counterattacking. All three major companies are bringing out new smaller cars beginning this fall. Chrysler has its K cars, which are similar in size to GM's compact X cars. Ford will bring out its new Escort and Mercury Lynx. GM will continue downsizing its fleet with the introduction of its J car subcompacts.*

In addition, the industry is trying to shore up the quality and reputation of its products. Some critics argue that Detroit's myriad models and options have always made quality control more difficult for U.S. manufacturers, while foreign automakers have stuck more closely to their basic products.

Industry executives now say they should stop comparing quality among themselves and look overseas. Ford has been sending delegations of engineers to the Far East to find out what Japan is doing right. Says Caldwell: "We've found some very interesting things, and we're not at all too proud to use them."

The auto sales slide is likely to continue for months to come. The new front-wheel-drive small cars will not all be introduced until April 1981. The task the industry faces will be the most difficult since Henry Ford rolled out the first Model T. Detroit, the city that put the world on wheels, must once again prove to its American customers that it knows how to build reliable, efficient and economical automobiles.

*The auto companies traditionally designate new model lines during development with a single letter. The letters are given arbitrarily and do not follow any particular sequence.

This file is automatically generated by a robot program, so viewer discretion is required.