Detroit's Fragile Comeback

By John Greenwald

Automakers ring up near record profits, but imports still gnaw at them

One year ago, the U.S. automobile industry was like a car lurching on flat tires. Detroit was emerging from the third year of a depression that slashed auto sales to their lowest level in two decades and cost car manufacturers $5.5 billion in losses during 1980 and 1981. But the Big Three automakers have rebounded so strongly that they are now within reach of record profits. General Motors, Ford Motor and Chrysler together earned $2.9 billion in the first half of 1983, and analysts estimate that their combined income could reach $6.6 billion for the entire year. Says Louis Lataif, vice president and general manager of the Ford division of Ford Motors: "I have a feeling that the next year or two will be extraordinarily good years for the car business."

Nevertheless, as the early 1984 models continued to roll onto dealers' lots last week, Detroit was still not comfortably in high gear. One big reason: U.S. automakers have yet to show that they can compete effectively against attractively priced, high-quality imports. Japanese cars, in particular, cost on average about $2,000 less to build than American autos and now claim 21.5% of the U.S. market, against 6.6% in 1973. Only so-called voluntary restraints have kept reading Japanese firms like Nissan and Toyota from capturing a far larger share of the American business.

Last month the Japanese hinted that they may be willing to curb car exports to the U.S. for a fourth consecutive year. Tokyo, however, will probably seek to raise the ceiling to some 2 million cars, up from the current level of 1.76 million. The two countries are expected to reach agreement before President Reagan visits Tokyo in November.

U.S. automakers, meanwhile, remain financially weak despite their recent profit surge. The huge losses of recent years, plus heavy spending to bring out new products, have left the Big Three with total debts of $9.5 billion. That is nearly double the amount of the borrowing on their books in 1978. Says Michael Driggs, deputy assistant secretary for auto-industry affairs in the Department of Commerce: "One cannot get well overnight. The industry needs several years of high profits to restore its financial condition."

Detroit has climbed to lofty earnings largely by cutting its costs. U.S. autoindustry employment fell from 1.5 million workers in 1979 to 1.1 million at the end of last year. Fully half the positions lost during the prolonged slump may never be restored. To keep their jobs, the remaining workers gave up wage increases and made additional concessions that saved the Big Three an estimated $3 billion.

Even as Detroit was closing plants and laying off workers, it was investing heavily in new technology. Since 1980 the Big Three have spent $42.8 billion to retool assembly lines and boost productivity through improvements ranging from computerized design equipment to the installation of 3,175 robots. Such steps, combined with lower wage bills, have enabled the firms to increase quality while making money on less than spectacular sales. Detroit can now break even by selling some 8.2 million cars and trucks a year, for example, compared with more than 11 million three years ago.

The automakers' new efficiency is strikingly apparent. They have been piling up profits on sales that are currently running at an annual rate of only about 6.8 million cars and 2.6 million trucks. That volume would make 1983 the fourth most sluggish year for autos since 1961 (the slowest pace: 5.7 million cars in 1982). This year's results are likely to be only some 4.6% better than the depressed level of 1980, when Detroit sold 6.5 million cars and lost a total of $4.2 billion. Last week domestic manufacturers said they sold cars at an annual rate of 6.7 million units during the first ten days of October, up 45% from the feeble year-ago pace.

Reduced energy prices have also been a boon to U.S. automakers. Without continued pressure to hold down gasoline costs, Americans have been resuming their love affair with big cars. Sales of option-loaded large and luxury autos jumped 26%, to 1.79 million vehicles, in the 1983 model year that ended last month. Mid-size autos like the Chrysler Le Baron and Pontiac Phoenix were up 20%. Such results delight Detroit, because full-and mid-size cars are the most profitable. Meanwhile, sales of U.S.-made small cars totaled 3.23 million during the recent model year, up just 4%.

The demand for American automobiles has recently been outstripping the supply. "I just wish we had more cars right now," says Frank Galeana, owner of Van Dyke Dodge in Warren, Mich. "As soon as we get the product in we're able to sell it." Shortages began cropping up last summer after Detroit underestimated the number of cars that dealers would need during the production break between model-years. The industry plans to assemble 1.98 million cars from October through December, up nearly 40% from a year ago and the highest fourth-quarter total since 1978.

Detroit is responding to the challenge from abroad by turning out flashy sports cars, creating sleek designs and producing souped-up, high-performance engines. Among the current offerings:

General Motors (1982 sales: $60 billion). The largest automaker currently has 43.1% of the U.S. market. GM brought out its completely redesigned Corvette (suggested retail price: $23,835). "It can compete with anything in the world," boasts Robert Lund, GM vice president for sales and marketing. This month the company introduced its two-seater, the mid-engine Pontiac Fiero ($8,000-$ 11,000). Transmission problems have delayed the arrival of GM's new full-size Cadiliac de Ville and Buick Electra until early next year.

Ford (1982 sales: $37 billion). Detroit's No. 2 manufacturer hopes to claim an 18% market share in 1984, up from 16.8% in 1982. Ford, which held 22.8% of the domestic market as recently as 1978, unveiled a slimmed-down Continental Mark VII ($22,231) this month. The company has been betting heavily on its streamlined Ford Thunderbird ($13,093) sports coupe, introduced with its Mercury Cougar twin in February, and on the compact Ford Tempo ($7,557)-Mercury Topaz line that arrived last May. Ford said Thunderbird accounted for 2.6% of all U.S. auto sales in September. The Tempo-Topaz entry recorded an 88% sales gain in the third quarter, compared with the compact models Ford was selling a year ago.

Chrysler (1982 sales: $10 billion). The revived company has jumped from a 7.4% share of the market in 1979 to 10.4% at present. This month it brought out its Chrysler Laser XE ($10,960)-Dodge Daytona sports cars, developed at a cost of $270 million to compete with classy imports like the Toyota Supra and the Mazda RX7. Early next year the company will begin full production of the first U.S.-made minivan. The front-wheel-drive vehicle, developed by Chrysler at a cost of $600 million, will sell for about $9,000, has room for seven passengers and fits into a standard garage.

American Motors (1982 sales: $2.9 billion). The Southfield, Mich.-based company, 46.4% owned by France's Renault, has rolled to a 2.5% market share on the strength of its Alliance subcompact. That showing puts AMC vehicles ahead of those produced in the U.S. by once fashionable Volkswagen, which now accounts for just 1.3% of domestic demand for American-made cars. AMC, counting on a resurgence of demand for four-wheel-drive vehicles, has invested $250 million in a new line of Jeeps that are smaller than previous models.

The Japanese, meanwhile, have virtually pushed low-priced European imports out of the U.S. market. Italy's Fiat stopped selling here earlier this year, and Renault will no longer offer its Le Car in America. Although Volkswagen still makes Rabbits at its plant in Westmoreland, Pa., it imports only pricier models like the Jetta, Sirocco and Quantum.

Inexpensive autos, in fact, could become an exclusive franchise of Japanese manufacturers. The average price of a U.S.-made car is expected to exceed $11,000 in the current model-year, an increase of 143% over the $4,523 cost in 1974. "You can see a lot of list prices starting at $7,500," says Ben Bidwell, executive vice president of Chrysler. "But by the time you build them the way the average person wants them--with AM/FM stereo, power steering, power brakes, automatic transmission and air conditioning--it's pretty hard to keep them below $10,000."

General Motors, for one, is now trying to join the Japanese. GM is awaiting a federal ruling, expected later this month, on whether it will be allowed to produce a new front-wheel-drive subcompact with Toyota in California. The controversial $300 million joint venture is strongly opposed by Ford and Chrysler. Under the proposed arrangement, the partners would build some 200,000 small cars a year. Such ventures point up the continued weakness of U.S. carmakers. Although Detroit has rebounded impressively, the industry's inability to compete in the small-car market without Japanese aid suggests that it is still not up to cruising Speed.

With reporting by Barbara B. Dolan, Paul A. Witteman This file is automatically generated by a robot program, so viewer discretion is required.