BUSINESS/ECONOMY

The small car invasion

IAN AUSTEN December 9 1985
BUSINESS/ECONOMY

The small car invasion

IAN AUSTEN December 9 1985

The small car invasion

BUSINESS/ECONOMY

The new Chevrolet models that started rolling into show rooms across North America in October sported a classic symbol of the U.S. auto industry—the Chevrolet grill badge, shaped like a bow tie. But three of the

Chevy models—the Nova, Spectrum and Sprint—are anything but all-American. Indeed, the three model lines share two factors: each is a key link in General Motors Corp.’s 1986 small-car line and each is made in Japan, or in the United States with the Japanese as partners. Indeed, the fact that GM, the world’s largest industrial company with 1984 sales of $115 billion, is for the first time offering Japanese-made cars in its lineup across the United States has lent weight to a disturbing conclusion reached by some auto industry analysts: despite robust sales and high profits in 1985, U.S. automakers may be forced out of the small-car market.

One major study warning of that possibility was published by Malcolm Salter, Alan Webber and Davis Dyer, professors at the Harvard Business School in Cambridge, Mass. They concluded that if the big three car manufacturers were unable to meet the competitive threat from foreign com-

panies, they would “either abandon or be forced to abandon most of the nation’s small-car capacity by 1990.” Added Salter: “If U.S. automakers cannot manufacture small cars profitably at home, they will eventually lose the capacity to compete profitably

in the midsize market.”

The Harvard study made it clear that the battle for the small-car market has entered a critical phase. North American auto makers —which cannot build cars as cheaply as the Japanese—are increasingly selling Japanesemade cars under their own nameplates. But Japanese automakers are attempting to secure their access to the North American market by building plants in the United States and Canada.

By 1990 Japanese plants will assemble one million vehicles a year in the United States, enough to supply about one-tenth of the U.S. market. Honda Motor

Co. Ltd. and Nissan Motor Co. Ltd. already have factories in the United States, and Mazda Motor Corp., Mitsubishi Corp. and Toyota Motor Corp. will open plants by 1988. Toyota, Honda and Hyundai Motor Co., the South Korean automaker, are also ex-

panding in Canada. Acknowledged Kenneth Harrigan, president of Oakville, Ont.-based Ford Motor Co. of Canada Ltd.: “We are making very little money on small cars in Canada. That is an area of the market that is being stolen from us.” Indeed, foreign auto companies already account for four of every 10 small cars sold in the United States and Canada. Last March President Ronald Reagan announced an end to fouryear-old quotas that limited Japanese imports to 1.85 million vehicles per year. The Japanese government announced that Japa“ nese companies would £ limit their imports for 2 the following year to 2.3

million vehicles, or about 20 per cent of the total U.S. market. But that figure leaves the Japanese with 40 per cent of small-car sales. In Canada foreign automakers have 28 per cent of the total market—the Japanese are limited to 18 per cent overall—and 42 per cent of small-car sales. Said Maryann Keller, a New York-based auto analyst with Vilas Fischer Associates Ltd.: “The domestic industry has been living in a special paradise for the past few years because actions taken to limit supply have increased prices. Additional supplies will tend to push prices down, which will squeeze the domestics’ margins.”

But while consumers might gain from the competition, domestic car makers warn that the result will be fewer jobs. Norman Clark, president of the Toronto-based Motor Vehicle Manufacturers’ Association, whose nine members employ 84,000 Canadians, said that if Americans buy more imports,

“that leaves less of the U.S. market to be served by Canadian domestic plants.”

The result, Clark said, is that 25,000 of = the 130,000 Canadians f in the auto manufac^ turing and parts in1 dustries could lose | their jobs in the next I decade. He added that ¡ the increased competi^ tion will force Canadiy an companies to cut s costs “by going off¡ shore or arranging for foreign-designed vehif cles to be assembled in

Canada.” Ford Canada j; will start importing a “ subcompact made by ° the company’s Taiwanese associate, Ford Lio Ho, by September.

Some auto industry observers say that the fears of the North American companies are exaggerated. Declared one official in the federal department of regional industrial expansion: “Clearly, the trend in North America is toward more competition and more penetration by foreign manufacturers. But it is in the corporate interest of the domestic companies to get people alarmed about the situation.” Added the official: “The fact is, we were pleased to see new investment in Can-

ada by Hyundai, Honda and Toyota. We worked hard to get them here.” Domestic manufacturers have been unable to eliminate the Japanese price advantage—an estimated $2,000 per small car—despite investing billions of dollars to improve efficiency. Said auto analyst David Healy of the New Yorkbased investment firm Drexel Burnham Lambert Inc.: “Ford is building, on average, a better car than its domestic competitors. But the company still can’t hold a candle to the Japanese in terms of quality.”

As well, Japanese factories in the

United States still produce automobiles at a lower cost than U.S.-owned operations. Honda of America Manufacturing Inc., for one, produces 150,000 Accord models annually at its three-year-old, $250-million factory in Ohio. Honda’s 1,855 production “associates,” as the company calls its workers, turn out 630 cars a day—a ratio of 2.9 workers per car, compared with an average of 4.5 workers per car at U.S.owned factories.

Faced with the daunting proficiency of the Japanese, the domestic industry is already conceding some of the

small-car market. Chevrolet’s Sprint is made by Suzuki Motor Co. Ltd. And the Chevy Nova, a new offering under an old name, is assembled largely from Japanese parts by New United Motor Manufacturing Inc., a GM-Toyota joint venture in Fremont, Calif.

For its part, Chrysler, which has imported autos made by Mitsubishi for 15 years, is planning a major new smallcar line called the Liberty. Although a factory site has not been announced, Chrysler chairman Lee Iacocca warned earlier this year that the company may look abroad to manufacture the line. Said Iacocca: “I don’t want to give you the idea that, long term, you’re going to see a lot of small cars built in America.”

So far, Ford has resisted importing much of its product line, but the company is changing that strategy. For one thing, Ford, which owns 23.8 per cent of Mazda, will sell some of the vehicles from the Japanese company’s first U.S. plant — due to open in 1987—through its own dealers.

The domestic auto companies face another unnerving prospect: a wave of new competitors in the small-car market. Next year Hyundai will start selling its Excel model in the United States for about $7,500. And South Korea’s Daewoo Corp. will start selling cars in the United States by 1987. As well, the first auto imports from eastern Europe have already reached America’s shores. Earlier this year Yugoslavia’s Zavodi Crvena Zastava (Red Flag Enterprises) started selling a subcompact car through Yugo of America Inc., whose president is entrepreneur Malcolm Bricklin. Called the Yugo, the vehicle’s $3,990 (U.S.) price tag is expected to make it the cheapest car in America. With so many competitors wooing fickle car buyers, U.S. automakers will be forced to marshal all their resources or face eviction from the small-car market.

IAN AUSTEN

LINDA CAHILL