The End of Detroit (4 page)

And as their customers grew more affluent, Japanese companies sensed an opportunity in the luxury car market. In 1982, Toyota chairman Eiji Toyoda declared that he wanted to build “the finest car in the world.” Toyota designers and engineers spent the next seven years studying American consumers and crafting a sedan they thought would attract aging baby boomers, who they felt were ready to shift to cars that cost more money and were more luxurious than the Toyotas they had originally owned. The result was the Lexus LS 400, which went on sale in 1989 to rave reviews, a rush of sales and the consternation of German and American luxury car companies. By 2002, Lexus outsold every other luxury brand, including century-old marques like Mercedes. And Lexus has been joined in the luxury car market by Nissan and Honda, with their Infiniti and Acura brands. They, too, have become solid luxury competitors.

Korea’s Hyundai suffered a horrible sales disaster during its first decade in the United States, due to the horrendous quality of its small cars. Its American president, Finbarr O’Neill, jolted Korean engineers into improvements, then decided to tackle Hyundai’s poor image by offering consumers a generous 10-year, 100,000-mile warranty in order to convince customers that Hyundai believed in its cars and consumers could trust the company. The approach worked. Hyundai’s sales quadrupled from 1998 to nearly 400,000 a year. O’Neill now wants to sell 1 million automobiles in the United States by the year 2010, which would make Hyundai the same size as Honda is now.

Only 10 years ago, European luxury makers, too, were in trouble. Like Detroit, they had completely miscalculated the ability of their Japanese rivals to create high-quality luxury cars at reasonable prices that consumers would want to buy. Moreover, the European cars didn’t have the features American consumers wanted, such as cup holders to hold coffee and Big Gulp drinks. On top of that, exchange rates and high manufacturing costs early in the decade put European cars well out of many consumers’ reach. The collective market share for European vehicles in the United States hit bottom in 1994 at a mere 3.9 percent of the market. But like the Japanese and Koreans, they started over. One by one, Mercedes, BMW and Volkswagen retuned their lineups and their approaches, searching for the right mix of company heritage, performance and brand image that would win customers back. And their strategy has been enormously successful. Their vehicles have become the next choice for consumers who want to upgrade from their Asian imports. Today BMW, VW and Mercedes are expanding their lineups in both directions—smaller, cheaper vehicles intended to appeal to younger consumers, and ultraluxury vehicles for the most demanding consumers. Overall, European vehicles have more than doubled their market share in just a decade and expect to gain even more sales.

What unites these foreign-based companies is that they have developed a better sense of what their American customers want than Detroit has. They have shown a willingness to change and go beyond the status quo that has made them leaders in the increasingly fast-paced car marketplace. Detroit companies, too often lagging behind, have fallen back on complaining that the Japanese, especially, have an unfair advantage because they are able to introduce their vehicles at home first, iron out the bugs, and then bring them to the United States, while Detroit has no such opportunity to hide its mistakes.

One could argue, however, that the imports have a tougher challenge than does Detroit. Unlike the Big Three, which rely on North America for three-quarters of their sales, the imports have to satisfy vast numbers of consumers in at least two key markets—their home market and the United States. They have to get it right more times than Detroit does. All anyone has to do is visit Tokyo—where hundreds of thousands of young people pour into districts like Shibuya and Harajuku on the weekends, to shop for clothes and electronics and sample the latest DVDs—to know just how hard a task pleasing the consumer in Japan can be. Tastes change daily, weekly, monthly, in a way that Americans have yet to experience. The platform shoes that were all the rage with Japanese teens in April are déclassé by May, and interest in automobiles is just as fickle.

What the imports learned was to not assume that their experience in their home markets automatically translates to the United States. The U.S. market may be the world’s easiest to enter, but it is one of the toughest in which to compete. The scale and the outlook are completely different. Today, Toyota, Honda, Mazda, Mitsubishi and Nissan all sell more vehicles in the United States than they do in Japan. The weak Japanese market, in a slump for much of the past 10 years, no longer subsidizes the sales organizations in the United States. When they stumble here, as some of them have over the years, they hurt the parent company. So success in the United States has become paramount.

Although they excel at anticipating consumers’ desires, foreign companies have become even more skittish about deciphering their success. Rarely do they boast about their vehicles in the fashion of Detroit’s automakers. They would prefer to announce low sales expectations, and exceed them, than fall short of goals that are too optimistic. Another tactic is to focus primarily on pleasing current owners first, without publicly declaring that they will entice owners of other brands to defect, even if that is what ends up happening. When it introduced the Odyssey minivan, for example, Honda estimated that it would sell a mere 60,000 in its first year on the market; but it saw demand soar to more than 180,000 a year thanks to word of mouth from delighted consumers. Toyota posted record net income for the industry in 2002, yet its executives agonized over every investment in every new product, every plant and every dollar spent on marketing campaigns. This combination of humility, determination, careful attention and, above all, devotion to quality has been a formula that has worked time and again for them.

General Motors, Ford and Chrysler, however, have been unable to find a similar formula. And this is the second reason underlying the disintegration of the American auto manufacturers’ position in the industry:
Detroit left the door wide open for the imports to walk right through.
The great tragedy of Detroit’s decade-long demise is that it is self-inflicted. Detroit has been mired in a boom-and-bust cycle from which it cannot break free. Its sense of timing has been numbed by its own tendency to look inward and believe only in its own conclusions. GM, Ford and Chrysler shifted en masse in the early- to mid-1990s to focus most of their attention on pickups, SUVs and minivans. As a result, they ignored the car market, claiming that trucks were where consumers’ tastes had shifted. They assumed that it would take years for the Japanese, the Germans and the Koreans to catch up in truck sales. Even when the foreign car manufacturers began to introduce their new light trucks, Detroit doubted that Americans would buy them.

When the foreign car manufacturers realized that they had missed consumers’ initial shift toward light trucks, they made a concerted effort to catch up and to surpass Detroit. Yet in doing so, they continued to pay careful attention to the car market, introducing even better versions of their standard-bearers, like the Camry and the Corolla, the Accord and the Civic. In one sense, this was a no-brainer for the foreign manufacturers, because these cars are far more popular outside the United States. The imports had to develop them for their home markets in Japan and Europe, so why not spend the money to develop improved versions for the United States at the same time? In doing this, the imports showed yet again one of the secrets to their core strength: find a portion of the market that everyone else has abandoned and do well in it, and never relinquish their hold over that category as they go on to tackle a new one.

Detroit paid a steep price for its shortsighted approach. Not only did the imports get into the light truck category, they began outmaneuvering Detroit with several innovations. Toyota and Honda were first to introduce small SUVs based on car underpinnings that were easy to handle, and more sporty and affordable for young families while still offering plenty of room. The Toyota RAV-4 and the Honda CR-V might not have been able to vault a stack of logs or slough through the mud, as Chrysler’s Jeeps could do. And sometimes the Japanese SUVs were noisy on the highway. But the reality was that most SUV owners never drove off-road in their vehicles. They never left their suburban streets and paved highways. And the noise level was something they were willing to endure. When Mercedes discovered that 30 percent of its wealthy sedan owners were purchasing Detroit’s sport utilities as well, but would buy a Mercedes SUV instead if one was available, the German company brought out its M-Class, built at its first U.S. plant in Alabama. The M-Class handled as well as one of its well-engineered cars and gave Mercedes buyers a feeling of power, prestige and privilege. Soon there were two Mercedes vehicles in their driveways, instead of a Mercedes sedan and a Jeep or a Ford Explorer.

The same pattern was pursued by other foreign manufacturers. In 2001, the BMW 5-series won the highest score for any car in history from
Consumer Reports,
while its 3-series compact became the car to aspire to among younger buyers. And the imports continue to pursue new niches. When gasoline prices hit $2 a gallon in 2000 and soared even higher in subsequent years, it was Toyota and Honda who were ready with hybrid gasoline-electric vehicles. Ford, run by an environmentalist, delayed plans to introduce its own hybrids and, in fact, sold off its electric car company. At the end of 2002, Honda even had sold the industry’s first hydrogen fuel-cell car to the governor of California, well before Detroit companies expected to have such vehicles available, despite their vows to beat the Japanese with better hydrogen fuel technology.

Why have the imports been able to prevail even at a time when the country has never been more patriotically inclined? That is a third reason for foreign manufacturers’ success in the United States: the impact of the new global economy. In the 1990s, products from all parts of the world flooded American stores. At the same time, American manufacturers stumbled over themselves to open new factories in Mexico, Brazil, China, Thailand and in Eastern Europe, seeking to lower costs in order to compete. Joint ventures, too, became the order of the day, involving German banks, British telecommunications companies and all manner of Asian firms. American companies had become more international and seemed to show no loyalty to American consumers or workers. Americans began to show little loyalty back, whether it was a TV set or a DVD player or an automobile. To most car buyers, Toyota and Honda’s Japanese heritage mattered less and less. To some it was even an advantage, because Japanese cars had come to symbolize quality. The same was true for European companies. As this mind-set change took shape, the import manufacturers took steps to ingratiate themselves with the people where they did business. In 1985, foreign manufacturers had factories in just a handful of American states, including California, Ohio and South Carolina. By 2003, Alabama alone was home to investments by Toyota, Honda, Mercedes and Hyundai, earning it the nickname “Detroit South.” (Or, as David G. Bronner, the colorful head of Alabama’s pension system and the chairman of US Airways puts it, Detroit is now known in his region as “Alabama North.”) Import companies have established operations in a handful of states.

Of course, American consumers do not inherently dislike Detroit. In fact, they have shown a willingness to try just about anything innovative that General Motors, Ford and Chrysler can unveil. After the September 2001 terrorist attacks, Americans responded in record numbers to the Big Three companies’ offers of zero percent financing on cars and trucks. Chrysler’s PT Cruiser became an instant hit when Chrysler introduced it in 2001. The Ford Thunderbird made heads turn when it finally arrived in showrooms in 2002, months behind schedule. The Chevrolet Corvette, 50 years on, has legions of enthusiastic fans. Detroit can still summon its clout and its magic on occasion.

But GM, Ford and Chrysler suffer from a handicap that the imports do not. They are inconsistent—inconsistent in terms of quality, reliability, durability and styling—and as a result, they repeatedly leave their customers heartbroken, because it shows that the Big Three do not understand them and do not genuinely respect them. Detroit, deep down, has bought into the iconography that it has nurtured over the years. Its executives seem to truly believe that only they know what American buyers want. Because Detroit has dominated the industry for its first 100 years, American car company executives feel they are the best arbiters of the industry. They think they know far more than their customers about the vehicles that these customers drive. They are convinced that should they stumble, as all companies are wont to do, consumers will be forgiving and return to Detroit anyway. Even in the face of vast research to the contrary, Detroit for years has convinced itself of the notion, completely unsubstantiated, that its vehicles are every bit as good as those built by the import companies. In fact, this was the very claim made one morning in November 2002 by General Motors vice chairman Bob Lutz when he declared GM’s vehicles the equal of those built by Honda and Toyota. Yet that afternoon, GM recalled 1.5 million minivans.

Poor quality, as well as an inability to trust what Detroit tells us, continues to undermine Americans’ faith in Detroit. In one of his television ads, created to convince consumers to believe in his family’s struggling auto company, Bill Ford bubbled with enthusiasm for the small Ford Focus. He failed to mention that the Focus, designed in Europe, has been the subject of government defect investigations 11 times since it went on sale in the United States in 1999. A few months earlier, another Ford car, the new T-bird, which should have been a standard-bearer for the company in design and excitement, had to have production shut down for several days after engine fans caught fire on the assembly line.

Detroit brings to mind a kind of automotive Oz, in which its simple announcement of a victory over imports is supposed to substitute for the real thing—despite the fact that its market share continues to fall and its profits have evaporated. Yet few are fooled. One need only look at the resale values of Detroit automobiles, far lower than the resale amounts for the best used foreign cars. This sense of unshaken superiority has been Detroit’s most fatal flaw. For its hubris has led to blindness in the halls of the Big Three, disappointment and even a vague sense of betrayal among many American consumers.