A Gridlock in Autos : Global Rush for Piece of the Action May Force Shakeout

It is shaping up as the biggest traffic jam in the history of the American automobile.

Cars imported from Western Europe and Japan, cars from South Korea, cars from Taiwan, Mexico, Brazil, Yugoslavia, maybe even Malaysia--and, oh yes, cars from Detroit. All will be converging on the United States and Canada over the next few years, vying for floor space in dealer showrooms and room on congested American freeways.

By the end of the decade, in fact, there will almost certainly be far more cars from far more countries here than Americans know what to do with.

Suddenly, developing nations all over the globe, aided by newly formed ties to multinational auto makers seeking low-cost sources of small car production, have targeted the American auto market as the place to prove themselves as emerging industrial powers.

With the increasingly muscular South Korean auto industry leading the way, Third World producers are likely to earmark as many as 1.2 million cars a year for export to the United States by the end of the decade, making a mockery of continued import restraints on Japanese cars. At the same time, the traditional rivals in the American marketplace--the Japanese and European importers and Detroit’s domestic firms--are all trying to hold their own or expand.

Add to the mix the 2 million “transplant” cars and light trucks that the Japanese and Koreans expect to build in the United States and Canada by 1990, and you have the makings of a genuine glut.

“We’re going to have the Big 30 auto makers, instead of the Big Three,” quips Gerald Greenwald, chairman of Chrysler Motors, Chrysler Corp.’s automotive unit.

Industry forecasters now warn that within four years, Detroit and the rest of the world could be shipping 15 million cars a year to an American public prepared to buy only about 12 million.

And, with the other major advanced markets--Europe and Japan--already saturated, there won’t be anyplace else for that excess worldwide car production to go.

Clearly then, a war of attrition is coming. “It’s going to be dog-eat-dog,” predicts Chris Cedergren, an analyst with J. D. Power & Associates, an automotive market research firm.

Consumers should benefit the most; long waits and sticker-plus prices for imports are likely to disappear, while buyers find themselves choosing from an unprecedented selection, including types of vehicles that didn’t even exist five years ago.

Price wars could become commonplace, especially in the small-car market, which will soon be redefined by a flood of cheap Third World mini-cars priced well below their closest Japanese and American rivals.

But the same conditions will make things bloody for the industry itself. Analysts believe that the only way the world’s auto makers will be able to cope is through a drastic shakeout, with both Japanese and American auto makers ceding more and more of the small-car market to Third World producers paying wages that today are often below $2 per hour.

Indeed, in many ways, that shakeout will move into high gear in the 1987 model year, which officially begins Wednesday.

So far, only two Third World cars--Yugoslavia’s cheap, and reportedly low-quality, Yugo, and the more successful Hyundai Excel from South Korea--have hit the market.

But the floodgates will open in the 1987 model year, thanks in large part to the American, Japanese and European auto companies sponsoring the Third World’s entry into the North American car market.

Next spring, General Motors, which already sells two small cars built in Japan and a third built by its California joint venture with Toyota, will introduce the LeMans, a Pontiac subcompact built in South Korea by GM’s joint venture with Daewoo Motor Co.

In January, Ford will introduce the Ford Festiva, a Japanese-designed subcompact produced in South Korea by Kia Motors, Ford’s new Korean partner.

A few months later, Ford will introduce the Mercury Tracer, built in Ford’s new plant in Hermosillo, Mexico, while a version of the same car produced by Ford Lio Ho, Ford’s Taiwanese subsidiary, goes on sale in Canada this fall.

Following the collapse of its prolonged negotiations with the Samsung Industrial Group of South Korea, Chrysler is now the only Big Three firm which has failed to line up a Third World production source.

Chrysler Worried

Erick Reickert, Chrysler’s vice president for program management, acknowledges that Chrysler is worried that the absence of a Third World small car may create a void at the bottom of its model lineup, but stresses that Chrysler is scouring the world for other small-car partners.

Industry sources note that Chrysler has held discussions recently with Proton Industries of Malaysia. For now, though, Chrysler is planning to make do with Japanese subcompacts built by Mitsubishi Motor Corp., along with a new line of small cars to be produced by its Illinois joint venture with Mitsubishi beginning in 1988.

Volkswagen, which has almost been squeezed out of the American small-car market by the Japanese during the last few years, will respond in February with its Fox, to be produced by VW’s Brazilian operations.

The following month, Mitsubishi will become the first Japanese auto maker to sell a Korean car in the United States when it introduces the Precis, its own version of the Hyundai Excel. Mitsubishi gained access to the Korean cars because it owns 15% of Hyundai, and supplied key components for Excel production.

Although Mitsubishi initially sought out Korean subcompacts as a way to skirt the quotas on Japanese imports, the rise in the value of the Japanese yen has since made it more difficult for the Japanese to compete in the “entry-level” small-car market against Third World cars priced between $5,000 and $6,000.

Others May Shift

As a result, other Japanese producers may be forced to follow Mitsubishi’s lead. Mazda is likely to distribute a version of Ford’s Korean-built Festiva in the United States in 1988, and industry sources say that Nissan may have YueLoong Motor Co. of Taiwan produce Nissan’s Micra mini-car for the American market by 1989.

“There is a new segment opening at the bottom of the car market, and we wanted to get into it,” says Richard Recchia, executive vice president of Mitsubishi’s American sales organization. “But you can’t do it in Japan. You can’t build a car in Japan as big as the Excel at the same price that the Koreans can.”

Many of these Third World cars will be direct replacements for larger and more expensive models built in the United States. The all-American subcompact, in fact, could well go the way of the American-built radios over the next year, becoming the first victim of the flood of Third World and “transplant” Japanese-American small cars that will soon find their way into the market.

The only thing keeping domestic subcompact production alive at all is the federal rule forbidding U.S.-based firms from counting imported small cars to satisfy the government’s fleet-wide average mileage standards. But both General Motors and Ford have been lobbying heavily to get Congress to eliminate the mileage rules, so they can import even more small cars from Asia.

“Absent any governmental restrictions, you will soon see all of the very small cars built outside of this country,” says Roger Maugh, Ford’s director of international product development.

On Borrowed Time

But even if mileage standards remain in force, the U.S.-built subcompacts on the market today are living on borrowed time. By the end of 1987, the Chevrolet Chevette, Pontiac 1000, Mercury Lynx, Dodge Omni and Plymouth Horizon could all be history.

The Korean-built LeMans will replace the 1000, the Mexican Tracer will take over for the Lynx, and the Chevette, Omni and Horizon are all scheduled to be dropped to make room for cars built in Japan or by U.S.-Japanese joint ventures.

The only all-American subcompact guaranteed to survive the year is the Ford Escort. But Ford plans to get rid of the Escort by the end of the decade, and company officials say they will replace it with a new car built in a U.S. joint venture with an Asian auto maker, most likely Mazda, which is 25% owned by Ford.

Meanwhile, Detroit, deterred by the multibillion-dollar costs of developing new small models, has all but given up its vaunted efforts to produce a new generation of import-fighters in the United States. Despite Chrysler Chairman Lee A. Iacocca’s past boasts that Chrysler’s all-new domestic subcompact--the so-called “Liberty” car--would be introduced before GM’s highly touted Saturn, Chrysler has quietly abandoned the car project.

Won’t Match Price

And even GM concedes now that its Saturn project, which was supposed to produce small cars by 1990 that would be equal to those from Asia in cost and quality, won’t be able to match the price tags on the coming Third World cars. As a result, Saturn is now likely to position its cars to compete with more expensive, upscale Japanese compacts, industry observers believe.

But the Americans won’t be the only victims of the shakeout.

Continued import restraints, the dramatic rise in the value of the yen and the Third World onslaught will force the Japanese to concentrate more fully on selling larger, more expensive cars.

And with so many Japanese companies beginning U.S. car production at the same time that so many other nations are starting to export to the United States, the Japanese will no longer sell out, analysts predict. They may even be forced to scale back their imports in order to keep their American plants operating at efficient levels.

“You are already starting to see it,” says Cedergren. “Some of the smaller Japanese companies are running into high inventories, and I think a few, like Mitsubishi and Subaru, will sell fewer cars here in 1986 than they did in 1985.”

Yet that ominous prospect has not slowed the furious pace at which the Japanese--and even the Koreans--are setting up North American assembly operations.

Today, there are just three Japanese-managed plants in the United States--Honda’s complex in Ohio, Nissan’s facility in Tennessee, and the GM-Toyota joint venture in Fremont.

But many more are on the way.

New Plants Opening

Mazda’s Michigan assembly plant, which will build performance-oriented cars for both Mazda and Ford, is under construction and will open in 1987. Toyota will open plants in both Kentucky and Canada to build Camry compact models beginning in 1988, while Honda will open a second North American facility next year in Canada. Hyundai, meanwhile, expects to open a Canadian assembly plant by 1991.

The Mitsubishi-Chrysler joint venture will open its plant in Illinois in 1988, while GM will set up another joint venture, this time with Suzuki, to build small cars and utility vehicles in Canada beginning in 1989. Finally, Fuji Heavy Industries, Subaru’s parent, has announced plans to form a joint venture with Isuzu Motors in the United States by 1990.

Within four years, the transplant facilities will have added roughly 15% to current U.S. auto production capacity, according to David Healy, automotive analyst with Drexel Burnham Lambert.

On top of all that, yet another Japanese auto maker is gearing up to sell new Japanese-built cars here for the first time. Daihatsu Motor Co. is planning to export its Charade mini-cars to the United States as soon as import quotas are eased.

So something will have to give. “If you add up everybody’s numbers, it comes out to 15 million cars on the market, and that is just not going to happen,” says Thomas Elliott, Honda’s senior vice president for U.S. auto operations. “Somebody’s not going to be able to do what they say they are going to do.”

May Hurt Japanese

And this time, it may be the Japanese who are squeezed. They may be forced to convert their North American plants from small- to large-car production, in order to avoid getting swamped by Third World imports. But that will place them in a head-to-head battle with Detroit in an area that Detroit knows best. “Can 300,000 units of Japanese subcompact capacity (in the United States) migrate to the compact market? Probably not,” says Data Resources analyst John Hammond in a new report. “Domestic auto makers plan to defend this market aggressively.”

So while South Korea, Taiwan, Mexico and Brazil battle it out for dominance at the low end, the Japanese, Americans and Europeans will find themselves in more direct competition than ever before, as they all go after the more affluent buyers of sporty, intermediate, full-size and luxury cars.

Says Mitsubishi’s Recchia with a sigh: “Anybody that can survive the next five years and still make money will be all right.”