What Now for Imports? : Foreign Car Makers Gear Up for Markets of ‘90s : JOHN E. REILLY: Questions & Answers

As the U.S. auto industry continues its battle against imports, John E. Reilly finds himself in what some would find an uncomfortable situation.

The 64-year-old San Clemente resident, native Pennsylvanian and graduate of the Buick division of General Motors, is chairman of Japanese-owned American Isuzu Motor Inc. and chairman of the Assn. of the Import Automobile Manufacturers.

As such, he is chief lobbyist in Congress for improved treatment of the car companies Detroit loves to hate.

He also is the only non-Japanese chairman of a U.S.-based Japanese auto importer, a situation, he says, that speaks as much for Isuzu as for John Reilly.

Although steeped in the world of American car making, Reilly says it was easy to move from Buick to imported cars--first with Volkswagen of America in 1965, then as head of VW’s Porsche/Audi division in the United States and executive vice president of two regional Toyota distribution operations before joining Isuzu in 1980.

The reason? In the 1960s, management in Detroit was so ossified that the real opportunities for advancement and creativity lay outside the so-called Big Three and with the upstart importers, Reilly said.

But things have changed--in Detroit and in Japan--and Reilly examined the changes, and the challenges facing auto importers in the coming decade, during a recent interview with Times staff writer John O’Dell.

Q. Imports currently have about 30% of the U.S. auto market. Do you see import automobiles taking a substantially bigger share?

A. No, I don’t think so. If we can assume that the Big Three have recognized what the competition is and what they need to do to compete on a level playing field, then I believe in the power of American productivity. Give us a major conflagration some place and the American always says, ‘Yeah, we can produce.’ I think the auto magnates of Detroit have said ‘OK, we recognize the crisis and now we know how to overcome it.’ I really think they’ve reached that point, and therefore I don’t see the import business going beyond what it has right now.

Q. What does that mean for some of the smaller importers? Everyone knows what a Honda is, or a Toyota or Nissan. But when you get down to an Isuzu--although Joe Isuzu did a lot for the company--and Suzuki or Daihatsu, what happens? Are we going to see some thinning out of the importers?

A. I think first of all what you’re going to see is that the Toyotas, the Nissans and the Hondas--companies that have already established themselves as really full line marketers--will continue to be here, continue to be successful, continue to compete with Detroit. But the smaller manufacturers have got to do one of two things: either expand their present product line and go fight the big boys, or continue to identify and occupy market niches. It’s just unthinkable that when we started with our Isuzu Trooper, for example, it led the sports utility vehicle category for the first five years, outselling Toyota, Nissan and every other company out there. It was a successful niche that Isuzu found and exploited.

Q. What happens if you can’t find any more niches and you can’t expand?

A. Then I think you’ll probably see some mergers by the turn of the century, and I have no idea who’ll merge with who.

Q. Speaking of niches. The really small cars, like those made by Daihatsu and Suzuki, get really great gas mileage. So why haven’t they taken off in the face of rising gas prices?

A. First of all, it’s very soon after the gas tax was increased and the Mideast crisis started, too soon to see any resulting change in car-buying habits. But I think what you’re going to see is that the consumer will continue to buy the vehicle of his choice, be it a large car or small car. What he’ll do is drive less. He’ll reconsider that Friday afternoon trip up to Santa Barbara to have dinner, or the hour and 20-minute commute. So I think that’s what you’re going to see. Not a major change in car sales but people driving less.

Q. Do you feel that import auto makers have been fairly successful in their relationship with Congress over the years. And what’s the biggest concern facing importers going into 1991?

A. Yes, we’ve been fairly successful. And rather than specific issues, the biggest concern our association has is that the government stop piling on legislation and requirements until we get finished with a few things they’ve asked us to do in the past. It makes no sense for Congress to tell us to make our cars more fuel-efficient and then to say make them more crash-resistant. Once they say we’ve got to add more fuel efficiency, then they should give us an opportunity to try that, rather than say after we’ve been been working on fuel efficiency for two weeks that we should now increase the weight of the vehicle. You just can’t do both of those things unless you come up with a whole new system of propulsion, or a new metal which is lighter than anything ever known to man. Give us an opportunity to do one thing first.

Q. Are import manufacturers working on alternatives to gasoline-powered, internal combustion engines?

A. There’s a lot of work being done on all different facets of the auto-manufacturing business. Ceramics are being tested and developed for use in engines of the future, and certainly we’ve all seen the results of some of the solar vehicle tests lately. And GM just announced that they will be able to produce an electric vehicle that has more range than people thought possible a few years ago. There are vehicles running right now on alternative fuels.

Q. But why has there not been much of a visible effort by manufacturers to equip cars at the factory to run on dual fuels? Gasoline or propane, for instance. A car owner can do it, but they must take their car to an outside supplier and make expensive alterations in order to burn a cleaner fuel.

A. Well, it isn’t just a question of a cleaner fuel. I think the oil companies have made some pretty good strides on developing cleaner fuels. I think the big discussion now is why the oil companies or automotive companies haven’t made bigger strides toward developing vehicles that run on alternative fuels like ethanol. And the answer is that it takes a redesign of the entire engine and emission and exhaust controls to run on those fuels. It’s a whole new industry and maybe it’s the answer, but nobody’s proven yet that those alternative fuels are as cost-effective as gasoline. So I don’t think you’ll see it happening in this century.

Q. At what point did the association find it necessary to become political?

A. It was probably about 10 years ago when they really started to get involved politically.

Q. And the genesis of that involvement?

A. I think it really started when the protectionist atmosphere was getting thicker and thicker in the United States.

Q. Protectionism affects automotive importers in this country, but does it affects Japanese importers more than Swedish, German or Italian auto makers?

A. No, not really. It actually got started with Germany and the so-called chicken tariff in the early 1960s. The Germans levied a tariff on American chicken products to protect German poultry farmers, and the United States retaliated by saying, ‘OK, we’re gonna put a tariff on your commercial vehicles, your trucks.’ And that’s why you don’t see any Volkswagen trucks in the United States anymore. So what really happened was the original protectionism was a European-American affair. But today the chicken war tariff is levied on the Asians, who had nothing to do with the chicken problem to start with. And that’s why the association began to get involved in the politics of lobbying.

Q. So in the absence of the 25% import duty, an $8,000 Japanese-made truck might only cost $6,400?

A. That’s exactly right.

Q. That must make Detroit happy.

A. Detroit was very supportive of the quota and of the voluntary import restraints now in effect.

Q. The economics of the protectionism issue and concerns about the health of Detroit auto makers sometimes is befuddling. Isuzu, for instance, is 38%-owned by General Motors. So isn’t GM cutting its own throat if it backs measures to restrict Isuzu’s ability to import and sell cars in the United States?

A. Let’s not forget that Mitsubishi is owned in part by Chrysler and that Mazda is owned in part by Ford. The percentages of ownership are smaller than with GM and Isuzu, but there still is profit to be made. Yes, there are vehicles being sold through those companies to the American consumer, and yes, this bashing goes on at the same time, and yes, it is perplexing.

Q. Among other things, Isuzu makes one of the more popular cars that GM sells.

A. That’s right, the Geo Storm. It’s a version of the Isuzu Impulse that is made in Japan and imported for GM.

Q. And Mazda makes the Ford Probe and Mitsubishi does most of the Dodge Stealth and the Eagle Talon and Plymouth Laser. So why do U.S. car makers own chunks of foreign manufacturers, import foreign car under their own name and then scream that imported cars are destroying Detroit?

A. First, why does GM own 38% of Isuzu? Isuzu is a worldwide distributor of vehicles, so GM is not only making profit from the vehicles sold in the United States, but from those sold in all of the 120 countries where Isuzu distributes vehicles. Secondly, absent Isuzu making the Geo Storm, could GM manufacture a vehicle of the same quality or same content at the same price the Japanese are producing? I think the answer to that is no, because if the answer was yes, then GM would obviously be producing it by themselves.

Q. But GM must think it now can manufacture a competitive car. It just launched the Saturn, which it calls its ‘import fighter’.

A. And the particular model they cite as their price leader, they just announced that they’re only going to produce 560 of them for the entire model year. So, who’s kidding whom? The thing that isn’t often brought to the public’s attention is that Ford Motor Co., for example, makes money with its overseas operations but loses money or makes minimal profits with its U.S. operations. Ford Motor and General Motors are, in fact, manufacturing in other countries and making money in other countries, which again perplexes me. Why isn’t that a problem? And why is there such an objection now to the Asian companies coming into the United States and manufacturing here? Ten years ago, the big cry from (Chrysler Corp. Chairman Lee) Iacocca and others was, ‘Let the Japanese companies come to the U.S. and produce and we’ll find out how good they are!’ Well, now we’re here, we’re producing, we’re all successful and now they want us back out again.

Q. The whole auto market is in a slump, but there are indications that things aren’t all that terrible for some of the second-tier import companies. Mitsubishi Motor Sales of America and Mazda Motor America, for instance, are both reporting record years for 1990. How come?

A. All of the smaller, growing import companies have had the luxury of coming into this market after the Toyotas and Hondas and Nissans. So we came in knowing what it takes to run a company and were able to start with zero expenses and build an organization that addresses itself to the economics in the marketplace, so that has made it a bit easier. Other companies, the GMs the Fords, the Chryslers, have been here for years, have these tremendous operations and some of them are only now cutting out the fat. As far as the market goes, it is about where we predicted it last year. We think we’re going to come in with about $14.1-billion in retail sales for the year. Of that, probably 27% will be in Japanese or Asian imports and probably 31-32% will be total imports. Obviously, Japan takes the majority of the import market, but two-thirds is still domestic.

Q. There has been criticism in management, union and even some academic circles of Japanese companies setting up shop in the United States, but filling their top executive jobs with Japanese nationals. With you as chairman, is Isuzu doing it differently than other Japanese firms?

A. Well, I’m the only non-Asian chairman, so that’s different. But corporate structure is an important thing to consider. An American corporation has vertical structure, and a lot of people have suggested that it’s too vertical, too rigid. The Japanese for years have had more of a horizontal structure. In a Japanese company, it’s very difficult at times to see who you report to. We kind of have the best of both worlds here. Everyone in the company who is involved in operations, either Japanese or American, reports through various staff levels to the senior VP of operations, which was my old job. Then we have an executive committee, and the president--a Japanese--is part of the executive committee. It consists of several officers from the company. But there is really no rigid rule of vertical reporting here or in most Japanese companies. It really is decision-making by consensus.

Q. What will the new federal luxury tax of 10% on car prices over $30,000 do to import car sales?

A. It won’t affect a lot of cars, but the luxury cars of this world will be hit. Lexus and Infiniti and Jaguar are part of our association, and for them it’s a very big issue. Unfortunately, we lost (a lobbying bid to kill the tax). But I think some of the other associations, like the Import Automobile Dealers Assn. or the National Assn. of Automobile Dealers, which both felt there should have been more discussion in Washington on the subject of luxury car taxes, will attempt to have it repealed or revised. The best answer to what it will do to sales is the one that Rolls-Royce gave. I guess the luxury car tax on one of their top models would amount to something like $19,000, and one of the executives from Rolls-Royce said there’s no question as to whether or not a Rolls buyer can afford the $19,000. The question is, will he? Will he spend it? We don’t know.

For many people, even the extra $1,000 tax on a $40,000 car is the make or break point. We can make all sorts of predictions right now, and I don’t think any of us would be exactly right. If you go back to our school days and the elasticity of demand theory then, sure, there should be less demand for expensive cars. But it’s a crazy business. We think we should take another hard look at it. And we need to say to the government that, gradually, with all of these laws being proposed, consumers’ choice of vehicles is being taken away. If they’re not doing damage to people, if they’re safe, why should you be taking away the choice of the individual to buy what he wants to buy? And that’s going to be one of our arguments when we’re back in Congress in January.