Reinventing the Wheel : Global Players Need to Steer a New Course to Stay in Race

The car company executive didn’t mince words. “The global motor industry is facing a business climate of unprecedented severity,” he said. His company was going through “a very difficult time with respect to profitability.”

No, the speaker was not Robert C. Stempel, the unfortunate chairman of General Motors who just announced his resignation under pressure. Instead, it was Yoshifumi Tsuji, president of Nissan.

The car industry is at a crossroads, Tsuji said recently at the Paris Auto Show. Vehicle sales have fallen in Japan, Europe and the United States in recent years, and he saw “little expectation that the market will recover quickly.”

But many others, especially in the U.S. market, see a sales upturn as imminent. “In 1986, more than 15 million vehicles were sold, compared to 12.8 million or so in 1992,” observes analyst Ronald Glantz of Dean Witter. “That means another big sales year is coming due.”

Others agree with Glantz’s reasoning--that car and truck buyers trade in their vehicles and spur a new sales boom every seven or eight years. And they conclude that the next upturn will come in 1993, or 1994 at the latest.

Who is right, the gloomy Nissan executive or the optimistic U.S. analyst? Both could be--meaning there may well be an upturn in 1993 or 1994, but not all car makers may benefit.

The larger truth is that the world has changed. Automobiles are no longer a growth business, at least in developed countries. In the Japanese market, where car sales used to rise 7% a year, expectations are for 1% growth in good years. Analysts expect car and truck sales to rise 2.4% in the U.S. market this year--even though they could jump 17% next year.

But amid such flat overall patterns, there will be great success for companies that get specific products right--as Chrysler, for example, has done with minivans and Jeeps. Chrysler has sold 440,000 minivans in the last 12 months, a big number for a specialty vehicle.

Along with hot sales for a new Jeep Cherokee model, the specialty vehicles are carrying Chrysler to sizable profits this year--at a time when its U.S. and Japanese rivals are losing money or struggling to break even.

Chrysler’s success indicates a new reality in the auto business. The old rule was that a company needed volume products, or high-priced luxury cars, to make money--the equipment and tooling to make any model of car is so expensive that only sales in the millions or prices in the tens of thousands could turn a profit.

But car buyers are no longer purchasing millions of copies of the same vehicle; instead they are indulging tastes for a wide variety of trucks, vans and cars--and looking for bargains besides.

That puts a premium on a company’s ability to design, manufacture and market efficiently, so it can make money on short production runs. “It has to bring the break-even point down to 100,000 cars a year, from 200,000,” says analyst Joseph Phillippi of Lehman Bros.

And that, in turn, favors flexible manufacturing--another technical advance in automotive production. Flexible assembly lines can switch from one vehicle to another without stopping--a truck, a car and then another truck can follow each other down the line, with computer-directed tools adapting to the model before them.

Flexibility is a quiet virtue. The Intelligent Body Assembly System at Nissan’s plant in Smyrna, Tenn., doesn’t look different from other machinery and scarcely makes a noise. Rather, computers and microprocessors guide the machinery silently and efficiently, working to extremely close tolerances.

The result, says Jerry Benefield, head of Nissan’s operation in Smyrna, is economical production of the company’s new Altima car, and the capability to switch cheaply and effortlessly to other models when the market dictates. “We’ll do it cheaper than the next guy,” Benefield says.

Maybe so, but in today’s auto business the next guy is quick to adapt the latest technical advances; nobody’s asleep anymore.

“Chrysler’s Bob Eaton is very attentive to engineering and manufacturing costs,” says analyst Phillippi, referring to Vice Chairman Robert Eaton, who will succeed Lee A. Iacocca as chief executive next year. The company’s new LH series of cars went from design to production in 39 months, compared to 4 1/2 years for previous new models.

Ford has become an efficient producer too. And John F. Smith Jr., General Motors’ president--and perhaps its next chief executive--is working hard to blast excess costs out of GM’s system. Smith knows that in a crowded, slow-growing business, any competitive flaw can be deadly. Nissan, for example, is losing money, even though it pioneered flexible manufacturing systems. The company’s unexciting designs and stodgy marketing didn’t measure up. Thus President Tsuji looks gloomily at this period in the business.

But this is not the first crossroads the car industry has come to. Just for example, a dozen years ago Chrysler seemed to be a goner, and the U.S. auto industry appeared headed for defeat at the hands of Japan’s car makers. Now Chrysler is a winner, Nissan is feeling a pinch and competitive success is more evenly spread among Ford, Honda and Toyota--although GM is still a worry. As ever, the business is cyclical--sunshine alternates with rain.

Time to Trade In?

Car and truck sales are low just now, but optimists take heart from the motor industry’s cycles, which show fat years recurring--and an upturn due.