GloboCars: THE NEXT CENTURY : Auto Makers Drive for New World Markets

The automobile is a century old and showing no signs of putting on the brakes.

More than 600 million vehicles roam the roads--from Germany’s high-speed autobahns and America’s interstates to the gridlocked streets of Thailand and unpaved byways of interior Brazil.

Last year about 50 million cars, trucks and other vehicles--an average of 135,000 each day--were driven off the world’s production lines. Two-thirds came from U.S., European and Japanese factories, but an increasing number were built in Southeast Asia and Latin America.

With their home markets overrun with cars, major auto makers are driving relentlessly into new markets. Aided by globe-shrinking technologies and communications, the push for profits is creating far-flung operations where both risks and potential payoffs are great.

“Companies that don’t think globally will be left behind,” said John F. Smith, president and chief executive of General Motors. “And so will the countries whose policies impede rather than encourage companies to do so.”

The automobile, almost since its infancy in the 1890s, has been the engineering wonder and then the economic engine of the developed world. No other industry turns out a consumer product that requires such a vast array of materials, processes and technologies or such large amounts of capital, labor and allied businesses.

Not surprisingly, the allure is intoxicating for emerging nations with growing middle classes. For them, the auto industry is a jobs machine capable of propelling their people to prosperity and worldly status.

The sheer size of some untapped markets has car makers salivating. China has 20% of the world’s population but less than 1% of its vehicles. Sales are expected to triple by 2000 to 3 million annually.

Like desserts, anything this good must be bad, and the auto industry’s projected growth has a dark side--congestion and pollution. Traffic is so bad in Bangkok that the 15-mile trip into town from Don Muang Airport can take three hours. The skylines of Los Angeles, Mexico City and Jakarta are darkened by smog largely caused by vehicle exhaust.

“There is increasing social demand on the auto industry to civilize its products,” said Jim Olsen, vice president of Toyota’s U.S. subsidiary.

These and other pressures are helping redraw the map for the industry as it enters the 21st Century. Here are some of the road signs guiding it into the future:

* The United States, Europe and Japan are mature markets with sales growth rates averaging just 1% to 2% yearly. With worldwide overcapacity, a company can expand only by taking market share from a rival or moving into new markets.

* Globalization means more consolidation and strategic alliances as car makers seek to share costs and spread risk. Efforts are mounting to build “world cars,” models that can be sold in multiple markets with only minor changes.

* Southeast Asia is the world’s hottest market. But the most coveted prizes are China and India. Latin America also has great potential. Economic and political concerns make Russia and Eastern Europe unattractive now.

* Trade barriers are coming down in emerging nations. Trade frictions will continue to flare up, especially involving big exporters like Japan. To ease tensions, firms are moving production into the countries where their vehicles are sold.

* Environmental and technological pressures are mounting on auto makers worldwide, including those of absolutists who say: Just stop making the things. That’s not going to happen, and even reducing emissions, alleviating traffic congestion and improving safety will result in higher car prices.

The automobile has been called “the machine that changed the world.” Clearly it has. Many regard it with emotion, awed by the freedom, speed and opportunity it has brought their lives.

Still, its reach is limited. Today only one in 12 of the world’s people owns a car. As that figure increases, the auto will certainly bring more change--for companies, consumers and countries.

Troubled Global Landscape

The auto changed Japan. Its auto industry was a juggernaut that made Toyota, Nissan, Honda, Mazda and Mitsubishi household names. For nearly 40 years, it was the classic growth industry, some years increasing 10% or more.

No more. Japan’s domestic auto industry has been in decline for three years, a reflection of the economic slump that has overtaken the country. “The Japanese automotive economy is changing from a growth to a cyclical industry,” said automotive consultant William Pochiluk.

The shift caught some auto makers unprepared. Nissan lost nearly $1 billion in 1993 and continues to bleed red ink. It became the first Japanese company ever to close a car factory when it shuttered the Zama plant last year.

Japanese sales also fell in the United States as the yen rose in value against the dollar, making their products pricier than U.S. models. They fared worse in Europe, where a severe recession drove industrywide sales down 16%.

The European slump exposed the weakness of car makers there as well. Fiat of Italy suffered huge losses. Volkswagen, once revered for its engineering excellence, lost $1.3 billion last year and now is ridiculed for its inefficient plants.

In the United States, the news is better. General Motors, Ford and Chrysler all reported strong operating earnings in 1993. But the profits came after three years of painful losses. GM alone lost $18 billion in North America in the last four years as it closed plants and fired workers.

With such economic and competitive pressures, a further shakeout is widely expected, with some weaker auto makers likely to go under.

Perils and Partners

It was once theorized that the auto industry would shrink to just three major players: GM, Toyota and Volkswagen. Only these companies--the largest, most powerful car makers in their regions--could make the investments and achieve the economies of scale necessary to compete on a global basis, it was argued.

Few ascribe to that view today. The reason: New technologies are more accessible, and new production methods require being lean and nimble.

“Size is absolutely no guarantor of success in the auto business,” said Robert Lutz, president of Chrysler, the smallest U.S. car maker. “It’s not going to be the large that eat the small, but the swift that eat the slow.”

In January, the German luxury auto maker BMW devoured Rover Group of Britain, acquiring a controlling 80% share in the weaker company for $1.2 billion. The remainder of Rover is owned by Honda. The BMW-Rover marriage is considered a good fit. BMW gets access to key products, such as Rover’s acclaimed sports utility vehicles, while the British firm gets access to its partner’s financial strength.

But even mergers that make sense are difficult to pull off. The combination of Renault and Volvo fell apart last year when Swedish investors rebelled, fearing the French would control their national treasure.

“Acquisitions tend to have a lot of unknowns,” said Maryann Keller, a New York auto analyst and author. “Consolidations that look good on paper often don’t work. The reason is people. Different cultures are hard to mesh.”

That was the case with the seven-year engagement of GM and South Korea’s Daewoo Group. GM bought 50% of Daewoo Motors in 1985. The idea was to build the Pontiac LeMans using GM’s engineering and marketing and Korean labor. Initially hailed as a model for global manufacturing, the venture collapsed in 1992 amid heated recriminations involving divergent cultures, language difficulties and differing business goals. Such failures have prompted many companies to eschew equity mergers for strategic alliances.

Among the world’s 41 largest auto makers there are 244 agreements, including joint ventures in manufacturing, parts sharing and research, according to the authoritative Ward’s Automotive International. Peugeot of France, for instance, has 22 agreements with other car companies, including a partnership with Taiwan’s Chinese Automobile Co. to build Citroen C15s and one with Fiat to produce a commercial van.

Not everyone advocates alliances. Chrysler, which once owned 24% of Mitsubishi, has sold its equity stake and unwound many of its joint operations with the Japanese car maker.

“Alliances don’t work,” Robert Eaton, chairman and chief executive of Chrysler, said flatly. The reason, he said, is that the market changes so rapidly while product development takes so long. Thus what made an alliance attractive initially often vanishes by the time the vehicle is produced.

For any partnership to succeed, it must benefit both sides. The Nissan Quest and Mercury Villager are produced by Ford at its Avon Lake, Ohio, plant. They’re the same vehicle with different brand names. The venture helps both: Nissan gets a minivan without having to pay an import tariff, and Ford gets a small minivan to complement its larger Windstar.

These close ties have allowed manufacturers to learn valuable lessons from each other. U.S. manufacturers have recovered in part because they have applied so-called lean production techniques copied from the Japanese.

World Cars

Another lesson is designing cars that can be sold on more than one continent.

The idea is not new. VW’s Beetle is the archetypal people’s car. It was tiny, cheap and well engineered. As an anti-status symbol in the 1960s, the roly-poly car became the first significant export to invade American shores.

The Japanese also used their centralized design and assembly operations to produce so-called world cars--vehicles sold on more than one continent with only minor changes. An example: Toyota’s Corolla.

The latest attempt at a world car is Ford’s Mondeo. The family sedan, which was launched last year in Europe, is being built in Belgium, Mexico and the United States. Ford hopes to sell 750,000 a year in 59 countries.

But Ford failed in an earlier attempt to build a global car. The Escort subcompact was envisioned for the world market in the 1980s. But internal rivalry between the European and U.S. staffs resulted in two cars with only two common parts--an ashtray and an instrument panel brace.

This time around, the company says that 90% of the European Mondeo is the same as the Ford Contour and Mercury Mystique, the car’s U.S. marques. But the program came at tremendous cost: $6 billion. Ford argues that the tab is reasonable. It is providing three cars in five body styles with two new engines that will be used in future products. Most important, the project has integrated Ford’s parts buying, manufacturing, design and engineering on a global basis.

In fact, Ford is regarded by many industry experts as a model global car company.

The firm is slowly melding its once autonomous international operations using supercomputers and video teleconferences. It has developed a web of global alliances: Mazda in Japan; Kia in South Korea; VW in Portugal, Brazil and Argentina, and BMW in Malaysia.

“We’ve been evolving into the next level of multinational company,” said Alex Trotman, Ford chairman and chief executive. “We’ve been managing more on a global basis.”

Where the Action Is

For Ford and other major auto makers, that means seeking opportunities in new markets. Simple math shows why. There is a car for every two people in the United States and Germany, and one for every three in Japan. In contrast, China has an auto for every 652 individuals; India, for every 356; Indonesia, 136; Egypt, 109; Colombia, 42; Turkey, 31; Russia and other former states of the Soviet Union, 17, and Mexico, 12.

Fueled by a high-octane mix of rising incomes and free-market policies, many of these emerging countries want to become significant car and truck producers. Eventually, some hope to become major exporters.

The effort is likely to produce a jobs bonanza. For every auto assembly job created, there could be up to 10 more jobs generated in parts manufacturing, distribution, sales and service.

But major manufacturers are treading carefully. After all, auto production is not as easy as selling a formula for Coke or building a McDonald’s on a busy street corner.

“We can’t move in and sneeze without spending $1 billion in some of these places,” said W. Wayne Booker, executive vice president of Ford’s international automotive operations.

In addition, the maze of trade regulations and local restrictions can be dizzying. Maintaining quality control in distant plants is difficult. The threat of labor unrest and even war is often real. And building vehicles to suit local taste is challenging.

Still, the possibility of 10% to 15% annual growth rates is irresistible, and car makers are maneuvering on many fronts to get a foot in the door. Here is where the action is hottest:

* Southeast Asia: Spurred by a rising, affluent middle class, the region--including Thailand, Indonesia, Singapore, Malaysia, Taiwan and Vietnam--is rapidly replacing traditional transport with cars. Tom McDaniel, president of GM’s Asia-Pacific operations, based in Singapore, sees a near doubling of sales from 860,000 in 1993 to 1.4 million by 2000. “The market is exploding,” he said.

Thailand, where sales increased more than 25% last year, is the biggest and hottest market. Malaysia is building vehicles in two ventures with Japanese partners. In less than a decade, production has topped 100,000 units a year.

Vietnam, boosted by the end of the U.S. trade embargo, has licensed half a dozen companies to build cars, trucks and buses. Taiwan, which is a bigger market that Australia, continues to be strong, with annual sales exceeding 400,000 vehicles. Exports are slowly increasing.

The Japanese dominate the region, accounting for 90% of all sales.

* China: With a population of 1.2 billion, this is the market most lusted after. Sales are projected to soar from 1.2 million in 1993 to 3 million by 2000.

“China stands out as the major opportunity for growth in the next 10 years,” said David Herman, chairman of Adam-Opel, GM’s German subsidiary.

Turning a nation of bicycle, bus and oxcart riders into car drivers will not be easy. The country’s roads are primitive. Economic and political uncertainties abound.

The potential rewards are so big, however, that no one wants to be left out. Volkswagen, Peugeot, Chrysler and GM already are making vehicles there in joint ventures.

* India: There has been an auto industry in India for 50 years, but high duties on cars and tight government control of investment and expansion have hindered development. Recent actions to lift these obstacles have raised hope that India is ready to build a competitive industry to serve its population of 820 million.

Suzuki is investing $200 million to build a second plant for its Indian joint venture. Mercedes-Benz and GM are both negotiating entry.

* South America: With the debt crisis behind it, this region is no longer the market of the future. Auto sales and production are booming, thanks to widespread trade liberalization.

Production in Brazil jumped 30% in 1993, and sales soared 43%. Brazil recently reduced taxes 20% on small cars. The decision prompted VW to resume production of the Beetle in Brazil after a seven-year hiatus.

The region’s major manufacturers--VW, Fiat, Ford and GM--are increasing spending in the region and seeking export opportunities. Economic concerns persist, however. Inflation is so severe in Brazil--a 2,500% annual rate last year--that in January GM instituted daily price hikes on vehicles.

* Mexico: Although auto sales and production were down in 1993, the slump was overshadowed by the approval of the North American Free Trade Agreement.

The International Trade Commission projects that NAFTA will mean a 7% increase in jobs and a 16% increase in wages for Mexico. With its central location, it is likely to become a major staging ground for exports to both North and South America. VW, Mercedes-Benz and Nissan all have plants there.

* Russia and Eastern Europe: Auto makers are proceeding here with caution because of the unstable economic and political situation. GM and Suzuki are in Hungary. Fiat is working in Poland. VW acquired Skoda in Czechoslovakia.

Russia privatized its largest auto maker, Volga Auto Works, two years ago. GM is providing the company with $700 million in engine-control systems over the next five years.

Trade Winds

The growth of emerging markets has accelerated as trade barriers have come down worldwide. Despite nagging problems, global trade in general is freer today than ever before.

“Tariffs are coming down in a lot of places,” said Dick Nerod, GM’s vice president of South American operations. “It results in more competition and more choices for consumers.”

In Colombia, for instance, vehicle sales are booming because of a surge of imports made possible by a 25% reduction in import duties. Many of the vehicles are coming from Venezuela and other South American countries.

The Assn. of Southeast Asian Nations--Singapore, Malaysia, Thailand, Indonesia, the Philippines and Brunei--has adopted a tariff-reduction system to spur trade and increase market access. ASEAN supports tariff reductions of 20% by 2000 on most goods, including cars with more than 50% local content.

Plenty of restrictions remain. Certification requirements, foreign ownership restrictions and high local-content rules are common. India, seeking to protect its supplier industry, imposes a 70% local-content requirement.

Trade frictions continue to flare among the major auto-producing nations. This is likely to persist as long as there are significant disparities in their balance of payments and the efficiencies of their operations.

Europe has imposed import restrictions on Japan until 2000 to buy time to restructure its inefficient auto industry. The United States continues to press Japan to open its market and lower its trade deficit.

The main issue in these battles is jobs. The U.S. Commerce Department says every $1 billion of trade imbalance equals a loss of 20,000 jobs. With a little over half of the nearly $60-billion U.S. trade deficit with Japan tied to autos and auto parts, that means 600,000 jobs.

Many major auto makers are undertaking global expansion in efforts to alleviate trade tensions and shield themselves from currency fluctuations.

The Japanese have concentrated design, engineering and manufacturing at home. But as trade tensions and the yen have risen, they have adopted a localization strategy--moving production to where the vehicles will be sold.

Greening of the Auto

Almost as rancorous as trade arguments is the growing debate over environmental damage caused by the automobile. Is the dream machine that promised mobility becoming a global nightmare causing oil-consuming gridlock, land-scarring sprawl and environmental degradation?

“Environmental damage from driving plagues the farthest reaches of the globe--polluting the air in cities, squandering valuable land and even altering the earth’s climate,” wrote Marcia D. Lowe of the Worldwatch Institute.

In the developed world, growth in the number of autos is slowing but miles traveled is increasing. In emerging nations, the demand and desire for cars race forward despite inadequate infrastructure and pollution controls.

Signs of society’s inability to cope with the auto abound: Traffic tie-ups in Amsterdam’s narrow downtown streets were so bad that it declared its central city a car-free zone. So much lead is dumped into the air in Bangkok in the exhaust from cars, trucks and the ubiquitous motorbikes and tuk-tuks--three-wheeled vehicles--that babies are routinely born with high trace levels. Excessive exposure to lead can cause neurological damage.

A recent report funded by the American Academy of Arts and Sciences and written by Elmer Johnson, a lawyer and former executive vice president of GM, calls for greater government reliance on pricing strategies--higher fuel taxes, parking fees and highway tolls--to curb vehicle usage.

The study also urges development of computerized smart highway systems to ease congestion; production of electric vehicles to reduce emissions; greater recycling of auto components, and development of mass transit.

Strides are being made to make the auto greener, even in developing countries.

Mexico now requires catalytic converters on its vehicles. Brazil encourages small, fuel-efficient vehicles through its tax policies. Singapore controls traffic with an expensive licensing system limiting driving time.

Germany is in the forefront of auto recycling, a response to the country’s shrinking landfill capacity and to the strength of its Greens movement.

Electric vehicle research is under way throughout the world. The effort is being propelled by California, which has mandated that 2% of vehicles sold there in 1998 be zero-emission models. Prototypes are being tested throughout the world, even as auto makers argue that battery technology is lagging.

There is a global trend toward increased cooperation among government, industry and the environmental community. The U.S. government has formed a historic partnership with the Big Three to develop a “clean car” that can get up to 80 miles per gallon.

“There is a lessening of environmental ‘wackoism,’ ” said David Cole, executive director of the Office for the Study of Automotive Transportation at the University of Michigan. “It is being replaced by government and industry working together as a team.”