Phil Long / Associated Press Bob and Marian Manns are beneficiaries of the competitive auto industry, providing them with stylish choices like their 1999 Chrysler minivan and 2000 Jaguar S-Type.

The new Golden Age

Auto industry booms but big challenges loom

By Daniel Howes and David Phillips

The Detroit News

Chrysler’s bold PT Cruiser contrasts with the spiffy 1955 Chrysler 300.

he last year of the auto industry’s first century wasn’t supposed to be so golden. No one predicted that U.S. consumers would snap up nearly 17 million cars and trucks in 1999 — the sixth consecutive year of booming sales. And few foresaw Detroit’s automakers posting record profits, nearly $88 billion collectively since 1993. While sales are likely to brake gently this year, the good times show scant signs of being thrown into reverse.

    “The U.S. market has permanently upshifted,” DaimlerChrysler AG Co-Chairman Robert J. Eaton said. “A new era is unfolding that is jacking the economy up to a new level. The industrial revolution and mass mobilization of society that unfolded in the 1900s and 1920s and the post-war boom now is giving way to the technology- and intellect-driven economy.”

    General Motors Corp., Ford Motor Co. and DaimlerChrysler AG, archetypes of the industrial American economy, stand astride that transformation. The 1990s may well be remembered as a new golden age for the U.S. auto industry, a time when the giants of the Rust Belt successfully mended their ways to make Detroit and its products respectable again.

    Among the biggest beneficiaries are U.S. car and truck buyers and the Michigan economy, a financial basket case just a decade ago. Even the state’s auto production, in decline for years, saw an uptick in 1999.

    Armed with computer chips and satellite technology, cars and trucks are smarter, safer, cleaner and more reliable than any time in history. The Internet and competition from entrepreneurs who think they can sell pick-ups as easily as televisions are creating savvier consumers and forcing restructuring in a retail system little changed in decades.

    Each new model year is giving consumers more for less than at perhaps anytime in the industry’s history. Vehicles are more affordable today than anytime since 1980, thanks to low inflation, wage gains and intense competition that makes rebates commonplace.

    “They’ve made it more comfortable for me,” said Marian Manns, 62, of Canton, Ohio. In the past decade, she and her husband, Bob, a retired orthopedic surgeon, have owned two BMWs, two Jaguars, a Chrysler minivan and three sport-utility vehicles — a Chevrolet Blazer, Jeep Grand Cherokee and Ford Explorer.

    “The vehicles are more consumer friendly,” said Manns, an opera buff and longtime member of her local school board. “They’re a lot quieter. The homey things make it easier for me to listen to my music and put my drinks somewhere. I love the heated seats.”

    That’s no accident. After decades of dullness, Detroit rediscovered design in the ‘90s and the need to respond more quickly to changing customer tastes and lifestyles. Stylish new products called crossover vehicles — part car and part truck — claim inspiration from past Detroit greatness even as they increasingly promise the utility of a sport-ute or pickup with handling of a passenger car.

    It hadn’t been that way for more than 30 years. But this is not history come full circle. The reality of Detroit’s new gilded era is that the industry is facing more change in more areas at the same time than any time in its history.

    And U.S. automakers face big challenges. Their market share continues to dwindle as foreign rivals increase their North American presence and enter new segments. Despite the recent earnings bonanza, profit margins are still narrow at about 5 percent.

    As Wall Street is quick to point out, Detroit’s automakers eke out too little supporting too much capital-intensive manufacturing capacity. That is forcing a global consolidation, restructuring and new alliances that would have been unthinkable less than a decade ago.

Detroit, the world

mark of how profoundly the auto industry is changing — and taking Detroit with it — came on a London stage 18 months ago. Germany’s Daimler-Benz AG announced plans to acquire Chrysler Corp., creating DaimlerChrysler and proving that the global auto industry respects no borders.

    The new company, still struggling to find its footing with investors despite respectable profits, symbolizes one path of globalization in the auto industry. Others have traveled it already.

    GM and Ford now effectively own Sweden’s auto industry, as well as the market leaders in the United Kingdom. The two Detroit giants, which already control two Japanese automakers, Isuzu Motors Ltd. and Mazda Motor Corp., now are wooing South Korea’s Daewoo Motor Co.

    Yet there are signs that Detroit’s appetite for conquest may be giving way to a more pragmatic approach intended to consume far less capital but deliver results just the same. GM, for example, is using partnerships with Japan’s Suzuki Motor Co., Fuji Heavy Industries Ltd. and Honda Motor Co. to gain access to world-class mini-car, all-wheel drive and engine technology without acquiring the companies.

    A key driver behind the strategy, also evident in Ford’s diesel engine alliance with PSA Peugeot Citroen of France, is increasing pressure from investors to improve the auto industry’s economics. For one thing, that means investing far less in expensive plants and equipment that increase fixed costs.

    “Designing and building cars is not a very profitable business because everybody can do it,” said John Casesa, an auto analyst for Merrill Lynch & Co. in New York. “It takes a whole lot of capital and the return (for investors) is just not worth the risk. The structure of the business is unsatisfactory.”

    The operating profit margins of 18 percent or more that made Detroit the epicenter of industrial might in the late 1950s and early ‘60s now stand at a mere 5 percent. Yet the intensifying competition from foreign rivals is forcing heavier investment, more often, in expensive product programs.

    Radical change is inevitable. Detroit’s automakers are using the flush 1990s to re-engineer an industry burdened by its smokestack legacy in an Internet age. With price-earnings ratios below 10, compared to an average of 31.5 for the Standard & Poor’s 500 Index, Detroit’s auto executives have little choice.

    Another revolution

    The auto industry may course through William Clay Ford Jr., chairman of the company that bears his name, but he’d be the first to admit there are no guarantees of success.

    “The last few years have been terrific for the North American market,” Ford said. “There are no signs that will disappear soon. Balanced against that is that the profitability for the industry — and Ford — is concentrated in a few segments: sport-utility vehicles, minivans and pick-up trucks.”

    That’s why the automaker founded by his great-grandfather, Henry Ford, is undertaking the most wrenching realignment of its corporate mindset since the Whiz Kids invaded Dearborn after World War II. Ford, the automaker, aims to become Ford, the automotive consumer-products company.

The Ford Explorer helped make sport utility vehicles the hottest models of the 1990s.

    In Ford’s view, the Internet and the drive to deliver ultra-clean advanced technology vehicles, potentially replacing the internal-combustion engine, both hold the potential to dramatically shift the economics of the auto industry.

    GM and Ford are deploying Internet technology in their global purchasing and supplier management systems that could trim the costs of purchasing transactions by as much as 90 percent. The automakers also are seeking ways to use the Internet to improve the car and truck buying experience without alienating their traditional dealer networks.

    Whether the moves signal visionary thinking or desperation is unclear and, arguably, irrelevant. But such a transformation, hailed by Wall Street for its potential to boost profits and efficiency, poses unprecedented challenges for others who have profited from the existing system.

    Retail angst

    If the nation’s auto dealers issued a statement following AutoNation Inc.’s decision to close 23 used-car superstores, the headline would probably have been: We told you it wasn’t so easy.

    Trouble is, AutoNation founder H. Wayne Huizenga’s remaining 406 new-car dealerships still make his empire the nation’s largest auto retailer. Moves into the car-selling business by free-wheeling entrepreneurs is forcing change on dealers already burdened with dissatisfied customers open to new ways of buying a car.

    Add the Internet, just beginning to cement its place as a legitimate forum for retailing, and it’s easy to see why independent dealers feel besieged. Already, GM’s Vauxhall Motors Ltd. in the United Kingdom is selling cars directly to customers over the Internet and delivering them through their existing dealer network.

    Dealers are not standing still. Some are embracing the Internet or experimenting with more consumer-friendly sales tactics, like one-price selling, and expanding their used-car, service and financial operations.

    Yet other well-heeled dealers are trying to stem the tide of change. They are pushing to strengthen state franchise laws, often relying on their strong political ties and well-heeled lobbyists, to erect hurdles to changes being pushed by manufacturers and new publicly owned mega-dealer chains.

    GM’s creation earlier this year of Retail Holdings Inc. to acquire up to 10 percent of its dealerships elicited such a firestorm that GM Chairman John F. Smith Jr. publicly reversed the plans. He now vows to make any changes only in partnership with GM’s 8,000 U.S. dealers.

    “GM and the others are spending too much time trying to effect the retail business and it’s wasteful,” said Scott H. Allen, a Cadillac dealer with two stores in Southern California. “They should commit these resources towards building cars and trucks that create market demand and have the reliability of hand tools. Then they can get rid of the dealers.”

    Still even Allen agrees that the car- and truck-selling business is under pressure to change itself or be changed by the marketplace. He is choosing to change himself by adopting more consumer friendly tactics, such as extended weekend hours.

    Regulatory pressure

    The auto industry of old never took change well. For decades, it aggressively combatted proposed emissions and safety regulations. The automakers still put up a good fight, but increasingly they see emission and safety rules as opportunities for competitive advantage.

    It is a truism today in Detroit that safety sells. That is clear in the proliferation of air bags throughout vehicles and advertising that touts federal safety ratings.

    The industry also is embracing a more cooperative stance on the environmental front. It has pursued industry-government joint ventures, such as the Partnership for a New Generation of Vehicles, a 10-year effort to develop an affordable, 80-mpg sedan.

    Such efforts has given the industry relative respite from aggressive new environmental regulations that could threaten the fat profits coming from trucks and sport-utility vehicles, the engines of Detroit’s prosperity.

    Instead of fighting proposed regulations, Detroit’s heavyweights are behaving as if they believe the best defense is a good offense. They are backing calls for cleaner fuels, more aggressive gas-mileage policies, more incentives and even a gas tax.

    Detroit’s apparent willingness to abet measures designed to boost fuel efficiency isn’t corporate altruism. The promise of breakthroughs in affordable advanced vehicle technologies, perhaps as early as 2004, is shifting an industry philosophy that long equated environmental regulation with lost jobs and declining profits. Planning for a different future now is considered smart business, not surrender.

    “Technology is going to be the way we respond to all that,“ said Neil Ressler, Ford’s vice-president of research and vehicle technology. “We cannot dictate what people are going to want. We have to anticipate what they might want.”

    Changing times

    The story of Detroit’s automakers likely will hinge on whether the new golden age is turned into a golden opportunity. The century-old model for building cars and trucks and selling them through independent dealers increasingly is vulnerable to savvy competitors and the new economy that is driven by information and fast-changing digital technology.

    The prosperity and record demand for Detroit’s wares is offset by growing pockets of excess plant capacity that could prove a significant drag on profits should the surging economy slow.

    Yet should the North American market continue to expand, DaimlerChrysler says it might expand its U.S. manufacturing base — moves already undertaken by Toyota Motor Corp. in Indiana, as well as Honda Motor Co. in Ontario, Canada.

    GM isn’t as fortunate. The automaker has extended the life of under-used plants in Baltimore and Ste. Therese, Quebec, that build unpopular sports cars and large vans. GM President G. Richard Wagoner Jr. said the automaker’s fixed costs “are much lower now than 10 years ago. We are better positioned to manage the dip than ever before.”

    That would be the ultimate test of whether Detroit’s automakers learned from the collective disasters of the late 1970s and early 1980s, the recession of the early ‘90s and the boom years that followed. The old ways are dying, and Detroit’s automakers are hurrying to change even while basking in the glow of this new golden age.

    “It’s not sustainable over the long term and they all recognize that,” said David Cole, director of the University of Michigan’s Office for the Study of Automotive Transportation. “We’re embarking on a much more technology-driven era. The nature of the business today will not be the nature of the business tomorrow.”