Detroit’s Long-Term Survival Hinges on Success Outside U.S.

Commentary

As Labor Day approaches, much of the auto industry’s focus is turning to negotiations between the United Auto Workers union and the Big Three, as they put the finishing touches on a new wage pact.

But even though a deal that closes the cost gap with foreign transplants is critical to recovery, long-term prospects actually may hinge as much – or more – on what happens outside North America.

And that has created a big shift in Detroit’s thinking

It’s not that U.S. auto makers were blind to anything beyond their borders in decades past. Certainly, it always made a difference whether they were earning money in Europe or running into the red in South America. And they were nothing if not tenacious in their repeated, ill-fated attempts to kick down the door to the Japanese market.

But there was little integration between the parent companies and their overseas operations, and ultimately what really mattered to Big Three brass riding the U.S. light-truck boom was the money they were making hand-over-fist in North America.

Now, it’s become crystal clear the U.S. market is all but a zero-sum game. Some growth is expected, with analysts predicting industry volumes ultimately will top 18 million new vehicles annually, up from less than 17 million this year. But that pales next to the expansion under way in the Asia/Pacific, forecast to become the biggest automotive market by decade’s end, and double-digit spikes in other emerging markets.

In addition, a steady stream of new players from places such as China or India will make it tougher – and more costly – to maintain share in North America, meaning Detroit must find more volume – and profits – elsewhere.

So far, the movement to shift focus overseas is nascent and uneven but encouraging.

Of the three auto makers, General Motors appears furthest ahead, having worked out a global product game plan and succeeded in pumping up its non-U.S. volume. International sales totaled a record 1.39 million vehicles in the second-quarter, and accounted for 59% of GM’s total deliveries in this year’s first half.

Ford has seen non-U.S. vehicle sales account for about 39% of its 2007 total so far, with demand rising 20% in South America and 22% in China and foreign operations responsible for the lion’s share of a surprising second-quarter profit. Management now is stepping up efforts to create a more cohesive company worldwide.

“(Ford) grew up as (a collection of) regional operations,” Ford CEO Alan Mulally notes. “But there’s no reason we can’t move to be a global company.”

Chrysler, too, is on the right track, with sales outside North America up 17% this year on a still-meager volume of 114,000 vehicles. Demand jumped 70%-plus in the Middle East/Africa region and Russia, and the Dodge brand recently re-entered Australia after a two-decade absence.

More work is needed, of course. GM is struggling to gain traction with its Cadillac luxury brand internationally. Ford still lacks a low-cost production source that would help it crack developing markets, while the jury is out on Chrysler’s desperate move to expand its much too limited reach via a car-making tie-up with Chinese upstart Chery.

And near term, solving the North American equation certainly remains key.

But ultimately, survivability may mean seeing to it what happens at home isn’t any more important than what goes on in China or Brazil.

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