WHO'S NEXT?

Cue the funky jungle music. It's tribal council time.

On a not-so-remote island known as the North American continent, a different game of Survivor is taking shape, with carmakers trying to outwit, outplay and outlast one another in the face of a recession some say is looming.

Already winners and losers are beginning to emerge, thanks to a cutthroat market that hit the brakes last October. Slammed hardest in this recent slump — if you can call the 17.2 million-unit sales pace of the first quarter a slump — are the U.S. Big Three, which have seen light vehicle sales fall a combined 9.8% since the start of the model year and have been forced to slash production schedules as a result. But there are other pockets of concern, as well. Money-making segments, such as sport/utility vehicles (SUVs), pickups and minivans are fading, and certain brands — including Mercury, Cadillac, Land Rover and Dodge — are fighting to ensure consumers don't vote them out of the market.

With the Big Three flagging, it's mostly foreign manufacturers — Toyota Motor Corp., Honda Motor Co. Ltd. and BMW AG among them — that are staking claim to the game's immunity necklace as the most recession-proof brands. They are playing well and are positioned to be there in the end, even after a prolonged downturn. Sales of crossover utility vehicles (CUVs), a stronghold of the import pack, are growing rapidly, and the foreign makes continue to dominate the luxury car segments and gain ground in the pickup and SUV markets — import truck sales rose 13.6% in March vs. a 4.2% decline for domestics.

And just as in the TV show, key alliances are being formed as automakers look to plug product and technology holes and better position themselves in the U.S. and abroad. General Motors Corp., for instance, has teamed up with Honda for V-6 engines, Fuji Heavy Industries Ltd. (Subaru) for all-wheel-drive technology, Isuzu Motors Ltd. for diesel engines and Fiat Auto SpA for purchasing (see story, p.53). Mazda Motor Corp. is counting on a more cohesive product strategy with Ford Motor Co. to continue its comeback in the U.S., and Nissan Motor Co. Ltd. is a stronger competitor with backing from benefactor Renault SA.

At stake is survival itself. Questionable is whether the North American market, long term, can continue to support 18 carmakers with 35 brands offering roughly 225 vehicles in some 24 cross segments of the market.

“A lot of adjustment has to come through the Big Three,” predicts analyst Susan G. Jacobs, president of Jacobs & Associates. “In any competition between the Big Three and the Japanese, or the Big Three and the Germans, the Big Three will lose because they do not have the cost structure or cachet in the brands or reputation for quality and reliability.”

The backdrop for all this: a teetering U.S. economy that has defied the experts and at times rattled the confidence of consumers. Americans have watched as the stock market has plunged, affecting them both psychologically and in real terms, as more and more wage earners have their savings and pensions tied up in stocks and mutual funds.

Also helping to cool the market euphoria of the past nine years is a rash of job cuts. Some 17,500 workers were given their walking papers at DaimlerChrysler Corp. in mid-March. GM also is trimming its head count, and both it and Ford have bagged shifts at certain car and truck assembly plants. Suppliers also are being dragged into the game — some of the largest have taken the knife to their employment ranks, with thousands of North American jobs earmarked for elimination since the first of the year.

“The first shoe hit manufacturing,” notes David Cole, director of the Center for Automotive Research at the Environmental Research Institute of Michigan. “Now the second shoe has fallen and hit suppliers.”

The layoffs are the result of drastic cuts in production, as automakers rein-in bulging inventories. In the first half of 2001, U.S., Canada and Mexico vehicle assemblers are slated to build 10% fewer cars and trucks, with GM alone slashing its schedule by 17.4%. Only Honda of America Mfg. Inc. and BMW Mfg. Corp. plan to produce more vehicles in January-June than a year ago.

The climate already has caused the unimaginable: rising criticism of Federal Reserve Chairman Alan Greenspan, who has cut prime interest rates to 5.0% in three separate actions this year in order to goose the U.S.'s $10 trillion economy.

Suddenly, Mr. Greenspan, the puppet master who deftly pulled the strings in engineering the longest economic expansion in U.S. history, is being second-guessed by critics, particularly on Wall Street.

“I don't think he's done as much as Wall Street would like,” DaimlerChrysler Corporate Economist Van E. Jolissaint says of Mr. Greenspan. “(But) his responsibility is for the overall economy and prosperity of the U.S., not whether Wall Street makes money or not.

“(And) it's our best guess right now that we manage to get out of this with what I call a bumpy landing — still no crash, no recession. Mr. Greenspan does it again.”

Causing the most angst for economists are the mixed market signals. Consumer confidence remains a far cry from its peak last May as measured by the Conference Board, while spending has held fairly steady. That has both Fed and car company officials scratching their heads.

“The Fed stays in touch with us, because they use the auto industry as a gauge of how the economy's doing,” says Mr. Jolissaint. “They actually said to me on the phone, ‘Why is the industry so strong?’ We can't explain it. We're not sure.”

Sums up Toyota North America Chief Operating Officer Jim Press: “It kind of reminds me of the story of the recession we were supposed to have, and no one showed up. This is a new economy slowdown.”

The wild card is attractive incentives, which reportedly rose to an average of $1,462 per vehicle in February from $1,367 in January. Some of this is market smoke and mirrors, as carmakers have sneaked up prices along with incentives. Overall, there's been a scant 0.5% net reduction in prices this year, according to Paul Ballew, GM general director-market and industry analysis. So far, that's been enough.

“Part of our explanation (for the stronger-than-expected market) is that we've made (consumers) offers they can't refuse,” says Mr. Jolissaint.

But not all boom markets are created equal. And not all automakers have benefited alike or shared the reward challenges from the first quarter's torrid pace — the second best January-March in U.S. history.

Combined Big Three light vehicle sales were off 10.0%, with some of their key brands — Dodge (-17.7%), Lincoln-Mercury (-17.9%), Buick (-16.4%) and Cadillac (-25.8%) — down by even wider margins. GM and Ford are expected to report sharp drops in first-quarter earnings, and DaimlerChrysler says it will report losses in the range of $715 million to $893 million.

In addition, there's been some softening in key segments — large and luxury SUVs, minivans and pickups — where DaimlerChrysler, Ford and GM rely heavily. And that has prompted bond-rating agencies to issue negative outlooks, saying conditions exist that may lead to credit downgrades.

What's more, most insiders remain convinced that despite the fast start, the U.S. market overall will struggle to hit the 16 million to 16.5 million-unit range, signaling tougher months ahead.

“We're prepared for a repeat of last year,” Gary Dilts, DaimlerChrysler senior vice president-sales, says of the weak second-half outlook.

Notes GM's Mr. Ballew, “The industry is off to a good start. The challenge for all of us is that demand will continue to moderate.”

Some of the second-half pain will be mitigated by first-quarter cuts in production to align inventories with demand. In recent months, the Big Three have lanced bulging inventories, cutting car supply by 26 days and trimming nearly 30 days off truck stocks.

“The good news is that vehicles are still selling well. The bad news is they're still selling out of inventory,” notes Dana Corp. Chairman Joseph Magliochetti.

But automakers are hoping that problem is behind them, and they are in better position to run steady even in a 16 million market. “Last spring, we were operating every plant full out,” says Mr. Jolissaint. “We're not planning on doing that. We're trying to operate on a pull basis, rather than a push basis.”

But the reality is there is just too much car and truck capacity here in North America, clouding the industry's overall long-term outlook. Automakers have the ability to produce 18.1 million cars and light trucks on straight time. At the current sales pace, the industry is running at less than 80% of that capacity down from 97.3% for all of 2000. And with new plants on tap from Honda and Nissan and expansions to be completed by BMW, Mercedes, Subaru-Isuzu Automotive Inc. and Toyota Motor Mfg. North America Inc. between now and 2003, it will only get worse.

“We think (overcapacity) will continue to be a problem for the next four or five years,” admits Mr. Jolissaint.

“The Big Three are learning now, in all segments, what it's like to be one of five or six big players, not one of three,” says Ms. Jacobs.

Something's got to give. Oldsmobile and Plymouth already have had their torches extinguished, and the marketplace is making a few more companies, brands, market segments and, perhaps, even executives, vulnerable.

Players bumped to jury status include:

▪ Big Three Small Cars

The Big Three automakers are in the dark when it comes to the small-car market. The segment as a whole has held its own so far in ’01, with sales down less than 1% in a light vehicle market that is off 5.6%. But DaimlerChrysler small-car sales have shrunk 13.1% and GM and Ford each has slipped more than 3%. Combined, Big Three market share has fallen a full two points to 46.1% of the small-car sector.

“It's a rough market,” notes Mr. Cole. “Not many companies are wealthy right now. Many of the big names are struggling. New powertrains are expensive and complex, which puts a greater squeeze on marginally financed manufacturers.”

But Mr. Cole says a comeback for the Big Three could be at hand. He says the upcoming Harbour Report on North American manufacturing productivity “will show the Americans have improved dramatically, and there is still room for more.

“Americans have large unrealized potential to cut cost,” he says.

▪ Ford's Premier Automotive Group

Luxury car sales remain steady, but Ford's Premier Automotive Group is anything but. Combined deliveries for the Jaguar, Land Rover, Lincoln, Mercury and Volvo brands have slid 19% since the start of the ’01 model year and light-vehicle market share has dropped more than a half point. And that entire decline isn't at Mercury, as might be expected. Jag sales are off 13.3%, Ms. Jacobs says, because it is grounded in sedans, and the XK8 coupe occupies a segment that's been among the most vulnerable. Land Rover is down 19.5%, hit by car-based SUVs that offer a better ride. And Volvo, which enjoyed a 41.5% surge in sales from February to March, remains 11.9% behind year-earlier volumes. Dominated by sedans and wagons, “Volvo is vulnerable to new entries, such as IS300 and C-Class or pre-owned programs for Mercedes and BMW,” Ms. Jacobs says. Lincoln will continue to under-perform, because it is oriented to retirees who are hit harder in a recession, she says.

That doesn't bode well if Ford's counting on a successful PAG as a hedge against the day when sales of its highly profitable trucks are affected by market shifts or more intense competition.

▪ Mercury, Land Rover, Cadillac, Dodge and Jeep

They are the five worst performing brands so far in ’01. Mercury and Land Rover are big-time contributors to Ford's overall PAG slump. And Cadillac continues to struggle despite a fairly healthy luxury-car market overall.

“That was a bit of a shock,” GM's Mr. Ballew says of Cadillac's disappointing sales so far this year, which he blames in part on a reduction in fleet deliveries.

“(But) there (also) is a bit of softening in that traditional luxury end of the business,” he adds. “That's a long-term structural issue that we're attempting to deal with.

“The CTS (Catera replacement) launch later in the year is very important,” admits Mr. Ballew. The upcoming Escalade EXT pickup and LAV crossover vehicle also are critical.

Dodge and Jeep sales each are down more than 15%. Jeep has suffered from an aging product line and softening SUV sales. Dodge has nothing in the hot CUV segment, sales of its passenger cars — down 14.9% since the start of the model year — continue to pale, and several of its trucks are nearing the end of their current lifecycles.

▪ Juergen Schrempp

Survival in the rugged automotive marketplace requires confidence-inspiring leadership. And that's where DC Chairman Schrempp appears to be off his game. To shareholders on both sides of the ocean and a large contingent of U.S. employees, Mr. Schrempp comes off as the Jerri (a Survivor TV contestant fans loved to hate) of this version of the Survivor game: abrasive, stubborn and locked in the midst of a questionable game plan that may not see him through to the end.

“Do you have any conscience?” one shareholder asked at DaimlerChrysler's contentious stockholders meeting last month.

There are a number of players who are hanging on, but whose positions appear precarious. Among them:

▪ The sport/utility market

Torches are flickering in this segment, which largely has been responsible for the industry's profit boom of the past several years. Model year sales of small SUVs are down 20.2% this year, and sales of midsize SUVs have slipped 17.4%. Sales of high-margin “Large Luxury” SUVs have plunged 32.8%. And the success of the “Large” segment group — up 7.9% so far this year — can be attributed to just three models, the Chevy Tahoe, GMC Yukon XL and Toyota Sequoia. Is the bloom permanently off this rose, replaced by the flowering of the more car-like crossover segment?

“There aren't as many first-time SUV buyers (as there used to be),” explains Ms. Jacobs.

▪ The minivan market

Another key profit-maker is endangered. Minivan sales are down 21.8%, as buyers move into other segments. “I think the van market definitely is going to have tradeoffs to crossover SUVs,” says Mr. Press. “We're also seeing the introduction of station wagons again. They're both nibbling a little bit at minivans.”

Most of the hit has been taken by DaimlerChrysler, which has lost more than 1.5 points of market share. Town & Country sales are up 25.6%, but that has failed to make up for the huge dips in Voyager deliveries (down 55.8%) and Caravan sales (off 30.6%). Ford also has lost some ground, while Honda has picked up two full share points with the Odyssey.

“We actually think it's a modest pothole in the road,” says DaimlerChrysler's Mr. Jolissaint. “We think the minivan segment is stable to slightly up. It's simply too attractive, too utilitarian, too useful.

“(But) there's overcapacity in minivans,” he adds. “The question going forward is, who's going to have the overcapacity?”

▪ The pickup market

Pickup trucks — small and fullsize models combined — have lost nearly a full point of market share so far in ’01. Only Toyota, with its still-fresh fullsize Tundra, has picked up volume. Ford, which has driven its F-Series to record profits in recent years, has lost more than a half point of share in the segment and faces a revamped Dodge Ram due later this year and upcoming entry from Nissan in 2003.

“They're not growing like they used to,” Jack Collins, vice president-marketing and product planning for Nissan North America Inc., says of fullsize pickup sales. “They may be ‘plateauing,’ and perhaps in the future there may even be a slight downturn in that segment.”

▪ The U.S. Big Three

No group has suffered more during the ’01 model sales slump than GM, Ford and DaimlerChrysler. The reason? The softening of the sport/utility, minivan and pickup markets, more import competition in those key segments and a penchant to overproduce cars and trucks when times are good. That resulted in too many vehicles on dealer lots when the slowdown hit and forced those higher-than-normal rebates and sudden production cuts, which will show up in first-quarter bottom lines.

What's more, if the market does begin to slip below the 16 million units expected, the Big Three will be among those hardest hit, according to a WAW analysis. Even at a 17.3 million-unit market, there are some brands struggling to hold on, including GM's Buick, Cadillac, Pontiac and Saturn and Ford's Mercury. At a 16.5 million market, it starts to get tough for the Ford and Lincoln brands, as well. And further dips quickly spell disaster for Chevrolet, Jeep, Chrysler and GMC.

“The strong dollar means that (the domestic automakers) have disproportionately shared the downturn,” says Mr. Jolissaint. “It is our hope that we will disproportionately share the recovery.”

Counters Ms. Jacobs, “I don't see a single segment where I think (the Big Three) will be gaining share.”

Among the favorites still to be in camp when the next recession ends:

▪ Crossover utility vehicles

This is the growth segment in the market, as sales have risen 190.8% in the model year's first six months on the wave of 10 new product offerings — including the torridly hot PT Cruiser and strong-out-of-the box Acura MDX, BMW X5 and Ford Escape. The segment has gained nearly four full points of market share and has helped revive the fortunes of Mazda in America, whose Escape-based Tribute has led to an overall 23.1% rise in first quarter sales.

▪ Luxury imports

Cadillac and Lincoln may be down, but BMW, Audi, Acura and Lexus all are off to solid starts in 2001. Mercedes recorded a record March, as did Audi, Infiniti and Lexus. Saab sales rose 41%, and BMW posted its best first quarter ever in the U.S. Of the top 10 performing brands this model year, five are Japanese or European luxury imports.

“Foreign brands will (continue to) outperform the domestics,” says Ms. Jacobs.

▪ Korean small cars

With a diminished Big Three presence and Honda Civic and Toyota Corolla/Echo sales softening, Korean makers are taking a growing chunk of small car sales in the U.S. As a group, their sales in the segment are up 20%, and their combined share has grown 2.5 points so far in the ’01 model year.

“(The Koreans) do have a low-cost advantage,” observes Mr. Cole. “It's why GM is interested in Daewoo.”

▪ Asian and European brands

It will take a more severe downturn before many of the Asians and Europeans begin feeling the pinch. The strength of the dollar vs. the euro, yen and won is providing the importers with a cost/price advantage over their U.S. counterparts. Honda, Hyundai and Kia posted record March sales and Mitsubishi enjoyed a best-ever first quarter.

“Right now, the imports are doing great,” notes DaimlerChrysler's Mr. Jolissaint. “The dollar is in excess of 20% overvalue over other currencies. Japan has lots of excess capacity because sales are not strong at home — and they've got a tailwind at their back coming this way.”

Through the first six months of the ’01 model year, sales of European makes as a group are up 1.6%, despite the poor performance of Ford's Jaguar, Volvo and Land Rover PAG brands and the early signs of a slump at VW, which has had to slow production in Mexico due to softening sales. Asian brand deliveries are up 3.3%. Even if the market drops by 3 million units, only a handful of foreign brands — Daewoo, Kia, Isuzu, Mazda and Nissan — lack the volume base to weather the storm.

▪ Acura, Kia, Hyundai, Saab

Slump, what slump? All might not survive a more severe downturn. But each of these brands is enjoying healthy double-digit growth so far in the ’01 model year. Acura posted its best month in history in March and leads all comers, with a 34.5% gain thanks to the addition of its MDX crossover. Kia (32.8%) and Hyundai (30.7%) follow, with Saab next on the list following a marketing push that's resulted in a 24.2% growth spurt.

▪ Carlos Ghosn

If there's one exec unlikely to garner votes for dismissal, it is Mr. Ghosn. The Brazilian-born president has led a quicker-than-expected comeback at Nissan, doing what many thought was impossible — closing plants in Japan, severing ties with key suppliers and shedding non-core operations. In addition, he hasn't shied away from investing in new product, giving the go-ahead for the image-building Z-car and taking the giant step into the fullsize truck market with a new plant in Mississippi.

“He came in and gave us a goal, and gave us focus,” Jed Connelly, senior vice president-sales and marketing for Nissan North America, says of Mr. Ghosn. “He told us we're going to be profit-oriented, market-driven, cost-conscious. He hasn't wavered from that focus.”

In the end, it may all come down to product. Big sellers — such as the PT Cruiser or anything BMW — are the models that have the strongest emotional pull with consumers. Those struggling — including the Pontiac Aztek, Chrysler Concorde, Buick Regal and Toyota Avalon — either have rubbed buyers the wrong way or simply failed to attract their attention.

“What's hot's hot, and what's not is not,” sums up Mr. Jolissaint. “If you have hot product that's new in the market, that hits the market right, you'll do extremely well. If your product is old and tired or hits the market wrong, you won't.”

Notes Nissan's Mr. Collins: “As the market softens, fresh product becomes even more valuable.”

“The winners are the people with a lot of money,” adds Mr. Cole. “They can really put the squeeze on the competition. They can invest in new manufacturing technology and also in new product technology. In determining winners and losers, there are no geographic boundaries. It will be company by company.”

So the tribe has spoken.

Struggling at 17 million

These brands may be far from dying if sales were to stay at last year's record pace. But based on an analysis of their market share trends over the last 10 years, and their performances during the first six months of the ’01 model year, they will begin to feel a squeeze as industry sales head downward. Most of these brands lack breadth of product: they're either heavily reliant on cars or compete in small niches. Nissan has the most depth, but the products (Xterra, Frontier and Maxima) that have allowed it to rebound in the U.S. market over the last two years are now in the latter part of their cycle plans and face ever-stiffening competition. Nissan will expand its product lineup with a large sport/utility vehicle (SUV) and pickup, but they're two years off. Increased competition is naturally reducing the availability of potential buyers, which is at the heart of why so many traditional domestic brands are on the list, especially from General Motors Corp. One GM brand — Oldsmobile — already is being phased out. Much of GM's Cadillac and Buick sales are dependent on large pricey sedans, a segment long in decline. Buick needs a retail (and image) lift from the new Rendezvous cross/utility vehicle (CUV), while Pontiac has not gotten a needed charge to its aging car and minivan lineup from the new Aztek CUV. Saturn rounds out the GM brands on the list. After nearly a decade of neglect, headquarters finally bolstered Saturn's lineup with the midsize L-Series sedan when a minivan or CUV might have been a better choice. The L-Series entered an already hotly contested midsize sedan market, and, worse still, in the lower-size end of that segment. Saturn does have a CUV coming later this year, which is a positive. Meantime, still lacking a clear-cut identity, the Mercury brand has been in decline for years. Its only unique product, the Cougar coupe, is being eliminated next year, and the remainder of its lineup consists of basically higher-priced versions of Ford models. Isuzu can lay claim as the only brand to rely too heavily on trucks, small rear-drive trucks in particular. Daewoo has a shaky status due to financial problems with its parent company, and it is more volume-sensitive in this market than most brands because its vehicles are low profit margin in nature.

16.5 million

Neither one of these brands is going to be forced out of business in a 16.5 million market, but their volumes will begin to pale more by historical standards than they already have. Based on its six-month ’01 market share, Ford's volume at this industry level would fall to a level lower than in 1995, when U.S. sales totaled 14.7 million, and the last time they were below 15 million. The comparison for Lincoln is similar. Ford suffers from the same basic problem as GM's brands: too much competition. But it does have a good product mix relative to market trends compared to the rest of the high-volume brands, running neck-and-neck with Toyota, which has the better spread. As with Cadillac, Lincoln has fallen behind the likes of Lexus, BMW and Mercedes in keeping with consumer attitudes and still relies heavily on sales of big sedans. The Navigator large sport/utility vehicle gave Lincoln a boost for a while, but now faces tougher competition and, like the Escalade, competes in a segment currently in severe decline. The upcoming Blackwood middle luxury SUV/pickup at best will be only a small stepping stone to a major turnaround.

15.5 million

Chevrolet's market share continues to decline year after year, and its mix remains too heavily weighted to small and midsize cars for it to mount a turnaround in the near future. At a 15.5 million market its volume would decline to a level it has not seen since industry sales last posted a sub-14 million total eight years ago. On the plus side, it is cutting the Prizm small car and Lumina midsize sedan from its mix, which possibly could help its bottom line but hurt overall volume. Also, Chevy is finally replacing the aged Blazer with the ’02 TrailBlazer already on sale, and the Avalanche, an SUV/pickup based off its large light-truck platform, should add sales though it could heavily cannibalize its large pickups and SUVs. The new Liberty should re-energize Jeep sales somewhat, but it is coming at a time when the middle SUV segment is in decline and losing sales to the more car-like cross/utility vehicles.

14.5 million

It would take quite a market dive for these brands to undergo a volume squeeze based on what they've done historically. Kia is a small volume player and any number of outside influences could spell its doom. It is slowly expanding up the ladder in terms of product spread, but needs to gain a profitable foothold in the midsize car market with the Optima, and a planned minivan needs to be a success if it comes to fruition. Both GMC and Chrysler's long-term existence could depend on how their owners view them as profit centers and how they eventually fit into the overall product plan mix with the other divisions in their companies. GMC will be losing its small Sonoma pickup truck and becomes basically a brand that sells large rear-drive trucks. Except for differences in pricing, packaging and some styling cues, Chevrolet has everything GMC has and more, and other GM divisions will be adding light trucks to their lineups in the near term. Chrysler (Plymouth has been phased out but is included on the label because the Voyager, Prowler and Neon have been rolled into Chrysler) sells three large sedans (Concorde, LHS and 300M) in a relatively narrow price range, and a product shakeout is likely there: The division's midsize cars and vans are selling well now, but they are new and compete in two of the most competitive segments.