Detroit is in Trouble

2001 could still turn out to be the third or fourth best year in U.S. auto sales history, but as our cover story makes painfully clear this month, it might not seem like it in Detroit. That's because it looks as if most of the difference between this year's weaker performance and last year's stellar numbers is going to come directly out of the hides of General Motors Corp., Ford Motor Co. and the Chrysler Group — with minimal impact on just about everyone else competing in North America.

In the last six-month sales period from October to March, sport/utility vehicles (SUVs), minivans and pickups — the key segments that Detroit has ridden to the top of the sales and profit charts during the past decade — started showing signs of weakness just as some hot new foreign competitors were jumping into the fray and racking up impressive gains.

Mercedes, BMW and Lexus already have beaten up Cadillac and Lincoln in luxury cars, now it looks like the same could happen in segments the Big Three invented and — until recently — completely dominated.

The Honda Odyssey now is recognized by most critics as the best-in-class minivan, for instance. Toyota Motor Corp.'s Sequoia is starting to enjoy the same reputation in the large SUV segment. The Toyota Tundra fullsize pickup also is doing well in a segment where offshore nameplates once didn't even dare to compete.

Highly publicized quality and safety problems put the former Big Three at a further disadvantage. Ford already is struggling with fallout over the Firestone tire recall. Then, after significantly delaying the launch of the new Explorer SUV to make sure there were no quality glitches, it still had to make an embarrassing recall because loose brackets could cause rear windows to shatter when the lift gates are closed. GM also had to recall brand new Chevy TrailBlazers, GMC Envoys and Oldsmobile Bravadas because of a dangerous suspension defect that could cause drivers to lose control (see Wrapup, p.13).

These problems suggest Detroit-based automakers could be in for steeper declines in sales and profits than their corporate spin-doctors would like us to believe.

It also explains why Detroit-based automakers are dialing back their capacity, while Honda Motor Co. Ltd. and BMW AG actually plan to produce more vehicles in the U.S. than they did a year ago.

For years now critics have warned that GM, Ford and Chrysler have been too focused on squeezing maximum profits from their light-truck cash cows and not enough on making sure these key products were best-in-class. Certainly the pressure from Wall Street and other sectors is intense, but it seems like a no-brainer: When you're making huge profits by charging luxury car prices for products based on old, low-cost, low-technology pickup truck platforms, you have to assume competitors will notice and try to beat you with a better design.

The large SUV segment is a perfect example, and it's typical of the behavior that has put Detroit in the hole many times before.

In the beginning, few so-called automotive experts thought almost half a million consumers would annually flock to showrooms to buy giant Ford Expeditions and Chevy Suburbans, or pay $50,000 or more for gussied up versions of those same vehicles in the guise of Lincoln Navigators and Cadillac Escalades.

But Ford and GM were smart enough to see that many North American baby boomers — who once ridiculed their parents for driving around in gas guzzling, land yachts with mushy suspensions — had no problem with driving around in big chrome-laden SUVs with those same attributes. As they have in the past when they sensed opportunity, U.S. OEMs moved quickly and a major new marketplace niche was born.

They did realize huge margins — as high as $15,000 per vehicle. But just like in the bad old days, Detroit engineers and marketers focused too much on wringing out dollars. They added chrome and creature comforts rather than more sophisticated suspension and steering systems. And by shortchanging basic engineering features, GM and Ford have allowed Toyota's new entry, the Sequoia, to easily muscle into the marketplace and distinguish itself as the most refined and desirable of the bunch.

Fortunately, there are a few promising new products in the pipeline that could still pump some life back into the Big Three's fortunes this year. And they have learned from some of their past mistakes. For instance, Detroit automakers resisted the urge to add lots of new bricks and mortar to satisfy the seemingly insatiable demand for trucks and SUVs back in the mid-’90s. They added overtime and third shifts instead.

Now dialing back production is much less catastrophic than it was in the ’70s and early ’80s. But losing overtime is hardly painless to a typical hourly worker. It means annual pay drops from about $69,000 per year to $45,000. That means tens of thousands of Detroit's most loyal customers probably aren't going to buy new cars and trucks this year, and that spells more trouble for Detroit.