In Depth

How Detroit Can Gain from Toyota's Recalls


The pitch was so ballsy, it bordered on the laughable. An American automaker that had just emerged from bankruptcy—an endlessly beleaguered outfit that for years had been unable to build cars people wanted to buy—was launching an ad campaign that boasted, "May the Best Car Win." It was September 2009, and General Motors was in danger of leading with its chin. Robert Lutz, then the company's marketing chief, decided it was time to shock consumers. Lutz felt Americans weren't giving GM enough credit for making cars that were as good as the Japanese competition. He was proud of his new Chevrolet Malibu, his Buick LaCrosse, and his Cadillac CTS. What could be gutsier than comparing Chevys to Toyotas and Buicks to Lexuses?

Car companies have been bragging about themselves and running down their rivals forever. But it's harder to do when 61% of your company has been pawned to the federal government. GM Chairman Edward Whitacre Jr. agreed with Lutz anyway, and greenlighted the campaign created by McCann Erickson. And the GM ads that seemed so risky last summer came to seem prescient last month when Toyota Motor (TM) stumbled into the worst crisis in its history: more than 8 million cars recalled worldwide, plummeting sales, and a U.S. government investigation into whether the company should have moved faster to correct the mechanical problems of its automobiles.

UNPRECEDENTED OPPORTUNITY

When was the last time an American carmaker caught a break? More to the point, how often does one of them create its own good fortune? Both have been rare. No one could have predicted that Toyota, the company that invented kaizen , or continuous improvement, would flame out over quality. But now that it has, GM, Ford (F), and even Chrysler have an unprece- dented opportunity to grab Toyota's customers. It won't be clear for some time how badly the recalls have hurt the Toyota, Scion, and Lexus brands. And Toyota, still a great company at its core, will doubtless recover some of its sheen. But it's probably fair to say that consumers will never again look at the world's largest automaker the same way.

So what's it going to be, Detroit? How far are you willing to push this? Many consumers may find it unseemly for Ford or GM to trash a bloodied competitor, even one suffering from self-inflicted wounds. That's why it's so significant that GM cooked up this approach six months ago; a company executive acknowledges that they wouldn't have dared launch the campaign after Toyota started the recall. At a moment when the industry is packing vehicles with more and more glitch-prone computers, Ford or GM could easily find themselves trapped in recall hell tomorrow. And although history may be filled with instances of companies grabbing share when their rivals are stumbling and distracted, the tricky part is doing so without appearing predatory. "Disparagement or gloating," Lutz wrote in an e-mail, "will only trigger a sympathy backlash in favor of Toyota."

For Detroit, the good news started sneaking into town in the late aughts. It showed up first at the Dearborn (Mich.) headquarters of Ford, when Alan Mulally, high-flying Boeing (BA) executive and Lexus driver, became Ford's CEO in September 2006. Mulally had studied Toyota for years and instilled its manufacturing and product development principles into Boeing's aircraft assembly. Now it was Ford's turn. Three months into the job, he made the industry equivalent of a state visit to Toyota City to see how Ford might emulate the automaker he called "the master." Upon his return, he called Toyota "the finest machine in the world, the finest production system in the world."

Mulally pushed Ford to create hotter, more sophisticated cars that would surpass Toyota's staid sedans. Ford invested billions to turn its Focus compact and Fiesta subcompact into aggressively styled small cars packed with creature comforts and powered by high-tech engines that are stingy on gas. Ford will begin selling the Fiesta in the U.S. this summer, the first subcompact in its American showrooms in years. The Focus arrives early next year. Sales of Ford's Fusion family sedan, restyled last year with a scowling face and 41-mpg hybrid system, rose 22.4% in 2009, while Toyota Camry sales fell 18.3%, according to researcher Autodata.

Mulally has been zealous about Ford's quality, too. In 2006, he delayed the launch of the Ford Edge sport wagon by a couple of months, forfeiting precious sales because he wasn't satisfied with the fit or finish. The hard work paid off. Ford now ranks in the top 10 in J.D. Power's (MHP) initial quality survey—right behind Toyota. Just five years ago, Ford ranked 22nd among 41 brands and was below the industry average for problems per 100 cars. Consumer Reports, the buying bible for millions of tire kickers, recently praised Ford for having "world-class reliability" and now recommends 13 of its models, vs. 14 for Toyota. "Ford is ideally placed to steal away some business with all the work they've done on recent models in reliability," says David Champion, the magazine's auto editor.

Ford has even begun staking out a reputation as a technology innovator. The company that in 2004 had to license hybrid technology from Toyota (for its Escape hybrid SUV) now offers four hybrid models and an advanced voice-activated phone and entertainment system known as Sync that it developed with Microsoft (MSFT). Its latest twists on technology are touchscreens that replace dashboard buttons and iPod-inspired thumb-wheel controls on the steering wheel. On the airwaves, Ford has begun touting that the Fusion hybrid gets 8 miles to the gallon more than the Camry hybrid in city driving. Another spot brags, "Ford quality is equal to Honda (HMC) and Toyota. If they can't beat Ford, Ford must be hard to beat."

The good news came more slowly to GM, and it was easily overlooked amid all the dire headlines about bankruptcy and bailouts. But even industry skeptics acknowledge that over the past few years the company has put together one of the smartest design operations around. That is partly thanks to Lutz, who despite his 77 years remains indefatigable. The controversial Lutz, the "car guy" who said in 2001 that the newest concept cars looked like "angry kitchen appliances," has taken a blowtorch to GM's design-by-committee bureaucracy, sidestepped the bean counters, and begun putting a few sweet machines in the Chevy, Buick, and Cadillac lineups. The much-praised Malibu makes even the redesigned Camry look staid by comparison, and GM has been making a Very Big Deal in its TV commercials about the Buick LaCrosse's tony cockpit. "GM has had a design renaissance," says IHS Global Insight analyst John Wolkonowicz.

GM still has gaping holes in its model lineup, namely the sort of small cars Toyota has long made so well. The Detroit company was so distracted by its financial problems in recent years that it didn't invest real money into its passenger cars until the Malibu came out in 2008. Now that's changing. The new Chevy Cruze compact comes out this fall offering close to 40 miles per gallon on the highway. That beats the fuel economy of any small car Toyota sells except the Prius.

Chevy is finally getting serious about subcompacts, too. To counter Ford's Fiesta and the Toyota Yaris subcompact, GM will launch an all-new Aveo next year. It will be a more substantial car than the current version.

BRAGGING RIGHTS

Right now the General can't afford to get too cocky about the quality of its cars and trucks, though quality has improved significantly in recent years. But the electric Chevy Volt, which will start hitting the showroom this fall, could give GM something to talk about. The company says the Volt will get a 230-mpg fuel economy rating. That means the Volt will be four times as fuel-efficient as Toyota's 2010 Prius, which now has software problems with its brakes. GM says the Volt will go 40 miles on a charge before the gasoline engine kicks in. The auto- maker plans to sell only 10,000 of the cars next year—the Volt is more about establishing technological cred than making money. But it could take a bigger bite out of Prius sales as GM ramps up production to 60,000 a year worldwide beginning in 2012.

Given Chrysler's plunging market share, it seems almost pointless to mention Detroit's No. 3 automaker, though the company, now controlled by Italy's Fiat (FIATY), does have one brand that attracts some Toyota buyers. It's called Jeep. All the same, with Chrysler's quality scores near the bottom of the pile, the company will struggle to sell vehicles to Toyota owners who prize reliability.

With Ford picking up speed and GM pulling out of the pit stop, you might expect some chest-beating in Detroit. In fact, the atmosphere is one of trepidation. These folks have been down so long that they don't want to tempt fate. A GM marketing executive says he and his colleagues first discussed ways to capitalize on Toyota's woes without seeming ghoulish. After all, this person says, Toyota's problems are serious; several people have died driving models that the company subsequently recalled. As executives met to discuss the way forward, dealers were calling to say that Toyota customers were showing up in their showrooms and looking at GM cars. The dealers fretted that with Toyota's resale values falling, they could get burned taking a trade-in that might sell at a loss later, says one executive who asked not to be named because GM wants to keep a low profile when it comes to Toyota's problems. In late January, GM marketing executives decided to offer $1,000 to anyone wanting to trade in a Toyota for one of their cars.

Eric Hirshberg, CEO and chief creative officer of Deutsch LA, which until recently did work for GM, says the rebates "are real close to the line" in terms of taste. The better strategy for GM, he says, is to stick with its "May the Best Car Win" campaign. "The most you would do is focus on your own analogous safety strengths," he says. "People are very focused on safety. Timing is everything." Hirshberg says the American carmakers could highlight crash-test ratings or quality scores, but tactfully. "You're handling a live grenade," he says. "A whiff of opportunism or schadenfreude would be as damaging to the advertiser as this is for Toyota."

Ford has been offering $1,000 rebates, too. Few at Ford feel Toyota's pain more acutely than marketing chief James Farley, who ran the Lexus division and was a Toyota marketing executive for 17 years. "Our actions were very sympathetic to what Toyota is going through," he insists. "Our intentions weren't to be opportunistic." Still, Farley acknowledges that in the first days of the rebates Ford dealers had their best weekend in January. "The uncertainty with one of our competitors may have helped bring out some customers who felt like it was a good time to buy," he says. "People are feeling, 'Hey, it seems there's some deals out there.' " In the coming weeks and months, Ford is considering spending more on advertising in the U.S., particularly on ads that compare its cars and trucks with those offered by Toyota, says a person familiar with the plans who asked not to be identified revealing internal deliberations.

"I DON'T WANT TO BE THAT STATISTIC"

In January, Toyota's U.S. market share fell from 17.9% to 14.1% (though that was partly because it stopped selling several models). That month, Ford grabbed 16.7% of the market, up from 14.2% the previous year. Farley says Ford has been doing better lately in some regions where Toyota has long ruled the road. Although GM is in the midst of cutting its brands from eight to four, its market share jumped from 19.5% to 21% in January. If it expects to extend those gains, it will have to win over more people like Homer Benavides. The 37-year-old engineer was negotiating to buy a Toyota Sequoia in suburban Chicago when he heard the SUV was being recalled for a sticky accelerator. "Toyota produces millions of vehicles and only a fraction have the problem," says Benavides, whose wife is expecting twins. "But I don't want to be that statistic." Benavides plans to buy a Chevy Tahoe instead. Stealing back some Toyota owners who drive trucks and SUVs may be GM's best play at first, since Chevy and GMC won over those buyers long ago.

Toyota has long dominated the boomer market, and it won't be easy for Ford and GM to woo graying consumers. "There's a large group of boomers whose opinion of Toyota is very high," says Dan Gorrell, president of AutoStratagem, a California consulting firm. "They'll be unaffected by this."

However, Detroit could reel in Generation Y, which likes Toyota but is less loyal than older buyers. Ford, in particular, has an opportunity thanks to Mulally's focus on small, zippy cars such as the Fiesta and Focus, which compare favorably with such Gen Y faves as the Honda Civic and Mazda3. GM, for its part, may have more luck with the next generation. According to a survey by Strategic Visions, a market research firm in San Diego, American kids aged 12 to 16 aspire to own muscle cars such as the Ford Mustang and Chevy Corvette.

There is a lot of pent-up demand out there, and as the economy improves there will be more opportunities for Detroit to make its case to Americans. But consumer psychology has shifted over the past couple of years. Americans have not simply become less brand loyal. Buffeted by financial forces beyond their control, they are ornery and disinclined to trust corporations—especially those that make lavish promises. Ford has momentum, but its success is a recent phenomenon. The company still needs to prove itself. "We're very suspicious, our confidence is shaky, we're not feeling very good," says Faith Popcorn of the marketing consultancy BrainReserve. And GM will have to tread especially carefully. American taxpayers won't soon forget that the U.S. government bailed out the company, a policy that proved to be very unpopular even though it saved thousands of manufacturing jobs.

It's not as though Detroit has the highway to itself. Honda, Nissan, Hyundai, Kia, and others could also pick up new customers. That's why GM and Ford can probably forget about making a patriotic appeal to "buy American." Buyers arrive at dealerships armed with detailed pricing data they found on the Web, and if Hyundai has the best combination of features and price, they'll drive a Hyundai. "Americans are forward-looking," says Nancy Koehn, who teaches history at Harvard Business School. "Instead of waving an American flag, I could see Ed Whitacre walking through the plant, passing a mechanic, saying, 'We've made some mistakes, we've learned from the past, but here's how we're getting better, working on making America strong.' " Koehn says Americans like feeling they're helping the country progress, not just boosting U.S. companies.

As Whitacre and Mulally have surely not forgotten, Toyota remains a force. No one can argue that the company handled its recall crisis with aplomb. And given its internal problems—overexpansion has stretched its resources—the odds of it stumbling again are high. But once Toyota gets past the current round of recalls, it can be counted upon to rev up its marketing machine. The company has done a remarkable job in recent years of embedding itself in the American culture. Toyota employs nearly 40,000 Americans in six states, mostly in the South, and as it has proven for 40 years, it knows how to make cars that Americans want to buy. Spokesman John Hanson says the carmaker can win back confidence by handling the recall well and fixing its quality problems.

The comeback campaign has already begun. During the Super Bowl post-game show, Toyota aired a commercial that waxed nostalgic about its long years of manufacturing reliable cars in America. It's the kind of pitch that appeals to loyal customers like Brian Yamashita, 47, who works in tech support in Orange, Calif., a Toyota stronghold. He just plunked down $17,000 to buy a 2010 Corolla. Before that, he drove a '98 Tacoma pickup for 238,000 miles. His mother drives a Lexus. He figures the Japanese automaker will figure out its quality issues and his car will be fine. Would he buy another? Absolutely. "I have faith Toyota will get it resolved," Yamashita says. "With any industry, whether it's cars, hamburgers, or spinach, there will be problems. I could do a lot worse with other manufacturers."

In other words, Detroit's window of opportunity won't stay open for long. "If you're going to grab market share from Toyota," says Consumer Reports' Champion, "you have to do it in the next nine months." GM and Ford can't count on Toyota to keep kicking the ball into its own goal. They will have to convince people their cars are worth buying because they are sharply designed, reliable, and fun to drive. If they do that, they might just find a way to turn one big break into a streak of good luck.

Helm is marketing editor for BusinessWeek in New York.
David_welch
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.
Naugton is a reporter for Bloomberg News

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