Businessweek Archives

All Revved Up, Nowhere To Go


News: Analysis & Commentary: DETROIT

ALL REVVED UP, NOWHERE TO GO

Eighteen months ago, Ford Motor Co. and Chrysler Corp. dealers across America rubbed their hands in giddy anticipation. Finally, they thought, Detroit had produced small family sedans with the performance and sophistication to rival Japan's best. Not only were Ford's new Contour and Chrysler's Cirrus technologically top-notch, they both came with stickers $2,000 lower than rivals from Honda Motor Co. and Toyota Motor Corp.

But the bonanza never arrived. The Contour "is not doing as well as we all thought," laments Jack A. Terhar Jr., president of Sill-Terhar Ford in suburban Denver. Cirrus, and its sister Dodge Stratus, have been slow off the line, too. The reason: Japanese car owners aren't even shopping for U.S. cars when they trade in small family sedans. Forget cracking the market in Japan: Even on their home turf, it appears, the No.2 and No.3 carmakers simply underestimated the challenge of luring die-hard import buyers.

QUALITY ISSUE. The new Japan fighters are vast improvements over the models they replaced, such as the rickety Ford Tempo. Still, Ford's and Chrysler's combined share of the small-family-sedan segment has actually dropped four percentage points from two years ago, says consultant Auto-Pacific Inc. (chart). General Motors Corp., whose models such as the Pontiac Grand Am attract a different class of buyer, has stayed about even.

Why is Detroit spinning its wheels? Ford has caused some of its own woes. Contour sales have suffered because a $2,000 incentive on the old Taurus model that's being phased out has temporarily made the Taurus cheaper to buy. More important, carmakers haven't persuaded hard-core import buyers they can compete with Japanese cars on quality. Maryann Keller, auto analyst at Furman Selz Inc., says that "forgettable advertising" hasn't prompted import owners to change their ways.

Meanwhile, Japanese carmakers aren't sitting still. Salespeople are pushing their cars' sterling quality reputation--particularly compared with Chrysler models, which contain up to triple the defects of their Japanese rivals, says J.D. Power & Associates Inc. And to help gloss over the 10% average price gap, Japanese auto sellers are pushing subsidized leases that keep monthly payments low. As a result, roughly 40% of Japanese autos in

the small-family-sedan segment are leased, vs. 25% for the industry overall. "We've had to get more aggressive with incentives," says Earl J. Hesterberg, general manager of Nissan's U.S. division.

Detroit's counterploy: rev up its own givebacks. In mid-May, Chrysler began offering a two-year, $229-a-month lease on the Cirrus and $219-a-month for the Stratus, which amounts to an estimated $1,000 subsidy over the life of the leases. Cirrus and Stratus immediately won 1.2 percentage points of market share in June--but mostly at the expense of Ford, which lost 2.2 points. In July, Ford countered with subsidies on two-year Contour leases valued at about $750 per car. To boost share, it also started selling more cars in low-profit deals with fleets: 33%, vs. its targeted cap of 25%.

For the moment, the moves mean American auto makers aren't making much money with their splashy new cars, a fact likely to be reflected in third-quarter earnings figures. That's hardly good news for Chrysler, which saw its second-quarter earnings drop 86% because of high costs in the minivan sector, or at Ford, where North American profits dropped 25%. Over time, however, the Big Three's improving quality and increasingly thoughtful designs could start chipping away at the Japanese stranglehold, say industry analysts. Even GM may get into the act with the new Chevy Malibu and redesigned Oldsmobile Cutlass, both due in the fall of 1996.

But the slow progress is a caution sign for Detroit. The meaning: U.S. carmakers must persist, both in pricing and quality, to win back car buyers from Japanese rivals. Companies such as Honda and Toyota took decades to earn their quality cachets. Detroit can't afford to take that long.By David Woodruff in Detroit


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus