Posted on 06/20/2007 2:50:10 PM PDT by bruinbirdman
Losing the small-car market to foreign manufacturers was easy. In the past half-century, Detroit never built great small cars or great 4-cylinder motors, never thought of little cars as a profit center and just did not like them. It is understandable how the Europeans first, then the Japanese and now the Koreans grabbed this business.
What is more puzzling is how those foreigners took the top and the middle of the American car market. I am talking about near luxury, the luxury and the ultra-luxury segments--the cars with the big profits. Ever since the demise of marques like Cord and Duesenberg in the 1930s, U.S. manufacturers had little presence in ultra luxury. Yet it was not that long ago that General Motors (nyse: GM) dominated the first two luxury groups. Ford (nyse: F) and Chrysler (nyse: DCX) were never as strong as GM in that part of the business, but they, too, have fallen way behind.
Start at the very top: the $150,000 to $400,000 cars. The market is tiny but important because it represents "the best." Detroit does not have a single entry. Maybach comes from Daimler; Rolls-Royce (other-otc: RYCEY) from BMW; and Bentley from Volkswagen. Cadillac displayed a super luxury show car a few years ago, the "16." Everybody seemed to love it but GM, apparently, cannot afford to build it.
A much more important class is the luxury group running $70,000 to $120,000. Mercedes, BMW and Lexus created this modern day luxury segment, a group with few entries from Detroit--and I am being generous by including such models as the Corvette Z06 and the slow-selling Cadillac XLR roadster.
In the 1970s and 1980s, Cadillac was too interested in building sales volume than pushing prices up the luxury ladder. Detroit's leaders forgot that key rule in war: Never let your enemy take the high ground. The Lexus LS, Mercedes S Class, BMW 7 Series and Audi 8 are the victors, while Porsche and Aston Martin will soon introduce four-door luxury sedans. I do not see any signs that Detroit is moving into this space.
Just below the $70,000 level are excellent entries such as the Mercedes E Class, BMW 5 Series and Audi 6 models. Cadillac is attempting to gain ground in this segment but has had limited success. The division's sales are off 7% through the first five months of this year and were down all of last year as well.
It was not that long ago that Ford's Lincoln division outsold Cadillac--for one year, anyway--but that nameplate has been in full retreat. Lincoln killed its sporty rear-wheel-drive sedan, the LS, at the start of the 2006 model year, and has failed to update the big Town Car, which at one time earned the division $1 billion a year, and its newest Lincolns are little more than dressed up Fords with more leather, chrome, trim and sound-deadening material. Early sales numbers for these new Lincolns are encouraging, but they are not C- or E-Class challengers.
The sales numbers tell the tale. Mercedes' total car and light truck sales are 99,000 for the first five months of this year; BMW (not counting Mini) 119,000; Lexus, 131,000; and Nissan's (nasdaq: NSANY) Infiniti division, 53,000. Contrast those figures with Cadillac's sales of 81,000 and Lincoln's 61,000.
Most of the best-selling foreign passenger cars are not oversized vehicles, but compact and intermediate models, such as the Mercedes C Class, the Lexus ES and the BMW 3 series. While some of these cars list for $30,000, it does not take much in the way of options to push window stickers into the $40,000 or even $50,000 range. What's more, some of the foreign cars have full lineups, including 4-door sedans, coupes, wagons and convertibles, which increases their appeal to a wider range of buyers. Every American entry that I can think of in this price range comes in only one body style.
Detroit has been in full retreat from this near-luxury segment. Although both divisions also offered some cheaper models, GM's Oldsmobile division once sold 1 million cars a year, while Buick was good for three-quarters of a million units. Now Oldsmobile is dead. Buick's one upper-class car, the Lucerne, is on Consumer Reports' recommended list but has only 32,000 sales in five months. The Chrysler 300 has 51,000, the ancient Mercury Grand Marquis 27,000. One sign of hope: the Cadillac CTS sedan, the replacement CTS, coming this fall, promises sexier styling, a better interior and a high-output V-6.
Foreign rivals are chewing away at the near-luxury market. The Lexus ES has 33,000 five-month sales; the Toyota Avalon, 32,000; the BMW 3 series, 60,000; the Mercedes C Class, 23,000; and the Acura TL, 25,000. Other competitive models include the Nissan Maxima, Infiniti G and Audi 4. Next year Hyundai plans a model with a V-8 option to compete against those cars.
All this is different from the 1960s and 1970s, when American upscale cars were big, beautiful and powerful. Little by little, European manufacturers won over U.S. consumers with vehicles that emphasized ride, handling and engineering. Meanwhile, the Japanese gained market share by offering quality, value and economy.
Money was not an issue in the ‘60s and ‘70s and even in the ‘90s. Then the market turned toward trucks and that is where all of Detroit's efforts went.
I also blame arrogance:
"They'll buy anything we build," was the attitude. Manufacturers made a few half-hearted attempts to produce some cars that a new generation might like, such as the "T Types" from Buick, the all-wheel-drive models from Pontiac and the Lincoln LS. Unfortunately, the financial types on top never understood the importance of investing in and nurturing this part of the business.
By selling uncompetitive small cars, the U.S. companies indirectly helped the growth of nameplates such as Lexus, which offered vehicles for satisfied consumers to aspire to when they were ready to move up from a Toyota Corolla or Camry. Today, this weakness at the upper end of the market leaves Detroit's loyalists few options when they are ready to move on up to the big time.
Of course, Detroit still can make a handsome car: That Chrysler 300, for example, won back some customers but the industry needs a lot more success stories like the 300.
The reason Detroit builds low quality vehicles is simple: Their labor costs are 25% higher than the Japanese labor costs, so they’ve got to cut corners some other way. And if they do cut corners, then that means they can’t compete head to head against the Japanese. Instead, they’ve got to sell vehicles that the Japanese don’t sell, so that they don’t have to compete with the Japanese.
Unfortunately, the Japanese make vehicles that sell to the most important segments of the market, which leaves the US manufacturers with the leftovers, which is to say, the low-profit segments that the Japanese don’t want.
Don’t really think so. The Japanese do fine with American labor.
Perhaps it has a bit more to do with massive executive compensation. Of course that would deprive people here of the joy of union bashing.
Might be the stupid disbelief that Americans would buy an inexpensive, reliable high mileage car;I really don’t think that 60+ miles to a gallon, under $10K and ten years before needing to do anything other than an oil change is unreasonable.
Sag Harbor NY, in the fabulous Hamptons, thirty years ago, several tremendous yachts, bigger than the rest, homeport written on their sterns:
DETROIT
J & D Power disagrees with you.
J.D. Power and Associates has released its 2007 Initial Quality Study. You'll no doubt be hearing about how well Ford has done in this year's IQS, as J.D. Power reports the Blue Oval has garnered five top model segment awards, more than any other automaker. Those models include the Ford Mustang, Lincoln Mark LT, Lincoln MKZ, Mercury Milan and the Mazda MX-5.
Ford should be swamping the airwaves with ad's touting this accomplishment, this includes foreign automakers as well.
I have worked for both GM and Toyota. There is very little actual difference in quality between U.S. and foreign cars.
There is however still a huge perceived difference. Car’s have such a long buying cycle that perception can be reality for many many years
I’ll tell you exactly what happened...in the sixties and seventies Detroit built junk; and they did not care. I had Chryslers that didn’t run, Chevys, Pontiacs, Buicks, and Fords that didn’t run.
In the early 80s I tried Toyota; have had one ever since.
Correct. I think Flint would agree. This article is more about the failures of Detroit in marketing.
yitbos
I’m not saying it’s American workers who are the problem. The Japanese plants in America have 25% lower labor costs than US manufacturer’s plants, and the Japanese workers in America are also American. The primary reason their labor costs are lower is that the Japanese don’t have to deal with the unions.
Believe me, if you put all of the executive compensation from all of the US automakers together, it would be a drop in the bucket compared to what Ford alone is losing.
On the other hand, I would not really defend auto management. They are mainly people who could not get jobs elsewhere, and were hired primarily because they have a mindset which is deferential to the unions. It’s pretty much the unions that make most of the important decisions, and that has been true for a long time.
Back in the 40’s and 50’s, when the union workers were rioting in the streets, that was a good strategy. Now it’s come back to haunt them.
Interestingly, much of the auto management has been fired in the last several years anyway. Most of the operational management at US auto factories is handled by union workers themselves these days.
I was reading not too long ago about a long time local union leader who had stepped into the shoes of management at Ford after Ford fired most of its management a couple of years ago. He was still working on the floor, while at the same time acting as a supervisor, and pressing the local union to make wage concessions, etc. Even with the concessions, though, the plant labor costs were still out of line, and it was looking bad. They quoted him as saying that, “If Ford goes out of business, I want to be able to say that I did everything possible to prevent it from happening.”
My question is this: How can he say that when he spent 20 years causing the problem that he is now trying to fix in just a few years?
http://www.autoblog.com/photos/jd-power-and-associates-2007-initial-quality-study/266377/full/
Of course this does not take into account that a mature product should have a lower defect rate.
I would agree with you, if you qualified your point by comparing apples to apples and oranges to oranges. Ford no doubt produces vehicles that are comparable or better than Japanese vehicles in their particular market segments. But like I said, the Japanese and US automakers don’t directly compete in the same segments of the market. Dollar for dollar, you don’t get the quality from Ford that you would get from Toyota. And Toyota makes a huge profit on those vehicles, while Ford makes a huge loss.
I think you're right, who is this Flint guy anyway?
I only read Road & Track and Car and Driver. ;-D
I don't believe the survey I posted takes into account dollar for dollar quality, however (as you know) the real money makers are the upper segment of the market.
Initial quality is one thing. However, myself and others here have been burned big time by Ford and American car Mfgr reliability, warranty gaming and plain old getting stranded. Consumers have a long memory for such things.
Component quality on basics such as water pumps, Tranny’s , brake cylinders, wiring, dash panels, batteries, etc. seem to be the culprit most of the time with the Big Three. These don’t show up on initial quality, I don’t believe.
“They’ll buy anything we make”—China
“My question is this: How can he say that when he spent 20 years causing the problem that he is now trying to fix in just a few years?”
Maybe he was using a D.C. made crystal ball.
In effect, the health, retirement and other fringe benefits that Detroit gave to the union was done at a time when the public could not choose to buy a car that did not have this costly component in its cost. But, this was an attempt to externalize costly and wasteful worker compensation, compensation that ran quite parallel to what socialists want to have government provide to every American.
In this case, the socialists in the unions and socialist sympathizers in corporate management and in government just brought these benefits inside the UAW contract, and thus instead of government having to provide them (with the cost being passed on to the taxpayer somehow), the employer provided them and the cost was passed on to the customer, who in this case was the American car buyer, a group that was almost the same as the taxpayer.
Now, GM spends more on each car for just health care than they do on steel. In the past few years management has awakened to the sad truth of the horrid cost of this entrenched benefit, a benefit that is almost a cultural fixture.
What is still lost on the socialists involved is that no cost component that fails to add value to the end product can survive in a free market, for sooner or later a competitor will come along who makes agile use of Occam’s Razor and cuts that non-performing cost component out of his product. GM still cannot shed that cost and worse- it is competing against cars build in countries that have nationalized health care, and thus do not have health care as a cost component in the price of the vehicle they export to the US.
I guess that Detroit now may have grounds to file a WTO complaint against nations that “unfairly subsidize” their automobile production when they have nationalized health care. ROFL! And the socialists here are still clueless.
I’d describe it more as self-consciously in-your-face than handsome. Others’ mileage may vary.
self bump for later
There is however still a huge perceived difference. Car’s have such a long buying cycle that perception can be reality for many many years
You know, you have a point. The last American car I bought was a 1989 Camarro. It needed to go to in for repairs 7 times in the first six months I owned it, twice on the back of a truck (the front spoiler made conventional towing a no-no). Finally, and reluctantly, the dealer replaced the entire computer system and wiring harness. Then it was OK... until the cruise control stopped working a few months later.
These events and happenings contributed to a perception on my part (as you put it) of low quality. I perceived that the car I bought from GM was a piece of crap.
Then I got married, and my new wife wanted a Toyota. A cheap one, a Corolla. We bought it. It worked perfectly from day one. Never a problem. Again, I experienced a perceived difference in quality. My perception was this: it's obvious that Toyota knows how to build a good car.
In the year 2000, I bought a brand-new Toyota 4Runner. It's in my driveway right now. Has more than 166,000 miles on it.
Perception is reality, in my case.
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