When the new model year begins in October of 1987, a tidal wave of small Japanese cars built in North America will start pouring into an already glutted United States market. It's the next major battle for the US auto industry, which has made big investments in new small-car factories to keep the public driving Detroit's American-made cars.
But the competition in this low-margin business promises to get even tougher -- squeezing out companies that can't stand the heat. US automakers saw record profits in 1984, but analysts are concerned that the profit picture will sag sharply with the developing overcapacity.
Spurred by a desire to stifle US protectionist pressure and by rising production costs at home (caused by a strong yen), the Japanese plan to build five new small-car plants in North America in the next 12 to 18 months. Two existing plants will be expanded. Korea's Hyundai is expected to build a 100,000-car plant near Montreal.
The new foreign plants here would add some 1.2 million units to small-car production capacity by 1988, up from the present 5 million-unit level, says John Hammond, an auto analyst with Data Resources Inc. Other analysts say production capacity on small cars will rise 1.8 million units by 1990.
The Japanese will meet not only US carmakers head to head, but also Korea's Hyundai, in what promises to be the ``industry's next major dogfight,'' Mr. Hammond says.
``There's such a small-car [over]capacity problem that it's going to probably cause somebody to close plants. More than likely it's going to cause some price cuts,'' says Vernon Lacy, chief economist at American Motors Corporation.
Another analyst says it's likely that future small-car overcapacity will mean that automakers are ``going to have to drop prices substantially.''
He believes the Japanese will even lead the way in cutting prices to gain market share, because they still have some extra margin built in to the prices of their small cars.
``They've had such a money tree up until now,'' says Donald Hilty, corporate economist at Chrysler Corporation.
``But there are indications they may accept lower profit margins. The [exchange-rate] disadvantage the Japanese have now is the same disadvantage US manufacturers have lived with for a long time.''