As US carmakers shrink, others expand

The challenge for the Big Three is not just to slim down but to modernize and look for partners.

The good news, for the US economy, is that all the auto jobs aren't disappearing. But it's also a sign of accelerating challenges for the automakers based in Detroit.

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Since they no longer dominate the market, any production cuts the Big Three make will be rapidly filled by other producers, who are determined to keep expanding. Analysts say that creates a Darwinian scenario in which Detroit's manufacturers need to get fitter, not just smaller, to survive long term.

"The Japanese have basically been opening new plants as quickly as they can," says Peter Morici, a University of Maryland economist who follows the industry. "And as they do, they're driving the American ... automakers out of business."

This backdrop helps explain why Detroit faces such pressure to consider alliances with longtime rivals, to confront more forcefully a longstanding labor-cost burden, and to ramp up efforts to develop new fuel-efficient cars.

Of course, the American nameplates aren't literally teetering on the brink of failure. GM still makes more cars than anyone, and Ford ranks No. 3 globally after Toyota. German-based DaimlerChrysler, home of the Chrysler Group since a 1998 merger, is No. 6. But to be competitive, they must remain large and successful enough to afford the rising costs of developing new car designs and engine technologies.

For now, the key threat comes not from China or India but from a clash of global titans. In 2010, the top 10 global companies or alliances will account for 86 percent of global car production, virtually unchanged from 85 percent today, according to a forecast by the PricewaterhouseCoopers Automotive Institute in Detroit.

In the long run, China appears determined to follow Japan's example of persistence in this bedrock industry, which tends to create jobs in industries from steel to electronics.

"First it was Japan, then it was Korea, now it's China," says Jeremy Anwyl, president of Edmunds.com, a supplier of automotive information based in Santa Monica, Calif. "Will they be up to snuff in quality, design? If I was in China ... I would be making this a big priority. If you remember the original Toyotas or Datsuns, they weren't exactly world class."

Now those companies are world class, and breathing down Detroit's neck.

Even as General Motors closed down its Oklahoma City plant this year, South Korean carmaker Hyundai was announcing its plan to open a Kia factory 700 miles to the east in West Point, Ga. This fall, Toyota will roll the first Tundra pickup off its new assembly line in San Antonio. Toyota, in particular, is expanding rapidly, even in a declining market. According to numbers out this week, its US sales volume has jumped 12.5 percent in the first nine months of this year, compared with the same period a year ago.

The predicament of the American brands is very real. The bonds of Ford and GM have been downgraded to below investment grade, or "junk," status. As the two move to shed about 30,000 workers apiece and close unneeded plants, Ford has brought in a new chief executive, and GM's biggest investor is pushing for faster change. Chrysler, long seen as the healthiest of Detroit's Big Three, recently announced that it will sharply reduce production for the rest of this year due to slowing sales.

What's Detroit to do? Industry analysts say several steps will be vital:

• Cut costs further. Labor expenses remain a key disadvantage, but bargaining with the United Auto Workers isn't scheduled until 2007.

• Keep investing in new products. "Consumer expectations are nuts," Mr. Anwyl says, with buyers wanting everything from creature comforts to fuel economy and cutting-edge styling. Toyota has done better than Detroit at refreshing models every three years or so.

• Consider alliances. GM is so big that some analysts question whether there is much synergy to gain from the kind of alliance proposed by the company's top investor, Kirk Kerkorian. But even the biggest carmakers face some new pressures. The industry has seen costs rise, even as new-car prices fail to keep pace with inflation. And now, demand is rising for hybrid engines and other alternative-fuel vehicles that can eat up billions in development costs.

GM and Renault-Nissan have held alliance talks at Mr. Kerkorian's bidding, but on Wednesday the companies said the discussions had broken down. They said they saw synergies in the partnership, but disagreed over GM's request for compensation.

SOURCE: WARD'S AUTOMOTIVE GROUP; RICH CLABAUGH - STAFF