Big Three automakers, reinvented, eye consumers worldwide

Talk about a near-death experience.

In 2007 two of America's three legacy automakers – General Motors and Chrysler – faced nothing short of oblivion, and Ford, though not in as dire straits, was feeling plenty of strain.

Six years later, Ford's Focus is by some measures the bestselling car on the planet. Domestic sales are beginning to rebound for all three US automakers. Profits are back, and it's again possible to find jobs in the American auto industry.

For an industry that has been fitfully (some would say futilely) trying to reinvent itself since the first oil crisis in the early 1970s, the comebacks verge on the astonishing – and they position the Detroit Three to be real competitors in the world's emerging markets, especially China.

Their evolution has been "transformative, like nothing that ever occurred in the past for the American auto industry," says Mike Smith, a labor historian at Wayne State University in Detroit. "American automobile workers and companies are more efficient than they have ever been during any time in history."

Of course, GM and Chrysler had some help, controversially, along the way. But their $80 billion government bailout appears headed for a close: By early 2014, the US Treasury Department plans to sell the last 300 million GM shares it owns back to General Motors, as well as to divest its majority ownership of Ally Financial, GM's former lending subsidiary. Last year, the United States sold its stake in Chrysler to Italian automaker Fiat.

But not all is as shiny and bright as a showroom model gleaming under the lights. The three US carmakers are not even close to regaining their historic share of US auto sales, and union auto workers have had to accept significant cuts in their standard of living.

Still, when US sales of light vehicles surpassed 14 million units in 2012 – the highest year-end total in five years – Detroit heaved a collective sigh of relief. At least the numbers look to be trending in the right direction.

Some factors driving renewed sales are out of the industry's control: pent-up consumer demand for new vehicles, a loosening credit market, and an improving job market. All help bolster consumer confidence so that Americans feel freer to spend on big-ticket items after so many years of holding back.

But since the economic downturn, the Detroit automakers have made moves to steer their own destiny, refreshing their product lines to emphasize smaller, fuel-efficient vehicles that more of today's consumers seem prone to buy.

"Everyone is making a much better product with much higher quality that performs better and with better fuel economy," says George Magliano, a senior automotive economist at IHS Automotive Consulting in New York City. "Toyota and Honda used to have the auto world locked up. Now, there are all sorts of [domestic] alternatives that fit the bill, and the consumer's mind-set has changed."

Having cut their labor and operating costs, the US automakers were forced to innovate on production methods to make cars more efficiently. One solution: a one-car platform that allows automakers to produce the same car anywhere in the world. The goal is to save billions by streamlining the design, supply, and manufacturing phases for multiple vehicle models. Ahead of the pack is Ford, which says it plans to use five common platforms to sell 6 million vehicles by decade's end; five years ago, the company used 15 platforms to achieve the same number.

Last year proved to be the watershed moment. All three Detroit companies earned higher profits per vehicle in North America than either Toyota or Honda – an achievement that Sean McAlinden, executive vice president of research at the Center for Automotive Research (CAR) in Ann Arbor, Mich., calls "unprecedented."

"Because of the crisis, [GM, Ford, and Chrysler] were allowed to fix problems, mistakes, and enormous contradictions they've had for 35 years, and they did get it done in about 12 months," Mr. McAlinden says.

Looking to China

Part of the US industry's rebirth stems from a more aggressive stance in booming global markets such as Brazil, Russia, and, most important, China. Most automotive analysts agree that the future of car buying will be determined outside America's borders. In 2012, 80 million light vehicles were sold globally; by 2020, the number will grow to 108 million, about two-thirds in emerging markets, according to IHS Automotive Consulting.

"Detroit has come to the reality that these markets are starting to live up to their potential, and it's going to pay off for them," Mr. Magliano says.

China is already the world's biggest auto market, topping 19 million in unit sales last year. By 2020, sales there are expected to exceed 32 million, topping combined sales forecasts for the US and Europe, and more than doubling the US sales peak of nearly a decade ago, most analysts say. But a 25 percent import tariff, a fragmented supply chain and distribution network, and a consumer preference for mainly small cars make entering China's market difficult for American manufacturers.

That is changing, however. Detroit's automakers are investing in plants in China, forging local partnerships to share suppliers and platforms, and launching vehicles, such as larger utility vehicles and luxury sedans, designed to appeal to buyers in the country's rising middle class.

GM is the most entrenched US automaker in China, enjoying a market share of almost 16 percent, reports Automotive News. It is boosting its dealership count to 4,200 and introducing 17 new or upgraded models this year alone. One brand expected to get a big push is luxury nameplate Cadillac: GM signed actor Brad Pitt to help steer Chinese buyers away from market leaders Audi and Mercedes-Benz. Last year GM sold just over 30,000 Cadillacs; it hopes to sell 100,000 by 2015.

Ford, meanwhile, is spending $5 billion to double the size of the assembly plant it opened in China in 2001, which would make it the company's largest production facility in the world. By 2015 the China plant would turn out 1.6 million units, up from 762,000 in 2012. Ford also wants to double its dealer network to 700 by 2015. By then, Ford expects to have launched 15 models, ranging from the Fiesta subcompact to the Explorer sport utility crossover.

"There's no question that China is going to be a growing market for Ford," says Erich Merkle, a company spokesman. "Right now we're scratching the surface. We have so many opportunities" regarding the range of vehicle types that consumers there are interested in buying, he says.

The Asia-Pacific region overall will account for 60 to 70 percent of Ford's global sales growth in coming years. Ford now has about 2.5 percent market share in China; analysts say that could grow to 6 percent by mid-decade.

Chrysler, for its part, is pushing far inland into Changsha, in the south-central province of Hunan, to make Jeeps for the Chinese market. Production is expected to start by the end of 2014. The company is also increasing its dealer network to 200 by late this year.

The China expansion is eventually expected to strengthen the bottom lines of each company. "If you build them in China and sell them there, ultimately the profits will come back to the American companies," says Mr. Smith of Wayne State University.

Roadblocks at home

Amid all the breathlessness about America's lean, mean, automotive machines, it's important to remember that full recovery in North America is many years away. Sales zoomed back last year because of pent-up demand, but analysts expect the rate of sales growth to slow in the US because of a creeping economic recovery and a higher-than-normal jobless rate. CAR, the Michigan-based think tank, estimates that 2012 will be the last year of double-digit sales growth until 2016. Sales in 2013 are expected to grow just 4 percent.

Today, the Detroit Three hold about 45 percent of the total US market, versus 51 percent in pre-recession 2007. But total sales for the US companies rose nearly 8 percent last year, according to Autodata, and sales for the first quarter of 2013 surpassed those for the same period in 2012.

Some worry that the federal government's ambitious fuel-economy standards for new cars could put the brakes on other innovations, as auto makers make heavy investments to meet those requirements. The auto industry (including foreign competitors that sell cars in the US) needs its new-vehicle fleet to average 54.5 miles per gallon of gasoline by 2025.

"There's not much money left over to experiment with something else [such as breakthroughs in safety or design] that could drive the market," says CAR's McAlinden. "I worry we may mandate our way out of real market innovation.... People don't only buy cars because of fuel economy."

Another possible roadblock: the Millennial Generation of car owners. They are less interested in buying new vehicles than were previous generations, and they are also the least able to afford the sticker prices.

"They were hurt most by the recession. They have a lot of college debt, and they are still underemployed," says Michelle Krebs, a senior analyst with Edmunds.com. "Everybody had anticipated they'd be like the baby boomers and rush to the car market, but that hasn't been the case."