Cars Can Drive the Recovery

July 1, 2002
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Washington: Now that we're into the summer of our economic recovery it's worth reviewing where we stand. The growth of the U.S. economy traditionally has rested on three main underpinnings-home building, machine tool making, and automobile manufacturing.

During the past recession all three held up remarkably well, fueled in part by robust consumer spending on durable goods and low interest rates that made home and new car purchases attractive. The weak link of the three, however, was car sales which many observers believe were artificially enhanced with lavish dealer price incentives and no- or very low-interest charge deals.

So some doubters recently have worried if America's car industry can shift into the faster gearing of high-volume-high-profit production and help boost the broader recovery. Or has Detroit sold tomorrow's cars with yesterday's incentives?

We think not. It seems to us a world trader's view of the car industry is called for. Simply put, the U.S. car industry can no longer be confined to the Big Three from Detroit, nor can the market be restricted to a search for profits inside the bounds of the United States. This sounds like a statement of the obvious-especially when the first name of one of the Big Three is Daimler-but the situation is more complex than that.

Car making is about more than just cars. The real national economic lift that comes from motor cars is felt by the myriad corporations that make the components of those cars-everything from engines to tires to windshield wipers.

One immediate danger is that, while share prices of leading auto parts firms are up by as much as 50 percent this year, forecasts of sales expect a decline of 5 percent in 2002 from a year ago to about $280 billion.

To our mind the same solutions apply to both parts makers and the big car manufacturers alike. They have to get better at their tasks-both at home and in the factious global market where overproduction and tight markets are even more exaggerated.

Which 'Big Three'?

The hard truth is that the "Big Three" automakers in the U.S. in terms of sales recently have been Nissan, Toyota and Honda. These three car companies' U.S. operations turn out better cars with fewer labor hours worked than the former "Big Three" of Detroit. It takes Honda just twenty-seven hours to make a car. Compare that to Ford's nearly forty hours, General Motors 40.5 hours, (a 16 percent improvement over past years), and Daimler Chrysler forty-four hours.

Another lesson for car and parts makers alike is the potential of the global market. When Hyundai breaks ground for its first U.S. production plant in Montgomery, Ala., or when General Motors pays $400 million for a majority share in Korea's Daewoo, the name of the game will remain the same-productivity equals profitability. This is especially true for American parts makers who must wean the Asian immigrants away from imported components by offering them better, cheaper, U.S.-made alternatives.

An even harder task is true global integration of design and components production that all car makers are going to have to achieve in order to sell into specific national markets. The much talked about computerization of parts making hasn't been a success, but it must be made to work. For some producers half to three-quarters of their design work is done by outside firms. The pressure is on to cut launch times for new models from four years to two years, or even one.

E-business collaboration is more than essential than ever now that Washington has changed its objective from its $1.5 billion program to increase car fuel efficiency to an open-ended commitment to develop hydrogen-based fuel cells as the power source. Talk about new design pressures.

But the bottom line is that the profits are there to be had. And with new profits comes the extra power the broad auto industry needs to pull our economy up onto the next plateau. It's time to get into gear.

Recent Articles by James Srodes

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