Now Playing in Europe: The Future of Detroit

[ehaase]

Any ideas for the niches that GM, Ford, and Chrysler can successfully fill?

http://www.nytimes.com/2006/10/29/business...agewanted=print

October 29, 2006

Now Playing in Europe: The Future of Detroit

By MICHELINE MAYNARD

VALENCIENNES, France

WALK inside Toyota’s five-year-old factory here, an hour’s drive from the Belgian border, and step into a world stuck on fast-forward. Yellow forklifts speed down aisles bearing fresh supplies of parts, forcing visitors to flatten themselves against the concrete walls as the deliveries go by.

Huge stamping presses beat out an ear-splitting rhythm of “ca-chunks” as they bang out metal sides and roofs for the small Yaris cars built here. Deep inside the plant, injection-molding machines spit out brightly colored front and rear bumpers, looking like so many Lego pieces, which are loaded onto racks to be towed to the assembly line.

By contrast, the atmosphere at BMW’s plant in Leipzig, Germany, is decidedly more refined. Its soaring gray and silver factory, designed two years ago by the architect Zaha Hadid, is the equivalent of automaking by Armani.

Unpainted car bodies, their sheet metal the hue of brushed pewter, ride silently through the plant lobby, lighted from beneath in blue, providing a perfect accent to the colors of the building.

Outsiders are not allowed near these 3-Series models; instead, they must observe production from a catwalk above the assembly line. Below, in what seems more like a very expensive kitchen than a factory floor, workers clad in neat coveralls stroll along an assembly line that spreads into a series of fingers, the places where the real work goes on.

These two plants, one high-volume, the other high-end, may seem to have little in common with each other, let alone with the United States car market. But together, these plants — and the niches they serve — may offer some idea of what lies ahead for American automakers on their home turf.

During the past, awful year for Detroit, industry executives and experts have been puzzling through what will become of General Motors, Ford Motor and the Chrysler Group. One potential future consists of total disaster, with the Detroit automakers vanquished by their Asian and European rivals. This is an option that only those with a doomsday complex really believe, given the Detroit companies’ billions in cash and broad infrastructure. Another potential outcome is that the Big Three vanquish the competition to again rule American roads, a prospect that has faded in 30 years of fighting the imports and is even more improbable now that foreign companies hold nearly half of the market.

A third option, much more likely than the others, is for G.M., Ford and Chrysler to adapt to a new American market that in many ways resembles Europe’s: a fragmented bazaar that has little in common with the mass-production ethos of Detroit’s first century. In this new American market, it is very hard to profitably support enough different brands and models to guarantee “a car for every purse and purpose,” which Alfred P. Sloan, as G.M.’s president, declared to be the company’s mission in the 1920s.

RATHER than trying to be all things to all people, Toyota, BMW and other successful carmakers on both continents are concentrating on a different strategy: find a niche, hone it and own it. In Europe, for example, the market is not dominated by any single player or small group of players with market shares that dwarf smaller competitors the way G.M., Ford and Chrysler once did in the United States. Instead, Europe’s car sales are splintered such that 5 percent is enough to make a difference, and 20 percent is more than anyone can expect.

“There’s no case anywhere in the world of any previously dominant manufacturer retaining much more than 20 percent once the market is opened to full global competition,” G.M.’s vice chairman, Robert A. Lutz, said in a recent interview.

As is the case in Europe, no auto company in America can automatically count on selling hundreds of thousands of one particular model annually as they could even five years ago, meaning that they must find ways to profitably stay on top of market trends — or be left in the dust. In Europe and increasingly in America, consumers are demanding the latest in environmental technology, both to save gasoline, as with hybrids, or to avoid using it altogether, as with diesel-powered cars.

While some national loyalty lingers in Europe, as it does in the United States, no company can rely on such loyalty to sell cars. Carmakers are forced to continually update their brand images in order to stand out in a crowded market. At the same time, like their European counterparts, America’s unionized autoworkers must also adjust. They cannot count much longer on the cushy contracts that typified their jobs in the past, because new deals at new factories have chipped away at pay and benefits while emphasizing more-productive work methods.

European companies have long competed this way, but it is a new reality for American carmakers who were so dominant for much of the last century. As recently as 1990, G.M., Ford and Chrysler together sold more than 70 percent of the cars bought in the United States; G.M. alone accounted for more than one-third of auto sales.

Now those companies’ American market share has dropped to around 50 percent, while the influence of Toyota and other foreign manufacturers is growing. Though G.M. remains on top, its share has slipped below one-quarter, and the battleground has become the section between 10 percent and 20 percent of the market. That is the area where Ford and Chrysler have slipped and where Toyota and Honda have grown.

In many ways, the changes in the United States have European parallels. Toyota is also rising in Europe, where its market share has more than doubled over the last 10 years, to about 5.7 percent. It has forged the gains by focusing on one segment, well-made small cars, and pursuing it with single-minded determination. Its factory here in Valenciennes is evidence of that focus.

Inside the factory offices, the plant manager, Didier Leroy, sits in front of an electronic tally board that shows the plant’s production goals for the day and the number of vehicles it has actually built. This board, along with others inside the plant, gave a disappointing picture on a recent afternoon, showing that workers had fallen behind their target.

But Mr. Leroy, who resembles a red-haired version of the actor Marcello Mastroianni, confides with a smile that managers intentionally set the targets a little too high, to keep workers focused on their tasks. If employees believe that they are falling behind, he says, pointing to the board, they will work more vigorously than if they think the day’s objective is easy to achieve.

The workers in Valenciennes need little reminder of what happens to people who cannot compete. Only about 75 miles up the Paris-Brussels highway are the remnants of a factory in Vilvoorde, Belgium, that Renault shuttered in the late 1990s because it could not operate it at a profit.

There is little chance of the Valenciennes factory meeting a similar fate. It is among Toyota’s most important plants worldwide — ranked even above its American operations, to hear some inside Toyota put it. An important reason lies inside the body shop, where major structural parts of the car are welded together.

Valenciennes was the first Toyota plant outside Japan to receive what the company calls its Global Body Line: a configuration of robots that can be programmed to build a number of different styles of vehicles without having to modify the entire factory. Today, that same body line is in Toyota’s plants in Kentucky and Indiana, and has been installed in the pickup factory that Toyota will open next month in San Antonio.

While the Valenciennes plant builds only one model, the Yaris, it produces it in four configurations — left-hand and right-hand drive, and equipped with gasoline and diesel engines. Each configuration requires different parts and production steps. That flexibility, which can also be harnessed to produce wholly different models on the same assembly line at the same time, is a hallmark of Toyota’s factories around the world, and an example that other companies, both in Europe and the United States, are striving to emulate.

Just last week, for instance, Alan R. Mulally, the former Boeing executive who has been Ford’s chief executive for less than a month, stressed that Ford’s plants must become more flexible if the automaker is to pull out of its sales tailspin. The company said last week that it lost $5.8 billion in the third quarter amid plummeting sales.

David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said that American carmakers must change, and fast, or risk disaster. “For an automobile manufacturer, big and slow doesn’t work anymore,” he said. “Big and fast gives you a chance.”

In Valenciennes, the word “big” is not in the vocabulary. Even a few years back, Toyota might have allowed more room on the assembly line to accommodate differences among the various kinds of Yaris cars it makes. But the crowded floors suggest that it decided otherwise, and Toyota is deliberately keeping things that way.

As the company builds more plants around the world — including another in the United States that could be announced soon — they are more likely to be compact facilities like the one here in Valenciennes; it would fit into a corner of Toyota’s sprawling factory in Georgetown, Ky., which produces hundreds of thousands of Camrys and other models each year.

EVEN more important, as Toyota considers how it will operate its factories in the United States and elsewhere, it is monitoring how managers and workers in France handle a 24-hour operation.

Toyota’s sales in Europe are growing much faster than expected — it is on a pace to meet its 2010 target of selling 1.2 million cars a year by 2008 — and it needs to wring every possible vehicle out of its factories here to meet that demand. The same is becoming true in the United States, where Toyota passed DaimlerChrysler this year for the No. 3 spot in sales, and now seems likely to pass Ford as No. 2, behind G.M.

Still, the constant production here is a risk for Toyota, which has had a long practice of sharing ideas among its factories around the world. As the company’s only 24-hour-a-day production site, Valenciennes now has no such sister plant and must act as an independent player, Mr. Leroy said.

By contrast, BMW’s sparkling factory in Leipzig has a distinct New World relative: BMW’s plant near Spartanburg, S.C., the inspiration for the factory’s layout. The German facility, which is fast rivaling Bach’s grave as Leipzig’s favorite tourist attraction, has a legion of similarities to the South Carolina factory. That is no surprise, because the Leipzig plant manager, Peter Claussen, was in charge of developing the American plant.

The Spartanburg facility, which began production in 1994, was BMW’s first venture outside Germany, and it initially prompted a debate over whether Americans could produce real BMWs. Likewise, the decision by BMW to build a factory in Leipzig, in the former East Germany, instead of in a cheaper location in central Europe, raised eyebrows for the same reason. But just as BMW scored valuable political points by setting up shop in the America’s rural South, it won hearts in Germany by building its showplace in a region where the unemployment rate is 20 percent, twice as high as it is in the rest of the country. “It’s unbelievable,” said James Oehlschager, 31, who works in the plant’s body shop. “I can’t describe the meaning for East Germany that BMW decided to come here.”

One reason BMW went to Leipzig was labor costs. While the factory is unionized, its pay rates average 20 percent less than what BMW pays its workers at its home base in Bavaria. The company also has the flexibility in Leipzig to vary the working hours, a perennial sticking point at other European auto factories.

Despite that, Mr. Oehlschager said workers did not feel like second-class citizens. “Compared to other salaries in the region, it’s a top level,” he said.

Like Spartanburg’s factory, the Leipzig plant is divided into three main sections: body shop, paint shop and assembly area. Each can work independently, so a bottleneck at one need not stop the whole plant.

Visitors who gaze down at the section of the assembly line available to public view are missing the part of the plant where the real work occurs, a series of mini-lines that shoot off from the trunk like branches. Forklifts do not race down the assembly line the way they do at the frenzied Toyota factory in Valenciennes. Instead, they deliver parts to the end of each branch, and then components are sent down the line to the spots where workers need them. If BMW needs to increase production here, it will not rip up the main line; it will just extend the length of each limb.

Even with that capability, BMW is not itching to expand. Nor is Toyota. The companies have similar shares of the European market, each just under 6 percent, and are leery of the hazards of growing too quickly.

“We do not believe in this incurable bigness,” Michael Ganal, a member of the BMW board, said last month in an interview at the Paris Motor Show. “Yes, you can create economies of scale if you grow, but it is better to run a fast and successful manufacturer.”

In a separate interview at the Paris show, Dieter Zetsche, the chief executive of DaimlerChrysler, agreed that reflexive pursuit of market share is not necessarily the right strategy. “If you have strong brands and satisfied former customers, you already have a brilliant strategy,” he said.

Such caution has historically been rare in the United States, and John Casesa, managing partner of the Casesa Shapiro Group, an investment advisory firm, said American auto executives must come to grips with it.

“The concentrated oligopoly structure is gone,” Mr. Casesa said. “Plant by plant, Detroit has had to adjust its thinking. Detroit doesn’t have any products that can fill a single plant any more” except for a handful of high-volume vehicles like Ford’s F-Series pickups or the new trucks that G.M. is about to introduce.

THERE are signs, however, that American executives are getting the message. Ford shocked the automotive world this summer by announcing that it would cut its production by one-fifth during the final three months of the year, its single-biggest reduction in more than two decades. Nearly all of the cuts are at plants that built only sport utility vehicles or pickups, whose sales plummeted as gas prices spiked. In an interview last week, Mr. Mulally said it was incumbent on Ford to end its dependence on big vehicles and to turn to the more-nimble production model provided by Toyota.

That makes the flexibility of factories like Toyota’s in Valenciennes even more important as American companies stare at their European-influenced future.

Yet Mr. Leroy said the factory had been valuable in another sense. As with its American plants, Toyota’s French factory has helped convince Europeans it is acceptable to own a car built by a Japanese company. Customer surveys have shown that they think of the Yaris as a French car, he said.

If such blending of perception is possible in Europe, where national identities have long been strong, the American market cannot be far behind. But for their part, American executives need not fear that their industry’s influence will be forgotten.

On a recent weekend, Mr. Claussen of BMW went to his bookshelf to seek guidance on solving a problem in the Leipzig factory. He found a solution in “My Life and Work,” written by Henry Ford in the 1920s.

Back then, Mr. Ford offered advice that still sounds appropriate today, as American companies look to Leipzig, Valenciennes and elsewhere for hints of the future.

“If there is any great secret of success in life,” he wrote, “it lies in the ability to put yourself in the other person’s place and to see things from his point of view — as well as your own.”

Nick Bunkley contributed reporting from Detroit.

[CARBIZ]

Good points all around. Perhaps we are witnessing the North American market becoming like the rest of the world's. If it became that GM has 20% market share here, then Ford, Chrysler, Toyota and Honda all hover around 10-15%, that could be a healthy, competitive market.

[Robert Hall]

Any ideas for the niches that GM, Ford, and Chrysler can successfully fill?

209883[/snapback]

Full size trucks, full size SUVs, RWD sedans (Charger, 300, Zetas), RWD coupes (Mustang, Camaro, Challenger).