January 14, 2008

Detroit may regret banking on the BRICs 

A recent article on CNN.com lamented the state the domestic American auto industry. The piece cited the now familiar refrain: Oil prices are high. Detroit is bleeding cash. Domestic vehicles are losing market share to more fuel-efficient Japanese models. For the U.S. Big Three, sales are now at their lowest point since 1998. 

Then the article noted the silver lining beneath the storm clouds: Labor costs are down. Detroit is pioneering several new “green” technologies which should have significant market potential in the coming years.  

 

The article neglected to note that the Japanese automakers are also benefiting from lower labor costs. (Honda, Toyota, Nissan, and Subaru all manufacture cars in North America.) And Toyota and Honda have green technology projects of their own. 

Detroit is also counting on increased demand in the so-called BRICs countries: Brazil, Russia, India, and China. Once again, these are markets where Detroit will face competition from the Japanese. If Ford can’t beat Toyota in the U.S., what makes anyone think that the Ford will be able to beat Toyota in Russia or Brazil, where lower incomes will make consumers all the more demanding? 

China and India are even more problematic. China and India now have well developed automotive sectors of their own. Indian automaker Tata has just released a sub-compact car that sells for about $2,500. Chinese carmakers are churning out similar low-cost vehicles. The quality standards of Chinese and Indian automakers still lag behind the Japanese and Detroit, but they are getting better all the time. (Ten years ago Korean automakers were also known for substandard quality; and now Korean-made vehicles giving even Toyota and Honda a run for their money.) 

Detroit executives may therefore be deluding themselves with the idea that the BRICs markets represent the solution to their problems. The American Big Three have long obsessed about export markets---- when they can’t even successfully defend their home turf.  

Detroit’s best chance of a real comeback is the U.S. market. But to convince American consumers to buy Fords and Chevrolets again, the folks in the corner offices in Detroit will have to get back to basics. This means focusing on vehicle design and quality again----not elusive dreams of India and China.