Consumer Reports made its 2006 automobile survey available to the public last week, yet advance press reports broke the big story: American car companies were shut out of the top honors. Japanese giants Honda and Toyota, the latter of which will soon displace General Motors as the world’s largest automaker, claimed seven of the 10 coveted “Top Pick” accolades, while an Infiniti (Nissan) and two Subarus rounded out the elite club.

Morgan Morel

Much of the talk in Michigan for the last few years has been about the dying automobile industry and the state’s dire economic situation. To be certain, the automation of auto lines and the increasing reliance on non-union labor in the South and across the world can be directly linked to the state’s woes. We’ve heard that Michigan isn’t structured to compete – high corporate taxes and a deeply ingrained union culture hamper efficiency and saddle automakers with unnecessary burdens.

But those issues are peripheral to the underlying problem so poignantly captured by Consumer Reports – the failure, by Ford Motor Company and GM, to produce innovative, attractive product lines.

As earnings reports make abundantly clear, the automobile industry as a whole isn’t struggling. Japanese companies are having record-breaking years. Toyota and Honda have steadily gained ground in virtually every segment, and even Chrysler posted modest profits and market share gains. Only GM and Ford are struggling to move cars from dealer lots to driveways without crippling discounts. People around the world want more cars than they ever have. They just don’t want a blue oval (or GM logo) on the hood.

Japanese firms are reaping enormous profits because they can – unlike Ford and GM – demand top dollar for their cars. When Toyota and Honda can flash their “Top Pick” seals of approval, they don’t need zero-down, zero-percent APR financing for three years to move their vehicles out of the dealership.

GM and Ford, unfortunately, don’t enjoy any such luxury. Consequently, even though American cars can sell, they don’t sell with very good profit margins.

For a while, the success of sport utility vehicles and trucks covered for a weak lineup of regular cars and luxury vehicles. While gas prices were low and 15 miles per gallon on the highway was affordable, buyers were willing to pay undiscounted prices for Explorers and Yukons. But with gas prices promising to stay well above $2 a gallon, the inefficient vehicles are harder to sell – and balance sheets are showing more red. To add additional pain, the Japanese are chipping away at whatever market remains; the Honda Ridgeline won the coveted Motor Trend “2006 Truck of the Year” award.

In the emerging market for efficient hybrid cars, American companies are playing a very lopsided game. While Toyota invested millions of dollars in hybrid technology during the last decade, GM and Ford battled for truck and SUV supremacy. In the not-so-far-back era of cheap gas (Remember when it cost just slightly more than $1 per gallon? 2001.), execs at GM and Ford snickered at the Japanese for investing in technologies aimed at hippies, greens and nobody else. Now that hybrids are all the rage, Ford is licensing technology from Toyota so it can compete against Toyota (using Toyota technology) in the hybrid market. The bottom line? Toyota is playing a game it can’t lose.

And it’s in that position because way back, before anyone knew whether hybrids would catch on, Toyota executives decided to gamble. They decided to look beyond the balance book and adopt a strategic vision. They figured cheap gas wouldn’t stick around forever and put money into research. They accepted lower profits, because instead of basing decisions on quarterly earnings reports, they looked to the future. Only now, as the impending petroleum crisis comes into focus, are American companies thinking about more efficient vehicles.

The sad fact is that Ford and GM aren’t in a position to compete effectively. They’re behind the Japanese on alternative fuel and hybrid technology. They’re losing their dominance of the SUV and truck market. They haven’t been major players in the luxury market for a long time.

In the short run, GM and Ford are going to bleed cash. Restructuring union contracts and shutting down excess capacity will help alleviate that problem. But long-term security depends on, obviously, making products that sell. In the 1980s, when Toyota shocked American companies with its far more efficient manufacturing processes and factory designs, the Big Three quickly adapted. Two of them need another lesson.

Momin can be reached at smomin@umich.edu

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