Toyota Is King

| Thu Aug. 2, 2007 10:15 AM EDT

Recently a Michigan friend wrote me of her concerns about Detroit's flagging auto industry and its impact on her family and friends:

Jobs are few and far between, and those that have jobs constantly worry about keeping them. Every time there is a layoff at GM, Ford, or Chrysler, it's another set back for the city. People panic. Our state has been rooted in manufacturing and automobiles for so long that it's hard to imagine losing that identity. Somehow, U.S. automakers are losing ground to foreign car companies. Toyota is just about ready to take over as the number one auto manufacturer, which would put GM in the number two spot. How does this happen?

Well, this morning's Washington Post brings news that foreign manufacturers have officially surpassed Detroit. They grabbed more than 50 percent of the U.S. market share for the month of July—the first time foreign companies have done so. GM's sales dropped 22.4 percent compared with a year ago. It remains the country's biggest automaker (in terms of the number of cars sold), but is feeling increased heat from Toyota, which now occupies the number two spot, ahead of Ford and Chrysler.

So, how does this happen? According to U.S. automakers and industry analysts quoted in the article, the housing market is to blame; falling home values have caused many people to hold off on making large purchases. Analysts also blame decisions at GM and Ford to scale back their sales to rental car companies, a practice that yields little profit, but which has traditionally padded Detroit's sale numbers.

Receding market share for U.S. companies may turn out to be a boon to consumers. As automakers seek to make up the difference in sales, a price war is looming. GM has threatened that it will begin aggressively discounting its pick-up trucks. As the company's chief market strategist told the Post, "If you have everybody throwing hand grenades at you, you have to respond."

Of course, automakers will almost certainly be forced to cut costs, compounding the pain of American workers. According to the Post:

If the market doesn't pick up, the sales slowdown will continue to complicate the financial outlook for carmakers. The three Detroit auto companies are waging cost-cutting campaigns. They've closed plants, cut jobs and sold off some of their best assets.
"There is no question there has been a tremendous change in the market over a long number of years," said Dana Johnson, chief economist of Comerica bank. "What the numbers tell you is that consumers have more, and more learned to prefer foreign cars."
Japanese automakers have been much healthier. They enjoy lower U.S. labor costs, positive foreign exchange rates and more popular product lines.
Toyota's Lexus brand sold 27,141 in July -- nearly double the sales of Ford's entire European luxury line from Volvo, Jaguar and Land Rover.
Shoppers also are gravitating toward small, fuel-efficient models, market segments where Japanese rivals lead.
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