German automakers yield to Japanese competitors U.S. recession also hurting car sales

December 01, 1991|By Ian Johnson | Ian Johnson,Special to The Sun

BERLIN -- Back when the VW Beetle ruled the roads, Germany dominated imports into the United States and Japanese cars were little more than a curiosity.

Today, however, Volkswagen and other major German automakers are insignificant exporters to the United States. In recent years, in fact, they have had so much trouble unloading their wares that they sell many models at a loss -- and even have to ship some flops back across the Atlantic.

Although their problems differ, Porsche, Volkswagen, BMW and Mercedes-Benz are all at a turning point. They face unprecedented competition in a market that requires quick product development, yet they have only a few models in their product lines.

Meanwhile, their woes are complicated by high production costs and a strong Deutsche mark. And except for Volkswagen, the German automakers specialize in luxury models or sports cars that face a one-two punch from the U.S recession and strong Japanese competition.

That's a serious problem for the economy of Germany, the world's biggest exporter, because cars are the nation's biggest export product.

Industry problems have been masked by a one-shot boost received from goods-starved eastern Germany. Production is expected to grow 5 percent this year to a record 5 million vehicles.

Next year, though, the German auto industry is expected to show declining production, as domestic demand slackens under new auto and gas taxes and exports stall, said Achim Diekmann, managing direction of the Automobile Industry Association.

The biggest problem for the industry is exports outside the protected European market. Exports slipped 4 percent in 1990 and for the first eight months of 1991 fell another 23 percent.

The problem is especially dramatic in the United States, where ++ German car exports could drop below 200,000 this year -- less than half of the record year 1986, when 445,000 were sold. Today, German cars account for about 2 percent of the U.S. market; Japan accounts for 30 percent.

Of all the German manufacturers, Porsche is suffering the most. The Stuttgart sports car manufacturer, which once sold 30,000 cars in the United States, is expected to sell only 5,000 this year. Porsche produced only 27,000 cars in 1990, vs. 53,000 in 1985.

Last year's revenue, $1.75 billion, was the worst in Porsche's history and forced the company to cancel plans to re-enter Formula 1 auto racing. The company turned a $400 million profit, but only by producing other manufacturers' cars, such as the Mercedes 500E.

This performance has fueled speculation that the world's last major independent sports car manufacturer will go the way of Jaguar, Lamborghini, Ferrari, Lotus, Alfa Romeo, and be bought up by a company.

While the strong mark has added as much as $10,000 to a Porsche's price tag, a larger factor is that the company has pursued a confused strategy -- sometimes staying with its traditional air-cooled engines, other times building water-cooled ones.

As model after model has flopped, its survival is largely due to one model, the egg-shaped 911, a 28-year-old design.

Europe's biggest auto manufacturer, VW, also is plagued with relying on one model in a market that increasingly demands new models every few years, said Karsten Rahlfs, analyst with M.M. Warburg in Hamburg.

The VW group, which includes Audi and the Spanish manufacturer SEAT, has relied on the VW Golf, also known as the Rabbit in the United States, for 59 percent of total sales and up to 80 percent of the company's $640 million profit in 1990.

Although the Golf is the most successful model in automobile history, with 13 million sales in 17 years, it never caught on in the United States. And some analyses show that the car, and the entire VW North American operation, is a money-loser.

Now redesigned to be cheaper and more reliable, the Golf will have to fight unprecedented Japanese competition and pay for VW's ambitious expansion plans. To acquire one of Eastern Europe's biggest manufacturers, Skoda of Czechoslovakia, VW has pledged to invest $5.5 billion over the next five years.

The new Golf also will have to support a line of production flops, including the Audi V8, the VW Passat and the VW Corrado, which sold so poorly in the United States that 1,000 had to be sent back to Germany.

Although German automakers have been trying to cut costs, analysts point out that their cars still have among the highest production costs in the world. According to a study by the McKinsey research group, Mercedes, VW and BMW cars have production costs 40 percent to 50 percent higher than Japanese cars produced in Japan and 25 percent higher than Japanese cars produced in Great Britain.

Part of the explanation: the generous social benefits and high salaries paid to German auto workers. But conservative management is another reason. Only this year, for example, has the first factory with modern small-group production methods been introduced in Germany, and this only at Opel, a German subsidiary of General Motors.

Small-group, flexible production is considered essential if German manufacturers are to switch strategies, from relying on one workhorse to sell everywhere in the world to introducing different models more often and in different markets, the McKinsey report says.

The Germans' inability to match Japanese flexibility, for example, is one of the prime reasons for the industry's debacle in the United States.

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