Motor Trends: Why The Most Profitable Cars Made in the U.S.A. are Japanese and German

If you want to solve one of the central mysteries of today's auto business, consider this tale of two cars: the Ford Taurus, built at plants in Atlanta and Chicago, and the Nissan Altima, made in Smyrna, Tenn. Neither vehicle is fancy; they're mainstream sedans for buyers on a budget. Both sell well. But when you talk about profit, the Taurus wobbles off the road. Ford must entice Taurus buyers with rebate offers and financing deals that slice 13%, or roughly $3,000, off the sticker price. After allowing for dealer profits, that leaves a negative return for Ford. The Altima, meanwhile, earns Nissan an estimated $1,500 (beyond the dealer's profit), contributing to the company's fat overall operating margin of 10.8%. You know the joke about the merchant who loses a little money on each sale but says, "I'll make it up on volume"? Don't tell that joke in Detroit.

So here's the mystery: if foreign-based companies like Nissan--along with BMW, Honda and Toyota--are building more vehicles in American factories, using American workers and American suppliers, and selling the vehicles to Americans for a good profit, why aren't DaimlerChrysler, Ford and General Motors doing the same? Last year the Big Three collectively lost money on car sales in North America (and earned a mere 1.8% profit on overall sales). Honda and Nissan earned higher margins and record profits, and Toyota is expected to post similar results.

The stock explanation for this situation is that the foreign makers pay their U.S. workers less in wages and benefits than do the Big Three. But that answer is wrong; the compensation is roughly equivalent. The real reasons for the transplants' success are much more interesting and instructive: more efficient manufacturing systems, better labor relations, more collaborative relationships with suppliers, lower "legacy" costs for retirees' pensions and health benefits, and hard-earned reputations for quality.

These advantages have been accruing since 1983, when the first transplant factories, built by Honda and Nissan, began producing sedans in Marysville, Ohio, and Smyrna, Tenn., respectively. But if the stakes were high then, they're even higher now. The Big Three's overall North American market share slipped to 61.7% last year, an all-time low, and it has declined an additional 1.6 points in the first quarter of 2003. Toyota is just a couple of market-share points from passing Chrysler, the smallest of the Big Three. Though it is narrowing the quality gap, Detroit today squeezes almost all its earnings out of "light trucks," an industry category that includes SUVs and pickups. But the transplants are attacking that bastion. Toyota is adding capacity for its full-size pickup, the Tundra, with a new plant set to open in 2006 in San Antonio, Texas. And later this month, Nissan will inaugurate a new plant (now in test mode) in Canton, Miss., where it will build the Armada full-size SUV and the Titan full-size pickup.