The End of Detroit (18 page)

Still, a minivan and a family sedan are hardly groundbreaking vehicles. They are simply ways for Toyota to keep pace. Two other derivatives of the Camry—the Lexus RX 300 and the Toyota Highlander—were far more significant to Toyota. The RX, which went on sale in 1998, and the Highlander, which followed in 2001, were Toyota’s first entries in a market that would explode in the next few years: crossover vehicles, or sport wagons. In essence, these are sport utilities that are built on a car chassis instead of the rigid truck frames from which sport utilities used to be built. Lately, Detroit companies are claiming that they invented this new segment of the market—Chrysler with its Pacifica crossover, which debuted in spring 2003, and Ford, which is developing the Freestyle, whose debut date still lies ahead. GM has its own on the way, and analysts are predicting that the sport wagon market will mushroom in coming years as consumers give up bulky truck-based SUVs and shift into the more maneuverable crossovers. But they are years behind Toyota, which introduced the second generation of the RX 300 in 2003, called the RX 330, and plans another version of the Highlander in the near future. The RX 300 was Lexus’s third light truck product to be introduced within two years, before either GM or Ford had been able to get luxury trucks onto the market (the Lincoln Navigator and Cadillac Escalade hit the market in 1998).

The idea of a Lexus light truck had been a revolutionary one. It first came up in 1991, when Illingworth, the Lexus general manager, traveled to Nagoya, Japan, with McCurry to see the next-generation version of the Land Cruiser SUV. The daunting Land Cruiser, a true monster of a sport utility, had been around since 1964 and was a perennial if modestly selling member of the Toyota lineup. Looking at the future vehicle, McCurry suddenly grabbed Illingworth’s arm and said, “You need that in the Lexus division.” Illingworth was stunned by the concept, since none of Lexus’s competitors had even conceived of a luxury sport utility. It was years before Acura introduced the MDX, or Infiniti the QX4. Neither Mercedes nor BMW had talked about their luxury sport utilities. The only thing close to one was a Range Rover, priced thousands of dollars above what a Lexus cost. “I said, ‘Bob, you’re nuts,’” Illingworth recalled. “But he could see that was where the market was heading. One of the curious things to me about Toyota is how we do make those right decisions when others don’t.”

McCurry said he had an instinct that baby boom consumers, already beginning to buy Ford Explorers in big numbers, were going to want to go plusher someday in sport utilities. In 1996, Lexus turned the Land Cruiser into the LX 450, its most expensive offering to date, costing close to $60,000. It introduced an updated version in 1998, called the LX 470, and introduced it at the same time as the RX 300. Though the crossover vehicle was an unfamiliar animal on the American market, Hostetter could see a need for it emerging as early as 1993. He noticed that baby-boom–era buyers were returning their Land Cruiser and 4Runner sport utilities and pickup trucks after their leases expired, and not taking home new ones. The company’s surveys showed that these customers had the highest dissatisfaction of any of Toyota’s owners, unhappy with the vehicles’ fuel economy, rough handling and size. Although Toyota had introduced a Camry station wagon, these buyers weren’t interested because they had been shuttled around in station wagons as children and thought them to be passé. Hostetter started tinkering with the idea of an SUV that had the handling characteristics of a car but the room and functionality of one of the bigger vehicles. “I had dreamed about it for a long time,” Hostetter said. It was a market that Toyota didn’t want to ignore, because these were wealthy customers who were willing to spend significant amounts of money on their vehicles.

In Japan, Toyota’s engineers were thinking along the same lines. In 1997, the company introduced the RAV-4, a small sport utility vehicle based on the Corolla platform, and by 1998 the RX 300, sold as the Harrier in Japan, was ready. The RX 300 has turned out to be one of the most popular vehicles in the Lexus lineup, a key reason why Lexus pushed past Mercedes and BMW in 2001 to become the country’s best-selling luxury brand. Lexus’s performance comes in the face of the toughest competition it has seen to date. Along with the German brands, both Cadillac and Lincoln are trying to stage comebacks. Cadillac’s effort has gotten the most attention, pegged to a growing lineup of edgy, macho-looking vehicles such as the Escalade sport utility, the CTS sedan and the XLR two-seater, all with the same angular front end. GM has been relentless in keeping Cadillac’s profile high, and Cadillac has scored well on J.D. Power surveys, coming in second to Lexus in 2003 in customer satisfaction. Denny Clements, the Lexus general manager, says he’s impressed with GM’s determination. “They get high marks. I’m excited for them. It’s still a hell of a name,” Clements said. But he isn’t worried. Cadillac’s efforts have had no effect on Lexus’s sales, he said, sitting in his office in Torrance. “Someday they will be a competitor. Right now, I don’t see it.”

Almost fifteen years after Lexus was created, it is still appealing mainly to customers who own imports rather than buyers who own Detroit products. It has an enviable mix of repeat customers, who represent 60 percent of its owners, and new customers. Lately, Lexus has been branching out beyond its original reputation as a producer of high-quality, serene automobiles. It has added the GX lineup of performance-oriented cars and SUVs, as well as the IS 300, which is aimed at younger customers who might otherwise buy BMW’s 3-series or an Audi. And Lexus scored an undeniable hit in 2001 when it added the SC 430 coupe to its lineup. For the first few months it was on sale, the SC 430 was the hottest car around. Fast and low-slung, it was sexier and more chic than any Lexus coupe had been before. Across the country, dealers were commanding $10,000 premiums above the car’s $60,000 sticker price, and SC 430s became a car of choice for celebrities, athletes and trendsetters. Unlike the usual Lexus audience, 66 percent of buyers for the SC 430 were first-time Lexus owners, earning an average income of $270,000. Dealers clamored for more, and Clements knew that Lexus could have easily sold twice as many SC 430s. But it did not increase the supply, for fear of diluting the car’s appeal. Clements, who began his career at Ford in the 1970s, had seen too many instances of auto companies flooding the market as soon as they had something successful. “I’m not going to mess that up,” said Clements, a tall, broad-shouldered man who resembles Homeland Security Secretary Tom Ridge. “Sometimes it’s very difficult not to say, ‘Let’s just crank it up.’ But you’ve got to pay attention and have discipline.” With the luxury market flooded, from a resurgent Cadillac to an aggressive BMW and all manner of other competitors, Clements does not take Lexus’s luxury car leadership position lightly. “When you’re the most successful, you’re the most vulnerable,” he said.

Another company might sit back, stick to the formula that led to its achievement and simply defend its turf. Not Lexus. In the surprise fashion that the brand added trucks to its lineup in the mid-1990s, it is about to shift into another category: hybrid-electric vehicles, which are powered by both gasoline engines and electric motors. At the Detroit Auto Show in January 2003, Lexus showed off a hybrid-electric version of the RX 330 that Clements thinks could be as important to the Lexus lineup as the original LS 400 was to the creation of the brand in 1989. The hybrid RX 330, which is due to go on sale in fall 2004, is a sharp contrast to the small hybrid-electric vehicles that consumers are most familiar with, such as the Toyota Prius, the Honda Civic and the original Honda hybrid, the Insight.

No other luxury car brand has even whispered about adding a hybrid-electric vehicle to its lineup, because the cars simply seem at odds with the statement that luxury vehicles make. But Clements sees it otherwise. “For Lexus, this is a real statement about technology,” Clements said. “We’re saying that you don’t have to sacrifice performance to be environmentally friendly.” His face lights up when he talks about the RX 330’s potential. “It’s huge. We think nobody knows how good this vehicle is,” he said. With its combination Lexus engine and 650-volt electric motor, it will go from 0 to 30 mph “right now” and 0 to 60 mph “incredibly fast,” Clements said. Moreover, it will earn 38–40 mpg in city driving, twice what the gasoline-powered RX 330 achieves.

But will Lexus customers be interested? Bob Lutz at GM doesn’t think so, dubbing this hybrid and all of Toyota’s other environmental efforts a PR campaign. Detroit auto companies delight in statistics that show Toyota’s fuel economy has dropped in recent years because it has added more SUVs to its lineups, even as it promotes the Prius hybrid. But Clements is convinced his well-heeled customers will want a hybrid too. “This is not a decision anyone took for the hell of it,” he said. He believes the RX 330 will appeal to the same kind of customers who were willing to take a chance on Lexus in the first place. The RX 330, like the Camry, like all vehicles across Toyota’s lineup, is meant to be a statement from Toyota of what it can offer its customers, said Press. “We are there so that we can fulfill our mission from each car individually, instead of making all kinds of trade-offs,” he said. “If you’re driven by the customer, you know that they want good quality and value. They want to get on the freeway, and feel their car go when they push the throttle down.”

Press says he’s frustrated by critics who deride the Camry as uninspired, a particular criticism of the latest version of the car, introduced in fall 2001. Though it remained the country’s best-selling car into 2003, Camry has suffered in comparison to the 2003 Accord, whose ride is stiffer than Camry’s and closer to that of a Volkswagen Passat. Some customers have complained that the Camry, which cost the company 25 percent less to develop than previous cars, is less Lexus-like these days than its predecessors and that the company cut some corners. Dana Hargitt, who took charge of the American side of the Camry’s development, is naturally sensitive to that, contending that the Camry is a smoother car with more room inside than Accord, whose ride he considers to be harsh.

Press draws another analogy. “It’s like a classic suit versus an Italian suit,” he explained. “You might buy the Italian suit and it might look great when you buy it, but you take it out three years later, and it looks old-fashioned.” Likewise, Press said, the Camry meets customers’ needs but doesn’t overreach. “The core Camry customer really doesn’t care if they can corner at 80 or 90 mph—they corner at 60 or 70 mph,” he said. He sees a parallel between Toyota and classic retailing brands like L.L. Bean and Lands’ End, whose catalogue offerings evolve to reflect trends that take hold among consumers. These retailers add Capri pants and thong sandals as they sense their customers want them, but they never abandon the bathing suits, parkas and hunting gear that comprise the core of their catalogues. Like them, Toyota feels comfortable broadening its line to include vehicles like the Lexus SC 430, or its upcoming lineup of Scion automobiles, aimed at the industry’s youngest and hippest consumers. But it will never abandon its basic mission, which the Camry represents. “That’s us. America, the mass of us, that’s us,” Press said. “As the lifestyles and needs of the customers move, the Camry will move with them. It’s a brand. It’s a van, it’s an SUV, it’s a sporty car, a sedan, a luxury car. The name Camry will always be there. It may not always be the volume vehicle that it’s been, but it will be there.”

Press claims he is delighted to see his competitors spice up their lineups with all types of flavors, from the speedy Accord to the trendy Altima, hoping to end Camry’s dominance. He just wants them to remember one thing: “Our strength is that we make a
ton
of vanilla,” he said.

CHAPTER SIX

THE CHALLENGER

WHEN CARLOS GHOSN APPEARS
at a Nissan news conference, he’s almost always alone on stage, in front of a plain screen bearing the Nissan logo. Occasionally, a new vehicle shares the spotlight. But whatever car or truck the company is promoting that day generally takes second billing, for clearly Ghosn is the show. With his hawklike face, and dark, sweeping eyebrows, Ghosn (pronounced “GO-nn”) is the mastermind of Nissan’s aspirations for the future, which are already taking root just four years after Ghosn arrived in Japan from the French automaker Renault to rescue the torpid company. His task seemed impossible, for Nissan in 1999 was deluged with debt, its operations an organizational mess plagued by interlocking holdings in suppliers, who themselves were struggling, its culture lethargic. Moreover, Nissan’s lineup was confused, with both mundane cars and halfhearted attempts at bold styling on vehicles whose reliability and quality clearly lagged that of Toyota and Honda. Nissan seemed destined to be constantly overshadowed by its competition. What’s more, few people outside of Europe had ever heard of Ghosn, whose name, which is of Lebanese origin, was constantly mispronounced. But Ghosn, as it turned out, was not to be underestimated.

His comeback plan has been marked by two elements: a flood of aggressively styled cars, trucks, minivans and SUVs that are intended to give Nissan a definable niche in the auto market, and a financial strategy aimed at restoring record profitability. Both have come about with breathtaking speed and resounding success. The cars, plus the company’s dramatically improved financial performance and Ghosn’s bold personality, have made him a celebrity in the automotive world, especially in Japan. Wherever he goes now in Japan, whether Tokyo Disneyland with his family, or a company event, he attracts a sea of admirers. Some approach bearing copies of his autobiography,
Renaissance
, which remained atop the best-seller list in Japan for more than a year. Others bring the Japanese comic books, called
manga
, that dramatically depict Ghosn’s life story. His reputation for relentless work has prompted the Japanese press to dub him 7-Eleven (after the 24-hour convenience stores). Journalists flock to hear his utterances. The news conference held by Nissan in the spring of 2002 to announce the completion of its recovery plan was typical: Ghosn stood by himself before an auditorium crowded with Japanese, American and French journalists and even a television crew from Lebanon, his parents’ home country. It is the kind of notoriety that some car executives have basked in and taken pains to cultivate, sometimes to the detriment of the job at hand. But Ghosn keeps his intense focus. Supremely confident, some might say to the point of arrogance, he is not a man known for wasting words or for entertaining small ambitions.

Having stabilized the company, Ghosn’s next goal is to return Nissan to the upper tier of Japanese manufacturers, making it the equal once again of Toyota and Honda. That might be daunting enough, given the benchmark that those two companies have set for quality, reliability and durability. But long-term, Ghosn’s reach is even more formidable. He wants Nissan and its French partner and savior, Renault, to become one of the world’s top-ranking automobile companies, not only in reputation but also in size. He wants Renault and Nissan combined to sell 8 million vehicles a year worldwide by the year 2010, which would make it twice as big as the combined companies were when they began their alliance in 1999—and a rival in size to Toyota and General Motors. While he admits such a goal is audacious, he refuses to say it is out of reach. “I don’t think about stumbling,” Ghosn said in an interview in his office in one of Nissan’s two headquarters buildings in the Ginza section of Tokyo. “This is not something that I consider. I simply don’t give it too much thought. The only thing I’m saying is, judge us on the performance that we are delivering.”

When Ghosn arrived at Nissan in spring 1999, the automotive giant was drowning after a 10-year decline coinciding with the downfall in Japan’s economy. Despite having turned in some of the industry’s most distinctive designs over the years, most notably the Z sports car, and having created a global manufacturing empire that stretched from Japan to Europe to the United States, Nissan was saddled with $22 billion in debt and a hopelessly tangled bureaucracy. Though Nissan was the first of the major automakers to begin production in Japan in 1933, it had lately been eclipsed by its far younger and spunkier competitor, Honda, which pushed past it to become the second-biggest automaker in Japan. The best and brightest graduates of Japan’s universities, who used to choose Nissan because its design-focused culture was far less rigid than Toyota’s manufacturing-based approach, were passing the company by. Nissan had been reputed to be in play by the summer of 1998, and speculation was rife within the company that a takeover was looming. “We all got it second- or thirdhand,” recalled Jed Connelly, senior vice president in charge of Nissan’s U.S. sales operations. “We heard DaimlerChrysler, we heard Ford.”

In fact, DaimlerChrysler was the company’s most serious suitor, but the negotiations fell apart in March 1999, after German executives had spent months vetting the company as the potential player in Asia that would broaden the newly created auto giant beyond the United States and Europe. The rejection was not a surprise to Nissan, but it was a slap in the face for DaimlerChrysler’s creator, Juergen Schrempp. He had argued heatedly in favor of acquiring a stake in Nissan in the face of opposition from every other company board member, particularly the American officials who had so willingly combined forces with Schrempp less than a year before. Finally giving in to the wall of resistance, Schrempp flew to Japan himself to deliver the bad news, a sign of respect that helped Nissan save face. DaimlerChrysler ultimately turned to Mitsubishi Motor Corp. as its Japanese partner, which also had deep financial problems that were time-consuming, although not as extensive as those at Nissan. (After Nissan’s turnaround had been achieved, the joke around Tokyo was that DaimlerChrysler had chosen the wrong sick Japanese auto company as its partner.)

Fortunately for Nissan, a second suitor was already waiting at the door when DaimlerChrysler walked away—Renault. It was Ghosn who began bugging fellow managers as early as summer 1998 to consider a bid for the struggling Japanese company. But he met with resistance, because mergers were a touchy subject at Renault. It had made a deal to combine forces with the Swedish auto company Volvo in 1992, only to see the arrangement drown in red tape and political outcry in both France and Sweden. Renault’s quiet but focused chief executive, Louis Schweitzer, still hungered for a partnership that would help Renault grow beyond Europe. Pushed by Ghosn, he held negotiations with Nissan even though it looked as if Nissan’s discussions with DaimlerChrysler would culminate in a deal with the German company. Within weeks of the collapse of the DaimlerChrysler talks, Schweitzer was able to reach an agreement with Nissan on a deal in which Renault would contribute $5.4 billion in cash to help shore up the Japanese auto company’s finances and provide management talent to run the place. Ghosn was named as Nissan’s president and second in command in April 1999, shortly after his forty-fifth birthday. The deal came as a complete shock to Connelly and other Nissan executives in the United States. “Renault was not on our radar screen, because they had not been in the United States for a long period of time,” Connelly said. Renault, in fact, had stopped selling cars in the United States in the early 1990s, after it sold its stake in American Motors Corp. to Chrysler in 1986, a deal that had also sparked opposition within Chrysler’s management ranks. (In fact, that deal sent Chrysler into a tailspin that pushed it close to bankruptcy in 1989 for the second time in a decade, forcing then-CEO Lee Iacocca to implement his own recovery plan.)

Ghosn had arrived at Renault in 1996. He had come over from the tire maker Michelin, joining Renault as the highest-ranking executive ever to be brought on from outside the auto company’s generally closed ranks. As unusual as that situation was, so was Ghosn’s background. Truly a product of a global society, Ghosn was born in Brazil in March 1954 to Lebanese parents. His mother, Rose, had dual Brazilian and French citizenship and his father, Jorge, also held a Brazilian passport. When he was 11, his mother moved with her brood of four children back to Lebanon, a not-unusual situation among the families of Lebanese men who moved abroad to advance their business interests. His father remained in Brazil, where he ran an airline consulting business. But he made frequent trips back to Lebanon to visit the still-growing Ghosn family (Carlos’s parents had two more children despite their distance). Ghosn gained a reputation as something of a scamp in Catholic school, where he loved to pull pranks on his fellow students and was frequently called on the carpet by the priests. He was an undeniable car buff, too. The comic book that tells his life story depicts an 11-year-old Ghosn, blindfolded and with his back to the road. A playmate asks him to identify an oncoming car by sound alone. “Cadillac Eldorado,” he declares. “Bingo!” says his friend.

Cars were part of his fascination with America, something that many youngsters in Europe and the Middle East shared at the time. And when it came time for college, he considered MIT, and in fact traveled to the United States in 1976 to tour the country during the bicentennial year. But Ghosn ended up in Paris, at the topflight École Polytechnique, and subsequently advanced to the École des Mines for a master’s degree and the preliminary work on a doctorate. It was here that he crossed paths with François Michelin, scion of the family-held tire company. The company had expanded its operations in Brazil, where it operated two rubber plantations, and executives were looking for French-trained engineers who spoke Portuguese.

Tipped off about Ghosn by a friend of his sister’s, Michelin himself took Ghosn under his wing, promising him an eventual assignment in Brazil if he would take charge of a factory in France. Ghosn agreed. There Ghosn, at age 26, supervised 700 workers; back in Brazil, he tested out some of the efficiency ideas that would eventually mark his reputation. Within three years, Michelin’s South American operations were among the company’s most profitable, and in 1988, Ghosn, then 34, was promoted to run Michelin’s North American operations, based in Greenville, South Carolina. Among his first encounters was with a company executive named James C. Morton, who oversaw a variety of functions, including the selection of sites for Michelin plants. When Ghosn arrived, the first thing people commented upon was his youth, Morton said. Within weeks, that was replaced by a buzz about his relentless energy. “He always demanded a level of respect, and he controlled the situation. I’m seven years his senior, and after a while, I never even thought about [the age difference],” said Morton.

Ghosn’s duties in the United States included supervising production at Michelin’s factories, whose costs he attacked with the same fervor he had shown in Brazil. Then, in 1990, he oversaw Michelin’s acquisition of Uniroyal-Goodrich, a merger that took painstaking months to complete and still more time to integrate the companies’ factories. But Ghosn relished the assignment and developed a deep fondness for Greenville, where he still owns the home in which he and his wife, Rita, also of Lebanese descent, lived with their four children. They made dozens of friends in the area—Rita frequently cooked Lebanese food for company gatherings—and might have stayed in the United States much longer. But Ghosn, after finally completing the merger, was told in 1996 to return to Michelin’s French headquarters. By this point, Ghosn was open to alternatives elsewhere in the auto industry, preferably at a major manufacturer instead of a supplier. When a headhunter called to ask whether he’d consider a job at Renault, he was receptive. He eventually accepted the No. 2 position.

As at Michelin, it did not take long for Ghosn to make an impression. Under the studious Louis Schweitzer, Renault’s sales and market share had grown thanks to a lineup of vehicles such as the small, spunky Twingo (its name a combination of twist and tango) and the Megane sedan. They were aimed at Europe’s burgeoning group of Generation X first-time car buyers. But the company’s costs had soared, and the government, meanwhile, was in the process of selling off its shares in what had been a partially state-owned company. In 1996, Renault faced a $1 billion loss, its first loss in 10 years. Upon arriving, Ghosn immediately set off through Renault’s automotive and parts plants, combing through its manufacturing processes and delivery systems for ways to save money. He declared he wanted savings of 20 billion francs over the next three years (the equivalent of nearly $3 billion, a large sum at what was a medium-sized player). The proposal included the unthinkable: Renault would close its manufacturing plant in Vilvoorde, Belgium, resulting in the loss of 3,500 jobs. The action enraged Belgian workers, who immediately went out on a wildcat strike, flooding the streets around the factory and picketing Renault’s offices. The French company was accused of making the Belgians pay for cuts it would not make in its home country, and Ghosn was dubbed “Le Cost Killer.” The furor eventually died down, and the pain of the cutbacks was offset by the profits that Renault posted in 1997 and 1998. At the same time, Renault scored a huge hit with the Megane Scenic, the first of Europe’s mini-minivans, which Ghosn touted as proof that Renault could spin its car platforms into other vehicles. Scenic was years ahead of its competition and had attracted 300,000 buyers before GM introduced its own version, the Opel Zafira. Ford executives, incredibly, doubted that the category would bear fruit. Despite the urging of its designers, Ford originally chose not to join the fray (a much-regretted mistake: the category now has sales of 1 million vehicles a year in Europe). The successes at Renault gave Ghosn substantial clout inside Renault, enough that Schweitzer was convinced to gamble on a stake in Nissan at his recommendation. As the Nissan deal was taking shape in the spring of 1999, Ghosn seemed like the logical person to send to Japan. The stakes, however, were bigger than any challenge he had faced in the past.