Dear Detroit:

May 5, 2003
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Kudos to Detroit. And at the same time, a caution.

First the praise. When the economy was hit with paralysis following the Sept. 11 terrorist attacks, no one can say that U.S. automakers didn't do their part to get things moving again. They were acting in their own self-interest, of course. But this looks like one of those cases in which what's good for General Motors, in fact, does turn out to be good for the country.

When GM rolled out interest-free vehicle financing a few days after the attacks, other U.S. car makers were forced to follow suit. The result: Consumers opened their wallets. And how!

October was the biggest month of all time for U.S. car sales, which helped stoke overall retail sales to a heady 6.4% growth rate, after a 2.4% decline in September. The auto industry's 0% interest rate deals did what Congress failed to do--provide a major spending stimulus just when the economy needed it most. Indeed, the U.S. auto industry's aggressive, post-Sept. 11 price competition will be "one of the key factors getting us out of the recession," according to Diane Swonk, chief economist at Bank One, who was quoted recently in The New York Times.

On the flip slide for the automakers, of course, the 0% deals put the squeeze on profits. And if sales of U.S. vehicles drop off sharply after the incentives are withdrawn, as some analysts fear, things could get nasty for the Big Three.

Now for the caution. In the months ahead, as U.S. car makers take whatever steps they deem necessary for self-preservation--be that layoffs, employee benefit reductions, plant closings or other cost saving measures--they best keep a close eye on the quality and reliability of their products. Putting the screws to suppliers for price reductions may save money in the short run, for example. But in the long run, it could take a toll on quality, as suppliers--concerned with their own bottom lines--scale back on their own continuous improvement efforts.

Even though U.S. car makers have made notable improvements in quality, they are still about two years behind their Japanese competitors, says Brian Walters, director of product research for J.D. Power and Associates.

The firm's research shows that in 2001, U.S. buyers of domestic nameplate vehicles reported 153 problems per 100 vehicles during the first 90 days of ownership. That's down from 164 problems in 2000. But Japanese vehicles sold here, by contrast, were at 163 problems per 100 vehicles in 1998, dropped to 144 in 1999 and came in last year at 135, Walters says. European nameplate vehicles sold in the U.S. also lead the domestics, at 141 problems per 100 vehicles in 2001.

On average, the auto industry as a whole has improved its quality by 5% every year for the past 10 years, Walters says. "So just maintaining your quality at the same levels you have historically is not good enough," he points out.

It's a truism by now, but one that bears repeating: When it comes to quality, particularly in a global market like autos, standing still is a losing proposition. The Big Three had better keep that foremost in their planning. If they don't, there could come a day when even 0% financing won't make much difference.

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