The great American comeback

The mighty US auto industry, which for much of the past 15 years lurched from one crisis to another, is once again vying to become the symbol of America's economic dominance.

Detroit's Big Three - Ford, General Motors and Chrysler - had been fighting a rearguard action against the onslaught from Japanese manufacturers. The battle was similar to that played out in Europe, where carmakers had to adapt or die. But America, the world's biggest single car market, is the most fiercely competitive and the fight was all the more painful.

Unlike in the UK, where car-makers either collapsed or became dissolved into larger corporations, the Big Three staged a comeback and retained their independence.

The failure of US companies to comprehend the Japanese threat earlier is one of the great lessons of business strategy. The Japanese were aided by the 1973 oil crisis, which increased demand for more fuel-efficient cars. But their biggest help came from the lofty arrogance of their US competitors, which enabled the Japanese to build market share by stealth. The smaller, low-cost cars made by Honda and Nissan were initially disregarded, despised even. Often badly built, their cars were seen as little threat to the gas guzzlers from Detroit. In 1965, General Motors commanded 50 per cent of the domestic market, whereas today it is 33 per cent. Japanese car sales account for 23 per cent of the US market.

It was not until the early Eighties that the Big Three realised major surgery on their operations was needed to survive. A massive attack on overstaffing coupled with a drive for efficiency and investment in new models was launched. A Japanese-like concentration on leaner, more efficient production methods was made. US car-makers began to reduce their dependency on the domestic market. As one US car executive said: "We have learnt the art of continuous revolution.''

Chrysler, which twice came close to collapse, is to spend $25bn on new models and improvements. Ford is undergoing massive change to become a global company by streamlining operations. GM has just completed a two- year overhaul, which has included selling off non-core operations and reducing investment stakes in other businesses.

There are storm clouds on the horizon, such as the effect on consumer confidence of yet another rise in US interest rates. So far, the US recovery has been robust enough to shrug off the rises, but the doubters say the market has reached its capacity to withstand much more.

There has also been no let-up in the competition from Japanese manufacturers. The recovery of US car-makers has been helped by the high cost of the yen, which has made Japanese imports more expensive. But the Japanese are adjusting by increasing output from their US plants. Furthermore, European manufacturers are opening car plants in the US, presenting their biggest challenge to domestic producers for many years.

By forcing the Big Three to restructure, the Japanese challenge proved both the problem and the solution for the US carmakers. As the future of Chrysler waits to be decided, there is no doubt that US car-makers are at their strongest for 20 years.