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Iacocca steering Chrysler past small-car market to upscale lane

When it comes to small cars, Lee Iacocca thinks he has a better idea: Let the Japanese make them. Chrysler has not yet boarded up its small-car factories. But all American automakers are facing an unpleasant dilemma: Can they compete with Japan in selling small cars? And if not, can they afford to abandon the market to the Japanese?

In the short term, at least, the answer to both questions is no. The three big car companies are taking different tacks in the brutally competitive and unprofitable small-car market. Chrysler has ``ceded the low end of the market to the Far East,'' Mr. Iacocca said in Tokyo Wednesday. General Motors seems to be in the small-car market to stay, as does Ford -- though more tentatively.

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In the past, Iacocca has lobbied on television and on Capitol Hill against allowing more auto imports into the United States. He tried to stop GM and Toyota from joining forces by filing an antitrust suit against them for setting up a joint venture in Fremont, Calif.

But last Friday, Iacocca dropped the suit and three days later announced that Chrysler and the Japanese automaker Mitsubishi were setting up a joint company to produce small cars. And Wednesday Chrysler may have signaled a further retreat from making its own small car: Iacocca announced that Chrysler's high-tech Liberty Project would not produce a subcompact car to compete with the Japanese head on.

American companies ``are gradually getting out of the small-car business,'' says Malcolm Salter, a professor at the Harvard Business School. ``The real battle is in mid-sized and large cars. It's a pattern that you're seeing, and Chrysler is just falling into line.''

The profit margin on US small cars is just too small, especially next to the Japanese product. Data Resources Inc., an economic forecasting firm, estimates that Nissan could lower the suggested retail price on its Sentra by 21 percent and still make a profit. By contrast, says Edward Sullivan, a senior economist at DRI, Chrysler's Horizon is making about $100 profit; Ford's Escort is barely breaking even; and GM's Chevette is losing money.

But the US can't leave the lower rungs of the market unattended, because Japan can, and will, move up, Mr. Sullivan says. ``The baby-boomers are coming of age, and as they mature into affluence, the Japanese are going to move into this more profitable market.''

DRI figures that the price on mid-size cars like the Nissan Maxima and Toyota Cressida could be reduced 43 percent. Since it doesn't cost much more to make a big car than a small car, he says, the Japanese can apply their small-car advantage to an upscale fleet.

US companies may want to continue to produce small cars for another reason: More than half a billion dollars' worth of fines. Under the corporate average fuel economy (CAFE) requirement, the fuel efficiency of a company's fleet of cars must average 27.5 miles per gallon by 1985. Chrysler and all of the Japanese companies are meeting the standard. But GM and Ford, which sell a heavier mix of larger and thirstier cars, could incur fines of $500 million and $150 million in 1986, the Department of Transportation estimates. That would represent 11 percent of GM's profits in 1984 and 5 percent of Ford's profits. GM and Ford are trying to get the standard lowered to 26 miles per gallon.

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Harry Mathews, an automotive specialist at the consulting firm Arthur D. Little, thinks US companies are biding their time. ``Most companies and analysts believe that Americans don't want small cars because they're less safe and comfortable. They don't want to take positions until they know what direction Americans will go.''

Chrysler may be more willing to leave the market, he says, because it ``must be careful with its resources. It can no longer be a full-line producer, so it's looking for niches that sell well.''

So Chrysler may be handing over the reins to Mitsubishi. Starting in late 1988, their joint company hopes to turn out 180,000 cars. Mitsubishi will design the car and run the daily operations in the plant.

Chrysler reportedly does not plan to build its Omni-Horizon line after 1987. But it has asked Mitsubishi to triple its deliveries to the US, from 87,000 autos this year to 287,500. Chrysler markets Mitsubishi cars under the Dodge and Plymouth names and is raising its share in the Japanese company from 15 percent to 24 percent.

Iacocca's announcement Wednesday that the Liberty Project, a high-tech plan to build a small car at costs similar to the Japanese car, would not produce a Liberty car ``per se'' created havoc for Chrysler's news department. Spokesman Baron Bates later said that the company never had a specific car in mind but that the technology and management techniques developed in the project would be used in all Chrysler plants. Auto industry analysts who saw a working model of a car linked to the project last month said they thought Iacocca's statement showed a major shift in strategy.

Analysts say GM is in the small-car business to stay. It is importing and distributing Japanese cars through its ties with Isuzu and Suzuki and through its joint venture with Toyota. But it is also launching a $5 billion project to meet the Japanese head on. With new technology and new labor relations, GM's Saturn Corporation hopes that by 1988 it will be turning out a subcompact as cheap to build and of as high a quality as Japanese models.

Ford is still in the ring but may eventually get out of producing its own small cars, analysts say. In December Ford and Mazda announced they plan to build 240,000 cars a year jointly in Flat Rock, Mich., starting in 1987. Mazda will design the car and run the plant.

Still, Americans simply like Japanese cars: Last year, even with ``voluntary'' restraints, 19.6 out of every 100 cars sold here were were Japanese. Arthur D. Little auto analyst Nancy Gardella figures that by 1987 Japanese cars will have 32 percent of the market.

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