You've seen the commercials, and now the numbers are beginning to confirm it: The Detroit automakers are back.
But there's another trend in the auto industry you won't see advertised on TV: The surprising stall of Toyota and Honda, which for two decades could seemingly do no wrong.
The two Japanese giants, once considered leaders in quality, innovation, and profitability, are now struggling with falling market share, blasé models, and a clay-footed response to feisty competitors. To some extent, Detroit's comeback is a byproduct of troubles at its two once-formidable rivals. "Ten years ago, Toyota and Honda had the lead and everybody else was behind," says Dave Sargent of J.D. Power & Associates. "That gap has narrowed to pretty much nothing."
Both automakers endured a setback from last year's earthquake in northern Japan, which severely disrupted supply chains and left shortages of several models just as car sales were starting to pick up in the aftermath of the recession. But with production now back to normal levels, Toyota and Honda are still struggling. Toyota's U.S. market share, 14.1 percent, is 2.9 percentage points lower than it was in 2009, according to data from forecasting firm LMC Automotive. Honda's share, 9.3 percent, is 1.8 points lower than in 2009.
What's striking about those numbers is that the two automakers lost share during a time when General Motors downsized from eight brands to four, Chrysler sputtered along with the most dated fleet in the industry, and Ford, the one domestic automaker that didn't declare bankruptcy or get a government bailout, deeply cut costs while plodding through its own restructuring plan. Instead of seizing turf from their wounded competitors, Toyota and Honda yielded it.
Part of the reason is the sudden surge of other carmakers, such as Korean nameplates Hyundai and Kia, and Volkswagen, which is pushing hard to become the world's biggest automaker. But Toyota and Honda have also suffered from a scourge that besets many successful companies. "They got complacent," says Karl Brauer, CEO of car-research site TotalCarScore.com. "It's ironic that the Koreans and Americans have had to straighten up and fly right, while there hasn't been the same level of pressure at Toyota and Honda. We're seeing the results of that."
Problems at Toyota surfaced in 2009, when a couple of different safety issues mushroomed into the recall of more than 8 million vehicles, several prominent lawsuits and a record fine levied against Toyota by the U.S. government. Even Toyota admitted that it had been too dismissive of customer complaints and too arrogant when regulators questioned its safety practices.
Toyota instituted a broad set of fixes, and those safety problems are largely in the past. Yet Toyota still seems to have been overtaken by upstart competitors it never spotted in the rear-view mirror. Hyundai and Kia have snatched customers from Toyota by building sharp-looking cars that offer great value, especially compared to the conservative stalwarts in Toyota's lineup. The Hyundai Sonata and Kia Optima sedans, for instance, are far saucier than the sedate Camry, plus they undercut it on price. Volkswagen, meanwhile, slashed the price on its Passat family sedan, another car that has cut into Camry sales.
Honda's slippage has been more incremental, with once-bulletproof models like the Civic and Accord losing their luster in a crowded and intensely competitive market. When Honda unveiled the redesigned Civic last year, for example, reviewers found the styling dull, the interior Spartan, and the technology unimpressive. While top competitors such as the Ford Focus and Hyundai Elantra had moved up to advanced six-speed automatic transmissions, Honda cut costs by sticking with an older five-speed.
Reviewers used to give Honda the benefit of the doubt, but this time, they howled. In the U.S. News & World Report car rankings, for example, the 2012 Civic ranks a mediocre 25th out of 41 compacts. Consumer Reports even dropped the Civic from its recommended list.
While Toyota and Honda were napping, General Motors and Chyrsler took advantage of debt writedowns, renegotiated union contracts, and other benefits of bankruptcy to invest heavily in new models, which is now starting to pay off. Detroit practically ceded the small-car market to the Japanese in the 1990s and 2000s, but has lately impressed reviewers with new bantamweights like the Chevy Cruze, Chevy Sonic, and forthcoming Dodge Dart. Ford hit the mark with its Fiesta and Focus compacts, and has dazzled reviewers with the new Fusion sedan, coming later this year. Meanwhile, the other Japanese carmakers—Nissan, Mazda, and Subaru—recovered more quickly from last year's earthquake, and they've picked up market share over the last few years.
Toyota and Honda aren't down for the count, however. Toyota CEO Akio Toyoda has pledged to build "more exciting" cars, with a new version of the Toyota Avalon and a new Scion sports car showing more aggressive styling than in the past. Meanwhile, Toyota continues to enjoy a lead in hybrids, and the expansion of the Prius into a full lineup of vehicles, including a wagon, compact, and plug-in variant, seems to be a success.
Honda has sped up planned changes to the Civic, insisting it will earn back any lost credibility. And the new CR-V crossover has received a much warmer welcome than the Civic. Honda and Toyota both have the automotive talent and other resources needed to once again catch up to competitors, which means Detroit should watch its back. This is one business where somebody's always right behind the leader.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.