They'll Buy Anything We Build

Jerry Flint 06.19.07, 6:00 AM ET

Losing the small-car market to foreign manufacturers was easy. In the past half-century, Detroit never built great small cars or great 4-cylinder motors, never thought of little cars as a profit center and just did not like them. It is understandable how the Europeans first, then the Japanese and now the Koreans grabbed this business.

What is more puzzling is how those foreigners took the top and the middle of the American car market. I am talking about near luxury, the luxury and the ultra-luxury segments--the cars with the big profits. Ever since the demise of marques like Cord and Duesenberg in the 1930s, U.S. manufacturers had little presence in ultra luxury. Yet it was not that long ago that General Motors (nyse: GM - news - people ) dominated the first two luxury groups. Ford (nyse: F - news - people ) and Chrysler (nyse: DCX - news - people ) were never as strong as GM in that part of the business, but they, too, have fallen way behind.

Start at the very top: the $150,000 to $400,000 cars. The market is tiny but important because it represents "the best." Detroit does not have a single entry. Maybach comes from Daimler; Rolls-Royce (other-otc: RYCEY - news - people ) from BMW; and Bentley from Volkswagen. Cadillac displayed a super luxury show car a few years ago, the "16." Everybody seemed to love it but GM, apparently, cannot afford to build it.

A much more important class is the luxury group running $70,000 to $120,000. Mercedes, BMW and Lexus created this modern day luxury segment, a group with few entries from Detroit--and I am being generous by including such models as the Corvette Z06 and the slow-selling Cadillac XLR roadster.

In the 1970s and 1980s, Cadillac was too interested in building sales volume than pushing prices up the luxury ladder. Detroit's leaders forgot that key rule in war: Never let your enemy take the high ground. The Lexus LS, Mercedes S Class, BMW 7 Series and Audi 8 are the victors, while Porsche and Aston Martin will soon introduce four-door luxury sedans. I do not see any signs that Detroit is moving into this space.

Just below the $70,000 level are excellent entries such as the Mercedes E Class, BMW 5 Series and Audi 6 models. Cadillac is attempting to gain ground in this segment but has had limited success. The division's sales are off 7% through the first five months of this year and were down all of last year as well.

It was not that long ago that Ford's Lincoln division outsold Cadillac--for one year, anyway--but that nameplate has been in full retreat. Lincoln killed its sporty rear-wheel-drive sedan, the LS, at the start of the 2006 model year, and has failed to update the big Town Car, which at one time earned the division $1 billion a year, and its newest Lincolns are little more than dressed up Fords with more leather, chrome, trim and sound-deadening material. Early sales numbers for these new Lincolns are encouraging, but they are not C- or E-Class challengers.

The sales numbers tell the tale. Mercedes' total car and light truck sales are 99,000 for the first five months of this year; BMW (not counting Mini) 119,000; Lexus, 131,000; and Nissan's (nasdaq: NSANY - news - people ) Infiniti division, 53,000. Contrast those figures with Cadillac's sales of 81,000 and Lincoln's 61,000.

Most of the best-selling foreign passenger cars are not oversized vehicles, but compact and intermediate models, such as the Mercedes C Class, the Lexus ES and the BMW 3 series. While some of these cars list for $30,000, it does not take much in the way of options to push window stickers into the $40,000 or even $50,000 range. What's more, some of the foreign cars have full lineups, including 4-door sedans, coupes, wagons and convertibles, which increases their appeal to a wider range of buyers. Every American entry that I can think of in this price range comes in only one body style.

Detroit has been in full retreat from this near-luxury segment. Although both divisions also offered some cheaper models, GM's Oldsmobile division once sold 1 million cars a year, while Buick was good for three-quarters of a million units. Now Oldsmobile is dead. Buick's one upper-class car, the Lucerne, is on Consumer Reports' recommended list but has only 32,000 sales in five months. The Chrysler 300 has 51,000, the ancient Mercury Grand Marquis 27,000. One sign of hope: the Cadillac CTS sedan, the replacement CTS, coming this fall, promises sexier styling, a better interior and a high-output V-6.

Foreign rivals are chewing away at the near-luxury market. The Lexus ES has 33,000 five-month sales; the Toyota Avalon, 32,000; the BMW 3 series, 60,000; the Mercedes C Class, 23,000; and the Acura TL, 25,000. Other competitive models include the Nissan Maxima, Infiniti G and Audi 4. Next year Hyundai plans a model with a V-8 option to compete against those cars.

All this is different from the 1960s and 1970s, when American upscale cars were big, beautiful and powerful. Little by little, European manufacturers won over U.S. consumers with vehicles that emphasized ride, handling and engineering. Meanwhile, the Japanese gained market share by offering quality, value and economy.

Money was not an issue in the ‘60s and ‘70s and even in the ‘90s. Then the market turned toward trucks and that is where all of Detroit's efforts went.

I also blame arrogance:

"They'll buy anything we build," was the attitude. Manufacturers made a few half-hearted attempts to produce some cars that a new generation might like, such as the "T Types" from Buick, the all-wheel-drive models from Pontiac and the Lincoln LS. Unfortunately, the financial types on top never understood the importance of investing in and nurturing this part of the business.

By selling uncompetitive small cars, the U.S. companies indirectly helped the growth of nameplates such as Lexus, which offered vehicles for satisfied consumers to aspire to when they were ready to move up from a Toyota Corolla or Camry. Today, this weakness at the upper end of the market leaves Detroit's loyalists few options when they are ready to move on up to the big time.

Of course, Detroit still can make a handsome car: That Chrysler 300, for example, won back some customers but the industry needs a lot more success stories like the 300.