Changing of the Guard

Lately we've all been so busy following the woes at General Motors (NYSE: GM  ) and Ford (NYSE: F  ) that it's been easy to forget there are a few companies doing fairly well in the auto industry. Especially since they happen to be based outside the U.S.

As GM and Ford slumped the last few years, Nissan (Nasdaq: NSANY  ) experienced a dramatic turnaround under Carlos Ghosn, while Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) have recently reported that their sales remain strong.

As only the third-largest producer in Japan, Honda still has plenty of room for growth and looks on track to set its fifth straight year of record profits. Yesterday, the company announced that it expects to sell 3.35 million cars for 2005, which, at 5% ahead of last year's sales total, would be a record high. In addition, profits are now expected to be $4.2 billion, which would also be a record.

But perhaps the biggest news floating around the auto industry today is that Toyota is likely to displace GM as the world's largest manufacturer of automobiles in 2006 or 2007. Toyota plans to manufacture a little over 9 million cars next year, which is about on track with what GM should manufacture this year. However, given that GM's sales are in decline and have yet to show signs of stabilizing, the logical conclusion is that Toyota will pass GM in the near future.

As a consumer in the market to purchase a car, I'm not surprised at Toyota's success. Before moving to Tokyo a few years ago, I reluctantly sold my Honda Accord because I wouldn't be getting much use out of it on the other side of the globe. After living in Japan for a couple of years, I became acclimated to public transportation and all of its pros and cons. Since returning to the U.S. earlier this year, my wife and I have been able to use public transportation to satisfy most of our needs. But since returning, we've found that there are times when a car is still necessary even when you're based in a very urban area of the U.S., so once or twice a month we rent a car for about $50 a day.

As we've found ourselves occasionally renting a car for a third or fourth time in a month, we're considering purchasing a new car and are exploring what our options are. Since we're renting cars on a regular basis already, we've used the rentals as an opportunity to try out a number of cars from multiple manufacturers. We've tried large cars, small cars, and on occasion, even an SUV or two. We've consistently come away more impressed with the offerings from the foreign manufacturers than those from American manufacturers (although there are a couple of Ford products that we enjoyed). That's not to say that American cars haven't improved and become much more reliable, but many of the offerings still have a way to go before they're competitive with the designs of the foreign manufacturers.

In fact, the biggest surprise from driving so many different cars in the last six months is the improvement in the offerings from Korean manufacturers Hyundai and Kia, which have both long been considered cheap for a reason. This is particularly true when you consider how much performance a Hyundai or Kia vehicle delivers for the price. In a few years, I wouldn't be surprised if it's Hyundai causing Japanese manufacturers fits, but for now, Toyota, Honda, and Nissan are doing extremely well, and there's no immediate sign that things will change.

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NathanParmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.


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