Detroit on Life Support

Will the Big Three become the Small Two?

Iack in 1994, Paul Ingrassia wrote a book, with coauthor Joseph B. White, about the American auto industry. Its title, Comeback, pretty much says it all. Comeback was a gossipy, insidery account of Detroits boardroom wars of the late 1980s and early 90s, which ended with the bad guys kicked out, a new breed of CEO taking charge, and the Big Three once again on top of the world.

What, I wondered, did the Washington Monthly think of all this back in the day? So I dug into the archives and took a look. James Bennet, who is now editor of the Atlantic but started his career at the Monthly, reviewed Comeback in 1994, and it turns out he was properly skeptical. “It is too much of a leap,” Bennet wrote, “to conclude that Detroit has regained the lead, as the packaging of this book suggests, perhaps in hopes of drawing a wider readership.” After all, the auto industry had looked publicly robust before, even as it was getting sicker on the inside. Was it possible that a strong yen was just hiding all the usual Detroit pathologies once again?

We all know the answer to that question now, so kudos to Bennet for getting it right fifteen years ago. But how about Ingrassia? His latest chronicle of the industry is called Crash Course, and once again the title says it all. So does Ingrassia get it right this time?

I wont make you wait for the answer: its impossible to say. This time around Ingrassia takes a studiously descriptive approach to his subject, willing to forecast neither doom nor gloom nor anything in between. “Predictions are perilous,” he admits at the end, and thats about all the fortune-telling we get from him.
T he financial crash of 2008 will likely be remembered as the crisis that launched a thousand books. Crash Course is one of them, and it bears both the strengths and weaknesses of the quick-turnaround genre. Its biggest weakness is pretty much what youd expect: its brief, it covers a lot of ground with tick-tock prose, and it never takes us very far below the surface.

But that weakness is also its strength. Ingrassia never lets the plot slow down, and his just-the-facts-maam style makes this a terrific primer if you want to bone up on Detroits first hundred yearsas well as its final six monthsbut dont want to spend all day doing it. Crash Course, to use a metaphor that Ingrassia might or might not take as a compliment, is a Corvette of a book.

The stars, of course, are the Big Three, with various German, Japanese, and Italian car companies playing supporting roles along the way. And there are villains aplenty. Shortsighted executives more interested in personal perks and glitzy mergers than they were in designing cars that people wanted to buy. Union leaders living in an alternate universe where lofty wages, insane work rules, and gold-plated benefits could go on forever. Wall Street bankers who helped turn auto finance companies into subprime mortgage casinos. State legislatures who coddled contribution-rich auto dealers and obstructed any kind of rational brand management. And, of course, gasoline prices.

By the late 90s, the Big Three had essentially turned their businesses into giant hedge funds with only one hedge: that the price of gasoline would stay at a buck a gallon forever. In 2004, after oil prices had doubled in the previous two years, one of GMs executives told CEO Rick Wagoner that the company might be relying too much on trucks and SUVs. Wagoner refused to listen: GM had been the last company to cash in on the truck boom of the previous decade, and he was determined not to make that mistake again. The next year, with gas prices soaring in the wake of Hurricane Katrina and SUV sales plunging, GM forged ahead with the launch of yet another new line of full-size behemoths. By that point, with their product pipeline otherwise dry and a cost structure that made it impossible to make a profit on small cars anyway, they hardly had a choice.

Chrysler, meanwhile, with its focus on big trucks, was in equally bad shape. Not only were their small cars unprofitable, but they had harsh rides and cheap-looking interiors thanks to cost-cutting measures imposed by their bosses at Daimler years earlier in an effort to nurse them back into the black. The belt tightening worked temporarily, but by 2007 they were no better off than GM. Worse, maybe. That year Daimler finally cut its losses and sold off Chrysler to a private equity firm that knew a lot about financial engineering but not, as it turned out, very much about either mechanical engineering or labor relations. Things continued to go downhill.

By the time the economic meltdown of 2008 hit, Chrysler and GM were already on a knife edge. Only Ford was in decent shape, but even there its hard to judge how much of that was good planning and how much was just luck. Its true that by 2008 Ford had gotten itself a new CEO and made some of the tough decisions GM and Chrysler had avoidedselling off weak subsidiaries, for example, and raising enough money to fund a multiyear turnaroundbut that was largely because they had had their near-death experience a couple of years earlier. In a sense, they were in the worst shape of the three, but that turned out to be a lucky break: it forced them to clean up their company before the financial storm of 2008 hit.

The size of that storm was almost beyond belief. One of the continuing characters in Crash Course (along with a Chrysler dealer in South Paris, Maine, and an autoworker in Belvidere, Illinois) is Mike Jackson, head of AutoNation, the countrys biggest chain of auto dealers. Ingrassia describes the events of September 2008 through his eyes:

No event since World War IInot the JFK assassination, not the attacks of 9/11, nor anything elsehad caused such a quick collapse in car sales as the Lehman bankruptcy. For the first half of the month, sales were running at an annual pace of 14 million vehicles, which wasnt great but was bearable. But from September 15 onward the sales pace dropped another 30 percent, to under 10 million vehiclesthe lowest level in nearly 30 years.

Still, Ingrassia makes it clear that, big as it was, the financial meltdown didnt cause the Big Threes problems, it only exposed them more plainly. They would have been in deep trouble, heading toward Chapter 11 proceedings, regardless. But the auto industryand GM especiallynever really believed that. Even in 2009, after one round of bailouts and with a second on the way, they remained in denial. Steve Rattner, the Wall Street investment banker Barack Obama tapped shortly after his inauguration to head up his auto task force, quickly concluded that GM “might be the worst-managed company he had ever seen.” But GMs CEO, Rick Wagoner, who had overseen $70 billion in losses since 2005, a money-losing debacle with Fiat, and plummeting market share during his tenure, was still stunned when Rattner asked him to resign as a condition of securing the second round of bailouts. All he could think of to ask was, “Are you going to get rid of Ron Gettelfinger, too?”referring to the head of the United Auto Workers union. Rattner was dumbfounded by Wagoners response. Later, he was equally dumbfounded when GMs board, demonstrating a seemingly inexhaustible sense of loyaltyif not the same amount of common senseerupted in anger at his request. As late as March 2009, they were still convinced that Wagoner had done everything he could and was just a victim of bad luck.

So was the bailout a good idea? Rescuing GM was never in doubtit was simply too big to be allowed to fail in the midst of an already deep recessionbut Ingrassia reports that Chrysler was a close call. As well it should have been: worldwide auto production capacity in 2008 was about 94 million vehicles, compared to worldwide demand of about 60 million. Even when the economy rebounds, the world is going to be awash in both auto factories and auto companies, and something is going to have to give. Chrysler looks to be a pretty good candidate.

Thats especially true since, even after an eleventh-hour makeover for Ford and Chapter 11 proceeding for GM and Chrysler, Detroit has hardly rid itself entirely of its pathologies. The UAW may have finally agreed to do away with the infamous Jobs Bank, which guaranteed workers 95 percent of their wages even when they were laid off, but their thousand-page collection of work rules remains mostly intact. Likewise, even though GM got rid of Oldsmobile in the early 2000s, it still retains far more brands than it needsall of them tiny players on the global stage except for Chevrolet and Cadillac. And Ford, which declined government help and avoided bankruptcy, also avoided the opportunity to restructure its debt load.

In other words, its probably not over yet. A couple of years from now, the Big Three may end up becoming the Big Two despite billions of dollars of taxpayer largesse. Except they wont be all that big anymore: Toyota passed both Chrysler and Ford in U.S. sales several years ago and is now nipping at GMs heels, while Honda and Nissan continue moving up the league tables as well. No matter what happens, the future of cars in America isnt likely to involve a Big Three. Itll be a Big Sixor a Big Fiveand Detroit will no longer be its center of gravity.

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