The End of Detroit (28 page)

Economics and trade aside, there is another key reason that import companies are unlikely to come under a substantive attack from Detroit. They have political friends here now. Toyota, Honda, Nissan, BMW, Mercedes, Hyundai and the others have accumulated plenty of supporters who could be expected to look out for their best interests, or who at least would have to remain neutral in any battle with Detroit. When it comes to assembly plants alone, import companies have operations in nine states—Ohio, Indiana, Illinois, Kentucky, Tennessee, Mississippi, South Carolina, Alabama and, soon, Texas. That’s a lot of congressional firepower, and a lot of governors whose states have reaped billions of dollars in investments during the past 20 years. That’s not including states with parts plants, like West Virginia, which has a Toyota engine plant and myriad suppliers and dealers spread across the country. If “all politics is local,” as former House Speaker Tip O’Neill liked to say, then these elected officials will have to remember who is employing the people in their states, even if they have Big Three plants, too. Another factor here is popular support for those factories among workers, business leaders and the like. Said Olson, “We’ve become good corporate citizens. They would come to our defense now and say to Detroit, ‘You will not do that.’”

Nowhere is that more true than in Alabama, where community representatives vowed to stand in the way of any arsenal Detroit might fire at Mercedes, Honda, Toyota and Hyundai, whose plants have made such a difference in the state. High atop a downtown Birmingham skyscraper sits the elegant Summit Club, one of the favorite spots of the city’s business leaders. Below, the lights of the city spread far and wide as a group of the state’s movers and shakers gathered in February 2003 to talk about what the automobile industry had meant to Alabama. Amid drinks and dinner and a lively discussion (which included a lot of joshing about whether Auburn was a “real” university like its rival Alabama), they agreed on two things. One was that Detroit’s market share was bound to keep shrinking as the imports attracted more customers. The other was that the imports could count on the support of Alabama’s congressional delegation, and their counterparts throughout the South, if they ever needed help. The guests ticked off on their fingers the names of the lawmakers who would rise up to defend their newfound friends.

“The American industry has had a chance to adapt,” said Theodore Von Cannon, the Birmingham, Alabama, development official who played a critical role in helping Honda come to Lincoln. “They never got the message. They opened the door for this.” He continued, “It’s sad. I don’t like it either. But these cars are made by American labor. And these companies have listened to their communities and they’ve become good neighbors.” Watson, the Lincoln mayor, said the difference Honda has made in his town is “phenomenal.” Meanwhile, Portera, the chancellor of the University of Alabama system, recalling his experience dealing with GM in the 1980s, said he had little sympathy for any lament that might emanate from Motown. “You shoot the enemy, you shoot yourself. These are global companies,” he said. “Something happened 20 or 25 years ago with the American consumer. It is second nature for many consumers now to buy what they want.” Neal Wade, the director of the Alabama Development Office, said he wouldn’t think twice in coming to the import companies’ defense should Detroit try to attack them. “Our responsibility is to provide jobs to the citizens of this state,” Wade said.

And in doing so, they are creating Detroit South.

CHAPTER NINE

THE END OF DETROIT

IN THE HEARTS AND MINDS
of many American consumers, Detroit’s traditional Big Three auto companies have lost their grip on the car market. And barring a miraculous rebound during the next few years, they will cede statistical control as well. If things get no worse between now and 2010, and the companies simply lose ground to imports at the same rate they have been doing for the past few years, the Big Three will see their share of the American market slip to roughly 50 percent. Moreover, unless a phenomenal renaissance takes place, it is likely that at least one of them will not continue in the same form that it is in now. Neither size, in the case of GM, nor the presence of the Ford family at Ford, nor the protection of DaimlerChrysler for Chrysler, can shield them from further deterioration.

The consensus among many Wall Street analysts, industry experts, executives from competing companies and even those inside Detroit is that GM, Ford and Chrysler face three potential scenarios. The first—and most likely—is that one or all of the companies will shrink further, forced by financial crisis to restructure, even beyond the cutbacks they are already making. And in the most extreme situation, one of them could seek Chapter 11 bankruptcy protection. Under the second scenario, the two remaining U.S.-based players, GM and Ford, seeing their market share depleted, might combine to form a dominant American player (assuming that federal regulators would allow it). And in a third scenario, one of them might seek a foreign partner, as Chrysler was bought by Daimler-Benz, placing the fate of yet another Detroit company in foreign hands. These possibilities were out of the question five years ago, when Detroit seemed to be strong. And there are people who still react in shock at the thought. Surely, GM is too big and powerful to fade away. Certainly, the Ford family would act en masse to protect the family’s company. And Daimler-Benz, having bought Chrysler, would certainly do everything to make it stronger, they say. But as the steel industry discovered, as the airline industry found out, as retailers learned, as dozens of famous names in American business know from painful experience over the past few years, no company is immune from demise, no matter how storied its history.

There are two primary reasons for this pessimism. First is that the composition of the American automobile industry has fundamentally changed as it begins its second century, compared with its first 100 years. Rather than be dominated by companies taking big chunks of the market, as GM and Ford did for much of the twentieth century, the industry is fragmenting into smaller pieces, following the same model as has the European auto industry. Indeed, there may be room for a dominant player, taking perhaps one-fifth to one-quarter of industry sales. But the market simply does not have room for two mass market companies without clear identities, not when there are so many competitors who know exactly who they are, building vehicles that precisely pinpoint their customers’ needs, and most important, who have spent years building their reputations for quality, durability and reliability. Because Detroit companies are ruled by the cult of personality, letting the latest whims of a CEO steer them in one direction or another, they have to stop every few years to reinvent themselves. The best import companies, by contrast, keep building on their foundation, pausing for breath sometimes, regrouping occasionally, but continually moving forward.

A second reason for pessimism is the danger that the companies will not earn enough money to support their vast and tangled operations, from the executive suite to the factory floor. The infrastructure has become so heavy, and the burden of health care and pension costs for retirees so great, that there is not enough profit being generated to support this mass for the long term. Scott Sprinzen, the automobile analyst at Standard & Poor’s, the Wall Street ratings agency, said GM faces a $50 billion health care liability going forward, on top of a pension fund with a $23 to $26 billion shortfall. (In June 2003, GM sold more than $17 billion in bonds meant to address the pension underfunding. But the liability remains.) Ford’s health care liability, meanwhile, is an estimated $27.4 billion, and its pension fund is $15.6 billion underfunded. George Borst, the chief executive of Toyota Financial Services, likens GM and Ford’s plight to that of the U.S.S.R., which seemed indestructible for the first seven decades of its existence, only to disintegrate in its final two years. “They’re all set up on world domination, and the world has changed,” Borst said. Gregory L. Kagay, an industry analyst with Auto Market Scope, said Detroit has only itself to blame. “The Americans are guilty of myopia, stubbornness, and bureaucratic malaise, among other maladies,” he said. “Detroit came to the starting line to win the wrong race. It faced not only a nimble competitor, but a wily one as well.”

However, GM, Ford and Chrysler will not go down without a fight. Nobody, certainly not executives at the Japanese, Korean or European companies, underestimates these companies’ ability to push vehicles out the door. As fast as the companies run into crisis, they can rebound. Repeatedly, competing executives insist it would take only a handful of strong-selling cars and truck models to vault the Detroit companies back to leadership. The companies have a valuable weapon in their big networks of dealers, who are capable of moving vast amounts of sheet metal. “No matter what you think of Ford, they still sell 10,000 cars a day,” said Denny Clements, general manager at Lexus, who began his career at Ford. And, as the Detroit companies have proved during the past two years, they can deluge the market not only with rebates available to anyone, but also with discounted sales to rental car companies, to their employees, retirees, dealers, dealers’ families, suppliers and everyone else with even the most tenuous connection to them. Another resource is the rental car market, which accounts for about 30 percent of Detroit’s vehicles. The Big Three have enough power to sell a lot of cars and trucks to somebody, no doubt about it. But when it comes to the most desirable consumers, those who have a choice, who willingly give Detroit their business, Detroit has lost valuable ground—first the car market, and now, increasingly, its leadership in the market for trucks. If it’s to get back on top, Detroit faces a Herculean task. Said Jim Press, Toyota’s executive vice president: “They have to do to us what we did to them.”

That is going to be difficult. Detroit is simply not luring import customers back to its showrooms; it is just selling to the same people, over and over again. Auto companies aim to attract a healthy mix of return customers, as well as those trading in competing vehicles, which are called “conquests.” All auto companies value loyal customers, but they simply have to keep new blood coming into their showrooms so they don’t eventually run out of business as their existing customers age and purchase fewer vehicles. But in 2002, 88 percent of Detroit’s customers previously owned Detroit vehicles, according to the AutoPacific Group, based in Thousand Oaks, California. Only 10 percent of Detroit customers traded Asian nameplates for Detroit automobiles, and just 2 percent traded in European vehicles, giving Detroit a dismal conquest rate of only 12 percent. At the same time, both Asian and European companies were attracting Detroit buyers with alacrity. About 43 percent of sales by Asian companies came from people who previously owned Detroit vehicles, the AutoPacific numbers showed, while 5 percent came from people owning European cars, giving the Asian companies a conquest rate of 48 percent. The performance was even better for the Europeans. About 32 percent of European car buyers traded in Detroit vehicles, and 33 percent traded in Asian vehicles, giving them a conquest rate of 65 percent.

If Detroit could have held its own, and hadn’t lost buyers to the imports, GM, Ford and Chrysler could have sold 1.5 million more cars than they did in 2002, said George Petersen, an AutoPacific analyst. “Domestic buyers are defecting in very large numbers. These are very sobering statistics,” Petersen said. “With the huge numbers of competitive products coming from the Europeans, from the Japanese, each one is taking a little bite. It’s like a kitten getting thrown in a pool of piranhas.”

The defection rate is having a significant impact on Detroit’s profitability. The automobile industry has always been a cyclical business, with Detroit used to peaks and valleys of demand, just like other traditional sectors of the economy. Over time, Detroit companies raked in billions of profits during good years, hoping they would offset the deep losses during the bad years. But in Detroit’s case, the peaks are not as high as they once were, and the valleys are getting deeper. In 1963, when the Big Three had nine-tenths of all sales in the country, they earned a profit margin of 17 percent on sales of cars and trucks, according to Merrill Lynch, the Wall Street brokerage firm. From then on, margins began their slow deterioration. In 1973, just before the Arab oil embargo slammed into the industry, profit margins were an average 11.4 percent. In 1983, when Japanese companies were making serious inroads, profit margins were 7.3 percent—the best they would be for the rest of the twentieth century. Even with the industry’s shift to supposedly high-profit pickups, minivans and SUVs during the 1990s, the high cost of incentives had devastated Big Three profits by the start of the new millennium. In 2002, the companies’ collective profit margin was a mere 1.4 percent—a bare fraction of the profits that they were earning 40 years earlier.

By contrast, Toyota, Honda, Nissan and BMW all earned profit margins of 10 percent or greater in 2002. To be sure, some of that performance was due to currency fluctuations. But a greater part of it was simply due to the fact that while import companies certainly offer incentives, they have not had to discount their vehicles in the same way the Detroit auto companies do. And they are constantly cutting the cost of developing new cars and trucks so that they can keep investing in their expanding businesses. Toyota has ordered its engineers in Japan to cut the cost of vehicles by 50 percent going forward, because it is concerned about the danger posed not by Detroit but by Chinese companies, whose labor costs are minute compared with the expense of employing workers in mature markets such as Japan, the United States and Europe.

What are the implications? Simple. Without adequate profits, Detroit cannot invest in the future, let alone pay the enormous pension and health care liabilities that the companies face. In 2002, analysts estimated that the Detroit auto companies faced a $1,200-per-car burden, called the “legacy cost,” because of the benefits earned by its retired workers. Without adequate profits, Detroit will have trouble simply treading water against the imports, let alone finding the resources to develop lineups of vehicles that could defeat them. It is a reason why, all across the industry, executives are questioning how any of the Detroit companies can hope to get through the next few years as they exist today. The companies are becoming like an upside-down pyramid, with a smaller and smaller tip trying to balance the vast expense of vehicle development against employee and retiree expenses.

Yet the corporate culture of bigness that is so inherent in Detroit and, indeed, in the American business world in general, does not lend itself to the belief that these companies will shrink. Voluntarily slimming down to a realistic and manageable size just isn’t part of the way Detroit does things. Gary Cowger, president of GM’s North American operations, said GM has no intention of letting Toyota push by it to become the world’s biggest carmaker, nor does GM plan to let its market share shrink any further. “We want to be the best American player. Not only the biggest, but the best,” Cowger said. But others see the handwriting on the wall. “If there is one thing that has done the most harm to the Big Three, it is the word ‘big,’” declared Jim Schroer, who was Chrysler’s executive vice president of sales and marketing until he was forced out in May 2003, after Chrysler stumbled in its attempts to keep pace with its domestic and foreign competition. Said Schroer, “We are beset by trying to achieve quantities of scale that require enormous volumes. And then you look around the industry and you see that the advantage is where companies are not big.”

GM vice chairman Bob Lutz is among the most vocal proponents of the idea that the auto industry has seen the end of Detroit—at least, the old definition of Detroit as a monolithic industry whose players were merely big and its vehicles interchangeable. At 71, Lutz, a former marine fighter pilot, is on the last and most critical mission of his career. He is striving to craft a new identity for GM as an aggressive company with exciting products, defeating the imports’ charge with vehicles that outpace them in flair and are their equal in quality. He is about the only man in Detroit who would be capable of handling the job, for he is hands down the most famous automobile executive in America. Ramrod straight, with gleaming white hair and an eaglelike gaze, he unabashedly wears the mantle of celebrity that was once shouldered by Lee Iacocca, his former boss at Chrysler, who refused to name Lutz as his successor and instead brought in Bob Eaton from GM. To this day, Lutz insists that it wasn’t his performance but his brash persona that lost him the job—specifically, a quip at a University of Michigan conference that Chrysler had been a woman on her deathbed, which Iacocca took as an insult. He left Chrysler before its merger with Daimler-Benz, to sit in relative obscurity for a few years as chief executive at Exide, a battery company, before GM’s CEO, Rick Wagoner, appealed to him to come to GM’s rescue.

The challenge that Lutz faces will have far more of an impact on his legacy than everything he did at Chrysler. The actions he is taking will determine whether GM can remain the world’s biggest auto company and hang on to leadership of the American market in the face of the imports’ drive. Under Wagoner’s predecessor, Jack Smith, GM spent the 1990s on its restructuring efforts, coming out as a leaner company financially but with continually eroding market share owing to a bloated lineup of vehicles that with few exceptions seemed out of sync with what consumers wanted. In the nearly three years since Lutz arrived as vice chairman of GM, with all of its product development operations under his wing, he has charged through GM’s engineering and design laboratories like hell on wheels. He has attacked the protocol and lethargy that kept GM’s product developers from getting their best ideas to the car market, handing out stickers reading, “Says Who?” each time someone suggests that GM’s tradition is to do things a certain way. He has insisted on a new identity for Cadillac, which he wants to see become the leading luxury brand in the country. Every utterance, every move results in a hail of publicity, which only serves to fuel the Lutz mystique. “He is an icon that everyone can rally around,” said Jeremy Anwyl, chief executive of
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