The End of Detroit (3 page)

These contracts, as well as the pensions and health care that GM, Ford and Chrysler provide for their workers, active and retired, have led to a penalty of $1,200 per vehicle that must be overcome before they can book the first penny of profit. That is not the case at Toyota and Honda and the other foreign firms, whose non-union employees are for the most part at least a decade younger than their counterparts in Detroit, and whose health care and retirement costs are structured in a far different way.

Detroit has spent countless hours and millions of dollars trying to figure out the imports’ secrets, studying their marketing methods, dissecting the way their vehicles are assembled, replicating the way they are manufactured, all without being able to truly understand their approach. Each Detroit company has entered into joint ventures with Japanese companies—GM with Toyota, Ford with Mazda and Chrysler with Mitsubishi—in a fruitless effort to find a silver bullet. Unable to find answers, Detroit has come up with countless excuses to explain the foreign companies’ success. It has hurled unfair-competition accusations at its rivals, insinuating that they are dumping vehicles on the market at low prices, maintaining that foreign governments are propping up the companies by keeping currency rates abnormally weak. Detroit has even criticized buyers of foreign companies’ cars for having bad taste, as Bob Lutz, GM’s vice chairman, asserted in 2002. Deconstructing the success of the Toyota Camry, Lutz called it one of the ugliest cars ever to travel the nation’s roadways, thereby slamming the choice of nearly 6 million consumers who might be potential customers for GM. (Even Lutz, however, had to concede the Camry’s sterling quality.)

To understand why Detroit is faltering, however, you need to get out of Detroit and visit places like California, where legions of young “tuners” have transformed their vanilla-flavored Honda Civic compacts into automotive dream machines. Or New England, where more than half of all vehicles sold are now imports, a distinction that once only California could claim. Or visit the headquarters of the imports, in Japan and Korea, where the desks of some of the young engineers are situated right in the lobby of the development centers, where they work oblivious to the flocks of curious visitors who arrive for appointments each day. In these places, Detroit’s illustrious past is merely a memory, and for some of the youngest buyers and employees, not even that.

However, if you attend the annual Dream Cruise, held one week each August on Woodward Avenue in Detroit’s northern suburbs, it would be easy to assume that Detroit’s glory days have continued. Throughout the week, travel slows to a crawl as classic cars from the twentieth century such as Cadillacs, Studebakers and Corvettes trundle up and down the boulevard in a rolling museum, gleaming in the summer sunshine. Here, on the long summer nights, women stroll in poodle skirts and men preen in Hawaiian finery, reliving Detroit’s dominance and wallowing in the nostalgia that American companies still manipulate when they feel the need. A visit to the Dream Cruise would make any onlooker think that since 1965 time has stood still.

But the fact is that there is no longer a single segment of the car market where Detroit is clearly the leading player, either in profits, quality or buzz. Detroit lost its grip on the small-car market first, seeing Japanese companies take command in the 1970s and 1980s. Later, in the 1990s, the Korean manufacturers assumed the dominant position among the industry’s entry-level vehicles. Mid-sized sedans, traditionally a Detroit strength, and still the heart of the automobile market, were ceded to Toyota in the late 1980s and early 1990s with Toyota’s bulletproof Camry and Accord models. More recently, they’ve been joined by Volkswagen, with the sturdy Passat, and Hyundai and its inexpensive Sonata. The highly profitable American luxury vehicle market, the source of numerous fantasy cars like the Lincoln Continentals of the 1930s and the Cadillacs of the 1950s, hasn’t been led by those two brands since 1986. During the past 15 years, the leadership among the most expensive cars has been snared by Lexus, BMW and Mercedes-Benz, and trailed by such challengers as Audi, Acura and Infiniti, despite numerous attempts by the Detroit auto companies to revive their most heralded brands.

In the early 1990s, Detroit found itself on the verge of another near-collapse, beset by a weak economy and the impact of the Gulf War. It sought an answer that would convince customers to buy its vehicles in volume again. It found one in a category called sport utility vehicles. Single-handledly, the SUV became Detroit’s ticket back to prosperity, with profits soaring as high as $15,000 a vehicle on luxury models like the Cadillac Escalade and Lincoln Navigator. Waits for the Jeep Grand Cherokee and Ford’s Explorer stretched for months. By mid-decade, it seemed that Detroit had found one place where it was immune to a charge from the foreign companies. GM, Ford and Chrysler dominated the market, holding more than 90 percent of SUV sales. But imports recognized the new opportunity for sales growth and quickly jumped in.

By 2003, Toyota and Lexus together sold eight different SUVs, from the entry-level RAV-4 to Lexus’s hulking LX 470. Honda, though late to this market, brought out the well-regarded Acura MDX and the Pilot sport utility. Mercedes and BMW entered the luxury SUV market with the M-Class and the X5, respectively. Even Porsche got into the fray with its controversial but breathtakingly fast Cayenne. And the Korean companies began to gobble sales, thanks to vehicles like the Hyundai Santa Fe.

Meanwhile, that most essential family market, minivans, which Chrysler virtually owned throughout the 1990s, was completely turned upside down by a new version of the Honda Odyssey minivan in 1998. With its three rows of seats and its solid handling, the Odyssey destroyed Chrysler’s lock on a market to which it devoted the production of three of its factories. The downfall of its minivans triggered a financial crisis that sent the company into a tailspin and cost Chrysler’s chief executive his job. As other foreign companies came forward with their minivans, such as the Toyota Sienna and the Nissan Quest, Detroit companies’ share of the minivan market fell from 94 percent in 1992 to 70 percent in 2003.

With the intense loyalty that pickup owners feel for their trucks, the truck market was Detroit’s last bastion. Detroit had a long history in the category, stretching back to the industry’s earliest days. (One of the first variations that Henry Ford made on the Model A was a pickup truck.) Together, GM, Ford and Chrysler sell 2 million pickups each year, and the Ford F-series has been the best-selling vehicle in the United States since 1978. But in 1998, when Toyota, which had failed on its initial attempt at a full-sized pickup, created the Tundra, it instantly swept honors from
Consumer Reports
magazine as the nation’s leading-quality truck, instantly making Toyota a force with which to be reckoned in a market that Detroit thought it would always own. More competition is on its way from the imports, with the Nissan Titan; a new, bigger version of Toyota Tundra; and a sporty pickup that Honda plans to build later this decade.

If the minivans, sedans and luxury cars that the foreign companies have introduced are any indication, those pickups will have customers waiting for them when they arrive at showrooms. Unfortunately for American automobile companies, in many cases the most desirable consumers, with high incomes, good educations and comfortable homes, have switched allegiances and have defected to imports. That has left Detroit to compete for increasingly older, less-educated, lower-income buyers whose sole priority is a good deal. Many of the vehicles that the foreign companies sell are now built in the United States, at plants that American car manufacturers insisted foreign companies build in order to compete on a level playing field. In the past 20 years, foreign companies have built 17 new factories in the United States, many of the newest in the South, and also in states like Ohio, Indiana and Kentucky, where Detroit companies have had plants for years.

Even as Ford, struggling to regain its former glory, proceeds to close factories as part of its bid to restructure and get its manufacturing capability in line with its dwindling sales, imports have continued to open new ones. Together, they now employ 85,000 factory workers, more than Chrysler and almost as many as Ford, and their factories produce nearly 5 million vehicles a year. Not a single one of these new factories has been organized by the UAW, whose only presence among these “transplants” is where the plants began in joint ventures with Detroit carmakers.

This is not the way things were supposed to turn out. Indeed, to many Americans, it is a big surprise that Detroit is in such dire straits. As recently as the middle of the 1990s, it looked as if GM, Ford and Chrysler had vanquished or at least outdistanced the foreign invaders. Customers waited months to buy the sexy Dodge Viper, the elegant Cadillac Seville STS sedan and Ford’s seemingly endless variety of SUVs, each bigger and more luxurious than the one that had come before it. Profits were enormous, topping a collective $16 billion for the automakers in 1998. The companies were venturing into all sorts of new businesses, including Internet companies, junkyards and electric vehicle companies, flush with cash that they used to fund their acquisitions. It was fun, again, to be in the automobile business in Detroit. The industry abounded with celebrity CEOs, such as Robert Eaton at Chrysler and Jacques Nasser at Ford, gazing upon their kingdoms with confident smiles. A
Time
magazine cover portrayed the chief executives of all three companies in profile, aligned to mimic Mount Rushmore.

But the American companies declared victory over the imports long before the game was won. As has happened so frequently throughout the industry’s history, the “good enough” mentality that has plagued the American automobile makers took hold once more by the year 2000. Sadly, the ground that Detroit conquered in the early 1990s had been lost again by the end of the decade, and the loss kept accelerating into the new millennium. In the wake of the 2001 recession and the terrorism that followed, the Big Three relentlessly enveloped consumers in a wave of incentives such as zero percent financing, no money down and no payments for months, and continued the offers for months afterward. Yet GM barely registered an increase in market share, while both Ford and Chrysler lost ground. The most desirable buyers simply shrugged and bought the higher-quality imports, even though the deals were not as widespread.

And this came at a time when the country was awash in patriotism, stirred by the horror of the September 11 attacks and fueled, at the end of 2002, by the specter of war with Iraq. There would probably never be a better climate for GM, Ford and Chrysler in which to gain sales.

What had gone wrong? First,
import companies have a better handle on consumers’ tastes. They can react faster and they do not let up.
Toyota and Honda were at a huge disadvantage relative to Detroit when they first put their cars on sale in the United States. They didn’t have a clue what American consumers wanted. They tripped up by simply shipping over the same vehicles that they sold in Japan and elsewhere in the world, which were small, fuel-efficient automobiles that appealed to only a small number of consumers. Toyota did so poorly with its initial car, the Toyopet, that it had to abandon the American market, returning two years later. The original Honda CVCC, a two-seater with a hatchback, was likened by its critics to one of Honda’s riding lawn mowers, albeit with a roof and windshield wipers. And the quality of Hyundai’s Korean-made vehicles was so dismal when they first went on sale in the mid-1980s that the company was almost forced to close up shop in the United States several years later.

But Toyota, Honda and Hyundai recognized that they didn’t know American customers the way they knew their buyers back home. So they set out to ask the people who bought their cars what they really wanted. The first answer the Japanese companies got, in the wake of the nation’s energy crises of the 1970s, was fuel economy. Subsequent feedback told them that quality and reliability and roominess, along with affordability, were key. And finally, they found an edge in appealing new body styles, like small SUVs and car-based wagons, called crossover vehicles, that no one else had dreamed up. As they were learning these lessons, Honda and Toyota were unhampered by the vast dealer organizations that Detroit companies had set up. Today, only 1,287 dealers sell approximately 2 million Toyota and Lexus cars a year, while there are 4,500 Chevrolet dealers selling a similar number of vehicles. Such a streamlined organization made two things possible: First, dealers made more money on each Toyota or Lexus they sold. Second, they were able to communicate with management much more easily to share news from the showroom floor and provide a heads-up when problems arose.

For quite a long while after they entered the U.S. market, the Japanese companies consistently delivered on their basic task, the small-car market. Detroit seemed willing to cede that market, because GM, Ford and Chrysler hadn’t found a way to build cars to compete with these “rice burners” at a profit, and they really didn’t want to be bothered figuring out how to do so. Japan’s dominance here wasn’t troublesome to them. Detroit’s executives argued that the success of foreign vehicles was limited. Subcompacts and compacts might be desired by ecology-minded individuals or small families, but once consumers needed more space or comfort, buyers, Detroit assumed, would automatically come home to American automobiles. They assumed that the Japanese companies were content to stay small and dominate their niche. But the Japanese companies gradually gained expertise. Once they understood consumers’ needs, they made their move upscale. By the late 1980s, they began building vehicles specifically for the American consumer—and building them at American plants, under the direction of skilled American executives, many of whom had trained at the Detroit companies. As American consumers’ tastes evolved, so did the companies’ lineups. The cars got bigger, the interiors more luxurious, the construction even more solid. The Toyota Camry, for example, grew six inches in 1992, and gained a smooth rounded styling that looked nothing like its boxy Japanese predecessor and everything like an American car.