The Long Road Down
Our writer’s point of view regarding the recent history of the Big 3
By Jerry Weber
When one is contemplating the state of the US auto industry, we have to look back some sixty years to see how we got to the present condition. After the depression and WWII got rid of scores of independent auto makers, a few crossed the finish line to resume production after the war. A couple more (as in Kaiser) started up at this time. It took until 1953 for the pent-up demand resulting from not having any new cars produced between the years of 1942-46 to be satiated. This enormous pent-up demand meant that anybody who could roll out something that ran could sell it easily for some seven years. Demand for new cars was so great that it was not uncommon for dealers to offer to move you to front of the waiting list for a new car if you would also take a new truck. There were planty of trucks available since the wartime efforts had been focused on making trucks for the troops. And what was the consumer supposed to do with the additional truck? That was his problem; and most people solved it by selling the truck to a tradesman or farmer at a loss, and consoling themselves with the new car in their driveway. It seems ridiculous to think about now, but such was the situation regarding the availability of new cars in the immediate post-war years.
When this surreal situation ended, the survival of the fittest took over. The first US casualties of the auto business were the independents (i.e., Packard, etc.). The only thing left of them after 1959 was the new American Motors and Studebaker. This means that the Big Three and Little Two had virtually all the consumer auto business in the U.S. The split was even more dramatic: GM had almost 50% of the market, Ford about 25%, Chrysler 15%, and everyone left could take the last 10%. So the “Big Three” had about 90% of everything. GM was so big that the government wanted to split Chevrolet off from the parent in antitrust litigation at the time (Chevrolet was about as big as the entire Ford Corp.) GM prevailed, or did they?
After the very profitable 50’s, came the even more profitable 60’s, but the party ended in 1973 with the oil embargo. The Big Three had virtually nothing that didn’t drink gasoline at the rate of 15 mpg. This was Japan’s finest moment, as they had the cars that used fuel as if it was expensive (because in Japan it always was). Here the Big Three struggled and seemingly never found economy as a word they could live with.
However, the second earth-shattering moment came when Honda went to Marysville Ohio in 1979 to build first motorcycles and later cars. They started non-union and stayed that way. Here despite all the efforts of the UAW, were the seeds of Detroit’s destruction. You cannot effectively compete with one side having a 20-25% labor and work rule advantage. Even better, the Japanese had no legacy healthcare and pension costs in the US.
With this advantage, and the ability to bring other gas-sipping, well-built models in from Japan, the stage was set for what by the late 1980’s became a full retreat in market share by the Big Three. GM was down to under 30% in the late 90’s and still dropping (today about 22% of the US market). No foreign-controlled auto plant has the UAW to deal with; no domestic maker has a plant that is not controlled by the UAW. Add in legacy costs and clumsy downsizing and you get a perfect storm.
The Big Three starting bleeding money and talent. Yes, that’s right – the people that left the domestic makers were hardly loafers and deadwood, for the most part. Many of the star execs and engineers for the foreign makers are alumni of the Big Three. The effects of this exodus rippled out slowly, but went a long ways. For the first time in July 2007, the domestics produced under 50% of all cars sold here (48% to be exact).
Let’s return to the 1970’s to see the twin demons that Detroit never could face up to. The first, of course, was fuel economy. As Detroit saw it, “there is no replacement for displacement”. The parallel to this was there is no profit in a less-than-3000 pound vehicle. If you look to the old Sloan formula for GM, each division was more luxurious than the lower one; thus, Cadillac at the top and Chevrolet at the bottom, with luxury spelled out in size. A 5000-pound Caddy weighed 1000 pounds more than a Chevrolet, but sold for twice as much. Since it didn’t cost twice as much to build it, the rest was profit. Now, apply the same premise to trucks.
Chevrolet Vega coupes fresh from the factory
The first cars the Big Three lost money on were the compacts in the Seventies. They were despised by dealers, and factory alike. The idea of a “little jewel box” of a small car was literally and figuratively foreign to the domestic makers.
This takes us to the second problem, the “jewel box” idea. “Detroit Iron”, as it came to be known, was sleek, brawny, sexy, but not made precisely. If you want ash trays to close on bearings, doors to go thunk, trim pieces to fit exactly, think Germany or Japan. At first this didn’t seem to be a big thing, as many Detroit-made cars went for long distances and seemed to be strongly built. But the idea of cars built well with all the accessory items included was a foreign idea. Even when the Big Three began to chase the Japanese for quality, the Japanese builders like Toyota and Honda kept raising the bar and staying in the forefront on quality. After several years of this by the 1990’s it was becoming apparent that foreign makes, particularly Honda and Toyota, had significantly better resale values then a comparable American model. People overwhelmingly preferred foreign used, and voted with their wallets. The quality issue did have a pay-off and it was down the road in the secondary market, if not initially such a big deal.
By the late 90’s GM had slipped under 30% for the first time and decided to fire back at the competition. GM was going to make deals both in sale prices and cost of financing. They were going to be the low-price leader. And, after forcing Ford and Chrysler to also show up at this dance the die was cast. Profit margins were to be given up initially until the competition went back to wherever they came from.
What actually happened was the foreign companies only partially matched the rebates and interest rates (they didn’t need to match them completely), and the profits of the Big Three went south for good. Worse, the discounted new cars destroyed the American used market. Who wants a two year old Chevy when a new one payment-wise is even cheaper? Also, the buying public now refused to buy American unless it was on sale. The Big Three had effectively established the perception of their cars as “distressed merchandise”, goods that needed heavy discounting in order to be sold to a buyer of last resort. When everyone stayed out of the domestic showrooms for a month the new sale at even lower terms was on the very next month. So the Big Three were the discount kings and fleet builders all at little or no profit. The stage is now set for the situation we are at today.
Part 2 next…
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