The Long Road Down

Our writer’s point of view regarding the recent history of the Big 3

By Jerry Weber

08.15.2007

Part 1:

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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Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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10 Comments

  1. Just a little correction: DeSoto wasn’t a independant like Packard, Studebaker but a division of Chrysler who was killed by 2 factors: the quality of the 1957 models, the “Forward look” launched in the rush and the “Eisenhower recession” of 1958 who hampered DeSoto (as well as the Edsel) sales. The final blow for DeSoto was when Chrysler introduced the 1961 Newport who entered in the DeSoto territory.

    Also, I wondered what could had happened to Nissan if the “French connection” (Renault) hasn’t came to the rescue? Perhaps they could had joinned Packard and Studebaker (as well as Humber, Hillman, Austin, Morris, Simca, Panhard,Hotchkiss….)

  2. Stéphane Dumas, thank you for the correction regarding DeSoto; I have edited the post to correct that reference. We apologize to our readers for any inconvenience.

  3. Well, technically, I don’t think the reference to DeSoto was incorrect. DeSoto was independent before Chrysler absorbed them, although it’s true they were a division on Chrysler by the time they were put to rest. But, using the same logic you apply to DeSoto, then are we to assume that Packard was not an independent because they were a division of Studebaker when they had their funeral? Or that Willys was not ever an independent because they were part of AMC when the brand went away? Or better yet, that AMC was not an independent because they were a Chrysler brand when they were finally shut down? It is a completely ridiculous notion and it is a stupid claim to make.

    You “corrected” to something incorrect. Mr. Dumas is the one with the incorrect inference, not the writer. The writer got it right.

  4. DeSoto fan – DeSoto was born from Walter P. Chrysler, never existed except as part of Chrysler, and died as part of Chrysler. Since you are a fan, you should know this.

    DeSoto’s situation was a lot different than Studebaker’s or that of Willys or Packard.

    The correction stands; and furthermore, it is not a correction of the writer’s work, but rather of his editor’s efforts. That person is me, and it was a careless mistake I made while working too fast with too little sleep. Hey, it happens. Sort of like now, actually.

    Those readers with any further interest in DeSoto can find any number of online and print publications that do a good job of detailing DeSoto/Chrysler history.

    – Brendan Moore

  5. If we’re splitting hairs, several Japanese Manufacturers have a UAW connection. Mazda’s Split Rock Michigan factory is Union, Toyota’s fully owned subsidiary NUMMI in the Oakland Area has UAW representation, and I believe Mitsubishi in Normal Illinois has some union workers.
    Union affiliation is of little consequence when a factory builds a well engineered product, but if the parts delivered to the factory will not remain screwed together, the best workers in the world can’t guarantee long-term quality.

  6. L.A. Dave, if you REALLY want to split hairs: Mazda’s factory is in Flat Rock, MI (not Split Rock) and has a UAW presence at Mazda’s invitation – but it’s also in the UAW’s backyard (probably figured it was inevitable), and they also build Ford Mustangs in the same plant. NUMMI is NOT a fully owned subsidiary of Toyota, but in fact a joint venture between GM and Toyota. I believe the factory in Fremont was a former GM facility – again, hence the UAW presence. (The goal of NUMMI was to teach GM the Toyota Production System and to teach Toyota to work in a UAW environment). Finally, the Mitsubishi plant in Normal, IL is in fact represented by the UAW, but again – it was previously a joint venture between Chrysler and Mitsubishi (Diamond-Star Motors); the UAW wasn’t going to let Chrysler operate a plant in the US without representation.

    I think at this point, who assembles a vehicle is important only in terms of its cost structure and therefore profitability; quality is likely almost identical between UAW and non-UAW made vehicles. But the unsustainable pension and retiree healthcare costs are what’s adding the $1200+ per car to the Big Three’s costs, while Japan, Inc. can instead apply that $1200+ to better engineering, better parts, or their profit margins. I say this as the owner of two Japanese-branded vehicles, by the way.

    Links: http://www.uaw2488.org/history.htm
    http://www.nummi.com/co_info.php

  7. Very perceptive comment about “distressed merchandise”. The car companies themselves did a lot to cheapen their own brand in terms of public perception. Nothing but discounting, rebates, subsidized financing, etc. They just about shouted, “take this stuff off our hands! We know it’s not very good, so here’s something to sweeten the deal”. I hadn’t really thought of it in that way before.

  8. RE: UAW and labor costs

    Yes, UAW workers cost more but that is not the main problem. Its ok for labor to cost more if it provides better value (i.e. higher quality or more productivity per hour worked). The UAW clearly did not provide that kind of value in the 1970s, although quality and professionalism have improved since then.

    The other problem with labor cost, especially health care and pensions can be laid squarely at the doorstep of American Corporations. They chose to create an employer based system of health care during WW II and defined benefit pension plans in the 1950s. They also systematically underfunded those obligations. Instead of paying into the pension and health plans to create a surplus for the future the Big Three took their profits during the boom times. The executives and the UAW leadership figured they could catch up with funding the pensions later. Unfortunately, “later” turned out to be the last two decades when the market was more competitive.

    Yes, labor costs are important, but you cannot lay all the blame on greed unions or a belligerent UAW. The Big Three were partly to blame for the mess. A little more foresight on the part of auto executives and the corporate boards would have meant lower legacy costs and that UAW labor would be competitive.

  9. The German brands command premium prices with quality reputations notwithstanding their unionized labor forces and government-directed regulatory and welfare programs. Like the Japanese brands, they, too, have been adept at adapting to changing markets without finding it necessary to dump and demean their own products. As was pointed out above, the downfall of the American brands can be traced more to their own insular hubris and their lousy business models than to the same outside forces affecting their competitors. That may be sad, but it is indeed the genesis of their demise. The fault, I’m afraid, actually lies in the mirror, not with the unions or with the rational buying public.

  10. I have been following the car business for 40 years, and was in it for 30 of those 40 years, and I can tell you, I saw Detroit’s decline from a ringside seat and it wasn’t pretty. I think GM has a good chance (50/50) for a revival, Ford is is a 5-1 shot, and since Nardelli was put in at Chrysler, those odds got a lot longer. Maybe 20-1, or maybe longer.

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