Blog: A New Lease on Life for Detroit

By Tom Martin

May 21, 2009

The daily headlines have been full of news about the bailout of the U.S. auto industry from its various problems. As interesting as such details are, I’d like to suggest that they aren’t the important part of the story for automotive enthusiasts.  In a dramatically changing automobile industry, what we’ve witnessed up ‘til now is more like the preparation for the invasion of Iraq. We’re entering the phase where we actually invade. But the hard parts and the decisive parts start after that. Or, if you prefer a happier analogy, we’ve been witnessing the prep for the wedding. Now we’re about to go in to the wedding ceremony and then off on a honeymoon. After that, the hard work and – we hope – good times begin. Ongoing life isn’t a wedding ceremony or a battle, and we would do well not to confuse the two.

What we are seeing now in the domestic auto industry is the shaping of a foregone conclusion: General Motors, Ford and Chrysler will survive. The form and the controlling powers are up in the air, but not the existence of the key bits of these companies.

Importantly, they will emerge in much better shape than they were in before this messy business began last year. That’s because, whether they go through Chapter 11 or not, they are restructuring. Which is to say calling this a bailout is not really correct. A bailout would be leaving the Detroit 3 basically the same, but with a windfall gift from the taxpayers. Then the car companies wouldn’t be fundamentally different, they would simply have survived with their old baggage still in hand. A bailout may have happened in banking, but a lot more is going on in Detroit.

Emerging in “much better shape” is not the same as being strong. You might be thinking that “much better shape” could mean that Detroit is no longer in the ICU, though still in the surgical recovery ward. But I think they’ll be much better off than that. More like released from the hospital.  Then it will be time for physical therapy and healthy living. Only PT and food won’t be completely in their control.  The conditions that get set up for their post-restructuring life will matter a lot. I think there is reason to doubt we’ll get this right.

To make a bit more sense of this, it helps to be clear about Detroit’s problems. Basically, there are two structural problems that Ford, GM and Chrysler in varying degrees have been up against. A structural problem is one that can’t easily be changed or may not be changeable at all. For example, height is a structural problem for some people wanting to play in the NBA. I’m 6 feet tall, and no matter how hard I practice I’m not going to be an NBA forward.

Detroit has two structural problems dating to the ‘70s and ‘80s. The first is a cost problem. Detroit has wage contracts and health benefit contracts that make it more expensive to manufacture cars than it is for many other car companies. Detroit also has excess capacity-based cost problems. When you go from 75% of the market to less than 50%, you have plants that are inefficient at lower volume. You have too many dealers (GM for example has about 6000 dealers to support versus Toyota’s 1500).

There’s no doubt that the Detroit 3 would be better off if they had solved these problems long ago. But if you think these problems are (or would have been) easy to solve, just look at what is happening now. With the first realistic prospect of bankruptcy ever for Ford and GM, and the involvement of congress, the treasury department, the labor department and POTUS himself, this has been a struggle. Still is, actually.

The second structural problem that Detroit has is branding. For decades Detroit made unreliable and unattractive products while many Japanese and European brands were raising the bar dramatically in these two areas. When you position your products as one variant or another of junk for 20 years or so, your brands take a beating.

The cost problem doesn’t help this, of course. But the Germans have a cost problem too, and they retreated to the top of the market to preserve brand strength. It hasn’t been so easy for Ford or GM to do this on top of the brand debacle of 1970-1990. To make money on premium (costly) technology, you have to be able to price for it, and that requires brand strength.

So, what to do in this situation? Well, you can throw your hands up, and say, “Who cares? Screw ‘em!” Nothing wrong with that, I suppose, but it seems a little short on imagination and the sense that the U.S. has something to contribute to the conversation. I’d add that, like many readers, I happen to be a fan of choice for consumers in the marketplace. The, “Who cares?” attitude doesn’t help with choice.

Since I’ve asserted that the US automakers are going to come out of this brush with bankruptcy in better shape than they’ve been in the last 40 years, you might ask what “caring” or “not caring” really means. Of course, one piece of caring is that the car companies aren’t out of the woods yet, and a sudden turn in public sentiment against what the President and the Automotive Task Force are doing might squash that nearly inevitable progress.

But there is another form of caring, with effects beyond just the domestic manufacturers, that really could be big. I’ll take that up in the next installment.