The decline of the North American car

As GM files bankruptcy, a look at who’s to blame and what’s next for the U.S. auto industry

GM2UPDATE (June 1, 2009): General Motors, the once proud icon of U.S. capitalism, filed for bankruptcy Monday. In the following piece, published last November in Maclean’s, Colin Campbell navigates through the rise and fall of the U.S. auto industry. In doing so, he identifies what went wrong at GM and explains whether the car company is even worth saving.

In hall No. 5, tucked far away from the main action at the high-profile Paris Motor Show last month, visitors who looked hard enough would have found the booth belonging to General Motors Corp. Those who went to the trouble—and not many did—were disappointed with what they found.

Paris was the place GM had decided to raise the curtain on a critical piece of its future in a world increasingly focused on efficiency and economy—the Chevy Cruze. The Detroit company is pinning its hopes on the lightweight Cruze to lure car buyers in Asia, Europe and North America away from bestsellers like the Honda Civic. Yet there were none of the usual showbiz trappings at its unveiling: no models leaning against the hood, no rock-concert special effects to usher in the age of the Cruze. Just a plain white stage and the car itself: a conventional, even understated, four-door family sedan. It “had all the pomp and circumstance of a Tuesday,” noted one auto critic. Perhaps it was just as well then that few journalists bothered to show up.

Most automakers look to the Paris show to highlight their next small, fuel-efficient wonders. It’s a science fair disguised as a car show. Mercedes-Benz and BMW were unveiling their first hybrids. Nissan snagged attention with its tiny Nuvu. Hyundai brought along its new mini-car, the i20. But at GM’s second-floor exhibit, visitors were confronted by a collection of massive Hummers and a hulking Cadillac Escalade. “This was emblematic of GM,” says Maryann Keller, an independent auto analyst who has covered the industry since the 1970s. “Here’s this show dedicated to small cars, new technologies, electric vehicles. Why, to Paris, would you bring Hummers, the Escalade and a Camaro? What planet are you on?”

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In truth, though, GM had far bigger problems than a flubbed launch. Just as the Cruze was fizzling in Paris, the company’s accountants and finance execs were assembling the final details of what was one of the company’s worst quarterly results in nearly 100 years. In just three months this fall, GM burned through US$6.9 billion in cash. In October, sales fell 45 per cent from a year ago, and it was clear the company was headed for yet another painful round of cuts. Even that may not be enough. GM ended last quarter with only $16.2 billion in cash, and there is no sign of an imminent turnaround in auto sales. Analysts have been musing about bankruptcy for years now, but suddenly it seems GM’s demise could really be at hand—a fact that even GM execs are now forced to acknowledge. “Even with our planned actions, our estimated liquidity will fall significantly short of the minimum required to operate our business,” the company reported.

The crisis is no longer just GM’s either. CEO Rick Wagoner warned of a domino effect should his company fail. Certainly, it would hit the Detroit auto industry like a wrecking ball, disrupting the auto parts industry and sparking a crisis of confidence among buyers that could drag an already weakened Chrysler and even Ford down too. Saving Detroit, even temporarily, could end up costing taxpayers dearly. The industry is currently asking for US$25 billion in relief, but it has already received US$25 billion to retool plants and will need another US$25 billion to fund health care trust funds it set up last year. Not saving the automakers could cost even more, as hundreds of thousands of jobs hang in the balance.

Politicians in Canada and the U.S. are now pondering the future of the once-proud American auto industry, and whether it even has one. But no matter what they decide, Detroit will never be what it once was.

There was a time that Corvette, Mustang, Cadillac and Chevy were not just brands, they were symbols of American technological achievement and material success. If there was a car to lust after or to gawk at, you could be sure it was made in Detroit. GM could confidently ask, “Wouldn’t you rather drive a Buick?” And the answer, to any red-blooded American, was always “yes.” Detroit was the first and last word on style and performance, and its influence spread through popular culture. The world looked up with envy at the American auto industry.

So how did it come to this? A dull sedan in a forgotten corner of a major auto show, with the spotlights shining on foreign rivals that not long ago were just tiny specks in Detroit’s rear-view mirror. The decline began slowly, almost imperceptibly. There were ups and downs, and periods when it seemed that salvation was at hand. But ultimately, Detroit’s carmakers were overcome by a combination of neglect, of a failure to learn from past mistakes, and staggering arrogance. They got caught in the slow lane in a fast-changing world. As lawmakers in the U.S. and Canada mull how to save the industry, the real question is whether there’s anything left to salvage.

In 1955, the movie Rebel Without a Cause came out, starring James Dean and a ’49 Mercury Coupe. Elvis Presley was about to rocket to fame, and to famously buy his mother a pink Cadillac with his windfall. It was the year of the Ford Thunderbird, the ’55 Chevy and the first of the famed Virgil Exner designs at Chrysler, like the Imperial. The act creating the interstate highway system would pass the following year and well-off Americans were migrating to the suburbs. This was “the apex of the golden age of the automobile in America,” says John Heitmann, a historian at the University of Dayton.

“The auto industry and the image of the nation were bound together as one,” says Bruce Pietrykowski, a sociologist at the University of Michigan-Dearborn. “The industry was the major promoter of cultural events, such as symphonic orchestras and popular television shows.” The city of Detroit was buzzing as it built not just cars but a new wealthy American middle class. Owning a car became a “symbol of upward mobility, financially as well as socially.”

One in seven Americans were tied to the industry directly or indirectly. It wasn’t just big, it was the symbol of American industrial superiority. But even in those glory days, the first cracks in the mighty facade began to appear. When a brief but steep recession hit in 1958, car companies panicked at a sudden drop in profitability, Heitmann says. They turned control over to financiers rather than “car guys” and engineers. “Once you get the accountants and bean counters, you lose that passion for automobiles,” he says. The Japanese automakers, on the other hand, tended to reserve top jobs for engineering visionaries—establishing a corporate culture that would pay big dividends in the long run.

There were other warning signs in those early days. Detroit, for instance, “failed to understand the emergence of Volkswagen in the U.S. and the appeal of smaller cars,” says Keller, who has written two books about GM. “It started when they were incredibly rich, incredibly arrogant and incredibly entombed in their own stupidity,” she says. An insular state of mind ruled in Detroit, as pro?t trumped design and quality. By the 1970s, an industry that had always seen itself as the epitome of American know-how found itself dealing with the Ford Pinto, which tragically exploded in some cases when it was rear-ended, and the laughably ugly AMC Gremlin. Observers dubbed it Detroit’s Malaise Era.

When the oil shocks of 1973 and 1979 hit, Detroit was unprepared. It had been dragged kicking and screaming into the small-car market, but even then failed to deliver a product that really fit the times. That period very nearly spelled the end for Chrysler. In 1980 it was staring down certain bankruptcy, and was saved only by a $1.2-billion loan from the U.S. government. Its fortunes reversed when, led by Lee Iacocca, it came out with the boxy but inexpensive and fuel-efficient K-car, matching the key advantages of the latest wave of imports. Then, in 1984, it invented the minivan. Ford, similarly, would soon strike gold with the Taurus sedan, proving that America could still deliver a hot design. But these successes proved to be more reprieves than genuine turnarounds. The door was left open to foreign rivals, and they came through in waves.

Honda set up shop in Marysville, Ohio, in 1982. Not only did it make high-quality cars, it did so without the financial burden imposed by Detroit’s United Auto Workers union. Foreign manufacturers established a new auto industry south of the Ohio River where there was little UAW presence.

Detroit had established a combative and costly relationship with its blue-collar workers dating back to the late ’40s, and would soon begin paying for it. “The UAW had insatiable greed, and none of the companies could stand up to it. Doing so would bring on long strikes and great losses,” says David Lewis, a historian at the University of Michigan who worked for GM in the early 1960s. Year after year, labour raised its demands, and management would capitulate to keep the factories humming, and to protect their vaunted market share. The situation worked fine, so long as those rising costs could be passed on to customers. But with Japanese competition, that proved increasingly difficult. “The net result included higher wage, pension, health care and other costs that strapped the surviving American automakers,” says Lewis. Today, health care costs add over $1,500 to the price of each car GM makes in the U.S., or over $7 billion a year—more than the manufacturers pay for steel. By comparison, Toyota spends under US$300 per car. From 1993 to 2007, GM spent $103 billion on pensions and health care for retirees.

These stresses aside, by the mid-1990s Detroit seemed to be experiencing another renaissance. GM was expanding into foreign markets and profits were hitting record levels—it made $6.88 billion in 1995. Demand for trucks and the new sport utility segment soared. With oil worth around $20 a barrel, North American consumers clamoured for big vehicles and Detroit delivered (practically handing the compact segment over to foreign automakers who were still primarily selling gas-sipping compacts and family sedans). Critics argued this sudden success had more to do with the boom times of the ’90s than the kinds of vehicles Detroit was pumping out, like the Chevy Lumina, Buick LeSabre and Chevy Cavalier—inexpensive cars that sold well but never built the kind of loyalty that the imports enjoyed. Overall profits disguised the fact that in the middle of the decade Detroit was still plagued by UAW strikes, which cost GM an estimated $1.2 billion in 1996 alone.

The roaring ’90s launched the era of easy credit, and automakers pushed “zero per cent” financing deals, which drove sales higher at the expense of profit margins. The recession of 2001 should have forced Detroit to pause, re-evaluate and restructure, but any soul-searching was short-lived. Americans kept on spending and Detroit kept paving its road to ruin, selling big, uninspired cars for low prices, and all but repeating the mistakes of the 1970s. “Eventually that cheap credit created more problems than it solved,” says James Rubenstein, an auto analyst and professor at Miami University in Ohio. Markets were flooded with a glut of new cars (often off-loaded to rental companies), and sales inevitably started to sink.

For Detroit, the underlying story through these rocky decades was one of market share decline. Until recently, GM, Ford and Chrysler were known as “The Big Three.” In the early 1960s, they controlled almost 95 per cent of the U.S. auto market. By 1980, that had slipped to around 80 per cent. Even a decade ago, GM was still the world’s largest company. Today, the label “Big Three” is about as dated as the tail fins on a ’50s Cadillac. With a market share of around 44 per cent, they’ve been downsized to “the Detroit Three.” The Asian carmakers, like Toyota, Honda, Hyundai and Kia, now hold 48 per cent of the U.S. market, according to Autodata Corp. And last year, Toyota sold more cars globally than GM for the first time. German carmakers like Volkswagen have also established themselves as industry giants. Thirty years ago, these companies were afterthoughts in North America. This summer, the Honda Civic overtook the Ford F-series pickup as the bestselling vehicle in America.

GM, on the other hand, has gone nowhere. In 1962, it sold 4.2 million automobiles and employed 605,000 people. In 2005, GM sold 4.5 million cars and employed 335,000 people—26 per cent of the market, with 11 major competitors. And while critics often point to rich employment contracts as the culprit in GM’s decline, that is only part of the story. While labour accounts for roughly $1,500 of the cost of each vehicle, GM, Ford and Chrysler offer anywhere from $3,500 to $7,000 in incentives to car buyers, says Ken Lewenza, the new head of the Canadian Auto Workers. “It’s not about labour rates, it’s about market, market, market. We could work for nothing and it still wouldn’t improve the bottom line or market conditions.”

While quality and efficiency have improved in recent years, Detroit’s reputation for bland, mediocre cars haunts it still. GM has known since the late 1990s that it needed, as Wagoner put it, “a little more spice in the mix.” But “spice” just translated into more of the same. Now a generation of young car buyers aspire to drive BMWs and Audis. Even for older car buyers, the days of longing to own a Buick are long gone.

A little over three years ago, Jerome York, an adviser to billionaire investor Kirk Kerkorian, quit the board of directors of GM with a dire warning. In a letter of resignation, York wrote that while the company appeared to have averted the near-term threat of bankruptcy, he had “grave reservations” about its business model and ability to compete with Asian producers. “The overriding issue remains that of North American market share decline,” noted York, a former Chrysler executive.

Today, GM stands as a company that has had countless warnings like this one and plenty of opportunity to right itself—to reduce its debt, to stop paying out dividends it couldn’t afford, to reduce labour costs and to kill off some of its eight brands. Keller argues it always grasped at magic solutions instead, like its efforts to automate factories or invest in the mortgage banking business in the 1980s. “With GM you have a company that’s reactionary. It’s never proactive; it never gets ahead of its problems,” she says.

That it has failed so consistently leads many to wonder if it is worth saving at all. The prominent U.S. hedge fund manager, William Ackman, stated last week that lending more money to the debt-laden company isn’t the answer and that it should consider bankruptcy. Even governments on both sides of the border are struggling with whether or not they should pony up to save Detroit. Taxpayers, after all, have a long history of propping up the auto industry with lousy results. According to the Canadian Taxpayers Federation, federal and provincial governments in Canada have handed Detroit automakers $782 million in the past five years. Where does it end? Public money has been pumped into GM’s Oshawa plant, Ford’s plant in Oakville and Chrysler’s paint shop in Windsor, to name a few. “In each case, the companies in return have promised to maintain X number of jobs. Generally that’s not happening,” says Tony Faria, director of the Office of Automotive Research at the University of Windsor. “What happens if six months into 2009 they come back and say we need more? How far are we prepared to go to keep supporting them?” It’s a question no elected official seems ready, or able, to answer.

A bailout is an especially troublesome prospect given that things aren’t nearly so bad with the Japanese automakers. Yes, all the carmakers are suffering in this economic downturn. Sales have dropped from 17.5 million cars a year to 10.5 million in the U.S., the steepest slump on record, says auto analyst Dennis DesRosiers. But Honda and Toyota are still expanding in Canada, he says. Throwing public money at companies that are failing is tantamount to punishing those that are prospering and hiring, he says. In our free market economy, shouldn’t we allow the weak to fail, and the strong to flourish?

That, however, is a tough argument for politicians to make, even those like Finance Minister Jim Flaherty, who has long argued against handouts to the private sector. He argued last week that a bailout puts government in the awkward position of choosing winners and losers. But, he added, government would look to invest in projects that appear to have a long-term future: “So if General Motors is going to build a hybrid car in Oshawa, people can understand that that is a good investment for the longer term. Operating a large truck plant, pickup trucks—probably not a good investment of taxpayers’ money.” The U.S. Congress is now debating whether to give the automakers access to the $700-billion Wall Sreet bailout package.

GM employs 142,000 workers in the U.S. and roughly 19,000 in Canada’s six plants, but as many as three million jobs are connected to the Detroit car companies, according to the Center for Automotive Research. Deciding which plants to save and where will be a nightmare, not to mention highly political. If a bailout does materialize, Canada will have to follow along if it hopes to maintain its share of the auto industry. “You’ve got to believe that the U.S. government will insist that its tax dollars be used for U.S. plants and U.S. workers. Canada has to recognize that it has to play a similar role,” says the CAW’s Lewenza. That’s what the Detroit Three are now asking for, which could mean a handout of more than $3.5 billion from Ottawa and Ontario.

There’s no question letting GM sink would be painful, but others argue it wouldn’t necessarily ruin the entire auto industry. To start, there is enough inventory out there to meet current demand for cars, says Faria. And as the market recovers, other foreign automakers, from India’s Tata Motors to Hyundai, could come in and pick up the slack. The question is, how much does it matter if the industry is foreign or domestically owned?

Many argue it matters a lot, and that killing off GM would be a colossal mistake. The North American industry, while down and out at the moment, is still a key segment of the American economy. “There’s nothing as complicated as a car that challenges as many industries and raw material manufacturers and component manufacturers,” says Keller. Losing it would cost more than jobs. While foreign-owned plants would still exist, they don’t contribute the same kind of technical know-how to the domestic economy. “The fact that you have a Honda plant in the U.S is irrelevant. You might as well have a toaster assembly plant,” adds Keller.

The big auto companies remain the foundation of many local economies. If GM fell, parts companies like Johnson Controls and Magna would have to lay off huge numbers of workers. Everyone from ad agencies to restaurants across the street from GM plants would suffer, says Faria. “We could easily see 700,000 to 900,000 people out of work” across North America, he says. All this would add fuel to the current economic wildfire—putting more pressure on the housing market, regional banks, and the service sector. In these already depressed rust belt regions, there are no clear options for workers who’d find themselves suddenly out of a job, not to mention the 775,000 retirees that depend on the automakers for their pensions. Those pensions could fall short, even if governments are forced to pick up part of the tab.

It’s unlikely that without a bailout GM can survive. Even bankruptcy protection might not be an option because of the difficulty in financing a restructuring plan, analysts say. That leaves liquidation as the final option. GM, and possibly others, would be forced to close up shop and sell their assets—a fate that would represent a calamity for hundreds of thousands of people. Just as government had a responsibility to the people of New Orleans after Katrina, there’s an argument that politicians have an obligation to help Detroit, Rubenstein argues. On top of all this, there’s the question of national security and energy independence, he adds. A bailout is likely to be tied to energy efficient cars like the Volt, which could have wide-ranging benefits for a country that has long talked of weaning itself off of foreign oil.

Even if GM survives, however, it will almost certainly involve ditching the current management. “Every single one of them has to go,” says Keller. GM’s Wagoner has overseen a staggering $73 billion in losses since 2005 alone. Starting fresh with new leadership is the only way to ensure that the same mistakes aren’t repeated yet again, she says.

The irony is that Detroit is being pushed to the edge just at a moment when it seems to be re-establishing its reputation for quality and design. Reliability ratings for most North American models are improving and critics actually like many of Detroit’s latest models again. Motor Trend named GM’s Cadillac CTS the 2008 Car of the Year. That car, along with the Chevy Malibu and Corvette, was also in Car and Driver’s 10 Best Cars ranking. The industry has enjoyed years of labour peace, and the 2007 contract agreements with the United Auto Workers in the U.S. were hailed as a significant step toward making American carmakers competitive again. Finally, they seemed to have regained their focus on the cars themselves.

But even with all that wind at their back, analysts say a full turnaround could still be half a decade away at least, and the Detroit Three don’t have that kind of time. They also don’t have history on their side, notes Heitmann. Starting back in the 1960s, the British government struggled to prop up its auto industry, intent on maintaining its place in the global auto trade. Britain faced many of the same challenges as Detroit, from weak management to rising competition. “Yet in the end it didn’t work,” says Heitmann. Famed brands like Jaguar and Rover received millions in aid, but in the end they succumbed to rivals. Those iconic names survive only as bit players, and small subsidiaries of foreign rivals. Any bailout in North America will have to be incredibly well-conceived and deftly-handled, he says. “I think problems are always solvable. But this problem is so huge one wonders. Is it solvable? Let’s hope.”

—With Duncan Hood