Last year the federal government spent $106 billion to bail out G.M. and Chrysler. In return, the two companies went through bankruptcy and substantially reduced their debt loads, will shut down 16 more factories by 2011 (after closing 22 between 2004-08), 3,000 dealerships will disappear, along with Pontiac, Saturn, and probably Saab, and the UAW gave up its 'Jobs Bank' (allowed senior workers to volunteer for layoffs at 95% pay) and many other prized bargaining wins. Only 60-some years previously these same auto companies, along with Ford and other firms, had been key to America's industrial might that helped win WWII. "Crash Course" provides an excellent accounting of how Detroit's auto oligopoly and labor union monopoly both failed after 70 years of constant battling.
In 1955, G.M. became the world's first company to earn over $1 billion in a year, its market share exceeded 50% (was being closely watched by the Justice Dept.), and Detroit's CEOs were king of the world. In 1960, imports comprised less than 5% of the U.S. auto market, though rising to 15% (mostly German) by 1971. More ominously, the year 1970 brought a 67-day strike against G.M., and worker sabotage at its Lordstown (Vega) plant. G.M. then worsened its quality problems by creating a new overall division (GMAD) in charge of production, separate from design and marketing and creating a lack of accountability. Then, in 1973 Detroit's import problems intensified with the first Arab oil embargo - buyers not only tried and liked Japanese cars' better fuel mileage, but their improved reliability (vs. the Chevrolet Corvair and Vega, Ford Pinto, and the later Dodge Omni) as well.
In 1982 Honda opened a plant in Ohio - it planned to sign with the UAW (its Japanese plants were unionized) but held back due to the plant managers' concerns. More than two dozen other Japanese plants followed, and the UAW's monopoly was quietly broken. Simple things involving respect - like providing job security, valuing worker ideas, making the work more ergonomic, locating predominantly in non-union areas, and improved dignity through common uniforms, parking, eating and restroom facilities for all levels eliminated the UAW's appeal.
Instead of focusing on improving car quality in the 1980s, Detroit went in other directions. G.M. bought Hughes Aircraft for its technology and EDS for its computer skills, paid Ross Perot $375 million to get off G.M.'s board and stop criticizing management, and established a 'Jobs Bank' for workers displaced by automation (later expanded to those displaced for any reason without any time-limit, and costing about $1 billion/year). The good news for G.M. is that it abolished both GMAD (assembly plants) and Fisher Body (stamping plants) to improve accountability, launched Saturn to build small cars with innovative labor relations and high-tech, and entered a partnership with Toyota to re-open a Fremont, Ca. plant (NUMMI) that had previously been G.M.'s worst. (Using the same workers and union leaders, Toyota led NUMMI to become a top quality facility as it produced cars for both firms.) Meanwhile, G.M.'s market share dropped to 41% by 1986 - had been over 50% at its peak. Across town, Chrysler bought Gulfstream and Maserati and moved production line locations ($800 million), and Ford spent billions to buy Jaguar, Aston-Martin, and part of Mazda.
The years 1990-91 brought $6.5 billion in losses for G.M., and the U.A.W. sabotaging the Saturn effort by insisting that expanding production into another facility required U.A.W. contract coverage (the Table of Contents ran nearly 20 pages), and that parts procurement had to be via union vendors. Other years in that decade brought record profits, aided by stretching factory depreciation from 35 to 45 years, and increasing projected pension investment returns. Mercedes bought Chrysler for a 40% stock premium in 1998, expecting $3 billion/year in savings - instead, Chrysler profits fell. Another strike at G.M. in 1998 lasted 54 days, and led to spinning off parts production into 'Delphi,' while continuing to guarantee Delphi's pension obligations. The U.A.W., in response, refused to allow suppliers to deliver pre-assembled modules that would save $2,000/car. Ford continued its acquisitions - buying Volvo for $6.5 billion, a chain of car repair shops in England for another $1.6 billion, and Land Rover for $2.9 billion. Soon after the Ford Explorer-Firestone tire problem hit, costing Ford at least $3 billion in recalls; thus distracted, Ford's quality hit bottom on J.D. Power ratings. The decade ended with all the Big Three all deciding to focus on trucks and SUVs - their profit areas.
The new millennium began with G.M. acquiring 20% of Fiat for $2.6 billion and agreeing to acquire the rest of the company later, spending $1 billion to close Oldsmobile and pay off affected dealers, expanding GMAC into home mortgages and commercial lending, and finding itself with a 29% market share. An internal report concluding that the company still had too many brands, factories and people was ignored. Its last profit was in 2004, at which time market share was down to 27%. About half of that was Chevrolet, and the rest spread over 7 other brands - including Subaru (owned 20%). The result, again, was a period in which G.M. cars looked like each other - for obvious cost-saving reasons. Then the Japanese brought out SUVs, gas prices rose, and G.M. was forced to pay $2 billion to Fiat to withdraw from its prior buy-out agreement. Meanwhile, Ford lost $12.6 billion in 2006, brought in a new CEO (Mulally, from Boeing), and borrowed $23.6 billion. Chrysler, meanwhile, was still losing money and the U.A.W. refused to grant contract concessions - Mercedes then sold it to Cerberus for virtually nothing (about a $35 billion loss from the original purchase price).
G.M.'s ratio of retirees to workers had now reached about 3:1 and added $1,600/car, vs. $200 for Toyota (few retirees). G.M.'s viability could no longer be taken for granted, and the UAW agreed to a two-tier wage structure (lower for new hires), and to take responsibility for retiree costs (for $35 billion from G.M., covering about 70% of projected costs). Government bailout talks in 2008 brought a succession of revival plans from G.M. - even the third plan only proposed to 'study' the topic of what to do with excess brands Saab and Saturn, to make Pontiac a 'niche' brand, and to recover by 2014 - based primarily on wishful thinking that the Chevy Volt ($37,000 cost, only 10,000 sales over its first three years) would accomplish this, and to avoid bankruptcy (the only way to break the UAW stranglehold). President Obama's 'car czar' concluded that CEO Wagoner and his board had to go, and they did. Now, Ingrassia concludes, instead of the Big Three, America will have a Medium Six.
Bottom Line: "Crash Course" is the story of an American tragedy - how early success, combined with timorous leadership, led ultimately to failure. Many blame Detroit management for focusing on SUVs and trucks - reality, however, is that these were the only vehicles they could earn profits with, as long as the Japanese had none, gas prices were low, and the UAW was so strong. This story, unfortunately, has also played out in the steel (more steel was produced in 2007 than in 1970, with one fifth the employees and one twelfth the man-hours per ton - thanks to bankruptcy and innovation) and airline industries, though with much better results in the latter - thanks to managements' aggressive use of bankruptcy law. Undoubtedly union abuse of power also has motivated the initial off-shoring of millions of additional American jobs. Unfortunately, the problem continues today - Boeing's 5-year string of $13 billion in profits brought the fourth strike by its Machinists Union in 20 years - this time for 8 weeks, delaying deliveries, causing cancellations, and prompting Boeing to lay off 10,000 workers and spend billions more to start a second-production line in non-union South Carolina.
Finally, American managers are often blamed for short-term thinking - eg. Detroit's CEOs failing to use bankruptcy laws to tame the UAW, and U.S. bankers dragging the nation into the 2008 Great Recession. Both Detroit's and the banking system's failure were abetted by U.S. regulators and political leaders failing to act. Conversely, our Chinese competitors are hampered neither by strong unions nor inept regulators. And that gives them a very strong advantage, in addition to their low costs.
