Falling Empires Part 3: Wither Detroit?

It will not have escaped even the casual observer that the companies formerly known as the Big Three automakers — GM, Ford, and Chrysler — are in bad, bad shape. GM lost $37 billion in 2007. Ford’s operating losses were $2.7 billion overall, but they lost $5 billion on their automotive operations. Chrysler, which is now owned by Cerberus Capital Management, is not obliged to share their annual results (not being publicly held), but they aren’t doing a lot better. As of this writing, the three companies are asking for at least $34 billion in federally guaranteed loans, a new bailout. In this last installment of our series, we weigh in on the state of Detroit.

1930 Ford Model A Boyce MotoMeter


In 1979, despite Chrysler’s flirtation with bankruptcy and a sea of red ink throughout the auto industry, it was still possible to refer to General Motors, Ford, and Chrysler as “The Big Three” without irony. Although imported cars surged to a record 21.8% market share in 1979, GM still controlled nearly half the market. Even ailing Chrysler, whose market share had slumped to 10.1%, controlled as much of the U.S. market as Toyota, Honda, and Volkswagen combined.

Thirty years later, things have changed. As of November 2008, GM’s market share has fallen to 20.4%, Ford’s to 15.8%, and Chrysler’s to 11.4%. If we count only cars, not trucks, the numbers are far worse than that: 7.8% for GM, 5.0% for Ford, and a mere 2.7% for Chrysler. By comparison, Toyota’s share of new car sales for 2008 (year-to-date) is 10.4%, more than Ford and Chrysler combined.


The picture becomes even worse if we break out fleet sales. Detroit has become very reliant on sales to commercial customers like rental car companies and government agencies. They’re an easy way to boost volume, making up for slow spots in retail sales.

Most automakers sell to fleets, but fleet sales represent a much larger percentage of Detroit’s total sales mix than they do for most non-U.S. automakers. In the first half of 2008, for example, 38.7% of all Chevrolet Cobalts, 49.9% of all Chevrolet Impalas, 62.2% of all Chrysler Sebrings, and 59.9% of all Lincoln Town Cars went to fleets. By comparison, only 1.9% of Honda Civics, 8.6% of Toyota Camrys, and 10.7% of Infiniti G35s were fleet sales. (The only import manufacturer whose dependence on fleet sales approaches Detroit’s is Kia.) At the beginning of 2008, each of the Big Three insisted that they would limit their reliance on fleet sales, but as they saw the dismal sales returns of this spring and summer, they were forced to change their tune.

What’s wrong with fleet sales? A sale is a sale, right? Well, for one, fleet sales are heavily discounted, which means that the manufacturer (and dealers) make less money on each car sold. More seriously, an abundance of fleet sales is poisonous to resale values. Most fleet operators keep their cars for no more than three years and then sell them for whatever the market will bear. As a result, a few years of heavy fleet sales creates a glut of late-model used cars, driving down prices. (For the most extreme example, one need only look at the UK market, where the prevalence of short-term, company-funded leases means that new vehicles can lose as much as 70% of their value in only three years.) It’s hard to persuade new-car buyers to pay anything resembling full price for, say, a new Chrysler 300, when they can pick up a two-year-old ex-fleet car for half the money or less. Furthermore, since lease costs are based on residual values, pushing down resale prices makes leasing more expensive.


Fleet or retail, it would be fair to say that Detroit has great difficulty selling its cars at anything close to their manufacturer’s suggested retail prices. This year, Detroit automakers have spent around $3,500 on incentives for each vehicle sold. By comparison, the Japanese companies have been averaging around $1,500 per vehicle, the Europeans $2,800.

It should be no surprise, then, that the average transaction price for most Detroit cars is lower than that of their Japanese rivals. Average transaction price for the Toyota Corolla, for example, is nearly $3,000 higher than that of the Chevy Cobalt and almost $2,000 more than the Ford Focus.

Then we come to the credit problem. Among Detroit’s leading strategies for maintaining what retail sales volume they do have have been generous credit terms like 0% financing, cheap leases, and a laissez-faire attitude towards buyers’ credit ratings. Putting it bluntly, many of their sales were to people who couldn’t really afford the cars they were buying.

The consumer credit collapse has not only made car loans harder to come by and lease deals nearly extinct, it has cost the automakers a great deal of money. The major automakers went into the financing business years ago because credit arms like GMAC (which, we should note, is now split 49/51 between GM and Cerberus, Chrysler’s parent company) were an easy way to make money — low overhead, modest risk, high returns. Modest risk, that is, until dealers started writing a lot of dubious loans.

If someone defaults on a car loan, the lienholder’s best-case scenario is to repossess the vehicle and sell it at auction. One of the reasons people default on car loans, however, is that they’ve ended up “upside down” on their note, owing more than the car is worth. If the lienholder repossesses the vehicle, that negative equity becomes part of their balance sheet instead. (Did we mention the plunging resale values?) A few years ago, GM and Ford made about a third of their revenues from their credit arms. This year, Ford Motor Credit’s investor statements show a pretax loss of almost $2.2 billion for the first nine months of 2008, and other financing entities aren’t doing any better.


The upshot is that Detroit sells far fewer cars at far lower prices than most non-U.S. automakers and the financing cash cow has become a gaping wound. On top of that, Detroit faces higher overhead costs than the “transplants” (overseas automakers with factories in the U.S.), which is a prescription for big operating losses.

Labor costs are part of the problem. Contrary to popular rumor, the disparity in wages and benefit costs between Detroit and the transplants is relatively modest — around 10% — but that’s for current employees, which doesn’t include Detroit’s significant “legacy costs.” Detroit automakers have also been paying out health and pension benefits to around 550,000 retirees and their surviving spouses; that compares with only 180,000 current union employees. Last year’s UAW agreements called for the bulk of those obligations to be transferred into a union-administered VEBA (voluntary employee benefits association), which reduces the automakers’ costs to some extent, but doesn’t eliminate them.

Another factor, at least for GM and Ford, is an array of redundant brands. Ford has fewer, having sold off Aston Martin, Jaguar, and Land Rover (with Volvo likely to follow), but Lincoln-Mercury remains, and its morbidity is readily apparent. GM, meanwhile, has eight divisions, the distinctions between which are barely understood by GM’s own marketing people, let alone the public.

Most of these redundant brands sell hair-split variations on the same products at very similar prices. From a business standpoint, there is very little reason for them to continue, but the cost of shuttering a division is high. When GM shut down Oldsmobile in 2004, it cost them a reported $2 billion to settle their franchise agreements, so it’s unlikely that shutting down other divisions would be any cheaper. (They could sell one or more divisions instead, but the question of who’s going to buy them at this point is another matter entirely.) As long as the divisions exist, though, they will continue to drive up marketing, advertising, engineering, and administrative costs, to no particularly good end.

These things were problems even when the economy looked healthier, but this year, with auto sales down more than 30% from 2007, they’ve become crippling. Each of the Detroit automakers is burning money at a ferocious rate, GM and Ford to the tune of about a billion dollars a month. They’ve mortgaged or sold almost everything not nailed down and they’ve borrowed so much money that their credit ratings have been reduced to a level slightly below some junk bonds. Overseas sales, which for a while looked like their salvation, have turned nearly as gloomy as ours have. In Spain, for example, new-car sales recently dropped by almost 50%.


So, now Detroit’s leaders come, as Iacocca did before them, to Washington, where they hope to find someone still willing to loan them money. As the old saying goes, if you look around the poker table and you can’t figure out who the sucker is, you’re it …

Forty years ago, Car and Driver editor Brock Yates coined the term “Gross Pointe Myopians” for the leadership of the Detroit automakers. He accused them of living in an insular bubble, so far removed from the real world that they remained convinced that they were doing the right thing even as they sailed their ship merrily into the iceberg. The embarrassing spectacle of businessmen like Rick Wagoner and Bob Nardelli — whose combined cash compensation is well over $50 million — flying their corporate jets to Washington to plead destitution suggests that Detroit’s vision remains astigmatic.

Wagoner, Nardelli, and Ford’s Alan Mulally, however, are only the latest inheritors of what we see as a deeply unhealthy corporate culture. Any leader, in business or elsewhere, makes mistakes. Any company at least occasionally stumbles or wanders off in the wrong direction, particularly in an industry where major decisions have to be made so many years in advance. But to keep making the same mistakes for more than three decades suggests a deeper problem, a system that breeds shortsighted decisions and perpetual malaise.

The pattern is as simple as it is familiar: after publicly and vociferously resisting any change in their approach to doing business (particularly safety, emissions, or fuel economy mandates), a Detroit automaker launches the exciting new product that will single-handedly put them back on the map, restore Detroit’s honor, and bring customers rushing back into showrooms. When the product appears, it is often deeply flawed, showing the effects of ill-considered economizing or a simple lack of will, as if someone had stopped the development process at 80% and declared it good enough.

Even if the product is truly competitive when it’s introduced, it is subsequently left to languish while its maker goes on to the next Next Big Thing; the Ford Taurus is an excellent example. Before long, it becomes necessary for the manufacturer to turn to big incentives, easy credit, and heavy fleet sales to maintain any semblance of sales volume. Customers not already embittered by quality-control and reliability issues soon come to see the product (and the brand that sells it) as the automotive equivalent of store-brand macaroni and cheese — not very appetizing unless you don’t have the money or the time for anything better.

It’s not that Detroit’s engineers or designers are less skilled or less dedicated than their counterparts at the transplants or foreign makes. It’s not even that anyone involved is happy about building disappointing token efforts. The problem is that the culture of these corporations is based on disconnected fiefdoms that compete with each other when they should cooperate, where managers (figuratively) cut each other’s throats to improve their own performance statistics, and where no one involved is in any position to take a holistic view of the finished product — or its effects on the experience or perception of the customer. It’s a culture where the leadership is rewarded (and, often, rewarded obscenely) for quarterly profits and stock prices, even as they undermine their companies’ futures. When GM chairman Rick Wagoner gets a raise after incurring losses that resemble the gross national products of some third-world countries, it is evident that Detroit provides its leaders with little incentive for looking at the big picture.

In richer years, the Detroit automakers could shrug off these problems. After all, when your company controls half the domestic market, it’s hard to worry too much about niggling organizational problems like divisions that compete with each other more than their external competition. Now, they’re feeling the burn.


So, what’s to be done about it? The proposed federal bailout has engendered strong feelings on all sides. As many defenders and apologists as Detroit has, there are a lot of people who bear GM, Ford, and Chrysler a good deal of ill will. Say what you will about pension costs, credit problems, or unexpected surges in oil prices — the fact remains that Detroit has lost market share primarily by repeatedly squandering the goodwill of their customers.

Nonetheless, the author believes that these pro- or anti-Detroit sentiments are ultimately beside the point, as is the question of whether Detroit is worth saving. Almost no one would debate that the collapse of even one of the “Big Three” would be disastrous for a huge swath of an already-recessed economy.

The real issue is not whether Detroit is worth saving, but whether it can be saved. Emergency room doctors and army medics are all too familiar with the concept of triage — a grim calculus that applies the greatest energy to those patients who can still be helped. Heartless as it may sound, there is little to be gained by pumping transfusion after transfusion into a patient who’s hemorrhaging uncontrollably.

Viewed in that light, the prognosis for Detroit is poor. As we mentioned earlier, the automakers’ credit rating is close to rock bottom. We, the public, are asked to invest billions where wiser investors fear to tread. Some idealists imagine that a quick reorganization and the implementation of smarter leadership could result in leaner, stronger companies, repaying any investment with dividends. On the other hand, Cerberus — one of the country’s wealthiest private investment firms — thought the same thing when they bought Chrysler last year, and now they, too, stand with hands out, begging for help.

It is difficult to envision GM recovering without Chapter 11 or similar legal protection. Even if they declared Chapter 11, it would likely take years for a viable post-bankruptcy entity to emerge from the rubble. There is also little evidence that GM’s current leadership (who refuse to step aside, even if it would get them federal aid) would be willing or able to make the profound cultural changes that would be required to address the malignancy. Ford’s Alan Mulally — who performed a similar revival at Boeing — seems more capable of such a feat, although Ford’s survival would still depend on an economic upswing that may not be coming any time soon.

As for Chrysler, it suffers from the least-competitive product line in the industry, and more competitive new products would be years away, even if Bob Nardelli had not sharply cut their development and engineering staff as part of what appears to have been an ill-fated “strip-and-flip” plan. The best Chrysler can likely achieve is a few more meager years selling repackaged Nissans, with any federal money being absorbed by Cerberus to compensate it for its failed investment. The Jeep brand may survive, perhaps being sold off, but the rest of Chrysler looks to have a “do not resuscitate” stamp on its chart. [Author’s note: We stand corrected; both Jeep and Chrysler still survive under the ownership of Fiat and are now part of FCA US LLC, formerly Chrysler Group.]

The question we must ask of any bailout is what its real goals would be. If it’s to save American industry, it must be remembered that Detroit’s plans revolve heavily around their business overseas and we may not be pleased with how much of any bailout money is spent within our borders. If the goal is to save jobs, we have to reconcile that with the fact that Detroit will lay off as many employees as they can get away with (Chrysler’s recovery, you will recall, involved the loss of fully half their workforce).

If we’re hoping that an infusion of federal money will result in a shift to more fuel-efficient cars (which was the original, and frankly improbable, pretense of the bailout), we must acknowledge that Detroit’s immediate future will still revolve heavily around trucks and SUVs. As for jobs, if the federal government wanted its investment to pay off in job creation (or at least a reduction in job losses), it might be better off putting money into the transplants, whose prospects are far rosier. Again, this is not a matter of patriotism or spite — simply the strong likelihood that the $34 billion Detroit wants may vanish with nothing to show for it, and that they their leaders would just be back again next year, asking for more. How much do we really want to pay to delay the inevitable?

If federal money is to be invested in the auto industry, the author would rather see it go to the relief of the many thousands of people who have and will lose their jobs even if the automakers get their money. A G.I. Bill-style fund for retraining and continuing education for laid-off auto workers, perhaps; or tax credits and mortgage relief for people who’ve lost their jobs rather than the companies that laid them off. A program of subsidized loans or incentives for people starting new businesses — or for companies that add jobs rather than eliminating them — seems a far better investment than the Detroit automakers. It has become unfashionable to express concern about the human costs of business, but they can no longer be ignored.

To abuse another metaphor, there sometimes comes a time in fighting a structure fire when you realize that a building is going to fall even if you quench the flames. At that point, all you can do is evacuate everyone you can and start looking for ways to contain the damage from its collapse.

As of this writing, it appears that Congress and the White House have hammered out a compromise to let Detroit get its money, on the grounds that the Big Three are “too big to fail.” We fear that Detroit will prove that dictum wrong and that when they do, we will all be left holding the bag.



In May 2009, we licensed a condensed version of this story to Clearwire Corporation’s Clear 365 channel. However, Clearwire had no connection with the original article.


Our figures on GM’s market share and 2007 losses came from GM’s 2007 Annual Report, General Motors, May 2008; the Ford numbers came from Ford’s 2007 Annual Report. Figures on fleet sales came from Automotive Fleet’s Vehicle Specs Fact Book, Automotive-fleet.com, accessed 1 December 2008. Figures on incentives came from Bill Visnic, “Edmunds.com Estimates August Incentives Scarcely Down from 2008 High Point,” Edmunds Auto Observer, 2 September 2008, www.autoobserver. com, accessed 1 December 2008.

Brock Yates’ editorial, “The Grosse Point Myopians,” appeared in the April 1968 issue of Car and Driver (Vol. 13, No. 10).


Add a Comment
  1. I agree with you that “bridge loans” aren’t going to fix the fundamental problems facing demand, or the internal culture of Detroit.

    People aren’t buying that many cars, it’s that simple.

    The unfortunate part is that no elected official wants to go down as “standing idly by” while millions lose jobs. From their point of view, it’s better to spend billions of dollars while millions lose jobs.

    The idea of spending billions to help retrain those who will inevitably lose jobs is a good one.

    Unfortunately, there’s no central speaker for such an effort. Wagoner and friends can speak for their companies, but I’d have a hard time believing the Detroit area community colleges would be able to make the same case.

    The other item complicating this is that for some reason, it’s easier to be an armchair auto company CEO than anything else. Everyone seems to have an answer to “What Detroit really needs to do is _______”

    1. [quote]The other item complicating this is that for some reason, it’s easier to be an armchair auto company CEO than anything else. Everyone seems to have an answer to “What Detroit really needs to do is _______”[/quote]

      Well, people who like cars like to imagine a company building cars to suit their tastes. It’s a natural enough reaction, but it doesn’t necessarily translate, in the same way that enjoying watching movies doesn’t qualify one to run a movie studio.

      There are two major schools of thought: one, that the auto industry is a business like any other that can be run by brand managers and marketing flacks who’d otherwise be selling cereal or soap, and two, that the auto industry needs to be run by ballsy, charismatic enthusiasts (e.g., how Bob Lutz sees himself). I think both are ultimately wrong, as GM has been proving for the last 20 years.

    2. Bob Lutz told CNN this morning that “this is simply a bridge loan which will get us into the next administration, where we hope we can do something more fundamental.” So, by GM’s own admission now, this is just the ante.

  2. There’s kind of a fundamental paradox to solving this situation.

    It’s widely accepted that Detroit is guilty being out of touch, full of group-think, and culturally unhealthy.

    Unfortunately, if you bring in people from the outside, they’re likely to know nothing about cars or the specifics of the car industry.

    Wagoner is an example of growing from within Detroit. Nardelli seems to be an example of an external business guy who’s not really interested in the car aspect of a car company, but Mulaly seems to be a goldilocks.

    Coming from Boeing, I’d say his experience is “close enough” to be useful, but not caught up in Detoitism. The relative health of Ford seems to support this claim.

    1. The thing about the cancer of GM’s organizational culture is that it shuts out outsiders. Even if you hired someone from, say, Honda, there’s no guarantee that any of the many managers and executives would cooperate with them. Mulally is dealing with a different situation at Ford, whose institutional culture, while not necessarily any *better*, isn’t as entrenched.

      I have nothing good to say about Nardelli. His track record at Home Depot involved increasing paper performance by gutting the service that made the company’s reputation, and its long-term effects on the company’s culture were not at all good. He was hired to prepare Chrysler for a strip-and-flip that is now not likely to happen; he’s a hatchet man, not a leader.

      Mulally and Ford at least seem to have a plan. They’re in the fortunate position that they have some very good European products — the new Fiesta, for example, is a very nice piece. Whether that’s enough remains to be seen, but it puts them in a better position than Chrysler, which sold its European holdings in 1978.

      Still, the failure of GM’s Saturn-badged Opels (which seem to have more to do with GM’s perverse marketing ineptitude and the "not invented here" mentality than the quality of the products, which seem decent, if not startling) and of Ford’s past "bring the European Fords to the U.S." efforts suggests the danger of holding one’s breath. Remember the Merkur line? Or Mercury’s ill-fated efforts to market the Capri in the seventies? Neither does anybody else…

  3. Two Things:

    One: Detroit fails at marketing.

    They’ve brought up good products in the last few years (Fusion, Malibu, Opels-as-Saturns, etc), but have failed to close the perception gap. Basically, they’re selling good products for crappy-product prices.

    Two: How do you know all of this?

    All of your articles read like you’re recounting a story from personal experience (which might be partially true). I wouldn’t suggest wikipedia-like [citation needed]s, but some sources would be cool to go read up on.

    1. Part of Detroit’s problem is that its products are typically accompanied by harrowing reliability, horrendous dealer experience, and a stinginess with warranty repairs that has cost them dearly. Honda and Toyota dealers don’t necessarily win any prizes in dealer experience, either, but there are better odds of not needing to deal with them as much. Detroit has relentlessly abused its customers for 30 years, and tried to make up for it with fire-sale pricing. A lot of people’s reaction to the Fusion or Malibu is going to be, “Well, let’s wait a few years and see whether they become nightmares after three years,” and it’s hard to blame them. Building a positive reputation takes time, and time is a luxury they do not have.

      Many of the sources I use can actually be found in the “bookstore” link in the main menu. Not all of them are in print, sadly. Among the most valuable sources are vintage magazines, particularly the old [i]Special Interest Auto[/i] (which has mutated into the various current Hemmings magazines). In their early days, [i]SIA[/i] had interviews with the people involved in the cars, many of whom were recently retired — primary sources are far, far better than enthusiast histories or press release journalism.

  4. Reading this four years after it was written is kinda shocking in a way. Fiat came in and “rescued” Chrysler (and is now saving Fiat because Europe is in dire times). Mercury has been killed off and Lincoln is trying to be rebooted. GM is looked upon as wasted money by some because it didn’t go thru bankruptcy court to starve off the union.

  5. Another superb article. Would be interesting to have a follow-up article, bringing the protagonists up to the present.

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