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Turnaround in Motor City?

Can the beleaguered Detroit auto industry manage a fiscal U-Turn?
| By Paul A. Eisenstein | From Catherine Zeta-Jones, September/October 2009

When Bob Lutz climbed aboard his helicopter in February, fired up the engine, and lifted off the makeshift landing pad at the now weed-choked edge of the General Motors Technical Center, in Warren, Michigan, it seemed the end of an era. With a salute learned during his days as a Marine pilot, the 77-year-old executive pulled back on the stick, lifted into the air and made a low pass over the "Design Dome," the silver-topped studio where some of the automaker's best—and worst—products have gone through the review process over the last half century.

Lutz had been brought in by the former GM chairman and CEO Rick Wagoner to help fix the automaker's broken product development system, an enterprise once renowned for vehicles like the Corvette and Cadillac Eldorado, but more recently reviled for abortive efforts like the Pontiac Aztek. After nearly seven years, the septuagenarian had pulled off some minor miracles, like the award-winning Chevy Malibu and Cadillac CTS. But with GM's fortunes failing fast, Lutz had calculated that a turnaround would take at least five more years. "I did the math and decided 82 was a little old to be dealing with these problems."

Lutz was by no means the only senior executive walking away from GM—whether by choice or coercion. Wagoner, the former college basketball star, had projected a full third of the company's top management would be gone by year's end—even before he himself was benched by the Obama Administration. The White House, which was dangling a $50 billion bailout package, became convinced Wagoner simply couldn't accept that the only way to save the 101-year-old automaker might indeed be to break it—to accept that bankruptcy was necessary to shed GM's crushing debt and restructure an unworkable cost base.

Mere months later, the once impeccable General Motors had achieved restructuring in record time. And Lutz had changed his mind about retirement, deciding the government would make a good partner and that a leaner, meaner GM was set for a turnaround. This time he would concentrate on his area of expertise—marketing—saying that his stint in product development had been "like practicing medicine without a license."

Not only were things starting to move at GM, but Chrysler, now allied with Fiat, had negotiated bankruptcy court equally as quickly. Ford has achieved its own peace, rejecting government bail out money in the belief that it could weather the economic storm by itself. Still the government-led effort to save the makers has generated a sizable measure of controversy, even triggering the threat of a boycott of GM and Chrysler products. After years of decline, there is plenty of justification for skepticism, yet there are also signs that the Motor City makers shouldn't be counted out, either collectively or individually.

GM and Chrysler are leaner, more aggressive entities than they have been in decades. Ford, meanwhile, is taking assertive steps of its own and beginning to reap the rewards. And after years of lackluster efforts, American companies are starting to turn out models that are making the auto critics approve.

At General Motors, the man called in to replace Wagoner was, to some, an unlikely hero in this scenario. Physically the Jeff to the ousted CEO's lanky Mutt, Frederick "Fritz" Henderson actually followed much the same career path as his mentor and predecessor: the Harvard MBA, the start at the GM Treasurer's Office, in New York, the overseas assignments including a stint in Brazil and Europe, and in Henderson's case, China. But the blunt and pragmatic Henderson knew that his job— and everyone else's at GM—depended on accepting the unacceptable. And on June 1st, Henderson, with the corporate board's reluctant approval, signed the paperwork that essentially ended the existence of a company that, for most of its first century, was synonymous with American prosperity and might.

No, the oft-quoted line attributed to former GM President Charley Wilson, "What's good for General Motors is good for America," wasn't quite accurate. (He actually declared, during a Capitol Hill hearing that "What's good for America is good for General Motors, and vice versa.") But choose the version you wish, for much of the 20th Century, either seemed to fit. But do they still, today? Apparently, the answer is yes, at least if you believe President Barack Obama, who is risking both his personal reputation—and tens of billions of dollars of taxpayer money—to bail out not just General Motors but its crosstown rival Chrysler.

The Arsenal of Democracy

If Detroit was the "arsenal of Democracy" during the Second World War, GM packed the heavy powder. When peacetime returned, it became the big engine of the economy. By the mid-1960s, its brands, Buick, Cadillac, Chevrolet, GMC, Oldsmobile, Pontiac, controlled more market share than all its competitors combined—triggering a decades-long battle with a Justice Department Antitrust Division that was intent on breaking up the automaker. It needn't have worried. Success was about to lead to excess, excess to complacency, complacency to failure.

Exactly when things began to go wrong is likely to be a subject of debate for years to come among the kids who follow Wagoner and Henderson into the Harvard MBA program. Perhaps one can point to that ultimate symbol of American excess, the finned '59 Caddy Eldorado, the sheet metal interpretation of the national mantra: bigger is better.

Like most of its crosstown competition, GM largely ignored the arrival of the first imports. How could one take seriously the likes of the Volkswagen Beetle? And did the war-ravaged Germans really think Mercedes-Benz could challenge Cadillac? Of all the Detroit makers, only tiny American Motors seemed to recognize the potential of small cars, but it was little more than an asterisk on the sales charts, the weakest domestic entry waiting for an eventual acquisition.

Even after the first oil crisis, in 1973, Detroit held fast, giving lip service to downsizing, but little more. Sure, makers would be forced to redesign or eliminate the biggest of their traditional land yachts, if for no other reason than the new Corporate Average Fuel Economy, or CAFE standards. But they would soon find alternatives by turning classic work trucks into personal use vehicles. The much berated Ford Excursion would dwarf even the largest Caddy or Lincoln of the Elvis era. But such products were still some years into the future.

Coming out of the twin oil shocks, GM's new CEO recognized there were some problems. But like his counterparts across town, the squeaky-voiced, pasty-complected Roger Smith might well have been reminded of the classic line from the Pogo comic strip, "We have met the enemy, and he is us." Smith just knew it was his destiny to rebuild GM's fortunes, and he was willing to spend money like a Pentagon planner to achieve his goals. Almost everything he started made matters worse.

An ill-conceived corporate reorganization, in 1984, virtually paralyzed the company and led to a series of follow-up moves insiders dubbed "the reorganization of the month." Questionable acquisitions of non-automotive companies never lived up to financial expectations, but the purchase of computer services giant EDS did bring the automaker a new board member named H. Ross Perot, whose primary purpose in life seemed to be to make Smith's own existence miserable. At one point, the prepresidential candidate Perot turned to reporters and declared that the best thing that could happen would be "to nuke GM." A wave of new products launched under Smith were derided for their plain looks—and the fact that you couldn't tell a Pontiac from a Chevy from a Cadillac, something highlighted on a cover of Fortune magazine. Meanwhile, the new factories designed to build them proved anything but efficient. The robots at a Caddy plant, in the Detroit enclave of Hamtramck, had an annoying habit of malfunctioning.

Denying Reality

Yet Smith and his minions seemed oblivious to the storm clouds rising over the Motor City. Following a speech at the Chicago Auto Show in 1987, retiring General Motors President Jim MacDonald was asked what he would say to several key analysts, who were then forecasting that GM would lose as much as four points of market share that year—about as much as Toyota then held. "I'd tell them they're smoking opium," said the taciturn exec. The analysts had actually underestimated the loss.

Management alone didn't deserve all the blame. The United Auto Workers Union, born of confrontation in the Flint sit-down strikes of the '30s, was among the first to hold out its collective hand when times were good. It could also put up a solid front of resistance when things got bad. The union slowly began to recognize that it had to play a role in improving quality and productivity, but for the most part, each union concession required a quid pro quo. Hoping to mollify the union, Smith's successor, Bob Stempel, agreed to what may have been the most socially-progressive—and financially ill-conceived—indulgence ever offered by the auto industry. Known as the Jobs Bank, it essentially created a make-work program for UAW employees displaced by measures, like the expanded use of robots.

The UAW had long engaged in the triennial practice of selecting a "strike target," the company positioned to give it the best deal, which the union would then bicycle over and demand of the other two makers. Despite the occasional claims by one or another of Detroit's manufacturers, they followed much the same policies. And they lived in a shared fantasy. If MacDonald thought GM would gain share, former CEO Harold "Red" Polling was promising to "drive the Japanese back into the sea." Yet it would be Detroit that would eventually need a life jacket.

If there's a sense of déjà vu to Chrysler's current crisis, that's because it indeed happened before. The smallest of the Big Three has had what might be described as a bipolar existence since its founding almost 75 years ago. "Every Chrysler Chairman has had to save the company," noted former CEO Bob Eaton, "some twice." The legendary Lee Iacocca's first brush with bankruptcy led him, on September 7, 1979, to request a government bailout. Without concessions from everyone, including workers, suppliers, dealers, banks—and the government—the ever-colorful executive declared, "the pieces of the mosaic fall off the wall."

After a bitter battle in Congress, Chrysler narrowly won a $1.5 billion package of federal loan guarantees—though not the direct infusion of cash that it has gotten this year. To the surprise of almost everyone, the debt would be paid off early and the automaker was saved, at least until it ran into trouble a decade later and it nearly foundered again. Always the most cash-strapped and resource-limited of the Detroit makers, Chrysler came up with a brilliant strategy. It redesigned some of its classic work trucks, pickups and SUVs into personal use vehicles, creating alternatives to the huge wagons and boat-like sedans effectively banned by the new government fuel economy standards. (A loophole in the CAFE law required light trucks to meet lower mileage standards.)

Running on Empty

The launch of products like the Jeep Grand Cherokee sparked one of the most dramatic shifts in the American market in automotive history, and by the dawn of the new millennium, pickups, minivans, SUVs and other light trucks accounted for roughly half of all U.S. new vehicle sales. More significantly, they provided Detroit with its only real source of profit, since the makers had largely ceded the hotly competitive passenger car segment to the Japanese.

But as demonstrated year-after-year, Detroit's makers seemed oblivious to trouble on the horizon. Blinded by the big profits generated by their big trucks, they ignored forecasts of rising fuel prices. Even before last year's huge run-up to $4-a-gallon gas, sales of SUVs and pickups were beginning to slide, but while it's easy to play Monday morning quarterback, cautions independent auto analyst Joe Phillippi, Detroit wasn't alone in wearing blinders, this time.

While it may have a reputation for green vehicles like the Prius hybrid, Toyota now has as many trucks in its fleet as its domestic rivals, and has actually seen its average fuel economy decline because of products like the big Tundra pickup. The Japanese giant, which last year pushed past GM to become the world's largest automaker, recently spent $1.5 billion to set up production of a new, full-size Tundra pickup in San Antonio, Texas—a truck that has so far fallen far short of expectations and contributed significantly to Toyota's recent record losses.

The key difference is that the Japanese, in particular, have a more balanced fleet, with flexible plants that are better positioned to respond to short or long-term shifts in market demand. That has helped them—along with importers from Europe and South Korea—capture a majority share of the American market for the first time ever.

It's not that the imports aren't suffering in the current economy. With the sales of new vehicles off a whopping 47 percent in the United States from their peak earlier in the decade, "no one has escaped," says Phillippi. The current market conditions have left everyone exposed.

And what the world discovered about GM and Chrysler, late last year was that the two makers were running on fumes. The bigger company, its cash flow slowing to a trickle, didn't have enough money to make it through the end of 2008. Chrysler was no better off after two abortive sales left it stripped of assets. The so-called "merger of equals," with DaimlerChrysler, a decade earlier, proved an unmitigated disaster. And the 2007 sale to Cerberus Capital Management—an analysis by The Economist actually suggests the Germans paid the private equity firm to take Chrysler off its hands—was even worse. By the time then-CEO Bob Nardelli sat down before Congress, last December, the corporate and product development center, in suburban Detroit, was a virtual ghost town.

The Gradualist

That's not to say the two companies hadn't foreseen the crisis. GM, if anything, had been closing plants and trimming jobs for several years, but CEO Rick "Wagoner was a gradualist. He simply couldn't bring himself to make the needed changes," contends a senior GM executive, who still considers the ousted CEO a friend, and asked for anonymity. Indeed, Wagoner seemed to suffer from the same inability to see the world around him that had hobbled his predecessors.

Like Chrysler, GM was able to talk the outgoing Bush Administration into providing an interim loan. But when the Obama Administration set up its auto task force, Wagoner's days were numbered. When it became clear the CEO couldn't accept the idea of a GM bankruptcy, he was forced out and replaced with Henderson, who seemed almost eager to do what Ross Perot had suggested years before: "nuke GM."

Chrysler was the first to file for Chapter 11, and its march through federal court, in New York, happened in record time. Those college textbooks will long study the bankruptcy case and whether decades of tradition and precedent were needlessly tossed out the window in favor of expediency. But the hasty process served as a model for the even bigger matter of GM's bankruptcy, filed on June 1st and resolved in six weeks.

Because of its hefty cash infusions, the U.S. Treasury now, effectively, owns both makers, though part of the deal to save Chrysler means the post-bankruptcy automaker is effectively under the control of the Italian automaker Fiat. Both makers have shed the majority of their debt, and radically leaned out their bloated cost structures. Henderson insists GM's cost structure is now in line with the best of the Japanese, notably Toyota.

It's certainly a much smaller General Motors. All told, it will now have about 64,000 white- and blue-collar workers on its American payroll, and significantly fewer abroad. In fact, GM was planning on selling a majority stake in Opel, its European subsidiary.

But perhaps what is most important is that there's a new sense of urgency, insists Susan Docherty, head of Buick, one of just four brands GM will retain in North America. "One thing that's changed in my world is moving with speed," says Docherty, adding that, "In the past, our company was data-rich but insight-poor. The quick insights we're now getting are culturally new here. But I believe this will be a part of GM from now on."

Government Motors

For at least the next year or two, the reborn General Motors will be a private company, the U.S. Treasury holding 60 percent of its stock, the rest divided up among a UAW health care fund, lenders and bondholders who traded debt for equity, and the Canadian and Ontario governments. In a speech made the morning GM went into Chapter 11, President Obama declared that, "What we are not doing—what I have no interest in doing—is running GM." Whether the government can hold to that promise remains to be seen, of course, and politicians are not, by nature, given to releasing the reigns of power.

Even if the government does show uncharacteristic restraint, the bailouts have been polarizing. Would there have been such a hue and cry had the job been completed by the Bush Administration? It's hard to say, but a number of conservative leaders, including the right-wing talk show host Hugh Hewitt, are outraged. He has frequently called for a boycott of what he calls "Government Motors," to protest the "Obamaization of the American car business. " Hewitt insists "individual Americans" must resist buying the automaker's products because, he wrote in one blog entry, "every dollar spent with GM is a dollar spent against free enterprise."

Even though such threats have so far had little impact on sales, it's not surprising GM's Henderson hopes to get the government out of his company as soon as possible. "Our highest overriding objective is to pay back both the Treasury and Canadian government and pay the highest possible return on their equity. It's our job to create real value for our shareholders and to repay the loans. The government said, and I believe them, that they will sell off their equity over time. My job is to do the best we can and if we do, we'll create real market value for them."

It's not just right-wing boycotters GM has to worry about. Over the decades, notes Art Spinella of CNW Marketing, the automaker has steadily slipped off the shopping lists of millions of American buyers. Even before the bailout, nearly four in 10 wouldn't consider a GM product, no matter how good, the research firm found. That's especially true in places like the trend-setting state of California, where the imports first gained a foothold, and the affluent Northeast, where those upstart Mercedes products now handily outsell Cadillacs.

If anything, that's good news for Ford, which doesn't shy away from reminding the public that it didn't need a bailout. That's not to say Ford doesn't have plenty of its own problems. It's also relied heavily on pickups, such as its F-Series, and SUVs. And it has had to trim production and its workforce. But the maker has gotten most of the same concessions from the UAW and has worked out its own strategy for reducing debt. Significantly, it has benefited from public concerns about bankruptcy and bailouts, according to research by the consulting firm AutoPacific, showing notable improvements in sales in recent months.

Ford has made gains in terms of productivity and quality, as well. But so have its rivals. In fact, Detroit has been doing a far better job, in many ways, than critics might realize. "Even in the face of unprecedented challenges, the Detroit automakers are keeping their focus on designing and building high-quality vehicles, which is a precondition for long-term success," noted David Sargent, vice president of automotive research for J.D. Power and Associates, which recently reported that the Big Three showed spectacular improvements in Power's oft-quoted Initial Quality Survey.

Even before last year's financial crisis, meanwhile, the influential Harbour Report, a measure of factory floor efficiency, showed that Chrysler had already matched the productivity of Toyota, and GM was closing fast. With the union concessions they have received, says the study's eponymous director, Ron Harbour, the Big Three as a group could soon be the most efficient makers in North America.

GM products, notably the Malibu, captured the influential North American Car of the Year honors—awarded by a jury of 50 U.S. and Canadian journalists—in two of the last three years. And several new offerings, such as the Chevy Equinox crossover, are considered front-runners for next year's awards.

Now What?

Despite such good signs, skeptics still have plenty of reasons to question the long-term viability of the Big Three, GM in particular. It's going to take plenty of corporate willpower not to slip into old, bad habits, company insiders admit. And it won't be easy to win back the trust and acceptance of the American public.

To help start that process, GM is turning, once again, to Bob Lutz. Agreeing to rescind his retirement, he will now focus on what might be called the public face of the company, its marketing and advertising. It'll be a challenging position, and not just because so many potential customers have turned off to the company. Simply reaching today's car buyers is far more difficult in a world where their attention is being drawn not only to broadcast TV, but 500 cable channels and the Internet.

Noting he likes "experimentation," Henderson has authorized a partnership with eBay in which GM products will be offered up much like other auction products. It could usher in an assortment of nontraditional sales and marketing strategies.

With half its divisions being sold or abandoned, GM expects to suffer a drop in market share, already down to 20 percent. But longer-term, new CEO Edward Whitacre Jr. insists he sees opportunity to regrow it "organically." He has a good track record to point to, for Whitacre is best known for stitching back together AT&T from the various Baby Bells spun off after a court-ordered break-up of the telecomm giant.

Could he have something similar in mind for GM? It's unlikely the automaker would ever try to buy back Hummer or Saab—though it has given strong signals it will eventually seek to regain control of Opel. And if the turnaround plan does prove effective, few seriously think GM will be happy to let Toyota go unchallenged as the industry's new king of the hill.

It's been a long, hard fall for Detroit, General Motors, in particular. And the folks who ran the industry during its heyday would probably be hard-pressed to even recognize what has emerged from the bankruptcy courts. But then again, Detroit did survive, albeit with the help of billions in taxpayer dollars. Now comes the hard part, proving the domestic makers can be viable enterprises again, winning back the skeptical buyers who have increasingly shifted their loyalty—and spending—to the imports.

Paul A. Eisenstein is a contributing editor to Cigar Aficionado.