The End of Detroit (2 page)

CHAPTER ONE

HOW DETROIT
LOST ITS GRIP

DETROIT
’
S LONG REIGN
as the dominant force in the American car industry is over.

Exactly 100 years after Henry Ford sold his first automobile in 1903, imports have taken an unshakable hold on the American consumer and are leading to the demise of inarguably the most important industrial force that America has ever produced. Like the steel industry before it, like the airline industry to an increasing extent, as with retailers, the balance of power in the car industry has shifted away from Detroit’s giant companies—General Motors, Ford Motor Co. and Chrysler Corp.—toward smaller, more nimble players that can react faster to the competitive landscape.

It’s an unthinkable but undeniable reality, one with tremendous ramifications for American life and the business world in general. During the twentieth century, the automobile changed everything in the United States, from the way people commuted to work, to where they lived, to the way they conducted romance. The automobile triggered the development of the interstate highway system, allowing Americans to see every corner of their country at ease. It created suburbs and exurbs, beginning with bedroom communities within a few minutes’ drive of downtown areas, to sprawling developments that extend for 50 miles or more outside major cities. At their peak a scant 40 years ago, Detroit-built vehicles accounted for more than 9 of 10 automobile sales in the United States. Nearly a million people worked in automobile plants, and every manufacturing job created by Detroit generated five more, at auto parts suppliers scattered across the country, at steel mills in Pittsburgh, Cleveland, Detroit and Chicago, and at coal mines in West Virginia and in the Deep South. The neon lights of car dealerships from Maine to California lit the night sky, and the arrival of the year’s new vehicles every autumn generated long lines of automobile enthusiasts eager to see the latest models.

But Detroit’s single-handed control of the American automobile industry has been lost forever. From small cars to luxury cars, from family sedans to minivans, vehicles made by foreign-based companies are escalating in popularity, attracting an unending stream of converts every year from among owners of vehicles built by Detroit’s Big Three. Four of every 10 vehicles sold in the United States in 2003 will be built by companies with foreign nameplates. That is a vivid contrast to 1960, when General Motors alone controlled 60 percent of the automobile market and the U.S. government constantly threatened to use the Sherman Anti-Trust Act break up its operations. Few could have imagined imports’ popularity in 1964, when the Ford Mustang and its creator, Lee Iacocca, accomplished the almost-impossible feat of landing simultaneously on the covers of both
Time
and
Newsweek
. At the time, the only imported car that most people knew about was the Volkswagen Beetle. Toyota was selling only a few thousand cars a year in the United States, and Honda had yet to produce its first car in Japan.

Yet today, GM, Ford and Chrysler together control barely the market share that GM itself held four decades ago. Buyers of all ages, incomes, ethnic backgrounds and social strata are choosing foreign companies’ cars and trucks over those produced by Detroit. Consumers may sigh nostalgically over the cars their parents drove, and they still crowd curiously around the vehicles that Detroit puts on display at auto shows and in shopping malls. But when it comes to spending their hard-earned dollars, their decisions tell a much different story.

Thanks to their record of quality and reliability, Toyotas and Hondas have become today’s Chevrolets and Fords. In the luxury market, Lexus and BMW cars have supplanted Cadillacs and Lincolns. Where once foreign cars were considered to be the domain of the wealthy, the eccentric or the unpatriotic, now everybody knows somebody who drives a foreign car—in part because foreign cars aren’t really foreign anymore. Millions of them are built in the United States every year, to an enthusiastic reception from their owners: grandmothers in Michigan, computer programmers in Texas and high school students in Nevada. If the current sales trends continue, cars and trucks from foreign-based companies could easily, some say inevitably, account for 50 percent of all American sales by the year 2010.

How could this have happened? The automobile industry, after all, has been the biggest economic engine this country has ever known, save for the war effort during World War II (as plenty of people will remind you, this was led by Detroit, which transformed itself overnight into the Arsenal of Democracy). Thanks in part to Henry Ford’s philosophy that factories should be built near where consumers bought products, automobile plants were established in all corners of the country, from Framingham, outside Boston, to Los Angeles, from Minneapolis to Atlanta. The center of production, and of the automotive universe, of course, was Detroit, where afternoon skies were clouded by a gray haze from the automobile, steel, glass and parts plants that churned out a seemingly endless supply. Well into the 1990s, GM produced 70 percent of all the parts that it used on its cars. In 1979, when Chrysler teetered perilously close to bankruptcy, the nation gasped at the idea that one of America’s industrial giants might shut its doors. While there were cynics who argued that Chrysler should be allowed to go out of business, the victim of its own mismanagement, its supporters rallied to convince Congress to pass $1.5 billion in loan guarantees, giving the company time to find its way back.

Today, thanks to the failures of firms such as Enron, WorldCom and United Airlines, a call for help from the automobile industry might well go unheeded or, at the very least, face a much more difficult time being addressed. Indeed, there is a strong chance that by the end of this decade, at least one of Detroit’s Big Three will not continue in the same form that it is in now. Already a German company owns Chrysler, and the difficult economy that has come about in the aftermath of the 1990s bubble is making it all the harder for Detroit to cling to market share. The dissolution of a Detroit automaker would be a tragedy for its employees and vendors. But, given the vast array of vehicles that they can choose from now, consumers might not even miss one of the Big Three companies should it disappear. The shift did not happen overnight. It has taken place slowly but steadily over the past 20 years. Either Detroit wasn’t paying attention, or if it did notice, the center of the automotive universe plodded on blindly in a state of denial.

The ultimate irony of Detroit’s demise is that it has been defeated by companies that do the job that Detroit once did with unquestioned expertise: turn out vehicles that consumers want to buy and vehicles that capture their imaginations. Toyota, Honda, Mercedes and BMW have never made industrial size their ultimate priority. They made vehicles their ultimate priority. They poured all their resources—human, financial, engineering, manufacturing, marketing and sales—into achieving their goal. They have not tried to be all things to all people, as GM strived to be with “a car for every purse and purpose,” a philosophy from which it has not strayed since the phrase was crafted by Alfred P. Sloan in the 1920s. They have not focused on one category in their lineup to the detriment of all others, as Ford did during the 1990s with its slavish devotion to sport utility vehicles. With their efficient development methods, their focus on manufacturing, and most important, experienced engineers in critical management jobs, the foreign companies never forgot that they were in business to develop top-quality cars and trucks that appealed to customers, as opposed to rental-car models and government fleets.

The overriding goal of General Motors and Ford has never been to simply be good, but to be big and to grow as strategically as possible. Selling one vehicle at a time to one customer at a time, the way the best foreign companies approach growth, simply was too slow. Throughout the 1990s, GM and Ford poured billions of dollars into a variety of foreign companies, from Fiat at GM, to Jaguar and Volvo at Ford, with disappointing results. Daimler-Benz’s purchase of Chrysler was supposed to provide the German company with a cash machine and easy access to the American mass market. Instead, DaimlerChrysler wound up being bogged down in cultural clashes and product delays, suffering huge losses that set back its competitive drive for years.

Deals, not product development, have driven GM, Ford and Chrysler in the past decade—and no wonder. With only occasional exceptions, Detroit executives have traditionally been finance men who look at vehicles themselves as an end result of a great enterprise, rather than critical products to which the utmost attention should be paid. There has long been a saying in Detroit that General Motors, with its huge credit, financing and mortgage operations, is less of a car company than a bank that builds cars. Indeed, three of the last four GM chief executives, including its current CEO, G. Richard Wagoner, came up through its New York finance staff. Although William Clay Ford, Jr., is the fourth generation of his family to run the auto company that bears his name, he is yet another finance executive, schooled at Princeton and Wharton. Only Dieter Zetsche, the Turkish-born German executive in charge at Chrysler, can claim an engineering background, and it is Zetsche, in fact, who is trying hardest to shift his company away from being seen as a Detroit carmaker. He is fully aware of what imports have done to Detroit’s hold on the American industry and the unebbing erosion that lies ahead. Among all the executives in Detroit, it is Zetsche who is acting the most urgently to help Chrysler avoid that fate, at the same time fully aware that Chrysler’s legacy of substandard quality is its biggest obstacle to success.

The companies that threaten Detroit are led by men who understand vehicles inside and out, who have dedicated their careers to meeting their customers’ needs. There is Fujio Cho, the ebullient chief executive of Toyota, who spent years in charge of Toyota’s giant manufacturing complex in Georgetown, Kentucky, where he walked the long assembly lines daily and spent endless hours getting to know his employees. When other executives at the company doubted that American Toyota workers could match the quality of Toyota’s vehicles in Japan, Cho insisted that they could, and oversaw an expansion of the plant that brought workers the chance to build large sedans and minivans. A modest man—a rarity among CEOs—Cho is taking that same determination now to Toyota on a global scale. By the year 2010, he wants Toyota to sell 15 percent of automobiles worldwide, which would make it the world’s biggest player, exceeding General Motors, which has been the world’s leading car manufacturer since the 1920s.

Helmut Panke, the chief executive at BMW, is another such determined executive. He has made sure that his company has the clearest brand image among the world’s automakers. Tall, lanky, with silver hair and bright eyes, Panke was trained as a nuclear engineer and began as a corporate consultant with McKinsey & Company. He was hired by BMW as it was looking to shift its image from specialty carmaker, with a narrow appeal, to a company all kinds of people could admire. Panke is holding a delicate balance between preserving the German company’s tradition for performance automobiles and seizing upon ideas to enhance BMW’s position. While running BMW’s American operations during the 1990s, Panke heeded his dealers’ cry to develop a luxury sport utility vehicle that would be among the fastest on the road. Panke also saw the promise that the Mini Cooper offered in attracting younger buyers, and he turned the 1960s icon into a smash hit for the new millennium. That open-mindedness helped BMW spar with Lexus in 2002 as the best-selling luxury brand in the United States, and Panke is now aiming to increase sales in the years ahead as he broadens BMW’s lineup. Even as he does so, he is pledging that a BMW will always be a BMW.

Carlos Ghosn, the charismatic chief executive at Nissan, is perhaps the most instantly recognizable automotive figure, aside from GM’s Robert Lutz, in the industry today. With his hawklike face and quick, clipped speech, the Brazilian-born executive of Lebanese descent has become so popular since arriving in Japan in 1999 that he has starred in a series of comic books. Under Ghosn’s leadership, Nissan has undergone a transformation. When he joined Nissan upon its alliance with the French automaker Renault, the Japanese company was saddled with more than $20 billion in automotive debt. Its product lineup was dotted with also-ran vehicles that required thousands of dollars of incentives to sell. And Nissan was bogged down by a corporate culture rooted in the past, with too many interlocking ties to suppliers. Today, Nissan has eliminated its debt. It has become one of the leanest, fastest-moving companies in the world, mirroring Ghosn’s own impatience to push Nissan forward. In 2003, Nissan opened a new factory in Canton, Mississippi, where it has begun building a crucial new series of vehicles, including the Quest minivan, the Titan pickup truck and two big SUVs. In addition, Nissan has even more vehicles coming, all developed swiftly and sharing components with Renault. By the middle of the decade, Ghosn is expected to take control at both Renault and Nissan, coordinating the attack of what he hopes will become one of the world’s leading automotive giants.

Whether based in Tokyo or Munich or California, executives of these foreign companies share the same enthusiasm and drive and belief that their companies, though not the world’s largest (at least not yet, in Toyota’s case), can have a tremendous influence in individual markets such as the United States. In doing so, they shield themselves from the economic forces that have been Detroit’s own undoing. With its emphasis on size and economies of scale, Detroit has always been vulnerable to the boom-and-bust cycles that have been a part of the car industry since its inception. As long as Detroit could rake in enough profits during good times to make up for the losses it encountered during lean years, that never mattered. Before imports’ push began, Detroit’s solution to any softening of sales was simply to shut down its plants to keep its vehicle inventories in line with sales, laying off for months on end. No more: Current United Auto Workers labor contracts at GM, Ford and Chrysler require the companies to pay their workers nearly all of their income, whether they are on the job or not. Moreover, the companies are limited from permanently closing factories without the union’s agreement, and must finalize any such moves during contract negotiations, a process that ensures generous benefits for workers who are losing their jobs.