Ed Wallace

Detroit After the Next Collapse

By Ed Wallace

Last week GM CEO Mary Barra was summoned to Washington to explain why she had made the decision to shutter another five factories in Canada and the U.S. After all, closing plants in politically sensitive regions, such as Michigan and Ohio, doesn’t play into the Make America Great Again script at all. But it wasn’t that many years ago that another GM CEO was also called to appear before Congress; in that chapter of this ongoing story, Rick Wagoner was chastised for not acting more quickly to put GM into a profitable business plan — and then beaten up for having the audacity to fly to that session of Congress in a GM corporate jet.

One CEO of General Motors was blasted for not taking far more dramatic steps to right the listing ship of what was once the world’s largest corporation, while a decade later another CEO is taken to task for doing the right thing. And if that isn’t proof that Congress loves to stage little show trials for the media’s consumption, then nothing does.

The real issue is what Barra was forced to do is brilliant short-term management, but is likely to damage Detroit in the long term. The automobile factories that Barra has announced for closing have built such vehicles as the Chevrolet Volt, the Cadillac CT6 and XTS, the Chevy Impala and Cruze, and the Buick LaCrosse. The first assumption is that those vehicles will go out of production, though only the Chevy Volt has been declared dead in the water.

Earlier this year Ford made a similar announcement in ending the production runs for its Fusion and Taurus sedans, the C-Max, and the Fiesta subcompact. Chrysler also canceled its 200 sedan and the Dodge Dart, so the list is certainly growing.

The Smart car is coming to the end of the road, as did the Hyundai Azera and Mitsubishi Lancer. True, some vehicles have overlaps with other products by the same manufacturer; and even Toyota is thinking about pruning its lineup — starting with vehicles that compete with other Toyotas. But no imported make is seriously considering dropping all or even most of its automobiles simply because we’re in another era when the public’s first choices for vehicles are once again trucks, SUVs, and crossovers.

The Stressed-Out Seventies

Let’s think back on the 1970s, a truly turbulent period for the American economy. It was first rocked by President Richard Nixon’s price controls, which is what actually led to the first lines for gasoline, months before the Arab Oil Embargo. You may remember that Detroit’s menu of fuel-efficient vehicles was woefully lacking once gasoline became more precious. True, Chevy had its Vega and Ford its Pinto, while Chrysler had the Colt, made by Mitsubishi. Not a great line up and it showed in sales. In 1973 the public purchased 14.5 million new cars, then a record number, after the energy crisis just two years later, only 11.1 million new vehicles were sold.

It took three years to recover those lost sales with another high-water mark, 15.4 million new vehicles sold in 1978. Then came the Second Energy Crisis, and we watched new car sales fall for four years in a row, down to a pitiful 10.5 million vehicles.

In March of 1980 Paul Volcker, then head of the Federal Reserve, increased the key rate to 20 percent, because inflation in America —a continuation of both the massive influx of Baby Boomers into the workforce, combined with the problems remaining from Nixon’s price controls years earlier — had hit 14.8 percent that same month. Volcker’s move had the effect of slamming the economy nearly to a dead stop, while three years later inflation was finally back to a more manageable 3 percent rate.

The big problem was that the Second Energy Crisis slowed us down enough to take stock, and Americans discerned how differently American-made cars were engineered as compared to the Japanese models. America’s offerings didn’t measure up.

It didn’t help that the late Seventies also highlighted Detroit’s shortcomings in taking care of their customers. Ford’s Granada was a huge success when introduced in mid-decade, but within two years its metallic paints, including light blue, silver and red, all washed out, leaving nearly new cars looking old and faded. Chrysler was known for its outdated styling, and GM also delivered problems of its own making.

For example, a 1976 national strike at tire manufacturers had GM shipping its products without spares, promising delivery once that strike was over — only GM made no attempt whatsoever to deliver the same type of tire for a spare that was already on the sold and delivered vehicles. And the very next year, GM was caught switching engines between its automotive divisions.

Today you wouldn’t think anything about switching engines, but in the Seventies there was a huge difference between the V-8 engines that powered the Chevy Monte Carlo and the Buick Regal. So different were they that salespeople for each division had to be trained about why a certain engine was used in their vehicles and not others. They in turn sold those benefits to their customers — only to be made out to be liars once the engine-switching fiasco was released to the public.

In those days, GM held meetings at its training center in Garland to haul dealers and salespeople into the corporate cover-up. Needless to say, it didn’t work.

From Compacts to No Cars

Within a couple of years, when the Second Energy Crisis started, customers were waiting months to take delivery of the new 1979 Honda Accord sedan. And they were paying more money for that compact car than a full-sized Oldsmobile 98 cost.

Detroit responded; and, although some of the manufacturers’ hyped product was just more of the same, other vehicles, such as the first Chrysler minivan and the Ford Taurus, reset the auto industry. But while Detroit’s automakers were starting their comeback on cars for the masses, Japan had already shifted gears to take on the American luxury divisions — Lincoln and Cadillac — not to mention anything high-end coming out of Germany.

This time what saved Detroit was the introduction of the first Ford Explorer and the public’s love for trucks. At peak, Ford was selling almost 1.5 million of its Explorer and F Series trucks in one year. Then in 1999 gasoline fell to 99 cents a gallon, and suddenly General Motors couldn’t build enough Suburbans to meet demand. But here is where the old guard at GM finally went away; the corporation was handed over to Rick Wagoner, and he realized almost immediately that depending totally on trucks and SUVs was not smart because oil and gasoline prices almost certainly would once again skyrocket one day. So Wagoner hired legendary “car guy” Bob Lutz and put him in charge of fixing GMs’ entire lineup, for the first time in maybe four or five decades.

Immediately Bill Ford stated that he was going to remake his company and announced that it would be “the year of the car.” Chrysler then introduced its 300 sedan, and for the first time in its history owners of BMW and Mercedes products were trading them in for a Chrysler.

By the time of GM’s bankruptcy, Lutz had completely remade the company’s lineup, and it was the best in General Motors’ history. Ford was not far behind, and under Alan Mulally pushed its retro Mustang and new Fusion, while bringing over more Ford European-designed and engineered cars. Chrysler, under Fiat, also showed phenomenal gains. And we reached the point at which Detroit took a backseat to no one for the quality of their products.

Only the public didn’t care. No; sales of cars, and fuel-efficient ones at that, fell with the price of gasoline. Even traditionally super-popular vehicles like the Accord and Camry were taking a hit. Customers had also turned to compact crossovers; and they did so in such numbers that pricing for those vehicles has gone up substantially. Not to mention that many trucks today sport window sticker prices four and five times higher than the average truck sold for just 30 years ago. And still the public can’t get enough.

For a factory to be profitable with the vehicles it produces, the utilization needs to be in excess of 80 percent; and really profitable products come out of factories that exceed 100 percent utilization. GM made the decision to close plants whose utilization was often 25 percent or less. The bad news is that it didn’t close all of its severely underperforming plants.

So GM, Ford, and Chrysler have all announced that they are dumping many, if not most, of the truly exceptional cars they finally created to prove that they were equal to the best of Japan. In fact, the Ford Fusion, Chevy Cruze, Cadillac CT6, and Chrysler 300 fit the Make America Great Again script perfectly. Only the public didn’t care; they love the trucks, SUVs, and crossovers Detroit makes.

Once again, this plan is brilliant, as long as the price of oil never goes up again.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com

  Comments