The decline of the North American car

The roaring ’90s launched the era of easy credit, and automakers pushed “zero per cent” financing deals, which drove sales higher at the expense of profit margins. The recession of 2001 should have forced Detroit to pause, re-evaluate and restructure, but any soul-searching was short-lived. Americans kept on spending and Detroit kept paving its road to ruin, selling big, uninspired cars for low prices, and all but repeating the mistakes of the 1970s. “Eventually that cheap credit created more problems than it solved,” says James Rubenstein, an auto analyst and professor at Miami University in Ohio. Markets were flooded with a glut of new cars (often off-loaded to rental companies), and sales inevitably started to sink.

For Detroit, the underlying story through these rocky decades was one of market share decline. Until recently, GM, Ford and Chrysler were known as “The Big Three.” In the early 1960s, they controlled almost 95 per cent of the U.S. auto market. By 1980, that had slipped to around 80 per cent. Even a decade ago, GM was still the world’s largest company. Today, the label “Big Three” is about as dated as the tail fins on a ’50s Cadillac. With a market share of around 44 per cent, they’ve been downsized to “the Detroit Three.” The Asian carmakers, like Toyota, Honda, Hyundai and Kia, now hold 48 per cent of the U.S. market, according to Autodata Corp. And last year, Toyota sold more cars globally than GM for the first time. German carmakers like Volkswagen have also established themselves as industry giants. Thirty years ago, these companies were afterthoughts in North America. This summer, the Honda Civic overtook the Ford F-series pickup as the bestselling vehicle in America.

GM, on the other hand, has gone nowhere. In 1962, it sold 4.2 million automobiles and employed 605,000 people. In 2005, GM sold 4.5 million cars and employed 335,000 people—26 per cent of the market, with 11 major competitors. And while critics often point to rich employment contracts as the culprit in GM’s decline, that is only part of the story. While labour accounts for roughly $1,500 of the cost of each vehicle, GM, Ford and Chrysler offer anywhere from $3,500 to $7,000 in incentives to car buyers, says Ken Lewenza, the new head of the Canadian Auto Workers. “It’s not about labour rates, it’s about market, market, market. We could work for nothing and it still wouldn’t improve the bottom line or market conditions.”

While quality and efficiency have improved in recent years, Detroit’s reputation for bland, mediocre cars haunts it still. GM has known since the late 1990s that it needed, as Wagoner put it, “a little more spice in the mix.” But “spice” just translated into more of the same. Now a generation of young car buyers aspire to drive BMWs and Audis. Even for older car buyers, the days of longing to own a Buick are long gone.

A little over three years ago, Jerome York, an adviser to billionaire investor Kirk Kerkorian, quit the board of directors of GM with a dire warning. In a letter of resignation, York wrote that while the company appeared to have averted the near-term threat of bankruptcy, he had “grave reservations” about its business model and ability to compete with Asian producers. “The overriding issue remains that of North American market share decline,” noted York, a former Chrysler executive.

Today, GM stands as a company that has had countless warnings like this one and plenty of opportunity to right itself—to reduce its debt, to stop paying out dividends it couldn’t afford, to reduce labour costs and to kill off some of its eight brands. Keller argues it always grasped at magic solutions instead, like its efforts to automate factories or invest in the mortgage banking business in the 1980s. “With GM you have a company that’s reactionary. It’s never proactive; it never gets ahead of its problems,” she says.

That it has failed so consistently leads many to wonder if it is worth saving at all. The prominent U.S. hedge fund manager, William Ackman, stated last week that lending more money to the debt-laden company isn’t the answer and that it should consider bankruptcy. Even governments on both sides of the border are struggling with whether or not they should pony up to save Detroit. Taxpayers, after all, have a long history of propping up the auto industry with lousy results. According to the Canadian Taxpayers Federation, federal and provincial governments in Canada have handed Detroit automakers $782 million in the past five years. Where does it end? Public money has been pumped into GM’s Oshawa plant, Ford’s plant in Oakville and Chrysler’s paint shop in Windsor, to name a few. “In each case, the companies in return have promised to maintain X number of jobs. Generally that’s not happening,” says Tony Faria, director of the Office of Automotive Research at the University of Windsor. “What happens if six months into 2009 they come back and say we need more? How far are we prepared to go to keep supporting them?” It’s a question no elected official seems ready, or able, to answer.

A bailout is an especially troublesome prospect given that things aren’t nearly so bad with the Japanese automakers. Yes, all the carmakers are suffering in this economic downturn. Sales have dropped from 17.5 million cars a year to 10.5 million in the U.S., the steepest slump on record, says auto analyst Dennis DesRosiers. But Honda and Toyota are still expanding in Canada, he says. Throwing public money at companies that are failing is tantamount to punishing those that are prospering and hiring, he says. In our free market economy, shouldn’t we allow the weak to fail, and the strong to flourish?

That, however, is a tough argument for politicians to make, even those like Finance Minister Jim Flaherty, who has long argued against handouts to the private sector. He argued last week that a bailout puts government in the awkward position of choosing winners and losers. But, he added, government would look to invest in projects that appear to have a long-term future: “So if General Motors is going to build a hybrid car in Oshawa, people can understand that that is a good investment for the longer term. Operating a large truck plant, pickup trucks—probably not a good investment of taxpayers’ money.” The U.S. Congress is now debating whether to give the automakers access to the $700-billion Wall Sreet bailout package.