The history of Detroit is one of booms and busts. It's in a bust now but creative, forward thinking could result in the next boom
It was the most obvious question I could have asked General Motors (GM) CEO Rick Wagoner. The setting was a semiprivate interview with him in a Dallas hotel on July 10. According to oil insiders and respected oil analysts, such as Charley Maxwell of Weeden & Co., the world is likely to hit a brick wall in terms of oil supply and demand by 2015. Therefore, I asked, could Detroit survive if the worst happens and oil sells for $250 a barrel with gasoline between $8 and $10 a gallon, seven years out?
Mentioning offhandedly that he speaks with Maxwell on a semiregular basis, Wagoner grabbed a piece of paper and drew a crude graph, thoughtfully suggesting that if such a gas price increase were spread out evenly over that period, instead of making a sudden jump, the public would have time to adjust to the higher energy costs. Consequently, Detroit would likely have enough time to make production adjustments.
I didn't have the heart to point out the flaw in Rick's argument: It has taken gas prices 10 years to go from $1 a gallon to $4—and even that slowly, increasing the price of gas has wrecked Detroit's business model.
When I asked him whether he still planned on staying at GM until age 65, thereby surpassing Alfred Sloan's reign as president and then chairman of GM, Wagoner declined to say. (On Aug. 6, the company's board of directors publicly reaffirmed their faith in his leadership.) But the first time I interviewed him, years ago when he first became GM's president, he understood his potential: He had both the time and the ability to imprint GM's future in this century just as surely as Sloan left his stamp on that company 88 years ago.
Speaking as someone who has been around the automobile industry for the past 35 years, I see Rick Wagoner as the real deal. Unlike the men who ran General Motors for the 45 years before he got there, he is a man who understands his weaknesses—which happen to resemble GM's problems closely.
Wagoner knew from the beginning that most GM cars had long lost their cachet with the public and that this had happened over decades, as the accountants gained total control of the purse strings. The brilliant prima donnas who had once defined GM styling had long since been banished or marginalized; at GM, the linear logic of those who had a way with numbers was allowed to overrule the genius gut instincts of those whose passion was great automotive design.
Rick Wagoner could solve that problem: He hired industry veteran Bob Lutz as his new product development czar.
Bob Lutz told me earlier this year that GM is still suffering the negative effects of that old system of accountability to the accountants. The case in point was the new Chevrolet Malibu. Lutz felt the company was going to hit a home run with it, but the person in control of setting production schedules and ordering supply contracts crunched the numbers and set the Malibu's maximum potential volume at 115,000 vehicles a year. Obviously, that was an accountant's mistake of huge proportions. Maybe the old adage that "numbers don't lie" doesn't always apply when it comes to cars. (Lutz also confirmed that the bean counter responsible for this decision is no longer with the company.)
Hits and Misses
When I state that if I owned a car company I would hire GM's top executives to run it, people get a blank look on their face as their jaws drop, and that's frustrating when you know the facts. Similarly, I'm tired of reading that GM constantly misses the mark on public demand and should have seen the current problems coming, because only half of that statement is true. GM has built exactly what the public demanded for 15 years—sport-utility vehicles and trucks that were parked in the best driveways in America—and did that as well and as profitably as anyone.
But it's true that GM should have anticipated the rising cost of energy over the past decade from the very fact of its success in China, Latin America, and Russia. GM's wins overseas proved that energy demand from formerly Third World countries would one day alter the world's energy equation. The other downside is that GM had 15 years to create world-class cars and hasn't completely delivered. In fairness, Detroit is about as nimble as an oil supertanker at sea, filled with crude and cruising at speed. Yes, the captain can slow the engines and turn the wheel, but it's going to be 20 miles before any change in course can be detected. And oil supertankers move faster than automakers; so do glaciers, for that matter.
Detroit's steering problem aside, no matter what our automakers manage to do in the future, they can't resurrect their Golden Era. The consumer world has changed so much over the past three decades that Detroit's regaining what it once had is about as possible as Frankie Avalon reclaiming the Top 40 charts. That being true, one assumed goal in so many stories on GM's problems—dominating the American market again—is unrealistic. That goal may well represent what our automakers meant to us in 1972, but it doesn't represent that today; and it certainly is no guideline to where the American automobile industry will be in another decade.
Maybe it's time to give the guys some slack. I don't mean we should dismiss the real mistakes that they have made, but pundits should quit judging their results in terms of what Detroit achieved in a different time in America. Automobile purchases no longer define us as they used to, or our outward appearance of success. That is a critical difference from Detroit's Golden Age.
A Different America
Yes, once upon a time in America you could demonstrate your status only by purchasing a new vehicle or a new home. On the automotive side, there was excitement in the neighborhood, young boys often converging from every direction on one neighbor's driveway, simply because a shiny new Malibu, GTO, or Toronado was parked where none had been the day before. In fact, many people remember exactly where they were when they saw their first Corvette. That's the impact Detroit once had.
But it was also an era when no one owned a microwave, a personal computer, an iPhone, or a 52-inch plasma widescreen. Few people owned upscale stereo systems or even dishwashers. When new cars were a big deal, most homes didn't have central air-conditioning. Because of fewer "must-have" items chasing the American consumer's dollar, people allocated more of their paychecks to updating the family automobile on a regular basis.
It also helped Detroit's sales that, until the recession of 1974-75, financing on new cars was limited to 36 months. People had equity in their vehicles within a year or two, which explains why the average American traded in a new car once every 27 months through the mid-'70s. No wonder it was a glorious time for Detroit: little competition for the attention of consumers, higher payments against incomes set aside for cars, faster equities for shorter trading cycles, and the prestige one got simply by purchasing a new car.
Other things fueling Detroit's success: women entering the workforce; 84 million baby boomers coming of age, all of them needing wheels; and then the boomers starting families that grew, necessitating regular vehicle style changes.
Changes in Priorities
Detroit's automakers can't return to their Golden Era because America can't go back, and to think that it could is delusional. Today a kid finds the latest version of Grand Theft Auto exciting—a new car, not so much.
Rampant nonautomotive consumerism can best be seen in the advent of cheap and easily accessible credit that has Americans paying off just under $1 trillion in credit-card debt right now, compared with the $4 billion we owed on our plastic in 1970. Again, a sizeable amount of money is leaving American households every month that once was earmarked for trading in a three-year-old car.
Of course, automobiles still exist that cause excitement in neighborhoods like any new vehicle used to—BMW (BMWG), Lexus (TM), and Mercedes (DAI), to name a few—but now it takes spending a fortune to get the same response that a run-of-the-mill Malibu SS did in 1964 or an Oldsmobile Cutlass Supreme did a decade later. Like the nation's values and priorities, American consumerism has changed, as has our accompanying debt load. Those factors have been the primary reasons why Detroit fails in the marketplace.
Detroit's last great hope was the widespread love of its trucks and SUVs, combined with the undying loyalty of the blue-collar middle class. But the blue-collar middle class is dying more quickly than the truck and SUV craze—and it's doubtful either one is coming back.
Stop Looking in the Rearview
Yes, there are mitigating factors, such as when economic times get tough. In tight straits you find car buyers making what they consider a more researched and smarter purchase, like demanding real resale value as opposed to simply talking about it, and here the imported models win. Quality is no longer the issue it once was, and Detroit has offered fuel-efficient vehicles for some time now. For example, the new Chevrolet Malibu gets 22 mpg in town and 30 on the highway, and that's better than the Volkswagen Rabbit's 21 and 29. But good luck trying to convince a potential car buyer that the bigger Malibu sips less gas than a compact VW.
Detroit's death has been a death by a thousand cuts. Its very success has always defined its downfall. The muscle cars and large family sedans that were beloved in the 1960s ingrained an image of Detroit that convinced many in the '70s that Motown couldn't build world-class compact cars. (And sure enough it didn't build world-class anything in the '70s.) And just as trucks and SUVs redefined Detroit's new successful image with consumers in the 1990s, those big vehicles are now held against it for the same reason.
And yet I don't think that this is cause to dismiss the ability of the executives at companies such as GM. But what they have to face up to is this: The consumer's world has changed, and mass-market automobiles will never again define one's place on the socioeconomic ladder the way they once did.
When this consumer/automotive evolution started in 1973, the writing was on the wall. Detroit can survive, but it can't shift into reverse and drive back to the good old days.