Car Books – Fourth Gear

Continued from Car Books – Third Gear

After reading what a scandal Volkswagen perpetrated on the unsuspecting public throughout the world, I was ready for a more upbeat car book to read.

I thought this might be a good read as I recalled from previous car books how divisive the relationship had been between car guys and financial people within Ford. Bob Lutz is unique in that he held executive positions in all three of the Detroit car companies, Chrysler, Ford and GM (twice) and this book covered his second stint at GM. But it turned out not to be the book that I thought it was and having been written by Lutz himself, only portrayed the story from his perspective, which to me, based on his opinions of the job he could have done had he been CEO, seemed a bit haughty (although I did appreciate Lutz’s disdain for GM’s PMP process, a Performance Management Program I too despise).

So I next tried this book, Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers – GM, Ford, and Chrysler by Bill Vlasic. Vlasic, being a business reporter, gave a much more balanced accounting among the Big Three as well as the UAW and turned out to be a really good book.

This book covered the fall and rise of the Big Three as a result of the Financial Meltdown of 2008. But the book actually picked up the history starting in 2005, which provided helpful background information about the financial health of each company prior to the sub-prime mortgage collapse that took place in 2008. Prior to the events of 2008, I was not aware of the huge issues the car companies were facing. These details made for a very interesting read.

The storyline in the book alternated between each of the Big Three, which gave a complete perspective of what was happening in each. At the time, all three of the Detroit car companies were heavily dependent upon gas-guzzling trucks and large SUVs, vehicles that each company made enormous profits from. And with these three US manufacturers holding over 90% of the US truck market and with trucks outselling cars by a factor of nearly 2 to 1, their sales made for tidy profits. In this period, cars were just not that profitable and were viewed by most as boring offerings.

But then Hurricane Katrina hit in the summer of 2005 and suddenly gas prices shot up a dollar a gallon and sales of gas guzzling vehicles plummeted. With no attractive fuel-efficient cars to offer, sales shifted dramatically from large US makes to small economical cars from Japanese manufacturers.

The Big Three quickly found themselves with parking lots full of unsold vehicles and excess manufacturing capacity. Each of them, in their own way, made plans to shutter plants to reduce their excessive manufacturing capacity. But the prior contract agreements with the UAW and the legacy “Job Banks”, a union guarantee that even laid off workers would still get paid by the manufacturer, minimized the potential savings of simply closing plants. Therefore, costly worker buyouts, in some cases exceeding $100,000 per worker had to be offered as well. Added to this the high cost of healthcare coverage for both active workers and retirees limited the savings the car manufacturers could realize. These “legacy costs” added thousands of dollars to the cost of a US car that foreign competitors, with their national healthcare systems, just did not have thus giving foreign car companies a financial competitive advantage.

Negotiations with the UAW began to occur and with the losses mounting, progress over reducing these legacy costs began to be made as the Union realized bankrupt car companies would be bad for all parties concerned. At one point during this period, GM was losing a billion dollars a month and Ford and Chrysler were each having record losses.

Chrysler, the one company in better financial shape, thanks to their relationship with Daimler (Daimler-Chrysler at the time), struggled with making progress with the union. That is until Daimler decided to unload Chrysler selling them to Cerberus Investments.

Meanwhile, Kirk Kerkorian was trying to wrestle control of GM from its management team by purchasing up to 10% of its stock and placing his right hand man on the GM board. His efforts ultimately failed which left GM in a precarious position having had the added distraction of fending off Kerkorian. To try to sell its backlog of vehicles, GM launched the idea to offer, “employee pricing” to everyone. While it helped them unload many more unsold vehicles, the pricing meant little to no profit and in some cases even a loss on the transaction.

At Ford, a different approach was being taken. Their plan was named the “Way Forward” which included plant closings, improvements in quality and new car offerings to spur sales. To finance this effort, Ford planned to borrow 20 billion dollars by mortgaging everything, even the Ford name. But Bill Ford didn’t think all this would be enough and so was trying to bring in a new executive to replace himself. After several highly qualified candidates declined, Bill brought in Alan Mulally from Boeing (a story that is told very well in American Icon: Alan Mulally and the Fight to Save Ford Motor Company by Bryce G. Hoffman). Ford’s borrowing in 2006 when credit was available was quite fortuitous given the collapse of the credit market in 2008.

In 2008 when GM and a Cerberus owned Chrysler went in search of credit to help fund their cost reduction plans, none was available. Knowing that the only way forward for GM and Chrysler was to continue to reduce their size and work force, these buyout and closure costs along with a plummeting of the US auto market from a high of 16 million vehicles to around 10 million units, resulted in their largest losses ever. The catastrophic decline in the auto market even left Ford with their largest loss in their 100-year existence.

Secretly GM approached Ford about merging (a fact I did not know) but Ford flatly declined. Jilted, GM next approached Chrysler about combining their two companies but was again turned down once it became apparent to Chrysler that it was just an attempt to save GM.

That Fall, just as Obama was about to be elected president, GM approached President Bush about the possibility of garnering government loans—a request for 10 billion of the TARP money that had been allocated to rescue the banking industry. The answer was no.

After Obama won the election and promised he would not let the US auto industry die, GM, Ford, and Chrysler went together to Congress to ask for help. Congress’s initial rebuff following a grueling two days of questioning was made only worse by the highly publicized debacle of the CEOs winging it from Detroit to Washington on their corporate jets to beg for billions in relief. Their only hope was a more successful second trip to Washington, this time each CEO having been driven in a hybrid vehicle made by their own company.

By this time Ford, given their previous borrowing, decided to forgo any loans from the US government. So it was just GM and Chrysler that requested loans. These loans came with very strict requirements which GM and Chrysler were ultimately not able to meet. This failure led to them both declaring bankruptcy with even the CEO of GM becoming a casualty, one of the few private company executives ever to be “fired” by the federal government.

With active US government participation, a new, but much smaller GM emerged from bankruptcy with the government becoming a 60% owner (this prompted the phrase “Government Motors”, technically a true moniker at least until the new GM issued stock and the US government sold off their shares to recoup their investment cost). For Chrysler, the government forced them to merge with Fiat, the Italian maker of these cute little cars.

Within two years, all three companies returned to profitable operations and today, are much stronger and much more able to compete in the US market. Looking back to these disastrous events that took place almost 10 years ago, it’s frightening to think how close the US auto industry came to becoming extinct. Since hindsight always provides a 20-20 perspective, it is easy now to say that had not the hard decisions been made and the hard work expended, our only choices today when purchasing a car would be a foreign-made or foreign-owned model!

And thanks to this book, I now had the story behind how it all came to fruition.