Detroit's Tale of Woe

There is a common belief among economists that all modern day industries evolve cyclically. Not surprisingly, so do the companies that make up those industries. The Big Three car manufacturers in America have an absolutely storied past and represent the epitome of what is now know as the Industrial Revolution, but unfortunately they too support this theory very well. Looking at them, one can clearly see what the declining side of this cycle looks like. In no place has it been more apparent over the last decade than in Motown.

It’s a simple fact of life that all things that rise must at some point fall, and industry is hardly exempt from this concept. North America is littered with the remains of small industrial cities and towns that house the remains of a more prosperous time. Like the historic ghost towns that came before them, it is not very difficult to find a vacant downtown with empty buildings and storefronts set against the backdrop of a crumbling mill or factory.

One can't argue that the Motor City has also become one of these vestiges, only on a much larger scale. During the height of the 60s Detroit held a population of over two million, making it the third largest city in the country. While the suburbs of the city have since grown tremendously, the city's actual "populous" is now less than half of that at roughly 900,000. That's not even enough to make the U.S. top ten.

Population decline in and of itself isn't necessarily a bad thing – if, that is, a city is continually attracting new industry and talent. Until recently, however, that was hardly the case with Detroit. The mass exodus very much revolved around the decline of one industry: automotive. While many competing companies have moved their operations to the U.S., they have generally chosen to settle in whichever Midwestern or Southern city happens to be offering the best incentives. The only thing replacing Detroit's declining Big Three, meanwhile, was a crumbling metropolitan infrastructure and demographic and racial imbalance.

Today, Detroit seems to be on the road to recovery. In electing a new Mayor in 2002 (the youngest of any major U.S. city, though hardly proven) it seems to have turned a corner where redevelopment is concerned. Local politicians and citizens alike seem to be accepting that the automotive industry may no longer be the sole attraction and can no longer provide long-term sustainability. Already there has been a massive undertaking to cut extraneous workers and expense from the city budget. Those items aside however, the best news may come from the auto industry itself, though not from the traditional "Big Three." Foreign automakers recognize the infrastructure and human resources benefits leftover from domestic fallout and are lining up to build technical and development centers.

The same can't yet be said for GM, Ford, and DaimlerChrysler themselves. In the face of continued loss in market share, exploding healthcare costs, and decreasing sales/profits, one would think that smaller, leaner, and stronger would be the way to go. Instead, these companies hang on to their wide assortment of brands, look to acquisition (which has dragged down partner brands), and even attempt growth as a way to combat the inevitable.

Now, the fact that they are in this mess to begin with is understandable. It just goes to support the initial "business cycle" claims mentioned above. Between 2000 and 2004 the number of auto-related jobs in Michigan shrunk by 21 percent, to the lowest point since 1991. As of April, 274,000 people were employed in the industry statewide, down from 347,000 in the same period in 2000, according to the Michigan Department of Labor and Economic Growth. Consider GM for a moment; For every current working employee there are over 2.5 retirees leading to an annual healthcare and benefits package costing the company over $5 billion a year.

To put that into perspective, GM is basically starting with a $1,500 handicap on every vehicle it produces relative to a foreign competitor.  In this industry, that is the equivalent of a boxer fighting an opponent with not only one hand tied behind their back, but with a "wedgie" to boot.

These three companies were built largely on the idea of fleet vehicles (i.e. rental, commercial , high volume economies of ). These types of cars need to be as basic, bland, boring, and cheap as possible. For every exciting model they put out, there needs to something else to pay the bills. But when you consider the legacy these companies have left behind in terms of overhead, healthcare/benefits, and unions, they really never stood a chance against the competition. The sooner the remaining "old school" management accepts this and convinces the unions to  start working toward a common goal, it will only get worse. Until, that is, one of these companies becomes the target of a takeover and the foreign buyer implements sweeping changes itself.

Once you are behind the competition in such a mature industry, catching up becomes very daunting. You have to adopt a completely different mentality and strategy. Trimming costs and cutting production here and there is not going to do it. I would argue that poor results from the top management within the Big Three hasn't been the problem, but rather that management has been too successful in that they have been able to squeak by for so long. They have made the inevitable that much worse when it finally arrives. The turnaround for these companies is going to come from radical thinking and will probably require a new breed of manager who will look a lot like Wolfgang Bernard before he lost the Mercedes-Benz post.

There will always be a "Detroit," and there will always be large American automotive manufacturers. What the successful ones will look like, however, is yet to be determined. Maybe they should look to their home city to see just how to evolve.

Comments

[AutoRants]

Great points!

Wolfgang Bernard - how could GM have missed the opportunity to hire him? What a shame...