Fall of Auto Industry a Tale With as Many Questions as Answers

• Paul Ingrassia, Crash Course: The American Automobile Industry’s Road from Glory to Disaster, New York: Random House, 2010, 306 pages, $28.00.

In 2009 General Motors had nearly 100,000 employees, 6,240 dealers, 60 vehicle models, a strong union, and a culture of arrogance stemming from years of dominance of the industry. While insiders believed that the company was indestructible, it was in dire financial difficulty. GM and Chrysler had closed 22 factories between 2004 and 2008 and they planned to close sixteen more by 2011. More than 3,000 dealerships were eliminated or scheduled for it.

As a result, GM was being analyzed, “diligenced,” by wonkish whiz-kids who didn’t know “a pound of potatoes from pound-feet of torque,” according to Crash Course, Paul Ingrassia’s detailed history of the ascent and collapse of the industry. These outsiders were staff to a presidential Automotive Task Force. Chrysler sought bankruptcy protection and was given 30 days by the leader of the free world to partner with eager Fiat. GM took bankruptcy and emerged majority-owned by the U.S. government. Ford chose to go its own course without a government bailout.

The American taxpayers’ contribution to the “rescue” included $50 billion for GM, almost $16 billion for Chrysler, and $40 billion for GMAC (GM’s financial arm). Included in the payouts: parts suppliers, pension guarantees, and tax credits for GM. The total tops $100 billion, which, as Ingrassia points out, is enough to buy 5 million cars. GM bondholders had legal, contractual first position in repayments to the company. Nevertheless, some of the value simply was transferred by the government to the union pension fund by government fiat. The Canadian and German governments put up additional funds for Chrysler and GM operations in their countries.

Classical theory holds that enterprises must be allowed to fail, to experience “creative destruction,” because they own assets which need to be reorganized. The Constitution does not decree that there be a General Motors, Chrysler, or Ford, nor does it allow Congress to spend money on them or any business enterprise. There is no longer a Pierce Arrow, Studebaker, Hudson, or Willys-Overland, and government did not rush to save them. Chrysler bought Willys and its Jeep model and has enjoyed great success with those vehicles.

Ingrassia, who was for 25 years the auto industry reporter for The Wall Street Journal, describes both colorful and dull company and union leaders. His is a complicated tale, full of questions. How did the Japanese make better cars and how were they able to manage American autoworkers better than Americans did? Why did the American auto companies make high-wage, high-pension, overpriced health-insurance contracts with the United Auto Workers union and repeatedly give in to its demands without a fight, resulting in uncompetitive production costs? This reviewer wonders how the 535 automobile engineering experts in Congress had the expertise to calculate the Corporate Annual Fuel Efficiency standards setting mileage mandates for the cars available to consumers. How did lawmakers determine that they had the legal authority to decree those standards? What effect did the standards have on vehicle design, especially crash-worthiness and horsepower? What effect did they have on sales?

The bailout came almost exactly 100 years after Henry Ford launched the Model T and Billy Durant founded General Motors in Dearborn, Mich. The intervening century saw enormous twists and turns in the makeup of the domestic auto industry — driven more by consumer desires than government dictates. By 1927, GM passed Ford as the nation’s largest car company. In 1936 and 1937, the UAW staged a sit-down strike in Flint, Mich., and won recognition from GM. The late 1950s witnessed the “tail-fin” era, and Ford’s Edsel was launched, only to flop. Compact cars were introduced in 1960, “muscle cars” in 1964. An Arab oil embargo caused gasoline prices to increase, boosting the sales of fuel-efficient Japanese cars. In the late 1970s, the Japanese began making cars in the United States (many of the plants were in the South), and proved to be good managers of their workers, whom they included in production decisions. In 1985, GM introduced the Saturn brand with much success, and the other companies also had some good years.

By the early 1990s, the Sport Utility Vehicle boom began, soon followed by a surge in pickup sales. These “light trucks” weren’t subject to CAFE mileage restrictions, so carmakers could build them larger and give them more-powerful engines; consumers snapped them up. Daimler-Benz acquired Chrysler in 1998. GM got into home-mortgage lending in 2002. Ford lost $12.6 billion in 2006 and borrowed $23.6 billion for a turnaround effort, remaining unbeholden to government. Chrysler was sold to Cerberus at a loss. By September 2008, losses mounted for all the companies. The collapse of Lehman Brothers crashed the stock market, and auto sales dwindled. GM and Chrysler said they would soon run out of money without government aid, and President Bush diverted bank-bailout funds to them.

In February, 2009 new President Barack Obama formed his Automotive Task Force. The government was now in charge.