Is This Detroit's Last Winter?

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Resizing the business will alter the number of nameplates that the Detroit Three market and the number of dealers that sell them. GM will sell or close Saturn. Pontiac and Saab could end up joining Oldsmobile and Plymouth in the hood-ornament graveyard because the cost of supporting a brand with a small market share doesn't make sense, nor does maintaining a dealership network created for an era when Chevy and Buick could support separate distribution systems. GM plans to reduce its dealer count 27%, to 4,700. "Certainly, having seven or eight brands for 25% of the market is far more than you need," says Ron Harbour, the partner in charge of consultancy Oliver Wyman's North American automotive practice.

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The Detroit Three, in fact, may have to shrink to two. Chrysler, which burned through $3 billion in cash in its last quarter and has $6.1 billion left, is looking for more partners like Nissan, which is already contracted to build a small car for the company. Chrysler's owner — Cerberus Capital Management, a New York City private-equity firm — got a lemon when it bought 80% of the company from Daimler for $7.2 billion last year. A merger could be a way out.

End of an Era
No matter what congress or President Obama does, there is one aspect of the industry that is beyond rescue. The Detroit of the American Dream, the Benevolent Manufacturing State — the big-metal, Big Labor, big-brother, bigger-than-its-britches Detroit — is deader than Studebaker.

The Benevolent Manufacturing State was the self-funded, full-employment, womb-to-tomb society — for autoworkers, auto executives, their families and their communities — that Henry Ford began in 1914 when he hiked the prevailing $3-a-day wage to $5. "Fordism" outraged capitalists; Ford viewed it as a way to make cars affordable to working people. His people. The industry sputtered during the Depression, an era that gave rise to the unions, but was revived by wartime production as Detroit's manufacturing capacity became a vital weapon in the Allies' arsenal. Detroit reshaped America, spurring a great migration from the South with the prospect of fair employment for blacks.

The Benevolent Manufacturing State achieved its full glory in the postwar period, a largely supply-driven era when Detroit could sell almost everything it made and could afford to give the United Auto Workers (UAW) most of what it wanted. From Linden, N.J., to Lorain, Ohio, to Long Beach, Calif., to be an autoworker was to have it made; to be an auto executive was to have made it. Detroit, says John Plant, the thoughtful CEO of partsmaker TRW, was about more than just industry: "It's the largest experiment of social re-engineering that any country has ever undertaken."

The death throes of the Benevolent Manufacturing State, however, have been costly. GM alone has paid out $103 billion in pension and retiree-health-care costs over the past 15 years. "The legacy costs were designed in an era when people retired at 65 and died at 66. We weren't wrong to give it to them 30 years ago. Now they retire early and live longer," says Conway.

What is particularly ironic about the Big Three's situation is that the companies are now as near to their long-sought goal of parity with the Japanese firms Honda and Toyota as they are to collapse. In the past couple of years, Detroit has closed the quality gap. Its cars are competitive on engines and drivetrains and fits and finishes. Some top-class products score well with car rater J.D. Power, such as the Cadillac CTS and Ford's new F-150. "What exposes us to failure now is not our product lineup or business plan or our long-term strategy," GM's Wagoner told Congress. "What exposes us to failure now is the global financial crisis."

Next year, workers at Ford plants will earn an average $53 an hour with benefits, the result of a breakthrough industry agreement worked out with the UAW in 2007. That's close to the $49 an hour that workers at the transplants average and far below the $71 an hour with benefits that was the old UAW wage, and that was cited by Alabama Senator Richard Shelby as a reason to oppose any bailout. And the cost differential on enginemaking between Detroit and the transplants will narrow to a couple of dollars by 2011. "You want to just choke these guys [in Congress] and take them through the 60 plants that I've been through and see what I've seen," says Harbour.

But timing is everything. So why did it take Detroit 30 years to catch up? "Either the crisis isn't big enough or the vision isn't persuasive enough," says John MacDuffie, a manufacturing expert at the University of Pennsylvania's Wharton School of Business. Instead, during those years, the domestic auto industry has been a slow leak, skidding from one restructuring to the next, chasing its declining market share as its costs have inflated.

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