Is This Detroit's Last Winter?

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Yet there were the occasional hits that demonstrated Detroit's deep pedigree in engineering and design. Chrysler, desperately surviving on a government-guaranteed loan, created the minivan in 1984. That same year, it launched the first modern sport-utility vehicle, the Jeep Cherokee. Throughout it all, Detroit kept its dominance of the hugely important pickup-truck market — and does so to this day.

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But overall, if you build the cars you can make rather than the cars the public truly desires, you have to price them that way and use rebates to move the metal off the lots. "They are building cars that they don't want to build. They have to build them because they have a fixed cost structure to amortize," says Nick Gidwani, a former auto-industry investment banker with Sankaty Advisors and now head of the startup auto-sales website CarZen. Particularly after the post-9/11 sales slump, Detroit got addicted to this strategy and used it to move plenty of SUVs.

The ensuing rise in gas prices and drop in sales underscored another weakness. Although gas-eating SUVs found a sweet spot in the U.S., for Detroit to assume a world in which gas prices would remain below $2 a gal. was asinine. In Europe, gas had long sold for more than $5 a gal., and tax policy ensured that it would stay there; the growing BRIC countries — Brazil, Russia, India, China — were driving up demand. Detroit's response was to lobby furiously against increasing fuel-economy standards instead of building more-efficient SUVs.

What's Next
The irony about being called on the carpet in Washington is that Detroit actually has a fairly clear idea of where it's going. Ford, for instance, under the leadership of Alan Mulally, has rationalized the company, dumping Jaguar, Aston Martin, Land Rover and some of its stake in Mazda. Volvo may be next. "We have streamlined all of the brands to focus on Ford," he says. Ford wants to be able to create small- and medium-size cars around the world from a single global blueprint. The initial product of the One Ford strategy is the much anticipated Fiesta. It was designed in Europe and is due to arrive in the U.S. in late 2009 substantially unchanged. "Ford can win market share in small cars again," says Harbour. There's also a new Fusion and a new Taurus, long overdue, and upgrades to other models. As part of its 2006 strategy, called "The Way Forward," the company has already closed 17 plants and shucked 51,000 workers.

Chrysler is a bit of a mystery. CEO Robert Nardelli has been somewhat scant on details for new products other than announcing an electric-vehicle platform that has so far not impressed anybody. No one would be surprised if Cerberus, Chrysler's owner, announced some kind of partnership or merger before the year is out.

As for GM, its current crop of autos, including the revived Malibu, is the strongest of the Detroit Three's fleets in North America, but it is still truck-heavy. Globally, GM is expanding in Russia and China; it is a solid performer in Europe and South America. With the advent of the Chevy Volt in 2010, the company will be in a position to lead the industry into hybrid-electric and then fully electric vehicles. "There's enough good product in the pipeline," says MacDuffie. "Judged against the past, it's really impressive."

The most important issue is cutting Detroit's output to an appropriate level. "What we would tell a client who went from 30% to 20% [share] and they say, 'We're modeling now at 20%,' I'd say, 'Let's model it at 16%,'" says Conway. Scaling below capacity doesn't mean you give up on 20% or even 22% share — you can add shifts, for instance, to boost output.

Reducing capacity could also go a long way toward solving Detroit's revenue problem. Between Detroit and the transplants, there are around 17 million units of manufacturing capacity in the U.S. In 2007 vehicle sales hit 16 million, but about 2 million of those were driven by the combination of easy credit and discount pricing. In a normal economy, the true size of the business may be closer to 15 million units. The Detroit Three simply have to generate more revenue per car and, not incidentally, a profit. Right now, the revenue gap per car is $4,000 vs. Toyota.

The competition hasn't stood still, of course. Japanese and German makers continue to improve their products, and the U.S. customers they have won over will be hard for the home team to get back. Even as the Big Three have closed the distance over manufacturing, drivetrain and other engineering issues, another has opened up. The transplants have moved on to the sensual: the quality of materials, the look and touch of dashboard knobs, the sound a door makes, the feel of seats. Craftsmanship is the new point of difference. "The Japanese have figured out, How do we reduce friction?" notes Gidwani. "Now they are going to have to catch them in a new area."

The real catch, though, is whether American taxpayers are willing to give the Big Three the chance.

(See the 50 Worst Cars of All-Time here.)

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