Can Detroit Be Retooled — Before It's Too Late?

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Even trickier for a Democratic Administration is telling hard truths to the union. On that score, Obama's toughness has gained him some street cred in business circles — even drawing faint praise from a Wall Street Journal editorial. The task force has made it clear that GM can't afford the renegotiated wage-and-benefits package the UAW agreed to in 2007. Even using GM's best-case scenario, the company projected a negative net cash flow of $14.5 billion over the next six years. Most of that deficit can be accounted for in retiree health and pension benefits — which means that one way or another, the hundreds of thousands of UAW retirees are probably going to get a lot less health coverage. The outlines of a plan are likely to be drawn up by Bloom, a pioneer in the voluntary employee beneficiary association (VEBA) approach. In a VEBA, the union agrees to accept a cash payment to fund a new health-care system that trustees administer, thus taking future liabilities off the company's books. That's what happened at Ford, where the company negotiated a deal in which half the VEBA will be funded in the form of stock rather than cash. GM may need even more help.

Understandably, neither the union nor the bondholders are happy about the task force's approach. The UAW feels particularly aggrieved because it has agreed to an unending series of givebacks over the past 20 years. Even before this latest crisis, the UAW had assented to the 2007 contract, which would have put Detroit's labor cost per car within a couple of hundred dollars of Toyota's and the other transplants'. That isn't enough, in the view of the task force, because consumers are willing to pay more for the foreign badges, and the Detroit Three need to earn more on domestic car sales to become viable for the long haul.

The Coming Car Boom
Once the dust settles, the new GM, or whatever replaces it, is likely to see a marketplace of consumers finally ready to spend money on new cars. GM's executives aren't entirely off base in thinking that pent-up demand is building, because it is. "Assuming general economic recovery, in the developed markets we will see maybe 95% of what it had been," says John Paul MacDuffie, an associate professor of management and co-director of the International Motor Vehicle Program at the Wharton School of the University of Pennsylvania. U.S. auto and light-truck sales topped 16 million for eight years and reached nearly 17 million in 2004 and 2005. Those numbers have slumped dramatically, but the current downturn is cyclical, says MacDuffie; there's no evidence of permanent decline in the demand for vehicles. (See pictures of the world's cheapest car.)

It's true that we've been putting off buying cars for nearly two years as unemployment has climbed and credit has been choked off. (Showroom traffic is increasing, notes Summit Auto's Buscher; it's financing that continues to lag.) But that also means that we'll be readier to buy when credit starts to loosen. Even if this recession lingers longer than expected, results will pick up substantially in 2011. Analyst Luedeman predicts that sales in North America will bottom out at 8.4 million units this year (others say slightly higher), then jump to 10.2 million in 2010, a 21% improvement. And by 2012 the industry will be in a full-fledged boomlet, at 13.8 million units annually.

Why are analysts so optimistic? History is an indicator of future sales. Eight or nine years ago, the industry was selling 16 million to 17 million units annually.

Now those millions of sedans, pickups and SUVs have reached the end of their useful life. America is becoming a rolling junkyard; the average car is 9.4 years old, a new record, says Buscher. "Light trucks are 7.5 years old. They haven't been that old for 10 years," he adds. In two years, says an industry economist, 35 million cars now on the road will be at least 10 years old. There's not enough duct tape in America to hold that much junk together. Even if they don't conk out, keeping these beaters going becomes an increasingly expensive proposition.

As a result, more cars are being taken off the road than are being manufactured. There are 245 million to 250 million vehicles on the road in the U.S., and roughly 5% are scrapped every year. Even with improved vehicle quality, that ratio is not really budging. Stuff wears out. So some 12 million to 12.5 million vehicles disappear annually; yet this year, no more than 9 million are being built to replace them. Next year, production will be 10 million or so, still less than the removal rate.

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