And Then There Was One

Distilling the Big Three into a single player could save Detroit.

By Keith Naughton | NEWSWEEK

Published Nov 29, 2008

From the magazine issue dated Dec 8, 2008

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So this is how it ends for Detroit? After more than a century of putting the world on wheels, the American auto industry collapses amid squabbling over clueless CEOs and their private jets? Not necessarily. There is another way forward: the Big Three could become the Big One.

The notion of three powerful U.S. automakers is already an anachronism. These companies are husks of the mighty institutions that once ruled the road. Now they control less than half the U.S. auto market and will lose a combined $30 billion this year. Collectively they are burning through nearly $6 billion a month, and General Motors and Chrysler warn that by the end of the year they'll be broke. They'll head back to Washington this week (ideally by car pool) to beg for a bailout.

But Detroit actually has parts worth saving. Melding them into a single entity could buff up its best brands, like Chevy, Ford and Cadillac, while leaving the clunkers (Pontiac, Mercury, Saturn, et al.) by the side of the road. It would take a healthy dose of Nietzsche's "creative destruction," but that's preferable to total destruction, especially when you're talking about an industry that supports 2.5 million jobs. Other major American industries have undertaken calamitous consolidations to survive. Why should Detroit be spared from market forces?

Sure, there are obstacles: a powerful union, fiercely independent dealers and a complex network of suppliers. Simply binding together three overwrought enterprises is likely to make matters worse. But there is a way forward. Chrysler, the weakest player, could fall, leaving two survivors. GM and Ford could eventually end up together by choice or force of bankruptcy. Ultimately, though, even GM Vice Chairman Bob Lutz, who warns that letting Detroit die will trigger "economic Armageddon," can see the power of One. "It would not solve today's problems," he told NEWSWEEK. "But long-term, with growing global competition and Chinese producers flexing their muscles, there will definitely be further industry consolidation."

Detroit might find a road map in other iconic American industries: aerospace and steel. After the Berlin Wall came down in 1989 and the end of the Cold War led to shrinking defense contracts, America's aviation companies began falling into one another's arms. Boeing grabbed up all U.S. civil-aircraft business, acquiring its chief domestic rival McDonnell Douglas in 1997. That allowed Boeing to take on the true competition: Europe's Airbus. A lone American automaker could also finally focus on its real rivals—Toyota and the rest. Another plus: killing off key competitors reduces excess factories that foster profit-corroding rebates. Next year, Detroit will have the capacity to build 2.2 million more vehicles than it can sell, predicts auto consultant CSM Worldwide. Wringing out that excess capacity—equal to nine factories—would go a long way toward restoring profits.

Like autos, foreign competition laid waste to the American steel industry. Beginning in 1986, more than 35 American steel makers went bankrupt. In 2002, billionaire investor Wilbur Ross agreed to buy up bankrupt LTV Steel, setting off a merger frenzy that saw 17 companies shrink down to three, while financial results reversed from a $1.1 billion loss in 2003 to a $6.6 billion profit in 2004. Ross used the bankruptcy courts to renegotiate labor contracts and hire back a fraction of the workers.

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Posted By: HotCarNut @ 01/01/2009 4:04:32 PM

(continued from previous post)

The US Government, via NAFTA, free trade agreements, lack of aggressive reaction with Japan's (and others') unfair trade practices, minimal funding of advanced research in propulsion technologies, and lack of a cohesive energy strategy has been a major part of the disintegration of the domestic auto industry. Without a doubt, the management teams at the Big 3 have been beyond inept since about 1968, but terrible public policy on the part of the US has been at least as damaging as poor management and the UAW strong-arm tactics. To believe that every country honors "free market" ideals is absurd, and yet the US government seems to expect US based manufacturers to compete on an uneven playing field against an imminently stacked deck. If all markets were truly free and open, I would have no problem with the US saying "you succeed or fail on your own". However, no other country treats their manufacturing base this way, and therefore, the US cannot afford to either. We as Americans are at a crossroads: do we try to hold on to the ideals that got us to this point, or do we return to the policies that were common after WWII during the 50s and 60s that sought to push American manufacturing to the forefront.
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Posted By: HotCarNut @ 01/01/2009 4:04:03 PM

You're forgetting a couple of key points. First, in the aircraft industry, the only real competition was Airbus. No Asian manufacturer has ever emerged to challenge Boeing and Airbus (which is actually owned by EADS which is in turn owned by the governments of France and Germany, and a private corporation - Daimler). In automobiles, the Japanese alone have 4 major manufacturers: Toyota, Honda, Nissan, and Mazda. Germany has 3.5: Daimler (owner of Mercedes, Smart, and Freightliner), BMW (owner of BMW and MINI), and VW/Porsche which counts as 1.5 because they are technically separate companies (owners of Porsche, VW, Bugatti, Audi, Lamborghini, etc). Italy has Fiat SpA with brands like Fiat, Ferrari, Maseratti, Alfa Romeo, etc. France has Renault (yes, I know that it's got an equity tie-up with Nissan). Even Russia has several auto manufacturers (albeit they're a decade behind technology wise). China has about 30 brands but really 3 big manufacturers, none of which have brands sold in the US. Yet. India has Tata which also owns Jaguar and Land Rover.

To say that the US has "too many" manufacturers despite being the largest vehicle market on the planet is absurd. What really is true is that the United States has the worst political backing of its' manufacturing base of any country in the developed world. For decades the Japanese government has supported Japanese manufacturers through restrictive trade laws on its domestic market and keeping the Yen artificially low versus the US Dollar and the British Pound (and now the Euro). The currency manipulation of the Yen boosted profits for Japanese manufacturers while making it much more expensive for US and European based manufacturers to import vehicles into the Japanese market. This currency manipulation was not officially recognized or admitted as policy by the Japanese until the recent comments of Honda's president admitting that not only was currency manipulation a common practice, but that if the Japanese government didn't begin interfering more forcefully, he would consider moving all of Honda's operations overseas.
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Posted By: vjspin3 @ 12/12/2008 2:50:29 PM

How do you merge three companies into one? Who decides how much each company???s stock is worth? What about the dealerships, some of which are next to or right across the street from each other. All three have similar but different contracts with the union; how do you resolve those differences? Who decides which factories close and which stay open? Who decides which brands disappear and which remain on the market? So many questions but still an idea that needs to be seriously considered.