Distilling the Big Three to One Could Save Detroit

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.

A bankruptcy judge could turbo-charge the overhaul of the Big Three's costly labor contracts. Last year, the United Auto Workers agreed to sharply cut the cost disparity between Detroit and Toyota. But execs say it will take another round of talks in 2011 to match the foreign competition—a leisurely pace they can no longer afford. That's why some say Detroit's salvation could come in the form of a prepackaged bankruptcy, a quicker reorganization where creditors agree to cuts up front that would hopefully be less disruptive to the overall economy. With government backing to secure loans and preserve car warranties, buyers might not turn away.

Bankruptcy could solve another intractable problem: Detroit's glut of dealers and car brands. The Big Three need to cut their dealers by one third but are blocked by state franchise laws. In bankruptcy, carmakers can tear up franchise contracts and wipe out entire brands. The question is, would a Wilbur Ross-type speculator come along to consolidate the remains of the domestic auto industry? Business experts say a Warren Buffett or Jeff Bezos could come into Detroit and whip up a winning combo.

Whoever rolls into Detroit should heed the history of Billy Durant, who created GM in 1908 by consolidating Buick Oldsmobile, Cadillac and Pontiac. He lost GM to the banks in 1910, but returned six years later with another carmaker he founded, Chevrolet. In the 1920s, he was forced out again and replaced by protégé Alfred P. Sloan who went on to define the 20th-century American corporation. Durant ended his days managing a bowling alley, proving the line between success and failure in Detroit has always been thin.